Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-K

(Mark One)ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2009
ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from  to 
Commission file number 0-18813




THQ INC. LOGO

THQ INC.(Exact Name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

13-3541686(I.R.S. Employer
Identification No.)29903 Agoura Road
Agoura Hills, CA(Address of principal executive offices)

91301(Zip Code)


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



Securities
registered pursuant to Section 12(b) of the Act:

Title of each class:

Name of each exchange on which registered:Common Stock, $.01 par value

The NASDAQ Stock Market LLCPreferred Stock Purchase Rights

The NASDAQ Stock Market LLC


Securities registered pursuant to Section 12(g) of the Act: None



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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

Accelerated filer o

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

Smaller reporting company o


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

The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common
equity was last sold, as of the last business day of the registrant's most recently completed second fiscal quarter, September 26, 2008 was approximately $827.4 million.

The
number of shares outstanding of the registrant's common stock as of May 15, 2009 was approximately 67,553,372.

DOCUMENTS INCORPORATED BY REFERENCE

The
registrant's 2009 Proxy Statement is incorporated by reference into Part III herein.



---





Table of Contents



THQ INC.        INDEX TO ANNUAL REPORT ON FORM 10-K        FILED WITH THE SECURITIES AND EXCHANGE COMMISSION        FOR THE FISCAL YEAR ENDED MARCH 31, 2009    
ITEMS IN FORM 10-K



PAGEPart IItem 1.

Business


1Item 1A.

Risk Factors


8Item 1B.

Unresolved Staff Comments


16Item 2.

Properties


16Item 3.

Legal Proceedings


17Item 4.

Submission of Matters to a Vote of Security Holders


18Part IIItem 5.

Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities


19Item 6.

Selected Consolidated Financial Data


23Item 7.

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


25Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


50Item 8.

Consolidated Financial Statements and Supplementary Data


52Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


99Item 9A.

Controls and Procedures


99Item 9B.

Other Information


100Part IIIItem 10.

Directors, Executive Officers and Corporate
Governance


102Item 11.

Executive Compensation


102Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters


102Item 13.

Certain Relationships and Related Transactions, and Director
Independence


102Item 14.

Principal Accounting Fees and Services


102Part IVItem 15.

Exhibits and Consolidated Financial Statement
Schedules


103Signatures


108Certifications


---





Table of Contents

FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report on Form 10-K that are not historical facts may be
"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to statements regarding industry prospects and
future results of operations or financial position. We generally use words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "future" "intend," "may," "plan," "positioned,"
"potential," "project," "scheduled," "set to," "subject to," "upcoming" and other similar expressions to help identify forward-looking statements. These forward-looking statements are based on current
expectations, estimates and projections about the business of THQ Inc. and its subsidiaries and are based upon management's current beliefs and certain assumptions made by management. Such
forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including,
but not limited to, business, competitive, economic, legal, political and technological factors affecting our industry, operations,
markets, products or pricing. The forward-looking statements contained herein speak only as of the date on which they were made, and we disclaim any obligation to update any forward-looking statements
to reflect events or circumstances after the date of this Annual Report. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed under the heading
"Risk Factors," included in Item 1A herein.

All references to "we," "us," "our," "THQ," or the "Company" in the following discussion and analysis mean THQ Inc. and its subsidiaries. Most of the properties and
titles referred to in this Annual Report are subject to trademark protection.

PART I

Item 1.    Business

Introduction

We are a leading worldwide developer and publisher of interactive entertainment software for all popular game systems,
including:



Our
titles span a wide range of categories, including action, adventure, fighting, racing, role-playing, simulation, sports and strategy. We have created, licensed and acquired a group of
highly recognizable brands, which we market to a variety of consumer demographics ranging from products targeted at children and the mass market to products targeted at core gamers. Our portfolio of
licensed properties includes games based on popular fighting brands such as World Wrestling Entertainment and the Ultimate Fighting Championship; kids and family brands such as DreamWorks Animation,
DisneyPixar, Marvel Entertainment and Nickelodeon; core gamer brand Warhammer 40,000; as well as others. In addition to licensed properties, we also develop games based upon our own
intellectual properties, includingCompany of Heroes,DeBlob, Frontlines,MX vs.
ATV,Red Factionand Saints Row.

We
develop our products using both internal and external development resources. The internal resources consist of producers, game designers, software engineers, artists, animators and game testers
located within our internal development studios and corporate headquarters. The external development resources consist of third-party software developers and other independent resources such as
artists, voice-over actors and composers. We refer to this group of development resources as our Studio System.

1

---



Table of Contents

Our
global sales network includes offices throughout North America, Europe and Asia Pacific. In the U.S. and Canada, we market and distribute games directly to mass merchandisers, consumer electronic
stores, discount warehouses and other national retail chain stores. Internationally, we market and distribute games on a direct-to-retail basis in the territories where we have
a direct sales force and to a lesser extent, in the territories where we do not have a direct sales force, third parties distribute our games. We also globally market and distribute games digitally
via the Internet and through high-end mobile phones, such as the iPhone.

We
were originally incorporated in New York in 1989 as Trinity Acquisition Corporation, which changed its name in 1991 to T.HQ, Inc. following a merger with THQ, Inc., a California
corporation. We were reincorporated in Delaware as THQ Inc. in 1997. Our principal executive offices are located at 29903 Agoura Road, Agoura Hills, California 91301, and our telephone
number is (818) 871-5000. Our Internet address is http://www.thq.com.

Strategy

In November 2008, we announced a more focused product strategy and an updated strategic plan. Our product strategy focuses
on:



We
made a number of changes in fiscal 2009 to our organization to support this more focused product strategy. We restructured our product development organization under new studio management. We
discontinued a number of titles in our product pipeline that did not fit our strategic objectives. As a result, to date, we have closed several of our internal studios, and reduced staff at other
studios. We
also reduced costs and headcount in our corporate and global publishing organizations. Upon completion of a few remaining studio personnel actions we will have reduced headcount by approximately 600
people, which is approximately 24% of our prior total staff. We also realigned our organizational structure to support this more focused product strategy.

Our Industry

The video game industry is the economic sector involved with the development, marketing and sale of video and computer games. It encompasses dozens
of job disciplines and employs thousands of people worldwide. Video games have increasingly become a mainstream entertainment choice for both children and adults: 72% of the United States population
between the ages of 6-44 plays video games, according to

2

---



Table of Contents

a
March 2008 study conducted by NPD, an independent provider of consumer and retail market research for video games and other industries. According to the International Development Group, Inc.
("IDG"), an independent consulting and advisory services company that analyzes the consumer electronics and interactive entertainment industries, sales of console, handheld and PC games (excluding
wireless) reached $12.6 billion in North America, and $11.1 billion in Europe in calendar 2008.

The
first modern video game platform was introduced by Nintendo in 1985. Advances in technology over the past 24 years have resulted in continuous increases in the processing power of the chips
that power both the consoles and PC. Today's video game consolesthe Sony PlayStation 3, Microsoft Xbox 360 and Nintendo Wiiare not simply gaming platforms, but
also function as multimedia hubs that can deliver high-quality digital movies and television programs. Video games are also played on personal computers that contain powerful graphics
cards, and on advanced handheld devices such as PSP (PlayStation Portable) and Nintendo DS. Additionally, both online gaming and wireless gaming have become popular platforms for video game players
over the last several years.

Our Products

We develop, market and sell video games and other interactive software and content for play on console platforms, handheld platforms, mobile devices,
PCs and online. The
following games generated 10% or more of our sales during the fiscal years ended March 31, 2009, 2008 and 2007:



Our
games are based on intellectual property that is either wholly-owned by us or licensed from third parties. We develop our games using both internal development resources and external development
resources working for us pursuant to contractual agreements. Whether a game is developed internally or externally, upon completion of development we extensively play-test each game, and if
required, send the game to the manufacturer for its review and approval. Other than games we release for PCs or wireless devices, the console manufacturers or their authorized vendors manufacture our
products for us. We then market and distribute our games for sale throughout the world.

Creating and Acquiring Our Intellectual Property

Our business process begins with an idea. Inspiration for our interactive entertainment software comes from many sourcesfrom our
internal studios, from our external studio partners, or from existing intellectual properties that we either license or acquire. Historically, most of our titles have been based upon licensed
properties that have attained a high level of consumer recognition or acceptance. We have relationships with many well-known licensors and create games based on certain properties they own
or control. Licensors generally do not grant exclusive output agreements for all of their properties with any

3

---



Table of Contents

one
publisher and thus our licenses are limited to certain of a licensor's properties. Our current key licenses allow us to publish the following properties:

Licensor

PropertiesDisneyPixar

"Ratatouille", "WALLE", "Up" and the next wholly-owned Pixar film following "Up"DreamWorks Animation

MastermindGames Workshop

Warhammer 40,000Marvel Entertainment

Super Hero SquadNickelodeon

Kids 6-14 animated properties and related live action movies, The Naked Brothers Band, Zoey 101, Unfabulous, and Drake & JoshWorld Wrestling Entertainment

World Wrestling Entertainment contentZuffa, LLC

Ultimate Fighting Championship content


These
intellectual property licenses generally grant us the exclusive use of the property for specified titles, on specified platforms and for a specified license term. The licenses are of varying
duration, and we pay royalties to our property licensors generally based on our net sales of the title that includes the licensor's intellectual property. We typically advance payments against minimum
guaranteed royalties over the license term. Royalty rates are generally higher for properties with proven popularity and less perceived risk of commercial failure.

A
key strategic initiative is to create or acquire new intellectual properties that we own. We refer to these properties as our "owned intellectual property[ies]". Our owned
intellectual property is generally created by one of our development studios or by a third-party developer with whom we contract on a work-for-hire basis. We have also acquired
intellectual properties from other publishers or developers. The titles we create based on intellectual properties we own may contain certain licensed content, such as music or rights to use of a name
or object (such as a brand-name vehicle). In this case, we enter into a license agreement with the content owner and pay either a fixed fee or royalty for the use of such content.

Developing Our Products

We develop our products using both internal and external development resources. The internal resources consist of producers, game designers, software
engineers, artists, animators and game testers located within our internal studios located throughout North America, in the United Kingdom and in Australia, and in our corporate headquarters. The
external development resources consist of third-party software developers and other independent resources such as artists, voice-over actors and composers. We refer to this collective
group of development resources as our Studio System.

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

The
development cycle for a new game depends on the platform and the complexity and scope of the game. Additionally, when developing an intellectual property into a game which is simultaneously being
made into a motion picture, our development schedule is designed to ensure that our games are commercially available by the motion picture's theatrical release. The development cycle for console and
PC games generally ranges from 18-24 months and the development cycle for handheld games generally

4

---



Table of Contents

ranges
from 9-18 months. These development cycles require that we assess whether there will be adequate retailer and consumer demand for a game and its platform well in advance of
its release.

The
investments in our development, prior to reaching technological feasibility, are recorded as product development expenses in our consolidated statement of operations as well as
non-capitalizable costs such as quality assurance. We had product development expenses of $109.2 million in fiscal 2009, $128.9 million in fiscal 2008 and
$97.1 million in fiscal 2007.

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

Manufacturing Our Products

Other than games we release for sale on PCs, digital download, or wireless devices, our video games are manufactured for us by the platform
manufacturers or their authorized vendors. We contract with various DVD replicators for the manufacturing of our PC products.

The
platform game manufacturing process begins with our placing a purchase order with a manufacturer. We then send the approved software code to the manufacturer (together with related artwork, user
instructions, warranty information, brochures and packaging designs) for manufacturing.

We
are required by our platform licenses to provide a standard defective product warranty on all of the products sold. Generally, we are responsible for resolving, at our own expense, any warranty or
repair claims. We have not experienced any material warranty claims, but there is no guarantee that we will not experience such claims in the future.

Distributing Our ProductsMarketing and Sales

The manner in which we drive consumer demand for our brands across the globe has evolved significantly in recent years as we have expanded our owned
and licensed franchise portfolio. At the global brand management level, we take a disciplined approach to defining and refining positioning for our key game releases. We implement extensive consumer
and retail research including concept and play testing in conjunction with our development studios.

Our
marketing plans vary by target demographic but generally consist of a three-pronged media plan encompassing TV, print and online advertising. Certain of our campaigns also include billboard
advertising, event sponsorship, in-theater advertising and radio placements. Retail or Channel Marketing efforts for our games include pre-sell give-aways, displays
and/ or demonstrations at retailer-specific trade shows, and cooperative retail advertising campaigns.

We
are taking a more aggressive approach in what we term the "connected marketing" space. This includes how we build our brand in the online space via editorial opportunities; screen shot, trailer and
other game content releases online; advertising; official game websites; and community outreach and management. Game trial has been a key driver of consumer demand for several of our core games,
through consumer demos released at retail or online, or game demos available at kiosks stationed at sports or other entertainment events.

Publicity
is another key driver of awareness for our game portfolio, as well as for THQ, as a publicly-held company. We maintain strong relationships with a broad group of business,
consumer, entertainment and games enthusiast reporters across the globe, working closely to secure positive editorial coverage across broadcast, print and online editorial outlets.

5

---



Table of Contents

Product Sales.In North America, our products are primarily sold directly to mass merchandisers, consumer electronics stores, discount warehouses and national
retail chain stores. Our products are also sold to smaller, regional retailers, as well as distributors who, in turn, sell our products to retailers that we do not service directly, such as grocery
and drug stores. Our domestic sales activities are led by our national sales team, which has representatives in most major markets in the United States.

Our
international publishing activities are conducted via our offices throughout Europe and Asia Pacific. The international offices market and distribute to direct-to-retail
customers and through distributors in both their home territories and, collectively, to approximately 60 additional territories.

We
utilize electronic data interchange with most of our major customers in order to (i) efficiently receive, process, and ship customer product orders, and (ii) accurately track and
forecast sell-through of products to consumers in order to determine whether to order additional products from the manufacturers. We believe that the direct relationship model we use
allows us to better manage inventory, merchandise and communications. We ship all of our products to our North American customers from warehouses located in Michigan and Minnesota, and we ship most of
our products to our international customers from warehouses located throughout Europe and Asia Pacific.

As
discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations," we typically only allow returns for our personal computer products; however, we may decide to
provide price protection or allow returns for our video games after we analyze: (i) inventory remaining in the retail channel, (ii) the rate of inventory sell-through in the
retail channel, and (iii) our remaining inventory on hand. We maintain a policy of giving credits for price protection and returns, but do not give cash refunds.

Platform License Agreements

Before we can develop, market, or sell video games on a console or handheld platform, we must enter into a license agreement with the manufacturer of
such platform. The current "platform manufacturers" are Microsoft, Nintendo and Sony. Each of these platform license agreements allows us a non-exclusive right to use, for a fixed term and
in a
designated territory, technology that is owned by the platform manufacturer in order to publish our games on such platform. We are currently licensed to publish titles on the Microsoft
Xbox 360; the Sony PlayStation 3, PlayStation 2, and PlayStation Portable; and the Nintendo Wii and DS; in most countries throughout the world. As each platform license expires,
if we intend to continue publishing games on such platform, we must enter into a new agreement or an amendment with the licensor to extend the term of the agreement. Certain agreements, such as the
licenses with Sony for the PlayStation 3 and PlayStation 2 and with Microsoft for the Xbox 360, automatically renew each year unless either party gives notice by the applicable
date that it intends to terminate the agreement.

Our
platform licenses require that each title be approved by the manufacturer. The manufacturers have the right to review, evaluate and approve a prototype of each title and the title's packaging and
marketing materials. Once a title is developed and has been approved by the manufacturer, the title is manufactured solely by such manufacturer or a designated vendor of the manufacturer. The licenses
establish the payment terms for the manufacture of each cartridge or disc made, which generally provide for a charge for every cartridge or disc manufactured. The amounts charged by the manufacturers
for both console discs and handheld cartridges include a manufacturing, printing and packaging fee as well as a royalty for the use of the manufacturer's name, proprietary information and technology,
and are subject to adjustment by the manufacturers at their discretion.

The
platform license agreements also require us to indemnify the manufacturers with respect to all loss, liability and expense resulting from any claim against the manufacturer involving the
development, marketing, sale, or use of our games, including any claims for copyright or trademark infringement brought against the manufacturer. Each platform license may be terminated by the
manufacturer if a breach or default by us is not cured after we receive written notice from the manufacturer, or if we become insolvent.

6

---



Table of Contents

Upon
termination of a platform license for any reason other than our breach or default, we have a limited period of time to sell any existing product inventory remaining as of the date of termination.
The length of this sell-off period varies between 90 and 180 days, depending upon the platform agreement. We must destroy any such inventory remaining after the end of the
sell-off period. Upon termination as a result of our breach or default, we must destroy any remaining inventory within a minimum number of days as specified by the manufacturer.

Seasonality

The interactive entertainment software market is highly seasonal, with sales typically significantly higher during the third quarter of our fiscal
year, due primarily to the increased demand for interactive games during the year-end holiday buying season.

Major Customers

Our largest customers worldwide include Best Buy, GameStop, Target, Toys "R" Us, Metro Group, and Wal-Mart. We also sell our products to
other national and regional retailers, discount store chains and specialty retailers. Wal-Mart and GameStop each accounted for more than 10% of our gross sales in fiscal 2009, 2008 and
2007. We sell our products to Wal-Mart pursuant to individual purchase orders placed by Wal-Mart and sell our products to GameStop pursuant to individual purchase orders placed
by GameStop. We have two "Vendor" agreements with Wal-Mart (one for our console products and one for our PC products) that we entered into in 2001 and 2002, respectively, that address
certain standard terms and conditions between us and Wal-Mart, such as payment terms; however, the agreements do not contain any commitment for Wal-Mart to purchase, or for us
to sell, any minimum level of products. We do not have any agreements with GameStop. With respect to both Wal-Mart and GameStop, as well as our other customers, the customer submits a
purchase order for each purchase request, and that purchase order contains basic pricing and delivery terms for such purchase. None of the purchase orders individually, with any customer, accounted
for more than 10% of the Company's consolidated net revenue for the fiscal years ended March 31, 2009, 2008 or 2007. A substantial reduction, termination of purchases, or business failure by
any of our largest customers could have a material adverse effect on us.

Competition

As a publisher of interactive entertainment software, we consider ourselves to be part of the entertainment industry. At the most fundamental level,
our products compete with other forms of entertainment, such as motion pictures, television and music, for the leisure time and discretionary spending of consumers. Our primary competition for sales
of video games comes from Sony, Microsoft and Nintendo, each of which is a large developer and marketer of software for its own platforms, as well as other publishers and developers of interactive
entertainment software, such as Activision/Blizzard, Atari, Electronic Arts, LucasArts, Namco, Sega, Take-Two Interactive Software, and Ubisoft. Additionally, in recent years, certain
large intellectual property owners, such as Disney and Viacom, have established video game units to develop and publish games based upon certain of the properties they own.

In
addition to competing for video game revenue, we compete with our competitors over licenses and brand-name recognition, access to distribution channels, and effectiveness of marketing
and price. We also face intense competition from our competitors for the services of talented video game producers, artists, engineers and other employees.

7

---





Table of Contents

Employees

As of March 31, 2009, we employed approximately 2,000 people, of whom over 670 were outside the United States. Upon completion of a few
remaining studio actions under our business realignment plan, we expect to have approximately 1,800 employees. We believe that our ability to attract and retain qualified employees is a critical
factor in the successful development and exploitation of our products and that our future success will depend, in large measure, on our ability to continue to attract and retain qualified employees.
None of our employees is represented by a labor union or covered by a collective bargaining agreement and we consider our relations with employees to be favorable.

Financial Information About Geographic Areas

See Item 7 "Management Discussion and Analysis of Financial Condition and Results of Operations" and Note 20 of notes to consolidated
financial statements included in Item 8.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission ("SEC"). Our SEC
filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act are available to the public free of charge over the internet at our website at http://www.thq.com or at the SEC's web
site at http://www.sec.gov. Our SEC filings will be available on our website as soon as reasonably practicable after we have electronically filed or furnished them to the SEC. Information contained on
our website is not incorporated by reference into this annual report on Form 10-K. You may also read and copy any materials we file with the SEC at the SEC's Public Reference Room
at 100 F Street, NE, Room 1580, Washington D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330 or on the internet at http://www.sec.gov/info/edgar/prrrules.htm. You can view our Code of Business Conduct and Ethics, our Code of Ethics for
Executive Officers and Other Senior Financial Officers and the charters for each of our committees of the Board of Directors free of charge on the corporate governance section of our website.

Item 1A.    Risk Factors

Our business is subject to many risks and uncertainties that may affect our future financial performance. Some of those important risks and
uncertainties that may cause our operating results to vary or may materially and adversely affect our operating results are as follows:

We must continue to develop and sell new titles in order to generate revenue and remain profitable.

We derive almost all of our revenue from sales of interactive software games designed for play on video game consoles, handheld devices and personal
computers. Even the most successful video games remain popular for only limited periods of time, often less than six months, and thus the success of our business is dependent upon our ability to
continually develop and sell successful new games.

Our business is "hit" driven. If we do not deliver "hit" games, our revenue and profitability can suffer.

While many new products are regularly introduced, only a relatively small number of "hit" titles account for a significant portion of video game
sales. If we fail to develop "hit" titles, or if "hit" products published by our competitors take a larger share of consumer spending than we anticipate, our product sales could fall below our
expectations.

8

---



Table of Contents

The global economic downturn could reduce demand for our products and increase volatility in our stock price, which could result in a material adverse impact on our
business, operating results, and financial position.

Current uncertainty in global economic conditions pose a risk to the overall economy as consumers and retailers may defer or choose not to make
purchases in response to tighter credit and negative financial news, which could negatively affect demand for our products. Additionally, due to the weak economic conditions and tightened credit
environment, some of our retailers and distributors may not have the same purchasing power, leading to lower purchases of our games for placement into distribution channels. Consequently, demand for
our products could be materially different from our expectations, which could negatively affect our business, our results of operations and our financial condition.

In
addition, periods of economic uncertainty may result in increased volatility in our stock price. The decline in our market capitalization and our financial performance during the latter half of the
quarter ended December 31, 2008, resulted in an impairment of all of our goodwill as of December 31, 2009. If we experience further deterioration in our financial performance as a result
of these and other factors,
we could be required to recognize additional impairment charges related to software development, licenses, and other long-lived assets in future periods.

Our lack of earnings over the past two fiscal years has reduced our cash position. While the company has plans in place to generate positive cash flow in fiscal 2010,
further deterioration in global macroeconomic conditions or failure to meet our current plan for fiscal 2010 could result in us having to pursue additional funding from public or private sources to
meet our cash needs, or to curtail or defer currently-planned expenditures, or both.

Because we did not generate positive cash flow in fiscal year 2009, our cash, cash equivalents and short-term investments have decreased
from $317.5 million as of March 31, 2008 to $140.7 million as of March 31, 2009. We expect to generate positive cash flow from operations in fiscal 2010. We expect to
achieve this with net sales at similar levels to fiscal 2009, cost savings achieved under our business realignment, as well as lower cash spend on product purchases and license payments. In addition,
on May 6, 2009 we signed a commitment letter for a revolving credit facility of up to $35.0 million with Bank of America, NA ("B of A"). Although we believe these actions will improve
our cash position, there can be no assurance that we will generate positive cash flow in fiscal 2010 or increase our cash position. Additionally, a further deterioration in global macroeconomic
conditions or our failure to meet our current plan for fiscal 2010 could result in further deterioration in our cash position, which could result in us having to pursue additional funding from public
or private sources to meet our cash needs, or to curtail or defer currently-planned expenditures, or both.

The decrease in our stock price and cash position over the last year may affect our ability to do business with key third parties.

The significant decrease in our stock price over the last year and the decrease in our cash and cash equivalents may cause certain third parties,
such as the platform manufacturers, our licensors, vendors and landlords to impose greater restrictions upon us that could negatively affect the profitability of our business and further deteriorate
our current cash position. For example, pursuant to the terms of established contracts, the platform manufacturers could require that we pay cash in advance for the product that we order from them and
our landlords could require larger security deposits. Additionally, it may make it more difficult to enter into agreements with such parties in the future and any such agreements may contain more
onerous contract terms, which could negatively affect our ability to operate profitably.

Because
of these and other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and
investors should not use historical trends to anticipate results or trends in future periods.

9

---



Table of Contents

Since a significant portion of our net sales are based upon licensed properties, failure to renew such licenses, or renewals of such licenses on less advantageous terms,
could cause our revenue to decline.

Games we develop based upon licensed brands make up a substantial portion of our sales each year. In fiscal 2009, sales of titles for our three
top-selling licensed brands, DisneyPixar, Nickelodeon and World Wrestling Entertainment ("WWE") comprised 47% of our net sales; and in fiscal 2008, 54% of our net sales were
based on titles from such brands. A limited number of licensed brands may continue to produce a disproportionately large amount of our sales. Due to the importance to us of a limited number of brands
and the intense competition from other video game publishers and the owners of such intellectual properties in the case of DisneyPixar and Nickelodeon, to publish games based upon these
licensed brands, we may not be able to renew our current licenses or may have to renew a brand license on less advantageous terms, which could significantly lower our revenues. In addition, some of
our key licensors have increased their development of video games as more fully discussed in our "Risk factors related to competition" below.

We
are currently involved in litigation with the WWE with respect to our video game license. Since WWE titles make up a significant portion of our sales, our inability to retain the license could
negatively impact our revenues and profitability. See, Item 3 "Legal Proceedings" for a more detailed discussion of this litigation.

A decrease in the popularity of our licensed brands can materially affect our revenue and financial position.

A significant portion of our net sales are derived from products based on popular licensed properties. A decrease in the popularity of the underlying
property of our licenses could negatively impact our ability to sell games based on such licenses and could lead to an impairment of our licenses.

Our inability to acquire or create new intellectual property that has a high level of consumer recognition or acceptance could negatively impact our revenues and
profitability.

We generate a portion of our revenue from wholly-owned intellectual property. The success of our internal brands depends on our ability to create
original ideas that appeal to the avid gamer. Titles based on wholly-owned intellectual property can be expensive to develop and market since they do not have a built-in consumer base or
licensor support. Our inability to create new products that find consumer acceptance could negatively impact our profitability.

Increasing development costs for games which may not perform as anticipated can decrease our profitability and could result in potential impairments of capitalized software
development costs.

Over the last few years, video games have become increasingly expensive to develop. Because the current generation console platforms and computers
have greater complexity and capabilities than the earlier platforms and computers, costs are higher to develop games for the current generation platforms and computers. In the last two fiscal years,
these greater costs have led to lower operating margins, negatively affecting our profitability. If these increased costs are not offset by higher revenues and other cost efficiencies in future, our
margins and profitability will continue to be impacted, and could result in impairment of capitalized software development costs. If these platforms, or games we develop for these platforms, do not
achieve significant market penetration, we may not be able to recover our development costs, which could result in the write-off of capitalized software costs if projects are canceled.

We rely on a small number of customers that account for a significant amount of our sales.

Our largest single customer, Wal-Mart, accounted for more than 13% of our gross sales in each of the last three fiscal years. In fiscal
2009, our five largest customers, including Wal-Mart, accounted for 41% of our gross sales. A substantial reduction, termination of purchases, or business failure by any of our largest
customers could have a material adverse effect on us. In fiscal 2009, business failures by two of our large

10

---



Table of Contents

customers,
Circuit City in the United States and Entertainment UK (EUK) in the United Kingdom caused us to write-off $8.5 million in bad debt, which negatively affected our
profitability.

A significant portion of our revenue is derived from our international operations, which may subject us to economic, political, regulatory and other risks.

In fiscal 2009 we derived 45% of our net sales from outside of North America, down from 51% in fiscal 2008. Our international operations subject us
to many risks, including: different consumer preference; challenges caused by distance, language and cultural differences in doing business with foreign entities; unexpected changes in regulatory
requirements, tariffs and other barriers; difficulties in staffing and managing foreign operations; and possible difficulties collecting foreign accounts receivable. These factors or others could have
an adverse effect on our future foreign sales or the profits generated from these sales.

There
are additional risks inherent in doing business in certain international markets, such as China. For example, foreign exchange controls may prevent us from expatriating cash earned in China and
standard business practices in China may increase our risk of violating U.S. laws such as the Foreign Corrupt Practices Act.

Additionally,
sales generated by our international offices will generally be denominated in the currency of the country in which the sales are made. To the extent our foreign sales are not denominated
in U.S. dollars, our sales and profits could be materially and adversely affected by foreign currency fluctuations. Changes in foreign currency rates decreased reported earnings by approximately
$1.3 million in fiscal 2009.

Fluctuations in our quarterly operating results due to seasonality in the interactive software entertainment industry and other factors related to our business operations
could result in substantial losses to investors.

We have experienced, and may continue to experience, significant quarterly fluctuations in sales and operating results. The interactive software
entertainment market is highly seasonal, with sales typically significantly higher during the year-end holiday buying season. Other factors that cause fluctuations in our sales and
operating results include:



We
believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. We may not be able to maintain consistent
profitability on a quarterly or annual basis. It is likely that in some future quarter, our operating results may be below the expectations of public market analysts and investors as a result of the
factors described above and others described throughout this "Risk Factors" section, and the price of our common stock may fall or significantly fluctuate.

Video game product development schedules are difficult to predict and can be subject to delays. Postponements in shipments can substantially impact our profitability in any
given quarter.

Our ability to meet product development schedules is affected by a number of factors, including the creative processes involved, the coordination of
large and sometimes geographically-dispersed development teams required by the complexity of our products, the need to localize certain products for

11

---



Table of Contents

distribution
outside of the United States, the need to refine and tune our products prior to their release, and the time required to manufacture a game once it is submitted to the manufacturer. We
have in the past experienced development and manufacturing delays for several of our products. Failure to meet anticipated production schedules may cause a shortfall in our expected sales and
profitability and cause our operating results in any given quarter to be materially different from expectations. Delays that prevent release of our products during peak selling seasons or in
conjunction with specific events, such as the release of a related movie, could significantly affect the sales of such products and thus our financial performance.

Video games that are not high quality may not sell according to our forecast, which could materially impact our profitability in any given quarter.

Consumers who buy games targeted at the mass market and core gamers prefer high-quality games. If our games are not high quality,
consumers may not purchase as many games as we expected, which could materially impact our revenue and profitability in any given quarter.

Our business is dependent upon the success and availability of the video game platforms on which consumers play our games.

We derive most of our revenue from the sale of products for play on video game platforms manufactured by third parties, such as Sony's
PlayStation 2, PlayStation 3 and PSP, Microsoft's Xbox 360, and Nintendo's Wii and DS. The following factors related to such platforms can adversely affect sales of our video
games and our profitability:

Popularity of platforms.In the previous console platform cycle, the PlayStation 2 was the best-selling platform and games
for the
PlayStation 2 dominated software sales. In the current platform cycle, the Wii is the best-selling platform to date, and in 2008, the Wii surpassed the Xbox 360 as the most
popular console in terms of software game sales, according to International Development Group. Since the development cycle for a console game is from 9 to 24 months, we must make decisions
about which games to develop on which platforms before knowing what the consumer preference for the platforms will be when the game is finished. Launching a game on a platform that has declined, or
failure to launch a game on a platform that has grown in popularity could negatively alter our revenues and profitability.

Platform pricing.Prices for the current generation of console platforms are higher than for the respective predecessor
platforms. The
Xbox 360 can cost as much as $399.99, the Wii is priced at $249.99 and the PS3 can cost as much as $499.99. The cost of the hardware could adversely affect their sales, which could negatively
affect sales of our products for these platforms since consumers need a platform in order to play our games.

Platform shortages.In the past few years, many of the platforms on which our games are played have experienced shortages and
some, including the
Nintendo Wii, are still difficult for consumers to purchase. Platform shortages generally negatively affect the sales of video games since consumers do not have consoles on which to play the games.

Our inability to enter into agreements with the manufacturers to develop, publish and distribute titles on their platforms could seriously impact our operations.

We are dependent on the platform manufacturers (Microsoft, Nintendo and Sony) and our non-exclusive licenses with them, both for the
right to publish titles for their platforms and for the manufacture of our products for their platforms. Our existing platform licenses require that we obtain approval for the publication of new games
on a title-by-title basis. As a result, the number of titles we are able to publish for these platforms, and our sales from titles for these platforms, may be limited. Should
any manufacturer choose not to renew or extend our license agreement at the end of its current term, or if any license were

12

---



Table of Contents

terminated,
we would be unable to publish additional titles for that manufacturer's platform, which could negatively affect our operating results.

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

Software pricing may affect our revenues and profitability.Software prices for the current generation console games are generally higher than prices for games for
the predecessor platforms. There is no assurance that consumers will continue to pay the higher prices of these games. Additionally, although we still publish games for the PlayStation 2 (PS2),
as consumers purchase games for current generation consoles rather than for the PS2 and demand for games on the PS2 declines, the prices of our games for the PS2 may also decline. Reductions in
pricing may result in lower revenues, which could materially affect our profitability.

We compete aggressively with other video game publishers for retail shelf space. Our inability to get our games placed on retailers' shelves could materially impact our
revenues and profitability.

As video game publishers strive to release more blockbuster titles and as retailers merge or cut back on purchases of video games, competition for
retail shelf space may become more intense. Additionally, in recent years, popular peripheral-based video games, such asGuitar Hero,
take more shelf space because of the large packaging required for the guitars. Our inability to get our products on retailers' shelves could reduce our revenues and negatively affect our
profitability.

Lack of retailer support for categories in which we publish games could negatively affect the sales of our products.

In fiscal 2009 and 2008, retailers strongly supported games that were music or peripheral-based, such asGuitar
HeroandRock Band,and we did not publish any games in this category. Future lack of retailer support for our key games could
cause lower sales of such games, negatively affecting our revenue and profitability.

Technology changes rapidly in our business and if we fail to anticipate new technologies or the manner in which people play our games, the quality, timeliness and
competitiveness of our products and services will suffer.

Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must implement and take
advantage of in order to make our products and services competitive in the market. We are investing in emerging video game platforms such as Massively Multiplayer Online Games (MMO's), which require
large investments and present many new risks. Globally, MMO games have rapidly become a popular way to play video games. We have no control over the demand for, or success of, these products. If we
fail to anticipate and adapt to these and other technological changes, our market share and our operating results may suffer. Our future success in providing online games, wireless games and other
content will depend on our ability to adapt to rapidly changing technologies, develop applications to accommodate evolving industry standards and improve the performance and reliability of our
applications.

Competitive launches may negatively affect the sales of our games.

We compete for consumer dollars with several other video game publishers and consumers must make choices among available games. If we make our games
available for sale at the same time as many other new games become available, consumers may choose to spend their money on products published by our competitors rather than our products and retailers
may choose to give more shelf space to our competitors'

13

---



Table of Contents

products,
leaving less space to sell our products. Since the life cycle of a game is short, strong sales of our competitors' games could negatively affect the sales of our games.

Development of software by hardware manufacturers may lead to reduced sales of our products.

Microsoft, Nintendo and Sony each develop software for their own hardware platforms. As a result of their commanding positions in the industry, the
hardware manufacturers may have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their licensees, including us. Additionally, the
manufacturers can bundle their software with their hardware, creating less demand for individual sales of our products. In the past twelve months, Nintendo's market share on the Wii and DS has been
over 50% of all software sales for these platforms. Continued or increased dominance of software sales by the hardware manufacturers may lead to reduced sales of our products and thus lower revenues.

Increased development of software and online games by intellectual property owners may lead to reduced revenues.

As discussed above, a significant portion of our revenue is due to sales of games based upon licensed properties. In recent years, some of our key
licensors, including Disney and Viacom, have increased their development of video games, which could lead to such licensors not renewing our licenses to publish games based upon their properties that
we currently publish or not granting future licenses to us to develop games based on their other properties. For example, in fiscal 2009, Disney decided to develop internally video games based upon
its upcoming movieToy Story 3rather than granting the license to develop and publish the game to an external publisher such as us. If intellectual
property owners continue expanding internal efforts to develop video games based upon properties that they own rather than renewing our licenses or granting us additional licenses, our revenue could
be significantly affected.

Competition for licenses may negatively affect our profitability.

Some of our competitors have greater name recognition among consumers and licensors of properties, a broader product line, or greater financial,
marketing and other resources than we do. Accordingly, these competitors may be able to market their products more effectively or make larger offers or guarantees in connection with the acquisition of
licensed properties. As competition for popular properties increases, our cost of acquiring licenses for such properties may increase, resulting in reduced margins.

Competition with emerging forms of home-based entertainment may reduce sales of our products.

We also compete with other forms of entertainment and leisure activities. For example, we believe the overall growth in the use of the internet and
online services by consumers may pose a competitive threat if customers and potential customers spend less of their available time using interactive entertainment software and more using the internet
and online services.

Competition for qualified personnel is intense in the interactive software entertainment industry and failure to hire and retain qualified personnel could seriously harm our
business.

We rely to a substantial extent on the management, marketing, sales, technical and software development skills of a limited number of employees to
formulate and implement our business plan. Our success depends to a significant extent upon our ability to attract and retain key personnel. Competition for employees can be intense and the process of
locating key personnel with the right combination of skills is often lengthy. The loss of services of key personnel could have a material adverse effect on our business.

14

---



Table of Contents

Increased sales of used video game products could lower our sales.

Increased sales of used video games, which are generally priced lower than new video games, could negatively affect our sales of new titles and thus
our revenues.

We rely on external developers for the development of some of our titles.

Some of our titles are developed by third-party developers. We do not have direct control over the business, finances and operational practices of
these external developers. A delay or failure to complete the work performed by external developers has and may in the future result in delays in, or cancellations of, product releases. Additionally,
the future success of externally-developed titles will depend on our continued ability to maintain relationships and secure agreements on favorable terms with skilled external developers. Our
competitors may acquire the businesses of key developers or sign them to exclusive development arrangements. In either case, we would not be able to continue to engage such developers' services for
our products, except for those that they are contractually obligated to complete for us. We cannot guarantee that we will be able to establish or maintain such relationships with external developers,
and failure to do so could result in a material adverse effect on our business and financial results.

Defects in our game software could harm our reputation or decrease the market acceptance of our products.

Our game software may contain defects. In addition, because we do not manufacture our games for console platforms, we may not discover defects until
after our products are in use by retail customers. Any defects in our software could damage our reputation, cause our customers to terminate relationships with us or to initiate product liability
suits against us, divert our engineering resources, delay market acceptance of our products, increase our costs or cause our revenue to decline.

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

We defend our intellectual property rights and combat unlicensed copying and use of software and intellectual property rights through a variety of
techniques. Preventing unauthorized use or infringement of our rights is difficult. Unauthorized production occurs in the
computer software industry generally, and if a significant amount of unauthorized production of our products were to occur, it could materially and adversely affect our results of operations. We hold
copyrights on the products, manuals, advertising and other materials owned by us and we maintain certain trademark rights. We regard our titles, including the underlying software, as proprietary and
rely on a combination of trademark, copyright and trade secret laws as well as employee and third-party nondisclosure and confidentiality agreements, among other methods, to protect our rights. We
include with our products a "shrink-wrap" or "click-wrap" license agreement which imposes limitations on use of the software. It is uncertain to what extent these agreements
and limitations are enforceable, especially in foreign countries. Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in some international
markets. Further, the laws of some countries where our products are or may be distributed either do not protect our products and intellectual property rights to the same extent as the laws of the
United States, or are poorly enforced. Legal protection of our rights may be ineffective in such countries. We cannot be certain that existing intellectual property laws will provide adequate
protection for our products.

Third parties may claim we infringe their intellectual property rights.

Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, from time
to time we receive notices from others claiming we have infringed their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into
royalty and licensing agreements on unfavorable terms, require us to stop selling or to redesign affected products, or pay damages or satisfy indemnification commitments

15

---



Table of Contents

including
contractual provisions under various license arrangements. If we are required to enter into such agreements or take such actions, our operating margins may decline as a result.

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

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K our
assessment of the effectiveness of our internal controls over financial reporting. Furthermore, our independent registered public accounting firm is required to report on whether it believes we
maintain, in all material respects, effective internal controls over financial reporting. Although we believe that we currently have adequate internal controls procedures in place, we cannot be
certain that future material changes to our internal controls over financial reporting will be effective. If we cannot adequately maintain the effectiveness of our internal controls over financial
reporting, we might be subject to sanctions or investigation by
regulatory authorities, such as the Securities and Exchange Commission. Any such action could adversely affect our financial results and the market price of our common stock.

Rating systems and future legislation may make it difficult to successfully market and sell our products.

Currently, the interactive software entertainment industry is self-regulated and rated by the Entertainment Software Rating Board
("ESRB"). Our retail customers take the ESRB rating into consideration when deciding which of our products they will purchase. If the ESRB or a manufacturer determines that a product should have a
rating directed to an older or more mature consumer, we may be less successful in our marketing and sales of a particular product.

From
time to time, legislation has been introduced at the local, state and federal levels for the establishment of a government mandated rating and governing system in the United States and in foreign
countries for our industry. Various foreign countries already allow government censorship of interactive entertainment products. We believe that if our industry were to become subject to a government
rating system or other regulation, our ability to successfully market and sell our products could be adversely affected.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our principal corporate and administrative office is located in approximately 100,000 square feet of leased space in a building located at
29903 Agoura Road, Agoura Hills, California. Including this office, the following is a summary of the principal leased offices we maintained as of May 15, 2009:

Purpose

North America

Europe

Asia Pacific

TotalSales and administrative


123,900


64,700


19,200


207,800Product development


353,500


6,100


23,700


383,300Total leased square footage


477,400


70,800


42,900


591,100


We
also own 10,820 square feet of space in Phoenix, Arizona, which serves as our data center and motion capture studio.

16

---



Table of Contents

Item 3.    Legal Proceedings

WWE Related Lawsuits

WWE Federal Court Actions.On October 19, 2004, World Wrestling Entertainment, Inc. ("WWE") filed a lawsuit in the United States District Court for
the Southern District of New York (the "Court") against JAKKS Pacific, Inc. ("JAKKS"), us, THQ/JAKKS Pacific LLC (the "LLC"), and others, alleging, among other claims, improper conduct
by JAKKS, certain executives of JAKKS, an employee of the WWE and an agent of the WWE in granting the WWE videogame license to the LLC. The complaint sought various forms of relief, including
monetary damages and a judicial determination that, among other things, the WWE videogame license is void. On March 30, 2005, WWE filed an amended complaint, adding both new claims and our
president and chief executive officer, Brian Farrell, as a defendant. On March 31, 2006, the Court granted the defendants' motion to dismiss claims under the Robinson-Patman Act and the Sherman
Act. On December 21, 2007, the Court dismissed the remaining federal claims, based on the RICO Act, and denied a motion by WWE to reconsider the Court's prior March 2006 order dismissing the
antitrust claims. The Court also dismissed WWE's state law claims, without prejudice to refiling them in state court, for lack of federal jurisdiction. WWE has now asserted its state law claims in
Connecticut, as described below. The Court has also granted our motion to dismiss without prejudice our cross-appeals in this action. WWE appealed the Court's rulings, and a hearing on the appeal was
held before the United States Court of Appeal for the Second Circuit on May 6, 2009. On May 19, 2009, the Court of Appeals affirmed the Court's dismissal of the WWE's claims.

WWE Connecticut State Court Action.On October 12, 2006, WWE filed a separate lawsuit against us and the LLC in the Superior Court of the State of
Connecticut, alleging that the Company's agreements with Yuke's Co., Ltd. ("Yuke's"), a developer and distributor in Japan, violated a provision of the WWE videogame license prohibiting
sublicenses without WWE's prior written consent. The lawsuit seeks, among other things, a declaration that the WWE is entitled to terminate the video game license and seek monetary damages. At a
hearing on May 8, 2007, the Court granted WWE's request to amend its pleadings to add allegations and claims substantially similar to those already pending in WWE's lawsuit in the Southern
District of New York and to "cite in" the other defendants from that action, including our CEO, Brian Farrell. Following the dismissal without prejudice of WWE's lawsuit in the Southern District of
New York, WWE sought leave to refile its state law claims in this action, which was granted. As a result, the claims by WWE in Connecticut represented a combination of the earlier claims relating to
the Yuke's agreements and the Connecticut equivalents of the state law claims that had previously been pending in the Southern District of New York. On August 29, 2008, the Court granted
motions for summary judgment filed by us and other defendants, dismissing the claims that were Connecticut equivalents of the claims previously pending in the Southern District of New York. The Court
subsequently denied a request by WWE to rehear arguments related to this decision. We have now filed an answer to the remaining claims in this action. Discovery is scheduled to be completed by June
2009, and the case is currently scheduled to be ready for trial by May 1, 2010. WWE has filed a motion for summary judgement on the claims related to Yuke's, and we and the LLC have
cross-moved for summary judgement on those same claims. These motions have been continued by the Court until after the close of discovery. On July 1, 2008, we filed a cross-complaint in this
action against JAKKS alleging that, if WWE's allegations are found to be true, then JAKKS breached its contractual, fiduciary and other duties to us.

We
intend to vigorously defend ourselves against the claims raised in this action, including those raised in the amended complaint. We also intend to vigorously pursue our cross-claims against JAKKS.
However, at this time we cannot estimate a possible loss, if any, from an adverse decision in this case. Games we develop based upon our WWE videogame license have contributed to approximately 23% of
our net sales in fiscal 2009, down compared with approximately 25% of our net sales in fiscal 2008, and up compared with approximately 15% of our net sales in fiscal 2007. The loss of the WWE license
would have a negative impact on our future financial results.

17

---



Table of Contents

Operating Agreement with JAKKS Pacific, Inc.

JAKKS Preferred Return Arbitration.In June 1999 we entered into an operating agreement with JAKKS that governs our relationship with respect to the WWE videogame
license. Pursuant to the terms of this agreement, JAKKS is entitled to a preferred payment from revenues derived from exploitation of the WWE videogame license. The amount of the preferred payment to
JAKKS for the period beginning July 1, 2006 and ending December 31, 2009 (the "First Subsequent Distribution Period") is to be determined by agreement or, failing that, by arbitration.
The parties were unable to reach agreement on the preferred payment for the First Subsequent Distribution Period. Accordingly, as provided in the operating agreement, an arbitration hearing was held
before the arbitrator on March 20, 2009. We are currently awaiting the arbitrator's decision. Although we believe continuation of the previous preferred payment would represent significantly
excessive compensation to JAKKS for the First Subsequent Distribution Period, we are not able to predict the outcome of the arbitration or otherwise estimate the amount of the preferred payment for
the First Subsequent Distribution Period. Accordingly, we are currently accruing for a preferred payment to JAKKS at the previous rate. However, we have advised JAKKS that we do not intend to make any
payment until the amount of the preferred payment payable to JAKKS for the First Subsequent Distribution Period is agreed or otherwise determined as provided in the operating agreement. We do not
expect the resolution of this dispute to have a material adverse impact on our reported financial results.

Other

We are also involved in additional routine litigation arising in the ordinary course of our business. In the opinion of our management, none of such
pending litigation is expected to have a material adverse effect on our consolidated financial condition or results of operations.

Terminated Proceedings

Lawsuits related to our historical stock option granting practices

Kukor and Ramsey v. Haller, et. Al.On August 25, 2006, following our announcement of the informal inquiry by the SEC, a purported shareholder derivative
action captionedRamsey v. Haller et. Al.was filed against certain of our current and former officers and directors in the California Superior Court,
Los Angeles County. The complaint alleged, among other things, purported improprieties in our issuance of stock options, breach of fiduciary duty and unjust enrichment. Another lawsuit was
subsequently filed by the same law firm on behalf of another purported shareholder, David Kukor, and the parties stipulated to consolidate the two actions. On or about April 19, 2007, a
Consolidated Shareholder Derivative Complaint (the "Consolidated Complaint") was filed, alleging the same types of claims and quoting from various public statements by us since the filing of the
original complaint. We were also named as a nominal defendant. On May 29, 2007, we filed a demurrer to the Consolidated Complaint as a whole, which was denied. The parties reached a settlement
in this matter, which was approved by the Court on February 25, 2009, pursuant to which we agreed to pay a specified amount for plaintiffs' counsel's attorneys fees and to implement certain
corporate governance reforms. Most of the attorney fee payment has been paid by our insurance carrier. The settlement of this action did not have a material adverse impact on our consolidated
financial position or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report.

18

---





Table of Contents

PART II

Item 5.    Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

THQ's common stock is quoted on the NASDAQ Global Select Market under the symbol "THQI." The following table sets forth, for the periods indicated,
the high and low closing sales prices of our common stock as reported by the NASDAQ Global Select Market:

Closing
Sales PricesHigh

LowFiscal Year Ended March 31, 2009Fourth Quarter ended March 31, 2009

$
3.15

$
2.23Third Quarter ended December 31, 2008


5.33


3.59Second Quarter ended September 30, 2008


15.97


11.00First Quarter ended June 30, 2008


20.61


19.45Fiscal Year Ended March 31, 2008Fourth Quarter ended March 31, 2008

$
28.19

$
17.94Third Quarter ended December 31, 2007


29.63


23.39Second Quarter ended September 30, 2007


31.32


24.98First Quarter ended June 30, 2007


36.39


30.52


The
last reported price of our common stock on May 15, 2009, as reported by NASDAQ Global Select Market, was $5.23 per share.

Holders

As of May 15, 2009 there were approximately 293 holders of record of our common stock.

Dividend Policy

We have never paid cash dividends 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.

19

---



Table of Contents

Securities Authorized for Issuance Under Equity Compensation Plans

Information for our equity compensation plans in effect as of March 31, 2009 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


9,463,510

$
16.57


6,761,497Equity compensation plans not approved by security holders


443,552
(1)
$
12.39


Total


9,907,062

$
20.22


6,761,497


---

Stock Price Performance Graph

The following information shall not be deemed to be "filed" with the Securities and Exchange Commission nor shall this
information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we
specifically incorporate it by reference into a filing.

The
following graph shows a five-year comparison of cumulative total stockholder returns for the period from March 31, 2004 through March 31, 2009, for the Company's common
stock, NASDAQ Global Select Market Composite Index and the RDG Technology Index. The comparison assumes an initial investment of $100 in each on March 31, 2004. We have not paid any cash
dividends and, therefore, the cumulative total return calculation is based solely upon stock price appreciation and not upon reinvestment of cash dividends.

The
comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of THQ's common stock.

20

---



Table of Contents

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among THQ Inc., The NASDAQ Composite Index  And The RDG Technology Composite Index

CHART

---

3/31/2004

3/31/2005

3/31/2006

3/31/2007

3/31/2008

3/31/2009THQ Inc.

$
100.00

$
139.10

$
191.97

$
253.51

$
161.64

$
22.54NASDAQ Composite

$
100.00

$
101.44

$
120.49

$
127.08

$
118.90

$
78.48RDG Technology Composite

$
100.00

$
96.76

$
114.34

$
118.22

$
113.92

$
78.83


Recent Sales of Unregistered Securities

On January 18, 2008, in connection with our acquisition of Big Huge Games, Inc. ("BHG"), we issued an aggregate of 199,631 shares of
our common stock to stockholders of BHG as partial consideration for the purchase of their shares of BHG. The shares are restricted from transfer and held in escrow by THQ until certain criteria are
met, as set forth in the BHG stock purchase agreement. We issued and sold these shares in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933 (the "Act")
and/or Regulation D promulgated thereunder. The shares were offered to "accredited investors," as defined under Regulation D, and no more than 35 non-accredited investors. At
the time immediately prior to making any sales, we believed that each purchaser who was not an accredited investor had such knowledge and experience in financial and business matters that they were
capable of evaluating the merits and risks of the prospective investment. Each investor was given access to information about us, as specified in Regulation D, in
making investment decisions. The recipients of the shares were not acting as underwriters within the meaning of Section 2(a)(11) of the Act, written disclosure was made to each recipient that
the shares have not been registered under the Act and, therefore, cannot be resold unless they are registered under the Act or unless an exemption from registration is available, and appropriate
legends were affixed to the share certificates issued to each recipient. The issuance of these shares was made without general solicitation or advertising.

21

---



Table of Contents

Due
to our decision in February 2009 to close and/or sell BHG, pursuant to the BHG stock purchase agreement, certain shares of the escrowed common stock will be released from escrow and delivered to
the holders of such stock on January 18, 2011 and the remaining shares will be released from escrow and delivered to THQ on January 18, 2013.

Purchases of Equity Securities by the Issuer and Affiliated Purchases

As of March 31, 2009 and 2008 we had $28.6 million authorized and available for common stock repurchases. During fiscal 2009, we did
not repurchase any shares of our common stock. There is no expiration date for the authorized repurchases.

22

---





Table of Contents

Item 6.    Selected Consolidated Financial Data

The following table summarizes certain selected consolidated financial data, which should be read in conjunction with our consolidated financial
statements and Notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein. The selected consolidated financial data
presented below as of and for each of the fiscal years in the five-year period ended March 31, 2009 are derived from our audited consolidated financial statements. The consolidated
balance sheets as of March 31, 2009 and 2008, and the consolidated statements of operations for the fiscal years ended March 31, 2009, 2008 and 2007, and the report thereon are included
elsewhere in this Form 10-K.

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

Fiscal Year Ended March 31,2009

2008

2007(b)

2006

2005(a)Net sales

$
829,963

$
1,030,467

$
1,026,856

$
806,560

$
756,731Costs and expenses:Cost of salesproduct costs


338,882


389,097


351,449


287,946


255,187Cost of salessoftware amortization and royalties


296,688


231,800


165,462


116,371


93,622Cost of saleslicense amortization and royalties


83,066


99,524


99,533


80,508


85,926Cost of salesventure partner expense


19,707


24,056


16,730


12,572


9,774Product development


109,201


128,869


97,105


94,575


80,090Selling and marketing


162,183


175,288


139,958


124,809


111,444General and administrative


76,884


69,901


78,413


57,944


50,278Goodwill impairment


118,799











Restructuring


12,266











Total costs and expenses


1,217,676


1,118,535


948,650


774,725


686,321Income (loss) from continuing operations


(387,713
)

(88,068
)

78,206


31,835


70,410Interest and other income, net


483


15,433


12,822


7,955


6,483Income (loss) from continuing operations before income taxes and minority interest


(387,230
)

(72,635
)

91,028


39,790


76,893Income taxes


46,226


(35,785
)

26,206


7,621


15,235Income (loss) from continuing operations before minority interest


(433,456
)

(36,850
)

64,822


32,169


61,658Minority interest


302





136


(63
)

(261
)Income (loss) from continuing operations


(433,154
)

(36,850
)

64,958


32,106


61,397Gain on sale of discontinued operations, net of tax


2,042


1,513


3,080





Net income (loss)

$
(431,112
)
$
(35,337
)
$
68,038

$
32,106

$
61,397Earnings (loss) per sharebasic:Continuing operations

$
(6.48
)
$
(0.55
)
$
1.00

$
0.51

$
1.05Discontinued operations


0.03


0.02


0.05





Earnings (loss) per sharebasic

$
(6.45
)
$
(0.53
)
$
1.05

$
0.51

$
1.05Earnings (loss) per sharediluted:Continuing operations

$
(6.48
)
$
(0.55
)
$
0.96

$
0.49

$
1.02Discontinued operations


0.03


0.02


0.05





Earnings (loss) per sharediluted

$
(6.45
)
$
(0.53
)
$
1.01

$
0.49

$
1.02Shares used in per share calculationbasic


66,861


66,475


65,039


62,615


58,545Shares used in per share calculationdiluted


66,861


66,475


67,593


65,520


60,367


23

---



Table of Contents

BALANCE SHEET DATA  (In thousands)

As of March 31,2009

2008

2007

2006

2005Working capital

$
189,604

$
396,505

$
562,316

$
459,558

$
400,063Total assets

$
598,329

$
1,084,320

$
1,013,541

$
848,468

$
746,606Stockholders' equity

$
307,040

$
740,569

$
768,957

$
627,751

$
547,758


---

Notes:

24

---





Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Our business is subject to many risks and uncertainties which may affect our future financial performance. For a discussion of our risk factors, see
"Part IItem 1A. Risk Factors."

Overview

The following overview is a top level discussion of our operating results, as well as trends that have, or that we reasonably believe will, impact
our operations. Management believes that an understanding of these trends and drivers is important in order to understand our results for the fiscal year ended March 31, 2009, as well as our
future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Annual Report on
Form 10-K and in other documents we have filed with the SEC.

Trends Affecting Our Business

Our revenues and profitability decreased in the fiscal year ended March 31, 2009 as compared to the prior fiscal year. The decreases are
related to the following significant trends affecting our business:

General Economic Conditions.Lower net sales and operating income in fiscal 2009 as compared to fiscal 2008, was partly due to the macroeconomic environment, which
began to impact our sales in certain international territories at the end of our second quarter in fiscal 2009. We continued to experience more conservative consumer spending in all major markets
during the fiscal 2009 holiday quarter, brought on by the slowing global economy, and we expect this trend to continue for the foreseeable future. Additionally, due to the weak economic conditions and
tightened credit environment, some of our retailers and distributors may not have the same purchasing power, leading to lower purchases of our games for placement into distribution channels. With
respect to the industry overall, calendar 2008 video game software sales increased 21% in North America and 11% in Europe compared to the prior year, yet much of this growth was realized by Nintendo
and other publishers of a relatively small number of "hit" titles. We expect video game software sales in our industry to be flat or to increase in a mid-single digit range in calendar
2010 as compared to calendar 2009.

In
addition to reduced consumer spending and reduced purchases of our games in our distribution channels, our profitability during fiscal 2009 has been negatively affected due to the insolvency of
some of our major retail distributors, including Circuit City in the United States and EUK in the United Kingdom. The inability of our customers to timely pay us or the insolvency of other major
customers would further impact our profitability.

Increasing Concentration in Top Titles and Higher Development Costs.During the last fiscal year, the majority of money spent on video game software was spent on
select top titles. We expect this trend to continue into fiscal 2010. Additionally, the cost to deliver video games has increased significantly over the last few years. Current generation consoles
have functionality that allows us to deliver exciting gaming experiences at high quality levels, but this increased functionality increases the overall cost to develop games and accordingly, our
software development costs have increased as we developed more games for these consoles. Because of the demand for select "hit" titles and the increased development investment, we believe that it is
important to focus our development expenses on bringing a smaller number of high-quality, competitive products to market. This focus may lower our revenue and profitability in any given
quarter, as we generally aim to ship games only when we believe the quality is high and the competitive window is most advantageous.

Shift in Kids Preferences.Growth in our kids licensed business (which represented approximately 25% of our net sales for fiscal 2009) has slowed considerably and
the business has become less profitable. During the last year, we have seen kids preferences shift from games based on traditional licensed movies and television shows, such as WALLEandSpongeBob SquarePants, to original games published by Nintendo

25

---



Table of Contents

for
play on their platforms, such as its Super Mario games, and games that tap into mass-market trends, such as music games. Additionally, sales of our games on the "kid friendly"
PlayStation 2 decreased by $160.6 million during the fiscal year ended March 31, 2009 as compared to the prior year. We believe that much of this business has shifted to the
Nintendo Wii and that, as discussed above, kids are choosing to play original Nintendo games and music games on this console.

Foreign Currency Exchange Rates Impact on Results of Operations.Approximately 45% of our revenue for the fiscal year ended March 31, 2009 was produced by
sales outside of North America. We are exposed to significant risks of foreign currency fluctuation, primarily from receivables denominated in foreign currency, and are subject to transaction gains
and losses, which are recorded as a component in determining net income. The income statements of our non-U.S. operations are translated into U.S. dollars at the
month-to-date average exchange rates for each applicable month in a period. To the extent the U.S. dollar strengthens against foreign currencies, as it did during fiscal 2009,
the translation of these foreign currency denominated transactions results in decreased revenue, operating expenses and income from our non-U.S. operations. Similarly, our revenue,
operating expenses and income from our non-U.S. operations will increase if the U.S. dollar weakens against foreign currencies.

Seasonality.The interactive entertainment software market is highly seasonal. Sales are typically significantly higher during the third quarter of our fiscal
year, due primarily to the increased demand for interactive games during the holiday buying season.

Strategic Plan and Business Realignment

In
November 2008, in order to address the significant trends affecting our business, we updated our strategic plan to focus on 1) developing a select number of high
quality titles targeted at the core gamer, 2) extending our leadership in the fighting and racing categories, 3) reinvigorating the product portfolio and improving profitability in our
kids' business, 4) building strong mass appeal/family game franchises, and 5) extending our brands into online markets. In the second half of fiscal 2009, we made changes to our
organization to support this new business strategy. We restructured our product development organization under new studio management and discontinued a number of titles in our product pipeline that
did not fit our strategic objectives. As a result, we have closed several of our studios and reduced our product development headcount significantly. Additionally, we realigned our sales, marketing
and corporate organizational structure to support this more focused product strategy by reducing both costs and headcount in our corporate and global publishing organizations. In total we reduced
headcount by approximately 600 people, or 24% of our workforce.

As
a result of these realignment initiatives, we recorded a $12.3 million restructuring charge for the fiscal year ended March 31, 2009. Restructuring charges include the costs
associated with lease abandonments, less estimates of sublease income, write-off of related fixed assets due to the studio closures, as well as other non-cancellable contracts.
Additionally, as of March 31, 2009, we incurred non-cash charges of $63.3 million, recorded in cost of salessoftware amortization and royalties, related to the
write-off of capitalized software for games that have been cancelled. We also incurred non-cash charges of $1.0 million, recorded in cost of saleslicense
amortization and royalties, related to impairment of licenses in connection with the cancelled games. In addition, we incurred $12.7 million in cash charges related to severance and other
employee benefits. Employee related severance costs are classified in product development, selling and marketing, and general and administrative expenses in our consolidated statements of operations
based upon the terminated employee's classification.

We
have substantially completed the actions necessary to achieve our business realignment plan, and expect to report additional charges of up to $10.0 million in fiscal 2010 as certain projects
are completed and facilities are vacated. We continue to maintain a strong studio system with eight internal development studios and more than 1,200 people in our product development organization.

26

---



Table of Contents

Overview of Financial Results for Fiscal 2009

Our net loss for the fiscal year ended March 31, 2009 was $431.1 million, or $6.45 per diluted share, and included a gain on sale of
discontinued operations, net of tax, of $2.1 million, compared to a net loss of $35.3 million, or $0.53 per diluted share, for last fiscal year, including a gain on sale of discontinued
operations, net of tax, of $1.5 million. Our net loss from continuing operations for the fiscal year ended March 31, 2009 was $433.2 million, or $6.48 per diluted share, compared
to a net loss from continuing operations of $36.9 million, or $0.55 per diluted share, for the year ended March 31, 2008.

Our
profitability is dependent upon revenues from the sales of our video games. Net sales in fiscal year ended March 31, 2009 decreased $200.5 million, or 19%, from fiscal year 2008, to
$830.0 million from $1,030.5 million. The decrease in our net sales was primarily due to a decrease in unit sales, unfavorable foreign currency changes due to a stronger U.S. dollar, and
a shift in title mix on our Wii games towards lower priced titles. The decrease in unit sales primarily resulted from fewer new releases during fiscal 2009 as compared to the prior fiscal year and,
additionally, sales ofWWE Smackdown vs. Raw 2009andWALLEwere lower than sales of WWE Smackdown vs. Raw
2008andRatatouillein the prior fiscal year.

Profitability
is also affected by the costs and expenses associated with developing and publishing our games. Excluding the impact of goodwill impairment charge of $118.8 million, costs and
expenses decreased by $19.6 million, or 1.8%, in the fiscal year ended March 31, 2009 as compared to the prior fiscal year. This decrease was primarily due to decreases in product costs,
license amortization and royalties, and product development expense as compared to the prior fiscal year, which were the result of cost reductions in product development expenses and lower sales of
licensed products.

Our
principal source of cash is from (1) sales of packaged interactive software games designed for play on home video game consoles, personal computers and handheld devices,
(2) downloads by mobile phone users of our wireless content, (3) interactive online-enabled packaged goods, digital distribution of our products and downloadable
content/micro-transactions, and (4) in-game advertising. Our principal uses of cash are for product purchases of discs and cartridges along with associated manufacturer's royalties,
payments to external developers and licensors, the costs of internal software development, and selling and marketing expenses. Cash used in operations was $194.2 million in fiscal year 2009, as
compared to $9.7 million in fiscal year 2008. The increase in cash used was primarily a result of an increase in our net loss for the year ended March 31, 2009 as compared to last fiscal
year, partially offset by non-cash goodwill impairment and higher amortization of
licenses and software development in fiscal 2009 as compared to fiscal 2008. Additionally, we had larger investments in software development and prepaid licenses and we had higher payments to our
vendors in fiscal 2009 as compared to fiscal 2008. These increases in cash usage were partially offset by higher collections of accounts receivable and fewer product purchases reflected in our ending
inventory balance.

Critical Accounting Estimates

The Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. The estimates discussed below are considered by management to be critical because they are both important to the portrayal of
our financial condition and results of operations and because their application places the most significant demands on management's judgment, with financial reporting results relying on estimates
about the effect of matters that are inherently uncertain. Specific risks for these critical accounting estimates are described in the following paragraphs. For all of these estimates, we caution that
actual results may differ materially from these estimates under different assumptions or conditions.

27

---



Table of Contents

Accounts receivable allowances.We derive revenue from sales of packaged software for video game systems and personal computers and sales of content and services
for wireless devices. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. We typically only allow returns for our personal computer
products; however, we may decide to provide price protection or allow returns for our video games after we analyze: (i) inventory remaining in the retail channel, (ii) the rate of
inventory sell-through in the retail channel, and (iii) our remaining inventory on hand. We maintain a policy of giving credits for price protection and returns, but do not give
cash refunds. We use significant judgment and make estimates in connection with establishing allowances for price protection, returns, and doubtful accounts in any accounting period. Included in our
accounts receivable allowances is our allowance for co-operative advertising that we engage in with our retail channel partners. Our co-operative advertising allowance is based
upon specific contractual commitments and does not involve estimates made by management.

We
establish sales allowances based on estimates of future price protection and returns with respect to current period product revenue. 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 in customer demand and
acceptance of our products, and other related factors when evaluating the adequacy of the price protection and returns allowance. In addition, we monitor the volume of our sales to retailers and
distributors and their inventories, because slow-moving inventory in the distribution channel can result in the requirement for price protection or returns in subsequent periods. Actual
price protection and returns in any future period are uncertain. While we believe we can make reliable estimates for these matters, if we changed our assumptions and estimates, our price protection
and returns reserves would change, which would impact the net revenue we report. In addition, if actual price protection and returns were significantly greater than the reserves we have established,
the actual results of our reported net sales would decrease. Conversely, if actual price protection and returns were significantly less than our reserves, our reported net sales would increase. In
circumstances when we do not have a reliable basis to estimate returns and price protection or are unable to determine that collection of a receivable is probable, we defer the revenue until such time
as we can reliably estimate any related returns and allowances and determine that collection of the receivable is probable.

Similarly,
we must use significant judgment and make estimates in connection with establishing allowances for doubtful accounts in any accounting period. We analyze customer concentrations, customer
credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. Material differences may result in the amount and timing of our bad debt expense for
any period if we made different judgments or utilized different estimates. If our customers experience financial difficulties and are not able to meet their ongoing financial obligations to us, our
results of operations may be adversely impacted.

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

We
evaluate the future recoverability of our capitalized licenses on a quarterly basis. The recoverability of capitalized license costs is evaluated based on the expected performance of the specific
products in which the licensed trademark or copyright is to be used. As many of our licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized license
costs based on certain

28

---



Table of Contents

qualitative
factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical releases or television
series based on the intellectual property and the rights holder's continued promotion and exploitation of the intellectual property. Prior to the related product's release, we expense, as part of cost
of saleslicense amortization and royalties, capitalized license costs when we estimate such amounts are not recoverable.

Licenses
are expensed to cost of saleslicense amortization and royalties at the higher of (i) the contractual royalty rate based on actual net product sales related to such
license, or (ii) an effective rate based upon total projected revenue related to such license. When, in management's estimate, future cash flows will not be sufficient to recover previously
capitalized costs, we expense these capitalized costs to cost of saleslicense amortization and royalties. If actual revenues or revised forecasted revenues fall below the initial
forecasted revenue for a particular license, the charge to cost of saleslicense amortization and royalties expense may be larger than anticipated in any given quarter. As of
March 31, 2009, the net carrying value of our licenses was $92.9 million. If we were required to write off licenses, due to changes in market conditions or product acceptance, our
results of operations could be materially adversely affected.

Software Development.We utilize both internal development teams and third-party software developers to develop our software. We account for software development
costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" ("FAS 86"). We capitalize software development costs once
technological feasibility is established and we determine that such costs are recoverable against future revenues. For products where proven game engine technology exists, this may occur early in the
development cycle. We capitalize the milestone payments made to third-party software developers and the direct payroll and overhead costs for our internal development teams. We evaluate technological
feasibility on a product-by-product basis. Amounts related to software development for which technological feasibility is not yet met are charged as incurred to product
development expense in our consolidated statements of operations.

On
a quarterly basis, we compare our unamortized software development costs to net realizable value, on a product-by-product basis. The amount by which any unamortized software
development costs exceed their net realizable value is charged to cost of salessoftware amortization and royalties. The net realizable value is the estimated future net revenues from the
product, reduced by the estimated future direct costs associated with the product such as completion costs, cost of sales and advertising.

Commencing
upon product release, capitalized software development costs are amortized to cost of salessoftware amortization and royalties based on the ratio of current gross revenues to
total projected gross revenues. In fiscal 2009, we recorded $63.3 million of additional amortization expense related to the cancellation of certain games. As of March 31, 2009, the net
carrying value of our software development was $162.5 million.

The
milestone payments made to our third-party developers during their development of our games are typically considered non-refundable advances against the total compensation they can
earn based upon the sales performance of the products. Any additional compensation earned beyond the milestone payments is expensed to cost of salessoftware amortization and royalties as
earned.

Goodwill and Other Intangible Assets.We perform an annual assessment of goodwill for impairment during the fourth quarter of each year or more frequently, if
events or circumstances occur that would indicate a reduction in the fair value of the Company. In the latter half of the third quarter of fiscal 2009, our stock price declined significantly,
resulting in a market capitalization that was substantially below the carrying value of our net assets. In addition, the unfavorable macroeconomic conditions and uncertainties have adversely affected
our environment. As a result, in connection with the preparation of the fiscal 2009 third quarter financial statements, we performed an interim goodwill impairment test consistent with SFAS
No. 142, "Goodwill and Other Intangible Assets" (FAS 142).

29

---





Table of Contents

We performed the first step of the two-step impairment test required by FAS 142, which includes comparing the fair value of our single reporting unit to its
carrying value. Due to market conditions at the time of the impairment test, our analysis was weighted towards the market value approach, which is based on recent share prices, and includes a control
premium based on recent transactions that have occurred within our industry, to determine the fair value of our single reporting unit. We concluded that the fair value of our single reporting unit was
less than the carrying value of our net assets and thus performed the second step of the impairment test. Our step two analysis involved preparing an allocation of the estimated fair value of our
reporting unit to the tangible and intangible assets (other than goodwill) as if the reporting unit had been acquired in a business combination. Based on our analysis, we recorded goodwill impairment
charges of $118.8 million for the year ended March 31, 2009, representing the entire amount of our previously recorded goodwill.

All
identifiable intangible assets with finite lives will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."

Revenue Recognition.Our revenue recognition policies are in compliance with American Institute of Certified Public Accountants Statement of Position ("SOP")
97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," which provide guidance on generally accepted accounting principles ("GAAP") for recognizing revenue on software transactions, and Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition in Financial Statements," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the Securities and Exchange Commission ("SEC").

Product
Sales: We recognize revenue for packaged software when title and risk of loss transfers to the customer, provided that no significant vendor support obligations remain outstanding and that
collection of the resulting receivable is deemed probable by management.

Some
of our packaged software products are developed with the ability to be connected to, and played via, the internet. In order for consumers to participate in online communities and play against one
another via the internet, we (either directly or through outsourced arrangements with third parties) maintain servers that support an online service we provide to consumers for activities such as
matchmaking, roster updates, tournaments and player rankings. Generally, we do not consider the online service to be a deliverable as it is incidental to the overall product offering. Accordingly, we
do not defer any revenue related to products containing the limited online service.

In
instances where the online service is considered a deliverable and where we have significant continuing involvement in addition to the software product, we account for the sale as a "bundled" sale,
or multiple element arrangement, in which we sell both the packaged software product and the online service for one combined price. Vendor specific objective evidence for the fair value of the online
service does not exist as we do not separately offer or charge for the online service. Therefore, when the online service is determined to be a deliverable, we recognize the revenue from sales of such
software products ratably over the estimated online service period of six months, beginning the month after shipment of the software product. Costs of sales related to such products are also deferred
and recognized with the related revenues and include product costs, software amortization and royalties, and license amortization and royalties.

Determining
whether the online service for a particular game constitutes a deliverable is subjective and requires management's judgment. Determining the estimated service period over which to
recognize the related revenue and costs of sales is also subjective and involves management's judgment.

When
we determine the online service from packaged software products bundled with other online services is considered to be more-than-inconsequential to the software product,
such amounts are recognized ratably over the estimated service period of six months beginning the month after initial sale.

30

---



Table of Contents

At
March 31, 2009 the deferred revenue related to these games was $11.6 million and is included within accrued and other current liabilities in our consolidated balance sheet.

Although
we generally sell our products on a no-return basis, in certain circumstances we may allow price protection, returns or other allowances on a negotiated basis. We estimate such
price protection, returns or other allowances based upon management's evaluation of our historical experience, retailer inventories, the nature of the titles and other factors. Such estimates are
deducted from gross sales. See "Note 3Accounts Receivable Allowances." Software is sold under a limited 90-day warranty against defects in material and workmanship. To
date, we have not experienced material warranty claims.

Stock-based compensation.We account for stock-based compensation under SFAS No. 123(R) "Share-Based Payment" ("FAS 123R"). Under FAS 123R, we
estimate the fair value of stock options on date of grant using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a
straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the
stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of
options that actually vest or are forfeited are recorded. The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including
the expected volatility of our common stock and an option's expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the
expenses recognized for stock-based compensation.

Income taxes.We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("FAS 109"). The provision for income taxes
is computed using the asset and liability method, under which deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for
the years in which those tax assets are expected to be realized or settled. To the extent recovery of deferred tax assets is not likely based on our estimates of future taxable income in each
jurisdiction, a valuation allowance is established. As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions
in which we operate. This process involves: (i) estimating our current tax exposure in each jurisdiction including the impact, if any, of changes or interpretations to applicable tax laws and
regulations, (ii) estimating additional taxes resulting from tax examinations and (iii) making judgments regarding the recoverability of deferred tax assets.

The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for the potential outcome for any uncertain tax issue, including our
claims for research and development income tax credits, requires judgment. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future
results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period in which they are resolved or when statutes of limitation on potential assessments expire.

As
of April 1, 2007, we adopted the provisions of FIN No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48"). Previously, we had accounted for income tax contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." As required by FIN 48, we recognize the
financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
"more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, we applied FIN 48 to all income tax positions for which the statute of limitations remained open. Our adoption of FIN 48 on April 1,
2007 had no impact on our April 1, 2007 beginning retained earnings balance. The amount of unrecognized tax benefits as of

31

---



Table of Contents

March 31,
2009 and 2008 was $10.9 million and $11.6 million, respectively. The contingent tax liability relates to tax positions taken in previously filed tax returns and similar
positions expected to be taken in our current year income tax returns. A portion of the contingent tax liability relates to fiscal years under examination. On May 24, 2007 we received
notification from the IRS that the Joint Committee on Taxation had completed its review of our file and took no exception to the conclusions reached by the IRS. We have evaluated the impact of the
conclusions reached in the IRS examination in the FIN 48 measurement and recognition process. We are currently under routine examination by the IRS for our income tax returns for fiscal years
2004 through 2007 and by various state jurisdictions for fiscal years subsequent to 2003. We expect some of these examinations to be concluded and settled in the next 12 months, however, we are
currently unable to estimate the potential impact to the liability for unrecognized tax benefits or the timing of such changes. We do not anticipate any significant changes in the unrecognized tax
benefits in fiscal 2010 related to the expiration of the statutes of limitations.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("FAS 157"). FAS 157 provides a single definition of
fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. In February 2008, the FASB issued FASB Staff
Position ("FSP")
FAS 157-2, "Effective Date of FASB Statement No. 157" which defers the implementation for certain non-recurring, nonfinancial assets and liabilities from fiscal
years beginning after November 15, 2007 to fiscal years beginning after November 15, 2008, which will be our fiscal year 2010. In October 2008, the FASB issued FSP
FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" which clarifies the application of FAS 157 in a market that is not
active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The statement provisions effective as of
April 1, 2008 and July 1, 2008, did not have a material effect on our results of operations, financial position or cash flows. We adopted the remaining provisions of this statement on
April 1, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

FSP
FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly ("FSP FAS 157-4")," provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or
liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and annual periods ending after March 15, 2009. The adoption is not expected to have a
material impact on our results of operations, financial position or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an Amendment of FASB Statement No. 115"
("FAS 159"). FAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be reported in earnings. We adopted this statement on April 1, 2008 and did not make this election for any of our existing
financial assets and liabilities. As such, the adoption of this statement did not have any impact on our results of operations, financial position or cash flows. The Company did elect the fair value
option for an asset acquired in the third quarter of fiscal 2009 (see "Note 2Investments").

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("FAS 162"). FAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental
entities. FAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU

32

---



Table of Contents

Section 411,
"The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles." We do not expect the adoption of this statement to have a material impact on our
results of operations, financial position or cash flows.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("FAS 141R"). FAS 141R retains the fundamental requirements in SFAS No. 141 that the acquisition
method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141R
defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control.
FAS 141R is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008, which will be our fiscal year 2010. We adopted this statement on April 1, 2009, and the adoption is expected to have a significant effect on our financial statements
for material acquisitions consummated subsequent to April 1, 2009.

In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). This change is intended to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to
measure the fair value of the asset under FAS 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years, which will be our fiscal year 2010. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the
effective date and the disclosure requirements must be applied prospectively to all intangible assets recognized as of, and subsequent to, the effective date. We adopted this statement on
April 1, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("FAS 160"). This Statement amends Accounting Research Bulletin ("ARB")
No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. FAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, which will be our fiscal year 2010. We adopted
this statement on April 1, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133" ("FAS 161"). This
Statement changes the disclosure requirements for derivative instruments and hedging activities. Under FAS 161, entities are required to provide enhanced disclosures about (a) how and
why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. FAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, which was our fourth quarter of fiscal year 2009. We adopted this statement on January 1, 2009, and the adoption did not have
a material impact on our results of operations, financial position or cash flows.

In
June 2007, the FASB ratified the Emerging Issues Task Force ("EITF") consensus conclusion on EITF No. 07-3, "Accounting for Advance Payments for Goods or Services to be Used in
Future Research and Development" ("EITF 07-3"). EITF 07-3 addresses the diversity which exists with respect to the accounting for the non-refundable
portion of a payment made by a research and development entity for

33

---



Table of Contents

future
research and development activities. Under this conclusion, an entity is required to defer and capitalize non-refundable advance payments made for research and development
activities until the related goods are delivered or the related services are performed. EITF 07-3 requires prospective application for new contracts entered into after the effective
date. We adopted this statement on April 1, 2008, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" that discusses how parties to a collaborative arrangement
(which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from transactions with third
parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant to EITF Issue
No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." Additionally, the consensus provides that income statement characterization of payments between the
participation in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable, rational, and
consistently applied accounting policy election. EITF Issue No. 07-1 is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2008,
which is our fiscal 2010 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. We adopted this statement on April 1,
2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
June 2008, the FASB ratified the EITF consensus on EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock"
("EITF 07-5") that discusses the determination of whether an instrument is indexed to an entity's own stock. The guidance of this issue shall be applied to outstanding instruments
as of the beginning of the fiscal year in which this issue is initially applied. EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years, which is our fiscal 2010. We adopted this statement on April 1, 2009, and the adoption did not have a material impact on
our results of operations, financial position or cash flows.

In
December 2008, FASB issued FSP SFAS 140-4 and FIN 46 (R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in
Variable Interest Entities" ("FSP SFAS 140-4 and FIN 46 (R)-8"). This disclosure-only FSP is intended to provide greater transparency to financial
statement users about a transferor's continuing involvement with transferred financial assets and an enterprise's
involvement with variable interest entities and qualifying special purpose entities. FSP SFAS 140-4 and FIN 46 (R)-8 is effective for reporting periods (annual or
interim) ending after December 15, 2008. We adopted this statement for our quarter ended December 31, 2008, and the adoption did not have a material impact on our results of operations,
financial position or cash flows.

FSP
FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," ("FSP FAS 107-1 and APB 28-1")
requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. FSP
FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and
annual periods ending after March 15, 2009. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.

FSP
FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP FAS 115-2 and
FAS 124-2") modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for
such securities. Under FSP FAS 115-2 and 124-2, a security is considered to be other-than-temporarily impaired if the present value of cash flows
expected to be collected are less than the security's amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security's amortized
cost

34

---



Table of Contents

basis
and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security's amortized cost basis. If an
other-than-temporary impairment exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis. Any remaining difference between
fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. The
FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and annual periods ending after
March 15, 2009. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.

Results of Operations

Comparison of Fiscal 2009 to Fiscal 2008

Our net loss from continuing operations for fiscal 2009 was $433.2 million, or $6.48 per diluted share, compared to a net loss from continuing
operations of $36.9 million, or $0.55 per diluted share, for fiscal 2008. Our net loss for fiscal 2009 was $431.1 million, or $6.45 per diluted share, and included a $2.1 million
gain on sale of discontinued operations.

Net Sales

In fiscal 2009 and 2008, net sales were $830.0 million and $1,030.5 million, respectively. We derive revenue principally from
(1) sales of packaged interactive software games designed for play on home video game consoles, personal computers and handheld devices, (2) downloads by mobile phone users of our
wireless content, (3) interactive online-enabled packaged goods, digital distribution of our products and downloadable content/micro-transactions, and (4) in-game
advertising.

Net
sales for fiscal 2009 are impacted by the deferral or recognition of revenue from the sale of titles with significant online functionality. The balance of deferred revenue related to these titles
is included within accrued and other current liabilities in our consolidated balance sheets. We also defer certain costs related to these titles; these costs are included within software development,
and prepaid expenses and other current assets in our consolidated balance sheets.

Net
sales decreased by $200.5 million in fiscal 2009 as compared to fiscal 2008, from $1,030.5 million to $830.0 million. Worldwide net sales in fiscal 2009
were primarily driven by sales ofWWE SmackDown vs. Raw 2009,Saints Row 2,and WALLE.
As more fully described below, the main factors that contributed to the decrease in our net sales were, i) an overall
softening in our kids business, ii) decline in sales of our games based on the WWE license, and iii) unfavorable changes in foreign currency translation rates.

The
following table details our net sales by new releases (titles initially released in the respective fiscal year) and catalog titles (titles released in fiscal years previous to the
respective fiscal year) for fiscal 2009 and fiscal 2008 (in thousands):

Fiscal Year Ended March 31,Increase/
(Decrease)2009

2008

% ChangeNew releases

$
556,384


67.0
%
$
755,126


73.3
%
$
(198,742
)

(26.3
)%Catalog


273,579


33.0


275,341


26.7


(1,762
)

(0.6
)%Consolidated net sales

$
829,963


100.0
%
$
1,030,467


100.0
%
$
(200,504
)

(19.5
)%


Net
sales of our new releases decreased by $198.7 million in fiscal 2009 as compared to fiscal 2008 primarily due to a decrease in the number of units sold. The decrease in units
sold was primarily the result

35

---



Table of Contents

of
releasing 25 fewer SKUs in fiscal 2009 as compared to fiscal 2008, which was primarily due to a decrease in titles from our kids business. A SKU is a version of a title
designed for play on a particular
platform. The decrease in units sold was also the result of fewer units sold ofWWE Smackdown vs. Raw 2009and Wall-Ein fiscal 2009
compared to sales ofWWE Smackdown vs. Raw 2008andRatatouillein fiscal 2008.

Additionally,
there was a decrease in the average selling price on our new releases in fiscal 2009 as compared to fiscal 2008. The decrease in the average selling price of our new
releases was primarily due to:



These
decreases were partially offset by the net deferred revenue activity on our new releases.

Net
sales of our catalog titles remained relatively flat, however, we had a decline in the number of catalog units shipped in fiscal 2009 as compared to fiscal 2008. The decline in units
shipped was partially offset by the fiscal 2009 recognition of the fiscal 2008 deferred revenue. Additionally, our catalog titles sold at slightly higher average selling prices in
fiscal 2009 as compared to fiscal 2008.

The
following table details our net sales by owned intellectual property and licensed titles for fiscal 2009 and fiscal 2008 (in thousands):

Fiscal Year Ended March 31,Increase/
(Decrease)2009

2008

% ChangeOwned intellectual properties

$
278,586


33.6
%
$
246,515


23.9
%
$
32,071


13
%Licensed


551,377


66.4


783,952


76.1


(232,575
)

(29.7
)%Consolidated net sales

$
829,963


100.0
%
$
1,030,467


100.0
%
$
(200,504
)

(19.5
)%


Net
sales of games based on our owned intellectual properties increased by $32.1 million in fiscal 2009 as compared to fiscal 2008. Fiscal 2009 net sales of games based on our
owned intellectual properties were driven by fiscal 2009 new releases such asSaints Row 2,Big Beach
SportsandDeBlob, as well as continued sales of the fiscal 2008 release ofMX vs. ATV:
Untamedand other catalog titles. We released seven fewer SKUs based on our owned intellectual properties in fiscal 2009 as compared to fiscal 2008. Excluding the
impact of deferred revenue in each year, net sales of games based on our owned intellectual properties would have remained relatively flat in fiscal 2009 as compared to fiscal 2008.

Net
sales of games based on our licensed properties decreased by $232.6 million in fiscal 2009 as compared to fiscal 2008 primarily due to a decrease in the number of units sold.
The decrease in units sold was primarily the result of releasing 18 fewer SKUs based on our licensed properties in fiscal 2009 as compared to fiscal 2008, which was primarily due to a
decrease in titles from our kids business. We experienced decreases in sales of games based on both our DisneyPixar and Nickelodeon licenses due to an overall softening in our kids
business.

We
also had a decrease in sales of games based on the WWE license primarily due to fewer units sold ofWWE Smackdown vs. Raw 2009in fiscal 2009 compared to sales ofWWE Smackdown vs. Raw 2008in fiscal 2008, partially offset by net sales of WWE Legends of
Wrestlemaniareleased in the fourth quarter of fiscal 2009. The decrease in sales of games based on the WWE license
was also due to a decrease in the average selling price onSmackdown vs. Raw 2009in fiscal 2009 as compared to Smackdown vs. Raw 2008in fiscal 2008, which was due to a decrease in the gross selling price as well as a higher percentage of
fiscal 2009 estimates for price protection as compared to fiscal 2008.

36

---





Table of Contents

The following table details our net sales by territory for fiscal 2009 and fiscal 2008 (in thousands):

Fiscal Year Ended March 31,Increase/
(Decrease)2009

2008

% ChangeNorth America

$
457,819


55.2
%
$
503,134


48.8
%
$
(45,315
)

(9.0
)%Europe


314,063


37.8
%

454,880


44.2
%

(140,817
)

(31.0
)%Asia Pacific


58,081


7.0
%

72,453


7.0
%

(14,372
)

(19.8
)%International


372,144


44.8
%

527,333


51.2
%

(155,189
)

(29.4
)%Consolidated net sales

$
829,963


100.0
%
$
1,030,467


100.0
%
$
(200,504
)

(19.5
)%


Net
sales in North America and in our international territories decreased in fiscal 2009 as compared to fiscal 2008 by $45.3 million and $155.2 million, respectively. The
decrease in net sales in both North America and in our international territories was primarily due to the decrease in sales from our new releases. Additionally, we estimate that unfavorable changes in
foreign currency translation rates during fiscal 2009 resulted in a decrease of reported net sales from our international territories of $41.0 million as compared to fiscal 2008.

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

Excluding the impact of goodwill impairment charges of $118.8 million, costs and expenses decreased by $19.6 million, or 1.8%, in
fiscal 2009 as compared to fiscal 2008, to $1,098.9 million, from $1,118.5 million. The decrease was primarily due to decreases in product costs, license amortization and
royalties, product development, and selling and marketing expense in fiscal 2009 as compared to fiscal 2008, which were primarily the result of lower sales and cost reductions in product
development stemming from our business realignment. These decreases were partially offset by an increase in software development expense in fiscal 2009 as compared to fiscal 2008,
primarily due to games cancelled in connection with our realignment as well as other realignment charges incurred in fiscal 2009.

Cost of SalesProduct Costs (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$338,882 |  | 40.8% |  | $389,097 |  | 37.8% |  | 12.9%
|         |  |       |  |          |  |       |  |      

Product
costs primarily consist of direct manufacturing costs (including platform manufacturer license fees), net of manufacturer volume rebates and discounts. Product costs as a percentage of net
sales increased by 3.0 points in fiscal 2009 as compared to fiscal 2008. This increase was primarily due to:



37

---



Table of Contents



Cost of SalesSoftware Amortization and Royalties (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$296,688 |  | 35.7% |  | $231,800 |  | 22.5% |  | 28.0%
|         |  |       |  |          |  |       |  |      

Software
amortization and royalties consists of amortization of capitalized payments made to third-party software developers and amortization of capitalized internal studio development
costs. Commencing upon product release, capitalized software development costs are amortized to software amortization and royalties based on the ratio of current revenues to total projected revenues.
In fiscal 2009 software amortization and royalties increased by 13.2 points as a percentage of net sales as compared to fiscal 2008. The increase was primarily due to
non-cash charges of $63.3 million incurred in fiscal 2009 related to games that were cancelled as part of our business realignment, compared to $23.9 million incurred
in fiscal 2008. The increase was also due to lower net sales on fiscal 2009 new releases as compared to fiscal 2008.

Cost of SalesLicense Amortization and Royalties (in thousands)

|        |  |       |  |         |  |      |  |      
|------- |  | ----- |  | ------- |  | ---- |  | -----
|
|$83,066 |  | 10.0% |  | $99,524 |  | 9.7% |  | 16.5%
|        |  |       |  |         |  |      |  |      

License
amortization and royalties expense consists of royalty payments due to licensors, which are expensed at the higher of (1) the contractual royalty rate based on actual net product sales
for such license, or (2) an effective rate based upon total projected revenue for such license. License amortization and royalties decreased on a dollar basis due to lower net sales from our
portfolio of licensed products in fiscal 2009 as compared to fiscal 2008. Also, net sales of our licensed properties made up a smaller portion of our net sales mix in fiscal 2009
with approximately 66% of our net sales compared to fiscal 2008 with approximately 76% of our net sales. Although net sales of our licensed properties made up a smaller portion of our net sales
mix, license amortization and royalties as a percentage of net sales increased slightly in fiscal 2009 as compared to fiscal 2008. This slight increase is primarily the result of overall
higher license rates due to the performance of our licensed properties and contractual minimum license requirements, which results in a higher effective rate.

Cost of SalesVenture Partner Expense (in thousands)

|        |  |      |  |         |  |      |  |      
|------- |  | ---- |  | ------- |  | ---- |  | -----
|
|$19,707 |  | 2.4% |  | $24,056 |  | 2.3% |  | 18.1%
|        |  |      |  |         |  |      |  |      

Venture
partner expense is related to the license agreement that the THQ/JAKKS Pacific joint venture, comprised of THQ and JAKKS Pacific, Inc. ("JAKKS"), has with the WWE, under which our role
is to develop, manufacture, distribute, market and sell WWE video games. Venture partner expense decreased by $4.3 million in fiscal 2009 as compared to fiscal 2008. This
decrease is due to an overall decrease in net sales of games based on the WWE license. We have not paid these amounts to JAKKS; see "Item 3Legal Proceedings" for information
regarding our venture partner agreement.

38

---



Table of Contents

Product Development (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$109,201 |  | 13.2% |  | $128,869 |  | 12.5% |  | 15.3%
|         |  |       |  |          |  |       |  |      

Product
development expense primarily consists of expenses incurred by internal development studios and payments made to external development studios prior to products reaching technological
feasibility. Product development expense decreased by $19.7 million in fiscal 2009 as compared to fiscal 2008. This decrease is primarily due to decreases in internal development
spending resulting from the closure of several of our studios as part of our business realignment as well as an increase in spend on products that have reached technological feasibility. These
decreases were partially offset by an increase in expense due to severance payments made to product development employees as part of our business realignment.

Selling and Marketing (in thousands)

|         |  |       |  |          |  |       |  |     
|-------- |  | ----- |  | -------- |  | ----- |  | ----
|
|$162,183 |  | 19.5% |  | $175,288 |  | 17.0% |  | 7.5%
|         |  |       |  |          |  |       |  |     

Selling
and marketing expenses consist of advertising, promotional expenses, and sales and marketing personnel-related costs. In fiscal 2009, selling and marketing expenses
decreased on a dollar basis by $13.1 million as compared to fiscal 2008. This decrease was primarily due to lower marketing spend onSmackdown vs.
Raw 2009in fiscal 2009 as compared toSmackdown vs. Raw 2008in fiscal 2008 and high
marketing spend in the fourth quarter of fiscal 2008 due to the launch of our owned intellectual propertyFrontlines: Fuel of War.

In
fiscal 2009, selling and marketing expenses increased by 2.5 points as a percentage of net sales as compared to fiscal 2008. This increase is primarily due to a decrease in net sales
primarily due to lower average selling prices in fiscal 2009 as compared to fiscal 2008 as well as fewer units shipped of our fiscal 2009 new releases as compared to
fiscal 2008.

General and Administrative (in thousands)

|        |  |      |  |         |  |      |  |      
|------- |  | ---- |  | ------- |  | ---- |  | -----
|
|$76,884 |  | 9.3% |  | $69,901 |  | 6.8% |  | 10.0%
|        |  |      |  |         |  |      |  |      

General
and administrative expenses consist of personnel and related expenses of executive and administrative staff, as well as fees for professional services, such as legal and accounting services.
General and administrative expenses increased by $7.0 million in fiscal 2009 as compared to fiscal 2008. The increase was primarily due to $10.1 million additional bad debt
expense in fiscal 2009 as compared to fiscal 2008 resulting from the bankruptcy of certain customers, partially offset by a decrease in employee related expenses.

Goodwill Impairment

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", we perform an annual assessment of goodwill to test for impairment
during the fourth fiscal quarter of each year, or more frequently if events and circumstances occur that would indicate that an impairment loss may have occurred. For the quarter ended
December 31, 2008 our stock price declined significantly, resulting in a market capitalization that was lower than our book value. In addition, the unfavorable macroeconomic conditions and
uncertainties have adversely affected our environment. As a result, in connection with the

39

---



Table of Contents

preparation
of the fiscal 2009 third quarter financial statements, we performed an interim impairment test of goodwill at December 31, 2008 and recorded non-cash impairment
charges relating to goodwill of $118.8 million.

Restructuring

Restructuring charges consist primarily of lease and other contact termination costs and asset impairments related to facility closures.
Restructuring charges were $12.3 million in fiscal 2009. We had no restructuring charges in fiscal 2008.

Interest and Other Income, net

Interest and other income, net, consists of interest earned on our investments as well as gains and losses resulting from exchange rate changes for
transactions
denominated in currencies other than the functional currency. Interest and other income, net, decreased by $14.9 million in fiscal 2009 as compared to fiscal 2008. The decrease in
fiscal 2009 was primarily due to the recognition of a $6.3 million other-than-temporary impairment loss on our investments, as well as lower average yields on a
lower average investment balance in fiscal 2009 as compared to fiscal 2008.

Income Taxes

We recorded an income tax expense of $46.2 million for fiscal 2009 as compared to income tax benefit of $35.8 million for
fiscal 2008. The income tax expense in fiscal 2009 reflects an effective tax rate of (12%), which is different than our statutory rate of 35%. The significant items that generated the
variance between our effective tax rate and the statutory tax rate for fiscal 2009 were (i) recording of a valuation allowance against deferred tax assets, (ii) goodwill
impairment, the majority of which is not tax deductible, (iii) fiscal 2009 research and development tax credits, and (iv) tax free interest income.

The
income tax benefit for fiscal 2008 reflects an effective income tax rate of 49%, which is higher than our statutory rate of 35%. The significant items that generated the variance between
our effective tax rate and the statutory tax rate for fiscal 2008 were (i) the partial release of the reserve on previous years' research and development tax credits,
(ii) fiscal 2008 research and development tax credits, and (iii) tax free interest income.

Minority Interest

In August 2008, we formed a joint venture, THQ*ICE LLC ("THQ*ICE"), with ICE Entertainment, Inc. a Delaware corporation ("ICE"), for
the initial purpose of launching online games in North America. THQ*ICE plans to launchDragonica, a free-to-play,
micro-transaction-based massively multiplayer online casual game in North America in calendar 2009. THQ and ICE own equal interests in THQ*ICE. We have consolidated the
results of THQ*ICE in accordance with Financial Accounting Standards Boards Interpretation No. 46R, "Consolidation of Variable Interest Entitiesan interpretation of ARB
No. 51," and the minority interest of $302,000 reflects the loss allocable to equity interests in THQ*ICE for fiscal 2009 that are not owned by THQ.

Discontinued Operations

On December 1, 2006, we sold our interest in Minick. As of March 31, 2009 we have received $20.6 million in cash due to the sale
of Minick. We recognized gains of $2.1 million, $1.5 million, and $3.1 million in fiscal 2009, 2008, and 2007, respectively, related to the sale of Minick. These gains are
presented as "Gain on sale of discontinued operations, net of tax," in our consolidated statements of operations. Pursuant to the Minick sale agreement, no additional consideration is outstanding as
of March 31, 2009.

40

---



Table of Contents

Comparison of Fiscal 2008 to Fiscal 2007

Our net loss from continuing operations for fiscal 2008 was $36.8 million, or $0.55 per diluted share, compared to net income from
continuing operations of $65.0 million, or $0.96 per diluted share, for fiscal 2007. Our net loss for fiscal 2008 was $35.3 million, or $0.53 per diluted share, and
included a $1.5 million gain on sale of discontinued operations.

Net Sales

We derive revenue principally from sales of packaged interactive software games designed for play on video game consoles, handheld devices and
personal computers. We also derive revenue through downloads by mobile phone users of our wireless content.

In
fiscal 2008, we deferred revenue for one of our titles,Frontlines: Fuel of War, on both PC and Xbox 360. We will recognize revenue
from the sale of this title over an estimated service period of six months, beginning the month after shipment. At March 31, 2008 the deferred revenue related to this game was
$30.9 million and is included within accrued and other current liabilities in our consolidated balance sheet. At March 31, 2008 the deferred costs related to this game were
$20.7 million and are included within software development and prepaid expenses and other current assets in our consolidated balance sheet.

The
following table details our net sales by territory for fiscal 2008 and 2007 (in thousands):

Fiscal Year Ended March 31,Increase/
(Decrease)2008

2007

% ChangeNorth America

$
503,134


48.8
%
$
600,159


58.4
%
$
(97,025
)

(16.2
)%Europe


454,880


44.2


365,406


35.6


89,474


24.5
%Asia Pacific


72,453


7.0


61,291


6.0


11,162


18.2
%International


527,333


51.2


426,697


41.6


110,636


23.6
%Consolidated net sales

$
1,030,467


100.0
%
$
1,026,856


100.0
%
$
3,611


0.4
%


Net
sales increased by $3.6 million in fiscal 2008 as compared to fiscal 2007, from $1,026.9 million to $1,030.5 million. Worldwide net sales in fiscal 2008
were primarily driven by sales ofWWE SmackDown vs. Raw 2008,Ratatouilleand sales
of our catalog titles.

North
America net sales decreased by $97.0 million in fiscal 2008 as compared to fiscal 2007. The decrease in North America net sales was primarily due to the
following:



International
net sales increased by $100.6 million in fiscal 2008 as compared to fiscal 2007. The increase in international net sales was primarily due to the
following:



41

---







Table of Contents



Changes
in foreign currency rates increased reported international net sales by $44.6 million or 10% in fiscal 2008, as compared to fiscal 2007. Excluding the impacts of foreign
exchange rates, international net sales increased by 13% in fiscal 2008 as compared to fiscal 2007.

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

Costs and expenses increased by $169.9 million, or 17.9%, in fiscal 2008 as compared to fiscal 2007, to $1,118.5 million,
from $948.7 million. This increase, on a dollar basis, was primarily due to:



Cost of SalesProduct Costs (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$389,097 |  | 37.8% |  | $351,449 |  | 34.2% |  | 10.7%
|         |  |       |  |          |  |       |  |      

Product
costs primarily consist of direct manufacturing costs (including platform manufacturer license fees), net of manufacturer volume rebates and discounts. Product costs as a percentage of net
sales increased by 3.6 points in fiscal 2008 as compared to fiscal 2007. This increase was primarily due to:



Cost of SalesSoftware Amortization and Royalties (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$231,800 |  | 22.5% |  | $165,462 |  | 16.1% |  | 40.1%
|         |  |       |  |          |  |       |  |      

Software
amortization and royalties primarily consists of amortization of capitalized payments made to third-party software developers and amortization of capitalized internal studio development
costs. Commencing upon product release, capitalized software development costs are amortized to software amortization and royalties based on the ratio of current revenues to total projected revenues.
In fiscal 2008

42

---



Table of Contents

software
amortization and royalties increased by 6.4 points as a percentage of net sales over fiscal 2007. This increase was primarily due to:



Cost of SalesLicense Amortization and Royalties (in thousands)

|        |  |      |  |         |  |      |  |     
|------- |  | ---- |  | ------- |  | ---- |  | ----
|
|$99,524 |  | 9.7% |  | $99,533 |  | 9.7% |  | 0.0%
|        |  |      |  |         |  |      |  |     

License
amortization and royalties expense consists of royalty payments due to licensors, which are expensed at the higher of (1) the contractual royalty rate based on actual net product sales
for such license, or (2) an effective rate based upon total projected revenue for such license. License amortization and royalties as a percentage of net sales remained flat at 9.7% in both
fiscal 2008 and fiscal 2007. In fiscal 2008, we recognized approximately $4.6 million of additional license amortization and royalties expense arising from our decision to
no longer pursue our Juiced and Stuntman intellectual properties in the future. Excluding these charges, license amortization and royalties, as a percentage of net sales, would have been lower
by half a point in fiscal 2008 due to the increased mix of net sales from games based on our owned intellectual properties, includingMX vs. ATV
Untamed,Juiced 2: Hot Import Nights,Stuntman: Ignitionand Drawn to Life.

Cost of SalesVenture Partner Expense (in thousands)

|        |  |      |  |         |  |      |  |      
|------- |  | ---- |  | ------- |  | ---- |  | -----
|
|$24,056 |  | 2.3% |  | $16,730 |  | 1.6% |  | 43.8%
|        |  |      |  |         |  |      |  |      

Venture
partner expense is related to the license agreement that the THQ/JAKKS Pacific joint venture, comprised of THQ and JAKKS Pacific, Inc. ("JAKKS"), has with the WWE, under which our role
is to develop, manufacture, distribute, market and sell WWE video games. Venture partner expense increased by $7.3 million in fiscal 2008 as compared to fiscal 2007. This
increase is due to an overall increase in net sales of games based upon the WWE license, primarily due to the release ofWWE SmackDown vs.
Raw 2008in fiscal 2008 on three additional platforms as compared toWWE SmackDown vs.
Raw 2007in fiscal 2007. We have not paid these amounts to JAKKS; see "Item 3Legal Proceedings" for information regarding our venture partner
agreement.

Product Development (in thousands)

|         |  |       |  |         |  |      |  |      
|-------- |  | ----- |  | ------- |  | ---- |  | -----
|
|$128,869 |  | 12.5% |  | $97,105 |  | 9.5% |  | 32.7%
|         |  |       |  |         |  |      |  |      

Product
development expense primarily consists of expenses incurred by internal development studios and payments made to external development studios prior to products reaching technological
feasibility. Product development expense increased by $31.8 million in fiscal 2008 as compared to fiscal 2007. This

43

---



Table of Contents

increase
is primarily due to overall increased product development efforts to support future growth, including increased quality assurance efforts and increased wireless game development due in part
to our acquisition of Universomo, a mobile game developer based in Finland that we acquired in May 2007. Also contributing to the increases in product development expense is approximately
$4.7 million recognized in the three months ended December 31, 2007 due to a change in our estimate of an unannounced title having reached technological feasibility.

Selling and Marketing (in thousands)

|         |  |       |  |          |  |       |  |      
|-------- |  | ----- |  | -------- |  | ----- |  | -----
|
|$175,288 |  | 17.0% |  | $139,958 |  | 13.6% |  | 25.2%
|         |  |       |  |          |  |       |  |      

Selling
and marketing expenses consist of advertising, promotional expenses, and personnel-related costs. In fiscal 2008, selling and marketing expenses increased on a dollar basis by
$35.3 million as compared to fiscal 2007. This increase was primarily due to the following:



In
fiscal 2008, selling and marketing expenses increased by 3.4 points as a percentage of net sales as compared to fiscal 2007. This increase is primarily due to the
following:



General and Administrative (in thousands)

|        |  |      |  |         |  |      |  |        
|------- |  | ---- |  | ------- |  | ---- |  | -------
|
|$69,901 |  | 6.8% |  | $78,413 |  | 7.6% |  | (10.9)%
|        |  |      |  |         |  |      |  |        

General
and administrative expenses consist of personnel and related expenses of executive and administrative staff, as well as fees for professional services such as legal and accounting. General and
administrative expenses decreased by $8.5 million in fiscal 2008 as compared to fiscal 2007. The decrease was primarily due to:



44

---



Table of Contents



Interest and Other Income, net

Interest and other income, net consists of interest earned on our investments as well as gains and losses resulting from exchange rate changes for
transactions denominated in currencies other than the functional currency. Interest and other income, net increased
by $2.6 million in fiscal 2008 as compared to fiscal 2007. The increase in fiscal 2008 was primarily due to higher average yields on higher average investment balances.

Income Taxes

We recorded an income tax benefit of $35.8 million for fiscal 2008 as compared to income tax expense of $26.2 million for
fiscal 2007. The income tax benefit in fiscal 2008 reflects an effective tax rate of 49%, which is higher than our statutory rate of 35%. The significant items that generated the
variance between our effective tax rate and the statutory tax rate for fiscal 2008 were (i) the partial release of the reserve on previous years' research and development tax credits,
(ii) fiscal 2008 research and development tax credits, and (iii) tax free interest income.

The
income tax expense for fiscal 2007 reflects an effective income tax rate of 29%, which is lower than our statutory rate of 35%. The significant items that generated the variance between our
effective tax rate and the statutory tax rate for fiscal 2007 were research and development tax credits and tax free interest income.

Minority Interest and Discontinued Operations

Minority interest in fiscal 2007 reflects the income allocable to equity interests in Minick that are not owned by THQ. Prior to
December 1, 2006, we owned 50% of Minick's outstanding common stock and controlled its board of directors. On December 1, 2006, we sold our interest in Minick. As of March 31,
2008 we have received approximately $18.6 million in cash due to the sale of Minick. We recognized gains of $1.5 million and $3.1 million in fiscal 2008 and
fiscal 2007, respectively, related to the sale of Minick. These gains are presented as "Gain on sale of discontinued operations, net of tax" in our consolidated statements of operations.
Pursuant to the Minick sale agreement, we may receive additional consideration of approximately 1.2 million Euro during the three months ended June 30, 2008. If such amounts are
received, the additional gain recognized will be reported in discontinued operations in the period the proceeds are collected. The results of Minick's operations were not material to any of the
periods presented and have therefore not been reclassified as discontinued operations.

Liquidity and Capital Resources

(In thousands)

March 31, 2009

March 31, 2008

ChangeCash and cash equivalents

$
131,858

$
247,820

$
(115,962
)Short-term investments


8,804


69,684


(60,880
)Cash, cash equivalents and short-term investments

$
140,662

$
317,504

$
(176,842
)Percentage of total assets


24
%

29
%




Year Ended March 31,(In thousands)

2009

2008

ChangeCash used in operating activities

$
(194,174
)
$
(9,714
)
$
(184,460
)Cash provided by investing activities


59,533


105,820


(46,287
)Cash provided by financing activities


33,954


(26,513
)

60,467Effect of exchange rate changes on cash


(15,275
)

3,479


(18,753
)Net increase (decrease) in cash and cash equivalents

$
(115,962
)
$
73,072

$
(189,033
)


45

---



Table of Contents

Our
primary sources of liquidity are cash, cash equivalents, and short-term investments. Our principal source of cash is from (1) sales of packaged interactive software games
designed for play on video game consoles, personal computers and handheld devices, (2) downloads by mobile phone users of our wireless content, (3) interactive online-enabled packaged
goods, digital distribution of our products and downloadable content/micro-transactions, and (4) in-game advertising. Our principal uses of cash are for product purchases of discs
and cartridges along with associated manufacturer's royalties, payments to external developers and licensors, the costs of internal software development, and selling and marketing expenses.

Because
we did not generate positive cash flow in fiscal year 2009, our cash, cash equivalents and short-term investments have decreased from $317.5 million as of
March 31, 2008 to $140.7 million as of March 31, 2009. The primary reasons for the decrease were lower sales in fiscal 2009 compared with the prior year, increased spending
on capitalized software, the timing of large license and other payments as well as expenses related to the implementation of our business realignment plan, as described below.

In
November 2008, we announced an update to our strategic plan and a business realignment initiative that resulted in the cancellation of several titles that were in development, the closure of five
of our studios, a reduction in development personnel, and the streamlining of our corporate organization.

In
February 2009, in response to continuing macroeconomic uncertainty, we announced additional realignment plans in order to further streamline our product development and corporate operations and
reduce future cash outflows. As outlined in our strategic plan and business realignment, these initiatives resulted in the additional cancellation of titles in development, studio closures and a
reduction in development and corporate personnel. Upon completion of a few remaining studio personnel actions, we will have closed several of our studios and will have reduced headcount by
approximately 600 people, which represents approximately 24% of our prior total staff. We expect to continue to realize efficiencies from the November 2008 and
February 2009 initiatives in fiscal 2010. These actions negatively affected our cash in fiscal 2009 by approximately $10.4 million, primarily a result of severance and
other employee-related costs, and lease and other contract termination costs.

Cash Flow from Operating Activities.Cash used in operating activities increased by $184.5 million for the fiscal year ended March 31, 2009 as
compared to last fiscal year. The increase in cash used was primarily a result of an increase in our net loss for the year ended March 31, 2009 as compared to last fiscal year,
partially offset by non-cash goodwill impairment and higher amortization of licenses and software development in fiscal 2009 as compared to fiscal 2008. Additionally, we had
larger investments in software development and prepaid licenses and we had higher payments to our vendors in fiscal 2009 as compared to fiscal 2008. These increases in cash usage were
partially offset by higher collections of accounts receivable and fewer product purchases reflected in our ending inventory balance.

Cash Flow from Investing Activities.Cash provided by investing activities decreased by $46.3 million for the fiscal year ended March 31,
2009, as compared to last fiscal year. The decrease in cash provided was primarily due to movement between our investments and our cash balances, offset by a decrease in capital spend for the
fiscal year ended March 31, 2009, as compared to last fiscal year.

Cash Flow from Financing Activities.Cash provided by financing activities increased by $60.5 million for the fiscal year ended March 31,
2009, as compared to last fiscal year. The increase in cash provided was primarily due to common stock repurchases of $54.9 in fiscal year 2008; we had no repurchases of our common stock
in fiscal 2009. The increase in cash provided by financing activities is also the result of net borrowings of $24.4 under our secured credit line.

Key Balance Sheet Accounts

Accounts Receivable.Accounts receivable decreased $52.4 million in fiscal year 2009, from $112.8 million at March 31, 2008 to
$60.4 million at March 31, 2009. The decrease in net accounts receivable is primarily

46

---



Table of Contents

due
to a decrease in net sales in the three months ended March 31, 2009 as compared to the three months ended March 31, 2008, as well as an increase in reserves as a percentage of gross
accounts receivable. The increase in reserves is primarily due to an increase in our allowance for bad debts due to the bankruptcy of EUK in the UK and Circuit City in North America. Accounts
receivable allowances were $101.0 million as of March 31, 2009, a $12.0 million decrease from March 31, 2008. Allowances for price protection and returns as a percentage of
trailing nine month net sales were 11% and 10% as of March 31, 2009 and 2008, respectively. We believe our current reserves are adequate based on historical experience, inventory remaining in
the retail channel and the rate of inventory sell-through in the retail channel.

Inventory.Inventory decreased $12.5 million in fiscal 2009, from $38.2 million at March 31, 2008 to $25.8 million at
March 31, 2009. The decrease in inventory was primarily due to 25 fewer SKUs released in fiscal 2009 as compared to fiscal 2008 which contributed to overall lower net sales.
Inventory turns on a rolling twelve month basis were 8 and 11 at March 31, 2009 and 2008, respectively.

Licenses.Licenses increased $6.1 million in fiscal 2009, from $86.8 million at March 31, 2008 to $92.9 million at
March 31, 2009. The increase was primarily due to advance payments made to key licensors, including DreamWorks Animation and Marvel Entertainment in excess of amortization of our existing
licenses.

Software Development.Software development decreased $18.7 million in fiscal 2009, from $181.2 million at March 31, 2008 to
$162.5 million at March 31, 2009. The decrease in software development is primarily the result of software development amortization of titles released in fiscal 2009 and a
$63.3 million decrease due to the cancellation of unreleased games resulting from our business realignment plan. These decreases were partially offset by our investment in cross-platform titles
scheduled to be released in fiscal 2010 and beyond. Approximately 86% of the software development asset balance at March 31, 2009 is for games that have fiscal 2010 release dates
and beyond.

Accounts Payable.Accounts payable decreased by $21.6 million from $61.7 million at March 31, 2008 to $40.1 million at March 31,
2009. The decrease in accounts payable is primarily due to a decrease in product purchases.

Accrued and Other Current Liabilities.Accrued and other current liabilities decreased $12.0 million in fiscal 2009, from $202.1 million at
March 31, 2008 to $190.1 million at March 31, 2009. The decrease in accrued and other current liabilities is primarily due to a decrease in the deferral of revenue from sales of
games with significant online functionality at March 31, 2009 as compared to the deferral of revenue at March 31, 2008. We also had a decrease in employee related accruals, partially
offset by the withholding of payments to our venture partner. See "Item 3Legal Proceedings" for information related to the payment to our venture partner.

Secured Credit Lines.During the 2009 fiscal year, we obtained secured lines of credit with UBS and Wachovia, now Wells Fargo & Company ("Wells
Fargo") and thus secured credit lines increased by $24.4 million due to the $21.4 million line of credit with UBS, and the $3.0 million margin account with Wells Fargo. The UBS
credit line is secured by our auction rate securities held with UBS and the Wells Fargo margin account is collateralized by our securities held with Wells Fargo. See
"Note 10Secured Credit Lines".

Inflation

Our management currently believes that inflation has not had a material impact on continuing operations.

47

---





Table of Contents

Financial Condition

At March 31, 2009, we held cash, cash equivalents, short-term investments and long-term investments, net of borrowings
on secured lines of credit, of $151.9 million. We believe that this amount, along with the cash we expect to generate from our operations through the end of fiscal 2010, will be
sufficient to meet our expected cash needs through the end of fiscal 2010 for direct manufacturing costs (including platform manufacturer license fees), payments to licensors and external
developers, internal product development costs, and selling, marketing and other general operating expenses. In light of current economic conditions, on May 6, 2009, we signed a commitment
letter for a revolving credit facility of up to $35.0 million with Bank of America, NA ("B of A"). We expect the new credit facility, which will be secured by our assets, to provide us with a
revolving line of credit for working capital and other corporate purposes. The credit facility is subject to the execution of final agreements, which we expect to complete by July 5, 2009.
Further deterioration in global macroeconomic conditions could result in us
having to pursue additional funding from public or private sources to meet our cash needs, or to curtail or defer currently-planned expenditures, or both.

As
of March 31, 2009, we had $2.4 million of preferred securities and $5.0 million of auction rate securities ("ARS") classified as short-term and
long-term available-for-sale securities, respectively. We classified certain of these investments as long-term to reflect the lack of liquidity of these
securities. In addition, we have $26.1 million of ARS classified as trading securities.

We
have estimated the fair value of the remaining ARS using a discounted cash flow analysis that considered the following key inputs: i) credit quality, ii) estimates on the probability
of the issue being called or sold prior to final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to have a successful auction. Based on
this analysis, as of March 31, 2009 we recorded a temporary impairment of $0.4 million related to our ARS in accumulated other comprehensive income in our consolidated balance sheet. The
contractual terms of these securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the security. We believe this temporary
impairment is primarily attributable to the limited liquidity of these investments. Accordingly, we do not consider these investments to be other-than-temporarily impaired as
of March 31, 2009. See "Note 2Investment Securities" in the notes to the consolidated financial statements for further information related to our investments.

In
October 2008, we entered into a settlement agreement with UBS, the broker of certain of our ARS. This agreement provides us with a future option to sell such ARS to the broker at the par value of
the underlying securities beginning in July 2010. In addition, under the arrangement, we will have the ability to borrow up to 75% of the market value (as determined by UBS) of these securities at any
time, on a no net interest basis, to the extent that such securities continue to be illiquid or until the option to sell is exercised. As of March 31, 2009 we have borrowed $21.4 million
under this agreement to ensure liquidity of the underlying ARS. The credit line is secured by our ARS held with UBS, which have a par value of $30.8 million and a fair value of
$26.1 million at March 31, 2009 See "Note 10Secured Credit Lines".

In
December 2008, we obtained a margin account at Wachovia Securities (now Wells Fargo & Company ("Wells Fargo")). The terms of the margin account enable us to borrow against certain
securities, including some of our ARS. The margin account is collateralized by the securities held with Wells Fargo, which have a par value of $7.8 million and a fair value of
$7.4 million at March 31, 2009. The interest rate on borrowing is currently set at LIBOR plus a margin. There was $3.0 million outstanding on this margin account at
March 31, 2009.

Our
ability to maintain sufficient liquidity could be affected by various risks and uncertainties described in Part IItem 1A "Risk Factors" in this Annual Report on
Form 10-K.

48

---



Table of Contents

Guarantees and Commitments

A summary of annual minimum contractual obligations and commercial commitments as of March 31, 2009 is as follows (in thousands):

Contractual Obligations and Commercial Commitments(6)Fiscal
Years Ending
March 31,

License /
Software
Development
Commitments(1)

Advertising(2)

Leases(3)

Secured
Credit
Lines(4)

Other(5)

Total2010

$
79,909

$
5,692

$
15,541

$
24,360

$
3,231

$
128,7332011


51,508


4,722


14,402








70,6322012


13,860


3,572


11,994








29,4262013


6,600


3,172


8,749








18,5212014


2,000


2,379


7,759








12,138Thereafter








9,232








9,232$
153,877

$
19,537

$
67,677

$
24,360

$
3,231

$
268,682






49

---



Table of Contents



Other
potential future expenditures relate to the following:

Manufacturer Indemnification.We must indemnify the platform manufacturers (Microsoft, Nintendo, Sony) of our games with respect to all loss, liability and
expenses resulting from any claim against such manufacturer involving the development, marketing, sale or use of our games, including any claims for copyright or trademark infringement brought against
such manufacturer. As a result, we bear a risk that the properties upon which the titles of our games are based, or that the information and technology licensed from others and incorporated into the
products, may infringe the rights of third parties. Our agreements with our third-party software developers and property licensors typically provide indemnification rights for us with respect to
certain matters. However, if a manufacturer brings a claim against us for indemnification, the developers or licensors may not have sufficient resources to, in turn, indemnify us.

Indemnity Agreements.We have entered into indemnification agreements with the members of our Board of Directors, our Chief Executive Officer and our Chief
Financial Officer, to provide a contractual right of indemnification to such persons to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and
damages incurred by the any such person as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which such person is sued as a result of their service as members of
our Board of Directors, Chief Executive Officer or as Chief Financial Officer. The indemnification agreements provide specific procedures and time frames with respect to requests for indemnification
and clarify the benefits and remedies available to the indemnities in the event of an indemnification request.

Litigation.For information related to legal proceedings that may result in future expenditures to the Company, see "Item 3Legal Proceedings."

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate
and foreign currency fluctuations. Market risk is the potential loss arising from changes in market rates and market prices. We employ established policies and practices to manage these risks. We use
foreign exchange option and forward contracts to hedge anticipated exposures or mitigate some existing exposures subject to foreign currency exchange rate risk as discussed below.

Interest Rate Risk

We have interest rate risk primarily related to our investment portfolio. A substantial portion of our portfolio is in short-term
investments made up of primarily municipal securities and long-term investments made up of auction rate securities ("ARS"). The value of these investments may fluctuate with changes in
interest rates. However, we believe our interest rate risk is insignificant due to the short-term nature of the municipal securities and the fact that the interest rates on our ARS are
either reset to short-term interest rates in the auction process or, in the event of a failed auction, are reset to the failure rates as specified in the underlying agreements which are
typically equal to or greater than short-term interest rates at the time of reset. Although there has been recent uncertainty in the credit markets, all of the securities are investment
grade securities, and we have no reason to believe that any of the underlying issuers of our

50

---



Table of Contents

ARS
are presently at risk or that the underlying credit quality of the assets backing our ARS has been impacted by the reduced liquidity of these investments. We have continued to receive interest
payments on the ARS according to their terms. See "Note 2Investment Securities" in the notes to the consolidated financial statements for further information related to our
investments.

As
of March 31, 2009, we had no outstanding letters of credit.

Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and are exposed to financial market risk resulting from fluctuations in foreign currency
exchange rates, particularly the GBP and the Euro, which may result in a gain or loss of earnings to us. Our international 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 by changes in foreign currency exchange rates. Throughout the
year, we frequently monitor the volatility of the GBP and the Euro (and all other applicable currencies).

Cash Flow Hedging Activities.From time to time, we hedge a portion of our foreign currency risk related to forecasted foreign currency denominated sales and
expense transactions by entering into option contracts that generally have maturities less than 90 days. Our hedging programs reduce, but do not entirely eliminate, the impact of currency
exchange rate movements in revenue and operating expenses. There were no such contracts purchased during fiscal 2009.

Balance Sheet Hedging Activities.We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign currency-denominated
assets and liabilities, primarily certain inter-company receivables and payables. Our foreign exchange forward contracts are not designated as hedging instruments under SFAS No. 133 and are
accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in our consolidated balance sheets, and the associated gains and
losses from changes in fair value are reported in interest and other income, net in the consolidated statements of operations. The forward contracts generally have a contractual term of one month or
less and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant at each month-end.

Foreign
exchange forward contracts are designed to offset gains and losses on the underlying foreign currency denominated assets and liabilities. Any movement in foreign currency exchange rates
resulting in a gain or loss on our foreign exchange forward contracts would be offset by an opposing gain or loss in the underlying foreign currency denominated assets and liabilities that were hedged
and would not have a material impact on our financial position. As of March 31, 2009, we had foreign exchange forward contracts in the notional amount of $67.2 million, all with
maturities of one month, consisting primarily of the Euro, GBP, and AUD.

The
counterparties to these forward contracts are creditworthy multinational commercial and investment banks. The risks of counterparty non-performance associated with these contracts are
not considered to be material. Notwithstanding our efforts to manage foreign exchange
risks, there can be no assurances that our mitigating or hedging activities will adequately protect us against the risks associated with foreign currency fluctuations.

We
do not hedge foreign currency translation risk. A hypothetical 10% adverse change in exchange rates would result in a reduction of reported net sales of approximately $37.3 million and a
reduction of reported income before taxes of approximately $0.8 million. A hypothetical 10% adverse change in exchange rates would result in a reduction of reported total assets of
approximately $12.7 million. These estimates assume an adverse shift in all foreign currency exchange rates, which do not always move in the same direction; actual results may differ
materially.

51

---



Table of Contents

Item 8.    Consolidated Financial Statements and Supplementary Data

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

52

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of THQ Inc.,
Agoura Hills, California

We
have audited the accompanying consolidated balance sheets of THQ Inc. and subsidiaries (the "Company") as of March 28, 2009 and March 29, 2008, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended March 28, 2009. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, 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 statements present fairly, in all material respects, the financial position of THQ Inc. and subsidiaries as of March 28, 2009 and
March 29, 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended March 28, 2009, in conformity with accounting
principles generally accepted in the United States of America.

As
discussed in Note 1, "Description of Business and Summary of Significant Accounting Policies" to the consolidated financial statements, the Company adopted Financial Accounting Standards
Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109" effective April 1, 2007.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of March 28,
2009, based on the criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated May 22, 2009 expressed an unqualified opinion on the Company's internal control over financial reporting.

DELOITTE & TOUCHE LLP

Los Angeles,
California
May 22, 2009

53

---





Table of Contents



THQ INC. AND SUBSIDIARIES        CONSOLIDATED BALANCE SHEETS        (In thousands, except share data)

March 31,
2009

March 31,
2008ASSETSCurrent assets:Cash and cash equivalents

$
131,858

$
247,820Short-term investments


8,804


69,684Cash, cash equivalents and short-term investments


140,662


317,504Accounts receivable, net of allowances


60,444


112,843Inventory


25,785


38,240Licenses


45,025


47,182Software development


137,820


155,821Deferred income tax


6,112


Income tax receivable


903


Prepaid expenses and other current assets


27,441


24,487Total current assets


444,192


696,077Property and equipment, net


33,511


50,465Licenses, net of current portion


47,875


39,597Software development, net of current portion


24,647


25,369Income taxes receivable, net of current portion





16,116Deferred income taxes


1,982


61,710Goodwill





122,385Long-term investments


5,025


52,599Long-term investments, pledged


30,618


Other long-term assets, net


10,479


20,002TOTAL ASSETS

$
598,329

$
1,084,320LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
40,088

$
61,700Accrued and other current liabilities


190,140


202,102Secured credit lines


24,360


Income taxes payable





6,504Deferred income taxes





29,266Total current liabilities


254,588


299,572Other long-term liabilities


33,503


44,179Commitments and contingencies





Minority interest


3,198


Stockholders' equity:Preferred stock, par value $0.01, 1,000,000 shares authorized





Common stock, par value $0.01, 225,000,000 shares authorized as of March 31, 2009; 67,471,659 and 66,352,994 shares issued and outstanding as of
March 31, 2009 and 2008, respectively


675


664Additional paid-in capital


495,851


468,693Accumulated other comprehensive income (loss)


(2,392
)

27,194Retained earnings (accumulated deficit)


(187,094
)

244,018Total stockholders' equity


307,040


740,569TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
598,329

$
1,084,320


See notes to consolidated financial statements.

54

---





Table of Contents



THQ INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF OPERATIONS        (In thousands, except per share data)

Fiscal Year Ended March 31,2009

2008

2007Net sales

$
829,963

$
1,030,467

$
1,026,856Costs and expenses:Cost of salesproduct costs


338,882


389,097


351,449Cost of salessoftware amortization and royalties


296,688


231,800


165,462Cost of saleslicense amortization and royalties


83,066


99,524


99,533Cost of salesventure partner expense


19,707


24,056


16,730Product development


109,201


128,869


97,105Selling and marketing


162,183


175,288


139,958General and administrative


76,884


69,901


78,413Goodwill impairment


118,799





Restructuring


12,266





Total costs and expenses


1,217,676


1,118,535


948,650Income (loss) from continuing operations before interest and other income, net, income taxes and minority interest


(387,713
)

(88,068
)

78,206Interest and other income, net


483


15,433


12,822Income (loss) from continuing operations before income taxes and minority interest


(387,230
)

(72,635
)

91,028Income taxes


46,226


(35,785
)

26,206Income (loss) from continuing operations before minority interest


(433,456
)

(36,850
)

64,822Minority interest


302





136Income (loss) from continuing operations


(433,154
)

(36,850
)

64,958Gain on sale of discontinued operations, net of tax


2,042


1,513


3,080Net income (loss)

$
(431,112
)
$
(35,337
)
$
68,038Earnings (loss) per sharebasic:Continuing operations

$
(6.48
)
$
(0.55
)
$
1.00Discontinued operations


0.03


0.02


0.05Earnings (loss) per sharebasic

$
(6.45
)
$
(0.53
)
$
1.05Earnings (loss) per sharediluted:Continuing operations

$
(6.48
)
$
(0.55
)
$
0.96Discontinued operations


0.03


0.02


0.05Earnings (loss) per sharediluted

$
(6.45
)
$
(0.53
)
$
1.01Shares used in per share calculationbasic


66,861


66,475


65,039Shares used in per share calculationdiluted


66,861


66,475


67,593


See
notes to consolidated financial statements.

55

---





Table of Contents



THQ INC. AND SUBSIDIARIES        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (In thousands, except share data)

Fiscal Years Ended March 31, 2007, 2008 and 2009

Common Stock



Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings
(Accumulated
Deficit)Additional
Paid-In
CapitalShares

Amount

TotalBalance at March 31, 2006


64,140,977

$
642

$
405,425

$
10,367

$
211,317

$
627,751Exercise of options


3,193,844


31


50,532








50,563Conversion of stock unit awards


8,100














Cancellation of restricted stock


(49,700
)













Repurchase of common stock


(615,500
)

(6
)

(13,581
)







(13,587
)Stock based compensation








20,090








20,090Tax benefit related to the exercise of employee stock options








8,866








8,866Comprehensive income:Net income














68,038


68,038Other comprehensive income (loss)Foreign currency translation gain











9,463





9,463Unrealized loss on investments, net of $1.3 million tax benefit











(2,227
)




(2,227
)Comprehensive income

















75,274Balance at March 31, 2007


66,677,721

$
667

$
471,332

$
17,603

$
279,355

$
768,957Exercise of options


1,421,907


14


21,122








21,136Issuance of restricted stock, net


194,600


2


(559
)







(557
)Issuance of ESPP shares


304,881


3


5,945








5,948Conversion of stock unit awards


8,100














Cancellation of restricted stock


(60,815
)













Repurchase of common stock


(2,193,400
)

(22
)

(54,888
)







(54,910
)Stock-based compensation








21,820








21,820Tax benefit related to the exercise of employee stock options








3,921








3,921Comprehensive income (loss):Net income (loss)














(35,337
)

(35,337
)Other comprehensive income (loss)Foreign currency translation gain











9,372





9,372Unrealized gain on investments, net of $0.1 million tax expense











219





219Comprehensive income (loss)

















(25,746
)Balance at March 31, 2008


66,352,994

$
664

$
468,693

$
27,194

$
244,018

$
740,569Exercise of options


437,754


4


5,995








5,999Issuance of ESPP shares


693,711


7


3,588








3,595Conversion of stock unit awards


8,100














Cancellation of restricted stock


(20,900
)













Stock-based compensation








18,326








18,326Taxes related to the exercise and cancellation of employee stock options








(751
)







(751
)Comprehensive income (loss):Net income (loss)














(431,112
)

(431,112
)Other comprehensive income (loss)Foreign currency translation loss











(28,019
)




(28,019
)Unrealized loss on investments, net of $4.5 million tax benefit











(7,428
)




(7,428
)Less: Reclassification of losses included in net income (loss), net of $3.5 million tax benefit











5,861





5,861Comprehensive income (loss)

















(460,698
)Balance at March 31, 2009


67,471,659

$
675

$
495,851

$
(2,392
)
$
(187,094
)
$
307,040


See notes to consolidated financial statements.

56

---





Table of Contents



THQ INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF CASH FLOWS    (In thousands)

Fiscal Year Ended March 31,2009

2008

2007OPERATING ACTIVITIES:Net income (loss)

$
(431,112
)
$
(35,337
)
$
68,038Adjustments to reconcile net income (loss) to net cash provided by operating activities:Minority interest


(302
)




54Depreciation and amortization


19,327


18,722


15,651Amortization of licenses and software development(1)


327,885


257,051


179,684Goodwill impairment charges


118,799





Gain on sale of discontinued operations


(2,042
)

(1,513
)

(3,080
)Loss on disposal of property and equipment


2,835


270


1,395Restructuring charges


12,266





Amortization of interest


846


825


Other-than-temporary impairment on investments


6,279


(13
)

Loss on investments


500





Stock-based compensation(2)


18,665


22,860


16,253Tax benefit related to stock-based awards





3,921


8,866Excess tax benefit related to stock-based awards





(2,157
)

(3,963
)Deferred income taxes


33,388


(42,537
)

(948
)Changes in operating assets and liabilities:Accounts receivable, net of allowances


38,529


(38,232
)

7,053Inventory


10,577


(9,622
)

2,277Licenses


(59,979
)

(38,423
)

(37,809
)Software development


(254,220
)

(225,433
)

(203,089
)Prepaid expenses and other current assets


(5,218
)

(7,031
)

(3,275
)Accounts payable


(16,266
)

30,635


(5,584
)Accrued and other liabilities


(14,793
)

40,826


28,380Income taxes


(138
)

15,474


(5,906
)Net cash (used in) provided by operating activities


(194,174
)

(9,714
)

63,997INVESTING ACTIVITIES:Proceeds from sales and maturities of available-for-sale investments


118,295


617,754


672,645Purchase of available-for-sale investments


(47,365
)

(458,561
)

(675,735
)Other long-term assets


66


(986
)

(2,933
)Acquisitions, net of cash acquired


(4,847
)

(32,636
)

(7,797
)Net proceeds from sale of discontinued operations


2,042


1,513


7,181Purchases of property and equipment


(8,658
)

(21,264
)

(21,496
)Net cash provided by (used in) investing activities


59,533


105,820


(28,135
)FINANCING ACTIVITIES:Stock repurchase





(54,910
)

(13,587
)Proceeds from issuance of common stock to employees


9,594


26,240


50,563Proceeds from secured line of credit borrowings


29,300





Repayment of secured line of credit


(4,940
)




Excess tax benefit related to stock-based awards





2,157


3,963Net cash (used in) provided by financing activities


33,954


(26,513
)

40,939Effect of exchange rate changes on cash


(15,275
)

3,479


6,430Net increase (decrease) in cash and cash equivalents


(115,962
)

73,072


83,231Cash and cash equivalentsbeginning of period


247,820


174,748


91,517Cash and cash equivalentsend of period

$
131,858

$
247,820

$
174,748Supplemental cash flow information:Cash paid during the period for income taxes

$
16,184

$
14,076

$
28,476Cash paid during the period for interest

$
348

$
190

$
79


---

See
notes to consolidated financial statements.

57

---





Table of Contents

THQ INC. AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Description of Business and Summary of Significant Accounting Policies

We are a leading worldwide developer and publisher of interactive entertainment software for all popular game systems, including:



Our
titles span a wide range of categories, including action, adventure, fighting, racing, role-playing, simulation, sports and strategy. We have created, licensed and acquired a group of
highly recognizable brands, which we market to a variety of consumer demographics ranging from products targeted at children and the mass market to products targeted at core gamers. Our portfolio of
licensed properties includes games based on popular fighting brands such as World Wrestling Entertainment and the Ultimate Fighting Championship; kids and family brands such as DreamWorks Animation,
DisneyPixar, Marvel Entertainment and Nickelodeon; core gamer brand Warhammer 40,000; as well as others. In addition to licensed properties, we also develop games based upon our own
intellectual properties, includingCompany of Heroes,DeBlob, Frontlines,MX vs.
ATV,Red FactionandSaints Row.

Principles of Consolidation.The consolidated financial statements include the accounts of THQ Inc. and our wholly owned and majority owned subsidiaries as
well as the venture we have with JAKKS Pacific, Inc. See "Note 18Agreement with JAKKS Pacific, Inc." The results of operations for acquisitions of companies have been
included in the consolidated statements of operations beginning on the closing date of acquisition. See "Note 5Business Combinations." All material intercompany balances and
transactions have been eliminated in consolidation.

In
August 2008, we formed a joint venture, THQ*ICE LLC ("THQ*ICE"), with ICE Entertainment, Inc. a Delaware corporation ("ICE"), for the initial purpose of launching online games
in North America. THQ*ICE plans to launchDragonica, a free-to-play, micro-transaction-based massively multiplayer online casual
game in North America in calendar 2009. THQ and ICE own equal interests in THQ*ICE. In accordance with Financial Accounting Standards Boards Interpretation ("FIN") No. 46R, "Consolidation of
Variable Interest Entitiesan interpretation of ARB No. 51", we have determined that we are the primary beneficiary of THQ*ICE, as we believe we would
receive the majority of expected returns or absorb the majority of expected losses. Accordingly, we have consolidated the results of THQ*ICE in the accompanying consolidated financial statements.

Fiscal Year.Effective April 1, 2006, we began reporting our fiscal year on a 52/53-week period. Beginning with the fiscal year ending
March 31, 2007, our fiscal year ended on the Saturday nearest March 31. The results of operations for the fiscal years ended March 31, 2009, 2008 and 2007 contain the following
number of weeks:

Fiscal Period

Number of Weeks

Fiscal Period End DateYear ended March 31, 2009

52 weeks


March 28, 2009Year ended March 31, 2008

52 weeks


March 29, 2008Year ended March 31, 2007

52 weeks


March 31, 2007


For
simplicity, all fiscal periods in our consolidated financial statements and accompanying notes are presented as ending on a calendar month end.

58

---



Table of Contents

Pervasiveness of Estimates.The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to licenses, software
development, accounts receivable allowances, income taxes, impairment of goodwill, and stock-based compensation expense.

Foreign Currency Translation.Assets and liabilities of foreign operations are translated at current rates of exchange while results of operations are translated
at average rates in effect for the period. Translation gains or losses are shown as a separate component of accumulated other comprehensive income (loss). Foreign currency transaction gains and losses
result from exchange rate changes for transactions denominated in currencies other than the functional currency and are included in interest and other income in our consolidated statements of
operations. For the fiscal years ended March 31, 2009, 2008, and 2007 foreign currency transaction gains were $0.8 million, $0.5 million, and $0.1 million respectively.

Cash, Cash Equivalents and Investment Securities.We consider all money market funds and highly liquid investments with maturities of three months or less when
purchased to be cash equivalents.

Investments
designated under Statements of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," as trading securities are bought
and held principally for the purpose of selling them in the near term and are reported at fair value, with unrealized gains and losses recognized in earnings. Investments designated as
available-for-sale securities are carried at fair value based on quoted market prices or estimated based on quoted market prices for financial instruments with similar
characteristics. Unrealized gains and losses of the Company's available-for-sale securities are excluded from earnings and reported as a component of other comprehensive income
(loss). Additionally, the Company assesses whether an other-than-temporary impairment loss on its available-for-sale securities has occurred due to
declines in fair value or other market conditions. Declines in fair value that are considered other-than-temporary are recorded as interest and other income, net, in the
consolidated statements of operations.

In
general, investments with original maturities of greater than 90 days and remaining maturities of less than one year are classified as short-term investments. Investments with
maturities beyond one year may also be classified as short-term based on their highly liquid nature and because such investments represent the investment of cash that is available for
current operations.

The
Company's investments include auction rate securities ("ARS"). These ARS are variable rate bonds tied to short-term interest rates with long-term maturities. ARS have
interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28, or 35 days. Interest on ARS is generally paid at the end of each
auction process or semi-annually and is based upon the interest rate determined during the prior auction. The majority of our ARS are AAA/Aaa rated, and are typically collateralized by
student loans guaranteed by the U.S. government under the Federal Family Education Loan Program or backed by monoline bond insurance companies. See "Note 2Investment Securities"
for further details.

Financial Instruments.The carrying value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued
expenses, accrued royalties, and secured credit lines approximate fair value based on their short-term nature. Investments classified as available for sale and trading are stated at fair
value.

We
account for our derivative and hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The assets or liabilities associated with
our derivative instruments and hedging activities are recorded at fair value in other current assets or liabilities, respectively, on our consolidated balance sheets. As discussed below, gains and
losses resulting from

59

---



Table of Contents

changes
in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

We
utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge foreign currency exposures of underlying assets, liabilities, or certain forecasted foreign
currency denominated transactions. Our accounting policies for these instruments are based on whether they meet the criteria for designation as hedging transactions. Changes in fair value of
derivatives that are designated as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in other comprehensive income until the underlying hedged item is recognized
in earnings within the financial statement line item consistent with the hedged item. Any ineffective portion of a derivative change in fair value is immediately recognized in earnings. During the
periods presented we did not have any derivatives that qualify for hedge accounting. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment are recorded in
earnings. The fair value of foreign currency contracts is estimated based on the forward rate of the various hedged currencies as of the end of the period. As of March 31, 2009, 2008 and 2007,
we had foreign exchange forward contracts in the notional amount of $67.2 million, $97.0 million and $47.0 million, respectively. The net losses recognized from foreign currency
contracts in fiscal 2009, 2008, and 2007 were $2.3 million, $5.9 million and $0.9 million, respectively, and are included in interest and other income, net, in our consolidated
statements of operations.

Accounts Receivable Allowances.We derive revenues from sales of packaged software for video game systems and personal computers and sales of content and services
for wireless devices. Product revenue is recognized net of allowances for price protection and returns and various customer discounts. We typically only allow returns for our personal computer
products; however, we may decide to provide price protection or allow returns for our video games after we analyze: (i) inventory remaining in the retail channel, (ii) the rate of
inventory sell-through in the retail channel, and (iii) our remaining inventory on hand. We maintain a policy of giving credits for price protection and returns, but do not give
cash refunds. We use significant judgment and make estimates in connection with establishing allowances for price protection, returns, and doubtful accounts in any accounting period. Included in our
accounts receivable allowances is our allowance for co-operative advertising that we engage in with our retail channel partners. Our co-operative advertising allowance is based
upon specific contractual commitments and does not involve estimates made by management.

We
establish sales allowances based on estimates of future price protection and returns with respect to current period product revenue. 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 in customer demand and acceptance of our products, and other related factors when evaluating the adequacy of the price protection and returns
allowance. In addition, we monitor the volume of our sales to retailers and distributors and their inventories, because slow-moving inventory in the distribution channel can result in the
requirement for price protection or returns in subsequent periods. Actual price protection and returns in any future period are uncertain. While we believe we can make reliable estimates for these
matters, if we changed our assumptions and estimates, our price protection and returns reserves would change, which would impact the net revenue we report. In addition, if actual price protection and
returns were significantly greater than the reserves we have established, the actual results of our reported net sales would decrease. Conversely, if actual price protection and returns were
significantly less than our reserves, our reported net sales would increase. In circumstances when we do not have a reliable basis to estimate returns and price protection or are unable to determine
that collection of a receivable is probable, we defer the revenue until such time as we can reliably estimate any related returns and allowances and determine that collection of the receivable is
probable.

Similarly,
we must use significant judgment and make estimates in connection with establishing allowances for doubtful accounts in any accounting period. We analyze customer concentrations, customer
credit-worthiness and current economic trends when evaluating the adequacy of the allowance for doubtful

60

---



Table of Contents

accounts.
Material differences may result in the amount and timing of our bad debt expense for any period if we made different judgments or utilized different estimates. If our customers experience
financial difficulties and are not able to meet their ongoing financial obligations to us, our results of operations may be adversely impacted.

Concentrations of Credit Risk.Financial instruments which potentially subject us to concentration of credit risk consist principally of cash and cash equivalents,
short-term investments, accounts receivable and long-term investments. We place cash and cash equivalents and short-term investments with high credit-quality
financial institutions and limit the amount of credit exposure to any one financial institution. We believe the risk related to cash and cash equivalents, and accounts receivable is not material due
to the short-term nature of such assets. Our investments include significant holdings of ARS. Although there has been recent uncertainty in the credit markets, all of the securities are
investment grade securities, and we have no reason to believe that any of the underlying issuers of our ARS are presently at risk or that the underlying credit quality of the assets backing our ARS
has been impacted by the reduced liquidity of these investments. See "Note 2Investment Securities" in the notes to the consolidated financial statements for further information
related to our investments.

Most
of our sales are made directly to mass merchandisers and national retailers. Due to the increased volume of sales to these channels, we have experienced an increased concentration of credit risk,
and as a result, may maintain individually significant receivable balances with such mass merchandisers and national retailers. We perform ongoing credit evaluations of our customers, maintain an
allowance for
potential credit losses, and most of our foreign receivables are covered by credit insurance. As of March 31, 2009 and 2008, approximately 16% and 15%, respectively, of our gross accounts
receivable outstanding was with one major customer. Our largest single customer accounted for 14% of our gross sales in fiscal 2009, 14% of our gross sales in fiscal 2008 and 18% of our gross sales in
fiscal 2007. Our second largest customer accounted for 13% of our gross sales in fiscal 2009, 12% of our gross sales in fiscal 2008 and 11% of our gross sales in fiscal 2007.

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

Property and Equipment.Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are depreciated over the shorter of their useful lives or the remaining lease term.

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

We
evaluate the future recoverability of our capitalized licenses on a quarterly basis. The recoverability of capitalized license costs is evaluated based on the expected performance of the specific
products in which the licensed trademark or copyright is to be used. As many of our licenses extend for multiple products over multiple years, we also assess the recoverability of capitalized license
costs based on certain qualitative factors such as the success of other products and/or entertainment vehicles utilizing the intellectual property, whether there are any future planned theatrical
releases or television series based on the intellectual property and the rights holder's continued promotion and exploitation of the intellectual

61

---



Table of Contents

property.
Prior to the related product's release, we expense, as part of cost of saleslicense amortization and royalties, capitalized license costs when we estimate such amounts are not
recoverable.

Licenses
are expensed to cost of saleslicense amortization and royalties at the higher of (i) the contractual royalty rate based on actual net product sales related to such
license, or (ii) an effective rate based upon total projected revenue related to such license. When, in management's estimate, future cash flows will not be sufficient to recover previously
capitalized costs, we expense these capitalized costs to cost of saleslicense amortization and royalties. If actual revenues or revised forecasted revenues fall below the initial
forecasted revenue for a particular license, the charge to cost of saleslicense amortization and royalties expense may be larger than anticipated in any given quarter. As of
March 31, 2009, the net carrying value of our licenses was $92.9 million. If we were required to write off licenses, due to changes in market conditions or product acceptance, our
results of operations could be materially adversely affected.

Software Development.We utilize both internal development teams and third-party software developers to develop our software. We account for software development
costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed" ("FAS 86"). We capitalize software development costs once
technological feasibility is established and we determine that such costs are recoverable against future revenues. For products where proven game engine technology exists, this may occur early in the
development cycle. We capitalize the milestone payments made to third-party software developers and the direct payroll and overhead costs for our internal development teams. We evaluate technological
feasibility on a product-by-product basis. Amounts related to software development for which technological feasibility is not yet met are charged as incurred to product
development expense in our consolidated statements of operations.

On
a quarterly basis, we compare our unamortized software development costs to net realizable value, on a product-by-product basis. The amount by which any unamortized software
development costs exceed their net realizable value is charged to cost of salessoftware amortization and royalties. The net realizable value is the estimated future net revenues from the
product, reduced by the estimated future direct costs associated with the product such as completion costs, cost of sales and advertising.

Commencing
upon product release, capitalized software development costs are amortized to cost of salessoftware amortization and royalties based on the ratio of current gross revenues to
total projected gross revenues. In fiscal 2009, we recorded $63.3 million of additional amortization expense related to the cancellation of certain games. As of March 31, 2009, the net
carrying value of our software development was $162.5 million.

The
milestone payments made to our third-party developers during their development of our games are typically considered non-refundable advances against the total compensation they can
earn based upon the sales performance of the products. Any additional compensation earned beyond the milestone payments is expensed to cost of salessoftware amortization and royalties as
earned.

Goodwill and Other Intangible Assets.We perform an annual assessment of goodwill for impairment during the fourth quarter of each year or more frequently, if
events or circumstances occur that would indicate a reduction in the fair value of the Company. In the latter half of the third quarter of fiscal 2009, our stock price declined significantly,
resulting in a market capitalization that was substantially below the carrying value of our net assets. In addition, the unfavorable macroeconomic conditions and uncertainties have adversely affected
our environment. As a result, in connection with the preparation of the fiscal 2009 third quarter financial statements, we performed an interim goodwill impairment test consistent with SFAS
No. 142, "Goodwill and Other Intangible Assets" (FAS 142).

We
performed the first step of the two-step impairment test required by FAS 142, which includes comparing the fair value of our single reporting unit to its carrying value. Due to
market conditions at the time of the test, our analysis was weighted towards the market value approach, which is based on recent share prices and includes a control premium based on recent
transactions that have occurred within our

62

---



Table of Contents

industry,
to determine the fair value of our single reporting unit. We concluded that the fair value of our single reporting unit was less than the carrying value of our net assets and thus performed
the second step of the impairment test. Our step two analysis involved preparing an allocation of the estimated fair value of our reporting unit to the tangible and intangible assets (other than
goodwill) as if the reporting unit had been acquired in a business combination. Based on our analysis, we recorded goodwill impairment charges of $118.8 million during the year ended
March 31, 2009, representing the entire amount of our previously recorded goodwill.

All
identifiable intangible assets with finite lives will continue to be amortized over their estimated useful lives and assessed for impairment under SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets."

Revenue Recognition.Our revenue recognition policies are in compliance with American Institute of Certified Public Accountants Statement of Position
("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions," which provide guidance on generally accepted accounting principles ("GAAP") for recognizing revenue on software transactions, and Staff Accounting Bulletin ("SAB")
No. 104, "Revenue Recognition in Financial Statements," which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed with the Securities and Exchange Commission ("SEC").

Product
Sales:    We recognize revenue for packaged software when title and risk of loss transfers to the customer, provided that no significant vendor support obligations remain outstanding
and that collection of the resulting receivable is deemed probable by management.

Some
of our packaged software products are developed with the ability to be connected to, and played via, the internet. In order for consumers to participate in online communities and play against one
another via the internet, we (either directly or through outsourced arrangements with third parties) maintain servers that support an online service we provide to consumers for activities such as
matchmaking, roster updates, tournaments and player rankings. Generally, we do not consider the online service to be a deliverable as it is incidental to the overall product offering. Accordingly, we
do not defer any revenue related to products containing the limited online service.

In
instances where the online service is considered a deliverable and where we have significant continuing involvement in addition to the software product, we account for the sale as a "bundled" sale,
or multiple element arrangement, in which we sell both the packaged software product and the online service for one combined price. Vendor specific objective evidence for the fair value of the online
service does not exist as we do not separately offer or charge for the online service. Therefore, when the online service is determined to be a deliverable, we recognize the revenue from sales of such
software products ratably over the estimated online service period of six months, beginning the month after shipment of the software product. Costs of sales related to such products are also deferred
and recognized with the related revenues and include product costs, software amortization and royalties, and license amortization and royalties.

Determining
whether the online service for a particular game constitutes a deliverable is subjective and requires management's judgment. Determining the estimated service period over which to
recognize the related revenue and costs of sales is also subjective and involves management's judgment.

When
we determine the online service from packaged software products bundled with other online services is considered to be more-than-inconsequential to the software product,
such amounts are recognized ratably over the estimated service period of six months beginning
the month after initial sale. At March 31, 2009 the deferred revenue related to these games was $11.6 million and is included within accrued and other current liabilities in our
consolidated balance sheet.

63

---





Table of Contents

Although we generally sell our products on a no-return basis, in certain circumstances we may allow price protection, returns or other allowances on a negotiated
basis. We estimate such price protection, returns or other allowances based upon management's evaluation of our historical experience, retailer inventories, the nature of the titles and other factors.
Such estimates are deducted from gross sales. See "Note 3Accounts Receivable Allowances." Software is sold under a limited 90-day warranty against defects in material
and workmanship. To date, we have not experienced material warranty claims.

Software
Licenses:    For those agreements that provide the customers the right to multiple copies in exchange for guaranteed minimum royalty amounts, revenue is recognized at delivery of
the product master or the first copy. Per copy royalties on sales that exceed the guarantee are recognized as earned. Revenue from the licensing of software for the fiscal years ended March 31,
2009, 2008 and 2007 was $11.7 million, $7.8 million and $8.6 million, respectively.

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

Also,
in accordance with EITF No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent," we recognize as revenues the net amount the wireless carrier pays to us
upon the sale of our applications, net of any service or other fees earned and deducted by the wireless carrier.

Advertising.Advertising and sales promotion costs are generally expensed as incurred, except for television airtime and print media costs associated with media
campaigns, which are deferred and charged to expense in the period the airtime or advertising space is used for the first time. We engage in co-operative advertising with some of our
retail channel partners. We accrue the associated costs when revenue is recognized and such amounts are included in selling and marketing expense if there is a separate identifiable benefit for which
we can reasonably estimate the fair value of the benefit identified; otherwise, they are recognized as a reduction of net sales. Advertising costs for the fiscal years ended March 31, 2009,
2008 and 2007 were $77.6 million, $85.7 million and $61.2 million, respectively.

Stock-based compensation.We account for stock-based compensation under SFAS No. 123(R) "Share-Based Payment" ("FAS 123R"). Under FAS 123R, we
estimate the fair value of stock options on date of grant using the Black-Scholes option pricing model. The fair value for awards that are expected to vest is then amortized on a
straight-line basis over the requisite service period of the award, which is generally the option vesting term. The amount of expense recognized represents the expense associated with the
stock options we expect to ultimately vest based upon an estimated rate of forfeitures; this rate of forfeitures is updated as necessary and any adjustments needed to recognize the fair value of
options that actually vest or are forfeited are recorded. The Black-Scholes option pricing model, used to estimate the fair value of an award, requires the input of subjective assumptions, including
the expected volatility of our common stock and an option's expected life. As a result, the financial statements include amounts that are based upon our best estimates and judgments relating to the
expenses recognized for stock-based compensation.

Income taxes.We account for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("FAS 109"). The provision for income taxes
is computed using the asset and liability method, under which deferred income tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for
the years in which those tax assets are expected to be realized or

64

---



Table of Contents

settled.
To the extent recovery of deferred tax assets is not likely based on our estimates of future taxable income in each jurisdiction, a valuation allowance is established. As part of the process
of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves: (i) estimating our
current tax exposure in each jurisdiction including the impact, if any, of changes or interpretations to applicable tax laws and regulations, (ii) estimating additional taxes resulting from tax
examinations and (iii) making judgments regarding the recoverability of deferred tax assets.

The
calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for anticipated tax audit issues in the U.S. and
other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due. Our estimate for the potential outcome for any uncertain tax issue, including our
claims for research and development income tax credits, requires judgment. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future
results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period in which they are resolved or when statutes of limitation on potential assessments expire.

As
of April 1, 2007, we adopted the provisions of FIN No. 48, "Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109"
("FIN 48"). Previously, we had accounted for income tax contingencies in accordance with SFAS No. 5, "Accounting for Contingencies." As required by FIN 48, we recognize the
financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the
"more likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the
relevant tax authority. At the adoption date, we applied FIN 48 to all income tax positions for which the statute of limitations remained open. Our adoption of FIN 48 on April 1,
2007 had no impact on our April 1, 2007 beginning retained earnings balance. The amount of unrecognized tax benefits as of March 31, 2009 and 2008 was $10.9 million and
$11.6 million, respectively. The contingent tax liability relates to tax positions taken in previously filed tax returns and similar positions expected to be taken in our current year income
tax returns. A portion of the contingent tax liability relates to fiscal years under examination. On May 24, 2007 we received notification from the IRS that the Joint Committee on Taxation had
completed its review of our file and took no exception to the conclusions reached by the IRS. We have evaluated the impact of the conclusions reached in the IRS examination in the FIN 48
measurement and recognition process. We are currently under routine examination by the IRS for our income tax returns for fiscal years 2004 through 2007 and by various state jurisdictions for fiscal
years subsequent to 2003. We expect some of these examinations to be concluded and settled in the next 12 months, however, we are currently unable to estimate the potential impact to the
liability for unrecognized tax benefits or the timing of such changes. We do not anticipate
any significant changes in the unrecognized tax benefits in fiscal 2010 related to the expiration of the statutes of limitations.

Basic and Diluted Earnings Per Share.Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for
the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding for the period, increased by common stock equivalents. Common
stock equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of our outstanding options, warrants, the employee stock purchase plan, and
other stock unit awards. However, potential common shares are not included in the denominator of the diluted earnings per share calculation when inclusion of such shares would be
anti-dilutive, such as in a period in which a net loss is recorded.

Recently Issued Accounting Pronouncements.In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("FAS 157").
FAS 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities.
In February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2,

65

---



Table of Contents

"Effective
Date of FASB Statement No. 157" which defers the implementation for certain non-recurring, nonfinancial assets and liabilities from fiscal years beginning after
November 15, 2007 to fiscal years beginning after November 15, 2008, which will be our fiscal year 2010. In October 2008, the FASB issued FSP FAS 157-3,
"Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" which clarifies the application of FAS 157 in a market that is not active. FSP
FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. The statement provisions effective as of April 1, 2008 and
July 1, 2008, did not have a material effect on our results of operations, financial position or cash flows. We adopted the remaining provisions of this statement on April 1, 2009, and
the adoption did not have a material impact on our results of operations, financial position or cash flows.

FSP
FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly ("FSP FAS 157-4")," provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or
liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and annual periods ending after March 15, 2009. The adoption is not expected to have a
material impact on our results of operations, financial position or cash flows.

In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115"
("FAS 159"). FAS 159 permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and
losses on items for which the fair value option has been elected will be reported in earnings. We adopted this statement on April 1, 2008 and did not make this election for any of our existing
financial assets and liabilities. As such, the adoption of this statement did not have any impact on our results of operations, financial position or cash flows. The Company did elect the fair value
option for a financial instrument acquired in the third quarter of fiscal 2009 (see "Note 2Investments").

In
May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("FAS 162"). FAS 162 is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for nongovernmental
entities. FAS 162 is effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting Principles." We do not expect the adoption of this statement to have a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("FAS 141R"). FAS 141R retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.
FAS 141R defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer
achieves control. FAS 141R is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, which will be our fiscal year 2010. We adopted this statement on April 1, 2009, and the adoption is expected to have a significant effect on our financial
statements for material acquisitions consummated subsequent to April 1, 2009.

In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP 142-3"). FSP 142-3 amends
the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,

66

---



Table of Contents

"Goodwill
and Other Intangible Assets" ("FAS 142"). This change is intended to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of the asset under FAS 141R and other GAAP. FSP 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years, which will be our fiscal year 2010. The requirement for determining useful lives must be applied
prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible
assets recognized as of, and subsequent to, the effective date. We adopted this statement on April 1, 2009, and the adoption did not have a material impact on our results of operations,
financial position or cash flows.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("FAS 160"). This Statement amends Accounting Research Bulletin
("ARB") No. 51, "Consolidated Financial Statements" to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial
statements. FAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, which will be our fiscal year 2010. We adopted
this statement on April 1, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133"
("FAS 161"). This Statement changes the disclosure requirements for derivative instruments and hedging activities. Under FAS 161, entities are required to provide enhanced disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008, which was our fourth quarter of fiscal year 2009. We adopted this statement on
January 1, 2009, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

In
June 2007, the FASB ratified the Emerging Issues Task Force ("EITF") consensus conclusion on EITF No. 07-3, "Accounting for Advance Payments for Goods or Services to be
Used in Future Research and Development" ("EITF 07-3"). EITF 07-3 addresses the diversity which exists with respect to the accounting for the
non-refundable portion of a payment made by a research and development entity for future research and development activities. Under this conclusion, an entity is required to defer and
capitalize non-refundable advance payments made for research and development activities until the related goods are delivered or the related services are performed.
EITF 07-3 requires prospective application for new contracts entered into after the effective date. We adopted this statement on April 1, 2008, and the adoption did not have
a material impact on our results of operations, financial position or cash flows.

In
December 2007, the FASB ratified the EITF consensus on EITF Issue No. 07-1, "Accounting for Collaborative Arrangements" that discusses how parties to a collaborative
arrangement (which does not establish a legal entity within such arrangement) should account for various activities. The consensus indicates that costs incurred and revenues generated from
transactions with third parties (i.e. parties outside of the collaborative arrangement) should be reported by the collaborators on the respective line items in their income statements pursuant
to EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." Additionally, the consensus provides that income statement characterization of payments
between the participation in a collaborative arrangement should be based upon existing authoritative pronouncements; analogy to such pronouncements if not within their scope; or a reasonable,
rational, and consistently applied accounting policy election. EITF Issue No. 07-1 is effective for interim or annual reporting periods in fiscal years beginning after
December 15, 2008, which is our

67

---



Table of Contents

fiscal
2010 and is to be applied retrospectively to all periods presented for collaborative arrangements existing as of the date of adoption. We adopted this statement on April 1, 2009, and the
adoption did not have a material impact on our results of operations, financial position or cash flows.

In
June 2008, the FASB ratified the EITF consensus on EITF Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity's Own Stock"
("EITF 07-5") that discusses the determination of whether an instrument is indexed to an entity's own stock. The guidance of this issue shall be applied to outstanding instruments
as of the beginning of the fiscal year in which this issue is initially applied. EITF 07-5 is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years, which is our fiscal 2010. We adopted this statement on April 1, 2009, and the adoption did not have a material impact on
our results of operations, financial position or cash flows.

In
December 2008, the FASB issued FSP SFAS 140-4 and FIN 46 (R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets
and Interests in Variable Interest Entities" ("FSP SFAS 140-4 and FIN 46 (R)-8"). This disclosure-only FSP is intended to provide greater
transparency to financial statement users about a transferor's continuing involvement with transferred financial assets and an enterprise's involvement with variable interest entities and qualifying
special purpose entities. FSP SFAS 140-4 and FIN 46 (R)-8 is effective for reporting periods (annual or interim) ending after December 15, 2008. We
adopted this statement for our quarter ended December 31, 2008, and the adoption did not have a material impact on our results of operations, financial position or cash flows.

FSP
FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," ("FSP FAS 107-1 and APB 28-1")
requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. FSP
FAS 107-1 and APB 28-1 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and
annual periods ending after March 15, 2009. The
adoption is not expected to have a material impact on our results of operations, financial position or cash flows.

FSP
FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments," ("FSP FAS 115-2 and
FAS 124-2") modifies the requirements for recognizing other-than-temporary-impairment on debt securities and significantly changes the impairment model for
such securities. Under FSP FAS 115-2 and 124-2, a security is considered to be other-than-temporarily impaired if the present value of cash flows
expected to be collected are less than the security's amortized cost basis (the difference being defined as the credit loss) or if the fair value of the security is less than the security's amortized
cost basis and the investor intends, or more-likely-than-not will be required, to sell the security before recovery of the security's amortized cost basis. If an
other-than-temporary impairment exists, the charge to earnings is limited to the amount of credit loss if the investor does not intend to sell the security, and it is
more-likely-than-not that it will not be required to sell the security, before recovery of the security's amortized cost basis. Any remaining difference between
fair value and amortized cost is recognized in other comprehensive income, net of applicable taxes. Otherwise, the entire difference between fair value and amortized cost is charged to earnings. The
FSP also modifies the presentation of other-than-temporary impairment losses and increases related disclosure requirements. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt the FSP for the interim and annual periods ending after
March 15, 2009. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.

68

---



Table of Contents

2.     Investment Securities

The following table summarizes our investment securities and their related inception-to-date gross unrealized gains and (losses), as of March 31,
2009 (in thousands).

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueShort-term investments:Municipal securities

$
6,397

$
5

$
(3
)
$
6,399Corporate securities


2,405








2,405Total short-term investments


8,802


5


(3
)

8,804Long-term investments:Municipal securities(1)


5,475





(450
)

5,025Total long-term investments


5,475





(450
)

5,025Total available-for-sale investments

$
14,277

$
5

$
(453
)
$
13,829Put option











4,541Trading securities(1)











26,077Total long-term investments pledged











30,618Total investment securities










$
44,447






Available-for-sale investments

The gross unrealized losses on our short-term available-for-sale investments in the above table were primarily caused by a
decrease in the fair value of the investments as a result of the limited liquidity of these investments. None of the
available-for-sale securities included in the above table have been in an unrealized loss position for more than 12 months.

During
fiscal 2009, our available-for-sale investments included in the table above had a decline in fair value of $0.5 million that was deemed temporary, as we believe the decline
in fair value is primarily attributable to the limited liquidity of these investments. As such, an unrealized loss in this amount was recorded to other comprehensive income.

In
addition, we had a pre-tax unrealized holding loss on our investment in Yuke's Co., Ltd. ("Yuke's") that is classified as available-for-sale and is included in
other long-term assets, net (see "Note 8Other Long-Term Assets").

During
fiscal 2009, we recorded impairment charges of $6.3 million to interest and other income, net, related to declines in fair value that we concluded were other than temporary. Of this
impairment, $2.0 million related to a downgrade in one security's rating from A to CCC- and $4.3 million related to securities received as collateral for former auction rate
securities ("ARS") that were required to be unwound as a result of Lehman Brothers filing for bankruptcy protection.

During
the year ended March 31, 2009 there were $0.1 million of realized gains and $0.4 million of realized losses from sales of available-for-sale securities.

69

---



Table of Contents

The
following table summarizes the amortized cost and fair value of our investment securities, classified by stated maturity as of March 31, 2009 (in thousands):

Amortized Cost

Fair ValueShort-term investments:Due in one year or less

$
8,802

$
8,804Due after one year through two years





Total short-term investments


8,802


8,804Long-term investments:Due after one year through five years


500


490Due after five years through ten years





Due after ten years


4,975


4,535Total long-term investments


5,475


5,025Total investment securities

$
14,277

$
13,829


The
following table summarizes our available-for-sale investment securities and their related inception-to-date gross unrealized gains and (losses), as of
March 31, 2008 (in thousands):

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
ValueShort-term investments:U.S. agency securities

$
3,501

$


$


$
3,501Municipal securities


58,381


527





58,908Corporate notes


7,493





(218
)

7,275Total short-term investments


69,375


527


(218
)

69,684Long-term investments:U.S. agency securities











Municipal securities(1)


47,185





(1,176
)

46,009Corporate securities(1)


6,800





(210
)

6,590Total long-term investments


53,985





(1,386
)

52,599Total investment securities

$
123,360

$
527

$
(1,604
)
$
122,283






During
the year ended March 31, 2008 there were $0.1 million of realized gains and no realized losses from sales of available-for-sale securities. During the year ended March 31,
2007 there were no realized gains or (losses) from sales of available-for-sale securities. In addition to the net unrealized loss of $1.0 million during the year ended
March 31, 2008 from our investment securities, we had a pre-tax unrealized holding gain on our investment in Yuke's Co., Ltd. ("Yuke's") which is classified as
available-for-sale and is included in other long-term assets (see "Note 8Other Long-Term Assets").

The
gross unrealized losses on our available-for-sale investments in the above table were primarily caused by a decrease in the fair value of the investments as a result of an increase in
market interest rates. None of the available-for-sale securities included in the above table have been in an unrealized loss position for more than 12 months.

70

---





Table of Contents

Auction Rate Securities

As of March 31, 2009 we had $31.1 million of ARS classified as long-term investments, of which $26.1 million were
considered trading securities and $5.0 million were considered available-for-sale. These ARS are variable rate bonds tied to short-term interest rates with
long-term maturities. ARS have interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28, or 35 days. Interest
on ARS is generally paid at the end of each auction process or semi-annually and is based upon the interest rate determined during the prior auction.

In
October 2008, we entered into a settlement agreement with UBS, the broker of certain of our ARS (the "UBS Agreement"). The UBS Agreement provides us with Auction Rate Securities Rights
("Rights") to sell such ARS to UBS at the par value of the underlying securities at any time during the
period June 30, 2010 through July 2, 2012. These Rights are a freestanding instrument accounted for separately from the ARS, and are registered, nontransferable securities accounted for
as a put option. Under the UBS Agreement, UBS may, at its discretion, sell the ARS at any time through July 2, 2012 without prior notice, and must pay us par value for the ARS within one day of
the settlement. As of March 31, 2009, the put option had a fair value of $4.5 million and is recorded in long-term investments, pledged and a gain of $4.5 million is
recorded in interest and other income, net, in the accompanying consolidated statement of operations for fiscal 2009.

Additionally,
pursuant to the UBS Agreement, we have the ability to borrow up to 75% of the market value of the ARS (as determined by UBS) at any time, on a no net interest basis, to the extent that
such ARS continue to be illiquid or until June 30, 2010 (see "Note 10Secured Credit Lines") and in return, we agreed to release UBS from certain potential claims related to
the ARS in certain specified circumstances. The credit line is secured by our ARS held with UBS, which have a par value of $30.8 million and a fair value of $26.1 million at
March 31, 2009. As of March 31, 2009, we have borrowed $21.4 million under the UBS Agreement. The ARS held with UBS that were previously reported as available-for-sale
were transferred to trading securities and are classified as long-term investments, pledged. We recorded a charge of $4.7 million for the mark-to-market adjustment
related to these trading securities in interest and other income, net.

In
fiscal 2009 the gross losses included in earnings from transfers of securities from the available-for-sale category into the trading category were $5.5 million. In fiscal 2009
there were no gains from transfers included in earnings from transfers of securities from the available-for-sale category into the trading category.

In
aggregate, $0.2 million of net mark-to-market losses have been recorded in interest and other income, net, in the accompanying consolidated statement of operations,
related to trading securities still held at March 31, 2009.

Fair Value

FAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances
disclosures about fair value measurements. Fair value is defined under FAS 157 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants on the measurement date. Valuation techniques used to measure fair value under FAS 157 must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to
measure fair value.

71

---



Table of Contents

We
used the following methods and assumptions to estimate the fair value of the investment securities included in the table above:



The
following table summarizes the Company's financial assets measured at fair value on a recurring basis in accordance with FAS 157 as of March 31, 2009:

Level 1

Level 2

Level 3

TotalCash Equivalents:Money market funds

$
38,234

$


$


$
38,234Short-term investments:Municipal securities





6,399





6,399Corporate securities


1,343


1,062





2,405Long-term investments:Municipal securities








31,102


31,102Put option








4,541


4,541Investment in Yuke's


3,847








3,847Total


43,424


7,461


35,643


86,528


Level 3
assets primarily consist of ARS, the majority of which are AAA/Aaa rated and collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan
Program. Most of the remaining securities are backed by monoline bond insurance companies. We have historically invested in these securities for short periods of time as part of our cash management
program. However, the recent uncertainty in the credit markets has prevented us and other investors from selling these securities. As such, we classified $35.6 million of these investments as
long-term as of March 31, 2009 to reflect the current lack of liquidity. We believe we have the ability to, and intend to, hold the ARS classified as available-for-sale
until the auction process recovers. All of the securities are investment grade securities, and we have no reason to believe that any of the underlying issuers of these ARS are presently at risk or
that the underlying credit quality of the assets backing these ARS has been impacted by the reduced liquidity of these investments. We have continued to receive interest payments on these ARS
according to their terms.

We
have estimated the fair value of these ARS using a discounted cash flow analysis that considered the following key inputs: i) credit quality, ii) estimates on the probability of the
issue being called or sold prior to final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to have a successful auction. The contractual
terms of these securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the security.

We
have elected fair value accounting for the put option pursuant to FAS 159, recorded in connection with an ARS settlement agreement signed with UBS as discussed above. This election was made
in order to mitigate volatility in earnings caused by accounting for the put option and underlying ARS under different

72

---



Table of Contents

methods.
We have estimated the value of the put option as the difference between the par value of the underlying ARS and the fair value of the ARS, after applying an estimated risk discount, as the
put option gives us the right to sell the underlying ARS to the broker during the period June 30, 2010 to July 2, 2012 for a price equal to the par value.

The
following table provides a summary of changes in fair value of our Level 3 financial assets as of March 31, 2009:

Level 3
Fair Value
MeasurementsBalance at March 31, 2008

$
54,419Total gains or (losses) (realized/unrealized):Included in earnings


(4,554
)Included in accumulated other comprehensive income


1,033Purchases, sales, issuances and settlements, net


(11,120
)Transfers in/(out) of Level 3


(4,135
)Balance at March 31, 2009

$
35,643


Transfers
out of Level 3 represent three ARS related to the Lehman Brothers bankruptcy, that are now valued using Level 1 and Level 2 inputs of the underlying securities we have
received.

Financial Instruments.As of March 31, 2009 and 2008, we had foreign exchange forward contracts in the notional amount of $67.2 million and
$97.0 million, respectively, with a fair value that approximates zero at both March 31, 2009 and 2008. We estimate the fair value of these contracts using inputs obtained in quoted
public markets. The net loss recognized from foreign currency contracts during fiscal 2009 was $2.3 million, and the net gain recognized from foreign currency contracts during fiscal 2008 was
$5.9 million, both of which are included in interest and other income, net, in our consolidated statements of operations.

73

---



Table of Contents

3.     Accounts Receivable Allowances

Accounts receivable allowances at March 31, 2009, 2008 and 2007 consist of the following (in thousands):

Balance at
Beginning of
Period

Provisions

Deductions

Balance at
End of
PeriodYear ended March 31, 2009Allowance for price protection and returns

$
92,788


194,562

$
(212,038
)
$
75,312Allowance for co-op advertising


19,907


53,309


(59,889
)

13,327Allowance for doubtful accounts and other


346


14,412


(2,364
)

12,394Total

$
113,041

$
262,283

$
(274,291
)
$
101,033Year ended March 31, 2008Allowance for price protection and returns

$
66,071

$
185,921

$
(159,204
)
$
92,788Allowance for co-op advertising


13,612


48,008


(41,713
)

19,907Allowance for doubtful accounts and other


866


67


(587
)

346Total

$
80,549

$
233,996

$
(201,504
)
$
113,041Year ended March 31, 2007Allowance for price protection and returns

$
48,223

$
128,454

$
(110,606
)
$
66,071Allowance for co-op advertising


8,440


40,726


(35,554
)

13,612Allowance for doubtful accounts and other


1,157


975


(1,266
)

866Total

$
57,820

$
170,155

$
(147,426
)
$
80,549


4.     Balance Sheet Details

Inventory.Inventory at March 31, 2009 and 2008 consists of the following (in thousands):

March 31,
2009

March 31,
2008Components

$
2,225

$
1,849Finished goods


23,560


36,391Inventory

$
25,785

$
38,240


Property and Equipment, net.Property and equipment, net at March 31, 2009 and 2008 consists of the following (in thousands):

Useful
Lives

March 31,
2009

March 31,
2008Building

30 yrs

$
730

$
730Land




401


401Computer equipment and software

3-10 yrs


50,382


63,646Furniture, fixtures and equipment

5 yrs


7,705


9,476Leasehold improvements

3-6 yrs


12,686


15,715Automobiles

2-5 yrs


58


10571,962


90,073Less: accumulated depreciation




(38,451
)

(39,608
)Property and equipment, net



$
33,511

$
50,465


74

---



Table of Contents

Depreciation
expense associated with property and equipment amounted to $17.5 million, $17.4 million and $13.7 million for the fiscal years ended March 31, 2009, 2008 and
2007, respectively.

Accrued and Other Current Liabilities.Accrued and other current liabilities at March 31, 2009 and 2008 consist of the following (in thousands):

March 31,
2009

March 31,
2008Accrued liabilities

$
31,108

$
39,876Accrued compensation


27,058


39,939Accrued venture partner expense


56,692


37,809Deferred revenue, netpackaged software product


11,606


30,864Accrued third-party software developer milestones


21,526


10,594Accrued royalties


42,150


43,020Accrued and other current liabilities

$
190,140

$
202,102


Deferred
revenues, netpackaged software product, consists of net sales from packaged software products bundled with online services considered to be
more-than-inconsequential to the software product. Such amounts are recognized ratably over the estimated service period of six months beginning the month after initial sale.
At March 31, 2009 and 2008 the deferred costs related to this deferred revenue were $6.3 million and $20.7 million, respectively, and are included within software development and
prepaid expenses and other current assets in our consolidated balance sheet. See "Note 1Description of Business and Summary of Significant Accounting Policies" for further
information regarding our revenue recognition policies.

Other Long-Term Liabilities.Other long-term liabilities at March 31, 2009 and 2008 consist of the following (in thousands):

March 31,
2009

March 31,
2008Accrued royalties

$
19,986

$
35,004Unrecognized tax benefits and related interest


5,158


5,461Accrued liabilities


8,359


3,714Other long-term liabilities

$
33,503

$
44,179


5.     Business Combinations

In fiscal 2008, we acquired certain of the assets and/or all of the outstanding equity interests in the following three entities for a total cost of $35.3 million, of
which $31.1 million was paid in cash at the time of acquisition, $0.3 million in shares issued, with the remaining balance of $3.9 million (which was included in accrued and other
current liabilities at March 31, 2008) paid during fiscal 2009:



During
fiscal 2009, the former shareholders of Universomo reached their additional post-acquisition performance targets and earned additional consideration of $1.7 million
(denominated as 1.2 million

75

---



Table of Contents

Euro);
of which $0.9 million was paid during fiscal 2009, with the remaining $0.8 million included in accrued and other current liabilities in our March 31, 2009 consolidated
balance sheet to be paid in fiscal 2010. There are no further amounts of additional consideration under this acquisition.

Goodwill
and other intangible assets recorded related to the above transactions has amounted to $30.7 million and $5.6 million, respectively, $34.8 million of which is not
expected to be deductible for income tax purposes. The acquisitions were accounted for using the purchase method in accordance with SFAS No. 141 "Business Combinations." Accordingly, the net
assets were recorded at their estimated fair values, and operating results were included in our financial statements from the date of acquisition. We did not present pro forma information as these
acquisitions were immaterial to our financial position and results of operations.

In
fiscal 2008, we paid the former shareholders of ValuSoft (acquired in fiscal 2002) additional consideration of $1.8 million for reaching certain pre-tax income targets pursuant
to the purchase agreement. No amounts of additional consideration are outstanding as of March 31, 2009. Goodwill recognized in the original transaction and in the payments of the additional
consideration has amounted to $23.0 million.

6.     Goodwill

The changes in the carrying amount of goodwill for the fiscal years ended March 31, 2009 and 2008 were as follows (in thousands):

Balance at March 31, 2007

$
88,688Goodwill acquired


30,329Additional consideration paid for ValuSoft


1,800Effect of foreign currency exchange rates and other


1,568Balance at March 31, 2008

$
122,385Additional consideration paid for Universomo


1,513Effect of foreign currency exchange rates and other


(5,099
)Impairment charges


(118,799
)Balance at March 31, 2009

$



We
perform an annual assessment of goodwill for impairment during the fourth quarter of each year or more frequently, if events or circumstances occur that would indicate a reduction in the fair value
of the Company. In the latter half of the third quarter of fiscal 2009, our stock price declined significantly, resulting in a market capitalization that was substantially below the carrying value of
our net assets. In addition, the unfavorable macroeconomic conditions and uncertainties have adversely affected our environment. As a result, in connection with the preparation of the financial
statements for our fiscal quarter ended December 31, 2008, we performed an interim goodwill impairment test consistent with FAS 142.

We
performed the first step of the two-step impairment test required by FAS 142, which includes comparing the fair value of our single reporting unit to its carrying value. Due to
market conditions at the time of the test, our analysis was weighted towards the market value approach, which is based on recent share prices, and includes a control premium based on recent
transactions that have occurred within our industry, to determine the fair value of our single reporting unit. We concluded that the fair value of our single reporting unit was less than the carrying
value of our net assets and thus performed the second step of the impairment test. Our step two analysis involved preparing an allocation of the estimated fair value of our reporting unit to the
tangible and intangible assets (other than goodwill) as if the reporting unit had been acquired in a business combination. Based on our analysis, we recorded goodwill impairment charges

76

---



Table of Contents

of
$118.8 million during the year ended March 31, 2009, representing the entire amount of our previously recorded goodwill.

7.     Other Intangible Assets

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

March 31, 2009

March 31, 2008Useful
Lives

Gross
Carrying
Amount

Accumulated
Amortization

Net
Amount

Gross
Carrying
Amount

Accumulated
Amortization

Net
AmountSoftware technology


2-4 years

$
3,955

$
(930
)
$
3,025

$
3,504

$
(562
)
$
2,942Trade names


3-10 years


1,282


(624
)

658


2,844


(673
)

2,171Non-compete / Employment contracts


1.5-6.5 years


633


(615
)

18


2,383


(1,127
)

1,256Total




$
5,870

$
(2,169
)
$
3,701

$
8,731

$
(2,362
)
$
6,369


Amortization
of other intangible assets for the fiscal years ended March 31, 2009, 2008 and 2007 was $1.8 million, $1.3 million and $1.9 million, respectively. Finite-lived
other intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from one and one-half to
ten years and are assessed for impairment under SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("FAS 144").

In
accordance with our accounting policy we continue to assess long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be
recoverable. During the fiscal year ended March 31, 2009, we performed an evaluation of our long-lived assets for impairment under FAS 144 and concluded no impairment was
indicated. FAS 144 indicates that the carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use
and eventual disposition of the asset, and an impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. As a result of our
realignment plan, we have incurred charges of $3.5 million related to the write-off of intangible assets.

The
following table summarizes the estimated amortization expense for each of the next five fiscal years and thereafter (in thousands):

Fiscal Years Ending March 31,2010

$
1,1212011


7282012


7032013


7032014


352Thereafter


94$
3,701


8.     Other Long-Term Assets

In addition to other intangible assets, other long-term assets include our investment in Yuke's, a Japanese video game developer. We own less than a 20% interest in
Yuke's, which is publicly traded on the Nippon New Market in Japan. Accordingly, we account for this investment under FAS 115 as available-for-sale. Unrealized holding
gains and losses are excluded from earnings and are included as a component of other

77

---



Table of Contents

comprehensive
income until realized. In fiscal 2009 the pre-tax unrealized holding loss related to our investment in Yuke's was $3.2 million, and in fiscal 2008 the
pre-tax unrealized holding gain was $1.4 million. Due to the long-term nature of this relationship, this investment is included in other long-term assets in
the consolidated balance sheets.

Other
long-term assets as of March 31, 2009 and 2008 are as follows (in thousands):

March 31,
2009

March 31,
2008Investment in Yuke's

$
3,847

$
7,080Other intangible assets (see Note 9)


3,701


6,369Other


2,931


6,553Total other long-term assets

$
10,479

$
20,002


9.     Restructuring

In November 2008, we announced that we updated our strategic plan in an effort to increase our profitability and cash flow generation. We have significantly realigned our
business to focus on fewer, higher quality games, and have established an operating structure that supports our more focused product strategy. On February 4, 2009, in response to continuing
macroeconomic uncertainty, we announced additional cost reductions in order to drive further efficiency improvements. As of March 31, 2009, the realignment has included the cancellation of
several titles in development, the closure or spin-off of several of our development studios, and the streamlining of our corporate organization in order to support the new product
strategy, including a reduction in worldwide personnel of approximately 600 people.

As
a result of these initiatives, we recorded a $12.3 million restructuring charge for the fiscal year ended March 31, 2009. Restructuring charges include the costs associated with lease
abandonments less estimates of sublease income, write-off of related long-lived assets due to the studio closures, as well as costs of other non-cancellable
contracts. Additional facility related charges will be recorded in future periods as the restructuring plan is completed and facilities are vacated.

The
following table summarizes the significant components and activity under the realignment plan for the fiscal year ended March 31, 2009 (in thousands) and the accrual balance as of
March 31, 2009:

Lease and
Contract
Terminations

Asset
Impairments

TotalBalance as of March 31, 2008

$


$


$
Charges to operations


5,617


6,649


12,266Non-cash write-offs





(6,649
)

(6,649
)Cash payments


(1,447
)




(1,447
)Foreign currency and other adjustments


886





886Balance as of March 31, 2009

$
5,056

$


$
5,056


As
of March 31, 2009, $2.2 million is included in accrued short-term liabilities and $2.8 million is included in other long-term liabilities related to
future lease payments.

We
also incurred non-cash charges of $63.3 million, recorded in cost of salessoftware amortization and royalties, related to the write-off of capitalized
software for games that have been cancelled in connection with the realignment plan. We also incurred non-cash charges of $1.0 million, recorded in cost of saleslicense
amortization and royalties, related to impairment of licenses in connection with the cancelled games. In addition, we incurred $12.7 million in cash charges related to severance and other
employee benefits. Employee related severance costs are classified in product development, selling and marketing,

78

---



Table of Contents

and
general and administrative expenses in the accompanying consolidated statements of operations based upon the employee's classification.

10.   Secured Credit Lines

In October 2008, we obtained a line of credit with UBS in conjunction with the ARS settlement agreement (see "Note 2Investments"). The line of credit is due
on demand and allows for borrowings of up to 75% of the market value of the ARS, as determined by UBS. The credit line is secured by our ARS held with UBS, which have a par value of
$30.8 million and a fair value of $26.1 million at March 31, 2009. All interest, dividends, distributions, premiums, and other income and payments received into the ARS investment
account at UBS will be automatically transferred to UBS as payments on the line of credit. Additionally, proceeds from any liquidation, redemption, sale or other disposition of all or part of the ARS
will be automatically transferred to UBS as payments. If these payments are insufficient to pay all accrued interest by the monthly due date, then UBS will either require us to make additional
interest payments or, at UBS' discretion, capitalize unpaid interest as an additional advance. UBS' intent is to cause the interest rate payable by us to be equal to the weighted average interest or
dividend rate payable to us on the ARS pledged as collateral. Upon cancellation of the line of credit, we will be reimbursed for any amount paid in interest on the line of credit that exceeds the
income on the ARS. There was $21.4 million outstanding, and a rate of 4.25%, on this line of credit at March 31, 2009.

In
December 2008, we obtained a margin account at Wachovia Securities (now Wells Fargo & Company ("Wells Fargo")). The terms of the margin account enable us to borrow against certain
securities, including some of our ARS. The margin account is collateralized by the securities held with Wells Fargo, which have a par value of $7.8 million and a fair value of
$7.4 million at March 31, 2009. The interest rate on borrowing is currently set at LIBOR plus a margin. There was $3.0 million outstanding, and a rate of 1.1%, on this margin
account at March 31, 2009.

11.   Capital Stock Transactions

As of March 31, 2008 we had $28.6 million authorized and available for common stock repurchases. During fiscal 2009, we did not repurchase any shares of our
common stock. During fiscal 2008, our Board authorized the repurchase of up to $75.0 million of our common stock from time to time on the open market or in private transactions. During fiscal
2008, we repurchased 2,193,400 shares of our common stock for $54.9 million. There is no expiration date for the authorized repurchases.

On
January 18, 2008, in connection with our acquisition of Big Huge Games, Inc. ("BHG"), we issued an aggregate of 199,631 shares of our common stock to stockholders of BHG as partial
consideration for the purchase of their shares of BHG. The shares are restricted from transfer and held in escrow by THQ until certain criteria are met, as set forth in the BHG stock purchase
agreement. Due to our decision in February 2009 to close and/or sell BHG, pursuant to the BHG stock purchase agreement, certain of the escrowed common stock will be released from escrow and delivered
to the holders of such stock on January 18, 2011 and the remaining shares will be released from escrow and delivered to THQ on January 18, 2013.

On
July 30, 2007 we amended our certificate of incorporation to increase our authorized number of shares of common stock to 225,000,000, from 75,000,000.

79

---





Table of Contents

12.   Accumulated Other Comprehensive Income (Loss)

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

Foreign
Currency
Translation
Gains (Losses)

Net Unrealized
Gains (Losses)
on Securities

Net Accumulated
Other Comprehensive
Income (Loss)Balance at March 31, 2006

$
6,644

$
3,723

$
10,367Other comprehensive income (loss)


9,463


(2,227
)

7,236Balance at March 31, 2007


16,107


1,496


17,603Other comprehensive income (loss)


9,372


219


9,591Balance at March 31, 2008


25,479


1,715


27,194Other comprehensive income (loss)


(28,019
)

(1,567
)

(29,586
)Balance at March 31, 2009

$
(2,540
)
$
148

$
(2,392
)


The
foreign currency translation adjustments relate to indefinite investments in non-U.S. subsidiaries and thus are not adjusted for income taxes.

13.   Earnings (Loss) Per Share

Basic earnings (loss) per share is computed as net earnings (loss) divided by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) per
share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, stock-based awards and purchase opportunities under
our ESPP. In applying the treasury stock method in determining our dilutive potential common shares, assumed proceeds
from dilutive weighted-average outstanding options include the windfall tax benefits, net of shortfalls, calculated under the "as-if" method as prescribed by FAS 123R.
The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted earnings (loss) per share for the periods presented (in thousands):

Fiscal Year Ended March 31,2009

2008

2007Net earnings (loss) used to compute basic and diluted earnings (loss) per share

$
(431,112
)
$
(35,337
)
$
68,038Weighted average number of shares outstandingbasic


66,861


66,475


65,039Dilutive effect of potential common shares








2,554Number of shares used to compute earnings (loss) per sharediluted


66,861


66,475


67,593


As
a result of our net loss for fiscal years 2009 and 2008, 9.0 million and 5.2 million potential common shares have been excluded from the computation of diluted earnings per share,
respectively, as their inclusion would have been antidilutive.

As
a result of our net income for fiscal 2007, all potential shares were included in the computation of diluted earnings per share.

Had
we reported net income for fiscal 2009 and 2008, an additional 0.7 million and 1.8 million shares of common stock, respectively, would have been included in the number of shares used
to calculate diluted earnings per share.

80

---



Table of Contents

14.   Income Taxes

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

Fiscal Year Ended March 31,2009

2008

2007Income (loss) from continuing operations before income taxes and minority interest:United States

$
(384,363
)
$
(99,868
)
$
60,955Foreign


(2,868
)

27,233


30,073$
(387,231
)
$
(72,635
)
$
91,028Provision for income tax (benefit) expense:CurrentFederal

$
1,734

$
(8,049
)
$
(518
)State


90


(355
)

(12
)Foreign


10,461


13,430


11,211Total current


12,285


5,026


10,681DeferredFederal


24,674


(33,833
)

6,905State


11,309


(6,310
)

(1,036
)Foreign


(1,637
)

(4,485
)

(519
)Total deferred


34,346


(44,628
)

5,350Add back benefit (expense) recorded to stockholders' equity:Tax benefit related to stock option exercises


536


3,921


8,866Tax benefit (expense) related to unrealized (gain) loss on investments


(941
)

(104
)

1,309Provision (benefit) for income tax

$
46,226

$
(35,785
)
$
26,206


The
differences between the U.S. federal statutory tax rate and our effective tax rate, expressed as a percentage of income (loss) before income taxes and minority interest, were as follows:

Fiscal Year Ended March 31,2009

2008

2007U.S. federal statutory tax rate


(35.0
)%

(35.0
)%

35.0
%Impact of changes in unrecognized tax benefits


(0.3
)

(6.4
)

State taxes, net of federal impact


1.9


(5.7
)

0.2Tax exempt interest income


(0.3
)

(3.3
)

(2.9
)Research and development credits


(0.6
)

(3.2
)

(4.3
)Non-deductible stock-based compensation


0.2


2.8


2.0Valuation Allowance


36.5Rate differences in foreign taxes and other


9.6


1.5


(1.2
)Effective tax rate


12.0
%

(49.3
)%

28.8
%


81

---



Table of Contents

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

March 31,2009

2008Deferred income tax assets:Accruals, reserves and other expenses

$
33,438

$
39,527Tax credit carryforwards


31,090


21,581Net operating loss carryforwards


125,680


28,777Depreciation and amortization


9,565


Unrealized loss on investments


3,445


Other


27,910


17,129Total deferred income tax assets


231,128


107,014Valuation allowance


(164,225
)

(8,357
)Deferred tax asset, net of valuation allowance


66,903


98,657Deferred income tax liabilities:Software development costs


(58,809
)

(62,000
)Depreciation and amortization





(3,163
)Unrealized gain on investments





(1,050
)Total deferred income tax liabilities


(58,809
)

(66,213
)Net deferred tax asset (liability)

$
8,094

$
32,444


As
of March 31, 2009, current net deferred tax assets were $6.1 million and long term net deferred tax assets were $2.0 million. As of March 31, 2008, current net deferred
tax liabilities were $29.3 million and long-term net deferred tax assets were $61.7 million.

As
of March 31, 2009, we have federal and various state net operating loss carryforwards totaling $330.7 million and $316.7 million, respectively, that expire through 2029 and
foreign net operating loss carryforwards totaling $22.1 million that can be carried forward indefinitely.

The
tax credit carryforwards as of March 31, 2009 includes research and development tax credit carryforwards of $22.4 million and $17.9 million for federal and state purposes,
respectively. The federal tax credit carryforwards expire through 2029, while the majority of the state credits are from California and can be carried forward indefinitely.

Our
deferred tax assets were reduced by a valuation allowance of $164.2 million and $8.4 million as of March 31, 2009 and March 31, 2008, respectively. We believe that it
is more likely than not that the deferred tax assets will not be fully realized. The deferred tax assets for which a valuation allowance has been established include all domestic deferred tax assets,
such as federal and state net operating loss carry-forwards and research and development credit carry-forwards, as well as certain foreign net operating loss carry-forwards.

A
portion of the tax benefits associated with certain net operating loss carryforwards relates to employee stock options. Pursuant to SFAS No. 109, "Accounting for Income Taxes"
("FAS 109"), current year net operating losses have been reduced by $1.4 million for these items. A credit will be recorded to additional paid-in capital when the net
operating losses attributable to the employee stock options can be utilized to reduce our income taxes payable.

At
March 31, 2009 we had accumulated foreign earnings of $51.6 million. We do not plan to repatriate these earnings, therefore, no U.S. income tax has been provided on the foreign
earnings. Additionally, we

82

---



Table of Contents

have
not tax effected the cumulative translation adjustment as we have no intention of repatriating foreign earnings.

We
adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109," ("FIN 48") on
April 1, 2007. Previously, we had accounted for tax contingencies in accordance with SFAS No. 5, Accounting for Contingencies. As required by FIN 48, we recognize the financial
statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the "more
likely than not" threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant
tax authority. At the adoption date, we applied FIN 48 to all tax positions for which the statute of limitations remained open. Our adoption of FIN 48 on April 1, 2007 had no
impact on our April 1, 2007 beginning retained earnings balance. The amount of unrecognized tax benefits as of April 1, 2008 was $11.6 million.

A
reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance at April 1, 2007

$
18,604Additions based on tax positions related to the current year


2,266Reductions for tax positions of prior years


(1,755
)Reductions as result of lapse of applicable statute of limitations


(229
)Settlements


(7,250
)Balance at April 1, 2008


11,636Additions based on tax positions related to the current year


807Additions for tax positions of prior years


42Reductions for tax positions of prior years


(1,506
)Balance at March 31, 2009

$
10,979


The
total unrecognized tax benefit of $10.9 million is reflected in our consolidated balance sheet as $6.1 million in net long-term deferred tax assets, and
$4.8 million in other long-term liabilities. The amount of unrecognized tax benefits at March 31, 2009 includes $5.4 million of unrecognized tax benefits which, if
ultimately recognized, will reduce our annual effective tax rate.

We
are subject to income taxes in the U.S. federal jurisdiction, and various states and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related
tax laws and regulations and require significant judgment to apply. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by
tax authorities for fiscal years before 2004.

Our
uncertain tax positions relate to tax years that remain subject to examination by the relevant tax authorities. On May 24, 2007 we received notification from the IRS that the Joint
Committee on Taxation had completed its review of our file and took no exception to the conclusions reached by the IRS. We have evaluated the impact of the conclusions reached in the IRS examination
in the FIN 48 measurement and recognition process. We are currently under routine examination by the IRS for our income tax returns for fiscal years 2004 through 2007 and by various state
jurisdictions for fiscal years subsequent to 2003. We expect some of these examinations to be concluded and settled in the next 12 months, however, we are currently unable to estimate the
potential impact to the liability for unrecognized tax benefits or the timing of such changes. We do not anticipate any significant changes in the unrecognized tax benefits in fiscal 2009 related to
the expiration of the statutes of limitations.

Our
policy is to recognize interest and penalty expense, if any, related to uncertain tax positions as a component of income tax expense. For the fiscal years ended March 31, 2009 and 2008, we
recognized $0.2 million and $0.1 million in interest expense, respectively, related to uncertain tax positions. As of

83

---



Table of Contents

March 31,
2009 and 2008, we had an accrued liability of $0.8 million and $0.6 million, respectively, for interest related to uncertain tax positions. These amounts are included in
other long-term liabilities in the consolidated balance sheets.

15.   Employee Defined Contribution Plan

For our United States employees we sponsor a defined contribution plan under Section 401(k) of the Internal Revenue Code. The plan allows employees the ability to defer
up to 60% of their annual compensation (up to the 2009 annual IRS annual maximum of $16,500). We matched up to 4% of eligible compensation with a maximum of $9,800 based on the 2009 IRS maximum
compensation limit from the inception of the plan through March 31, 2009, and the plan allows for employee matching going forward. We may also contribute funds to the plan in the form of a
discretionary profit-sharing contribution; however, we did not make any such contributions during fiscal 2009. Employer contributions under the plan were $5.9 million, $6.1 million and
$4.9 million in the fiscal years ended March 31, 2009, 2008 and 2007, respectively.

16.   Stock-based Compensation

Prior to July 20, 2006, we utilized two stock option plans: the THQ Inc. Amended and Restated 1997 Stock Option Plan (the "1997 Plan") and the THQ Inc.
Third Amended and Restated Nonexecutive Employee Stock Option Plan (the "NEEP Plan"). The 1997 Plan provided for the issuance of up to 14,357,500 shares available for employees, consultants and
non-employee directors, and the NEEP plan provided for the issuance of up to 2,142,000 shares available for nonexecutive employees of THQ of which no more than 20% was available for awards
to our nonexecutive officers and no more than 15% was available for awards to the nonexecutive officers or general managers of our subsidiaries or divisions. The 1997 Plan and the NEEP Plan were
cancelled on July 20, 2006, the same day THQ's stockholders approved the THQ Inc. 2006 Long-Term Incentive Plan ("LTIP").

Under
the 1997 Plan, we granted incentive stock options, non-qualified stock options, performance accelerated restricted stock ("PARS") and performance accelerated restricted stock units
("PARSUs"). The NEEP Plan provided for the grant of only non-qualified stock options to non-executive officers of the Company. The LTIP provides for the grant of stock options
(including incentive stock options), stock appreciation rights (SARs), restricted stock awards,
restricted stock units ("RSUs"), and other performance awards (in the form of performance shares or performance units) to eligible directors and employees of, and consultants or advisors to, the
Company. Subject to certain adjustments, as of March 31, 2009, the total number of shares of THQ common stock that may be issued under the LTIP shall not exceed 11,500,000 shares. Shares
subject to awards of stock options or SARs will count as one share for every one share granted against the share limit, and all other awards will count as 1.6 shares for every one granted against the
share limit. Prior to July 31, 2008, awards other than shares subject to awards of stock options or SARS counted as 1.6 shares for every one granted against the share limit. As of
March 28, 2009, we had 6,761,497 shares under the LTIP available for grant.

The
purchase price per share of common stock purchasable upon exercise of each option granted under the 1997 Plan, the NEEP Plan and the LTIP may not be less than the fair market value of such share
of common stock on the date that such option is granted. Generally, options granted under the LTIP become exercisable over three years and expire on the fifth anniversary of the grant date. Other
vesting terms are as follows:



84

---



Table of Contents



The
fair value of our nonvested restricted stock and restricted stock units is determined based on the closing trading price of our common stock on the grant date. The fair value of PARS, PARSUs, DSUs
and RSUs granted is amortized over the vesting period.

Beginning
in March 2007, we offered our non-executive employees the ability to participate in an employee stock purchase plan ("ESPP"). Under the Amended and Restated ESPP, up to 1,000,000
shares of our common stock may be purchased by eligible employees during six-month offering periods that commence each March 1 and September 1 (each, an "Offering Period").
The first business day of each Offering Period is referred to as the "Offering Date." The last business day of each Offering Period is referred to as the "Purchase Date." Pursuant to our ESPP,
eligible employees may authorize payroll deductions of up to 15 percent of their base salary, subject to certain limitations, to purchase shares at 85 percent of the lower of the fair
market value of our common stock on the Offering Date or Purchase Date. The fair value of the ESPP options granted is amortized over the offering period. During the year ended March 31, 2009,
employees purchased 495,533 and 198,178 shares at a price of $2.13 and $13.02 per share, respectively, on the Purchase Dates. During the year ended March 31, 2008, employees purchased 180,229
and 124,650 shares at a price of $15.90 and $24.47 per share, respectively, on the Purchase Dates. As of March 31, 2009, we had no shares available for issuance under the ESPP. Accordingly, we
suspended offerings under the ESPP effective as of March 1, 2009.

Any
references we make to unspecified "stock-based compensation" and "stock-based awards" are intended to represent the collective group of all our awards and purchase opportunities: stock options,
PARS, PARSUs, DSUs, RSUs and ESPP options. Any references we make to "nonvested shares" and "vested shares" are intended to represent our PARS, PARSU, DSU and RSU awards.

85

---



Table of Contents

For
the fiscal years ended March 31, 2009, 2008 and 2007, stock-based compensation expense recognized in the consolidated statements of operations was as follows (in thousands):

Year Ended March 31,2009

2008

2007Cost of salessoftware amortization and royalties

$
5,797

$
6,800

$
2,087Product development


3,242


4,773


3,364Selling and marketing


2,432


2,654


2,817General and administrative


7,128


8,444


10,704Stock-based compensation expense before income taxes


18,599


22,671


18,972Income tax benefit


(5,447
)

(6,132
)

(5,060
)Total stock-based compensation expense after income taxes

$
13,152

$
16,539

$
13,912


Additionally,
stock-based compensation expense is capitalized in accordance with FAS 86, as discussed in "Note 1Description of Business and Summary of Significant Accounting
Policies." The following table summarizes stock-based compensation expense included in our consolidated balance sheets as a component of software development (in thousands):

Balance at April 1, 2007

$
3,837Stock-based compensation expense capitalized during the period


5,765Amortization of capitalized stock-based compensation expense


(6,800
)Balance at March 31, 2008

$
2,802Stock-based compensation expense capitalized during the period


5,368Amortization of capitalized stock-based compensation expense


(5,797
)Balance at March 31, 2009

$
2,373


FAS 123R
requires that stock-based compensation expense be based on awards that are ultimately expected to vest and accordingly, stock-based compensation expense recognized in fiscal years
ended March 31, 2009, 2008, and 2007 has been reduced by estimated forfeitures. Our estimate of forfeitures is based on historical forfeiture behavior as well as any expected trends in future
forfeiture behavior.

The
fair value of stock options granted is estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions noted in the table below. Anticipated
volatility is based on implied volatilities from traded options on our stock and on our stock's historical volatility. The expected term of our stock options granted is based on historical exercise
data and represents the period of time that stock options granted are expected to be outstanding. Separate groups of employees that have similar historical exercise behavior are considered separately
for valuation purposes. The risk-free rate for periods within the expected lives of options and ESPP are based on the US Treasury yield in effect at the time of grant.

The
fair value of our ESPP options for the six month offering periods that began on September 3, 2008, March 3, 2008, September 4, 2007, and March 1, 2007, was estimated
using the Black-Scholes option

86

---



Table of Contents

pricing
model with the weighted-average assumptions noted in the table below and the per share fair value for those offering periods was $3.98, $5.52, $7.63, and $8.39, respectively.

Stock Option Grants

Employee Stock
Purchase Plan

Stock Option Grants

Employee Stock
Purchase Plan

Stock Option Grants

Employee Stock
Purchase PlanYear Ended
March 31, 2009

Year Ended
March 31, 2009

Year Ended
March 31, 2008

Year Ended
March 31, 2008

Year Ended
March 31, 2007

Year Ended
March 31, 2007Dividend yield



%


%


%


%


%


%Anticipated volatility


46.8
%

36.8
%

36
%

38.8
%

37
%

37
%Weighted-average risk-free interest rate


1.8
%

1.93
%

3.9
%

4.4
%

4.9
%

5.1
%Expected lives


3.0 years


0.5 years


3.2 years


0.5 year


3.2 years


0.5 year


A summary of our stock option activity for fiscal 2009, 2008 and 2007 is as follows (in thousands, except per share amounts):

Options

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term
(in years)

Aggregate
Intrinsic
ValueOutstanding at March 31, 2006


9,075

$
16.00Granted


2,638

$
24.60Exercised


(3,217
)
$
15.66Forfeited/expired/cancelled


(932
)
$
18.61Outstanding at March 31, 2007


7,564

$
19.15Granted


2,982

$
27.44Exercised


(1,422
)
$
14.89Forfeited/expired/cancelled


(1,007
)
$
25.86Outstanding at March 31, 2008


8,117

$
22.10Granted


3,925

$
10.40Exercised


(438
)
$
13.71Forfeited/expired/cancelled


(2,779
)
$
20.42Outstanding at March 31, 2009


8,825

$
17.84


3.1

$
18Vested and expected to vest


7,987

$
18.17


3.0

$
16Exercisable at March 31, 2009


3,808

$
21.52


1.8





The
aggregate intrinsic value is calculated as the difference between the exercise price of a stock option and the quoted price of our common stock at March 31, 2009. It excludes stock options
that have exercise prices in excess of the quoted price of our common stock at March 31, 2009. The aggregate intrinsic value of stock options exercised during fiscal years ended
March 31, 2009, 2008 and 2007 was $2.6 million, $19.5 million and $42.9 million, respectively.

The
weighted-average grant-date fair value per share of options granted during fiscal years ended March 31, 2009, 2008 and 2007 was $3.25, $8.28 and $7.81, respectively.

87

---





Table of Contents

A summary of the status of our nonvested shares as of March 31, 2009 and 2008 and changes during the years then ended, is as follows (in thousands, except per share
amounts):

Shares

Weighted-
Average
Grant-date
Fair Value
Per ShareNonvested shares at April 1, 2007


339

$
21.81Granted


494

$
29.74Vested


(92
)
$
23.60Forfeited/cancelled


(129
)
$
25.34Nonvested shares at March 31, 2008


612

$
22.16Granted


369

$
17.73Vested


(83
)
$
22.88Forfeited/cancelled


(179
)
$
20.99Nonvested shares at March 31, 2009


719

$
20.09


The
weighted-average grant-date fair value of nonvested shares granted in the fiscal year ended March 31, 2007 was $26.21.

The
unrecognized compensation cost, that we expect to recognize, related to our nonvested stock-based awards at March 31, 2009, and the weighted-average period over which we expect to recognize
that compensation, is as follows (in thousands):

Unrecognized
Compensation
Cost at
March 31, 2009

Weighted-
Average Period
(in years)Stock options

$
14,551


1.4Nonvested shares


7,838


2.6ESPP





$
22,389


Cash
received from exercises of stock options for the fiscal years ended March 31, 2009, 2008 and 2007 was $6.0 million, $21.1 million and $50.6 million, respectively. The
actual tax benefit realized for the tax deductions from exercises of all stock-based awards totaled zero, $5.5 million and $8.9 million for the fiscal years ended March 31, 2009,
2008 and 2007, respectively.

The
fair value of all our stock-based awards that vested during the years ended March 31, 2009, 2008 and 2007 was $22.4 million, $23.5 million and $19.9 million,
respectively.

Non-Employee Stock Warrants.In prior years, we have granted stock warrants to third parties in connection with the acquisition of licensing rights for
certain key intellectual property. The warrants generally vest upon grant and are exercisable over the term of the warrant. The exercise price of third-party stock warrants is equal to the fair market
value of our common stock at the date of grant. No third-party stock warrants were granted or exercised during the fiscal years ended March 31, 2009, 2008 and 2007.

At
March 31, 2009, 2008 and 2007, we had 390,000 stock warrants outstanding with a weighted average exercise price per share of $12.32.

In
accordance with EITF No. 96-18, "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Connection with Selling Goods or Services," we
measure the fair value of these warrants on the measurement date. The fair value of each stock warrant is capitalized and amortized

88

---



Table of Contents

to
expense when the related product is released and the related revenue is recognized. Additionally, as more fully described in "Note 1Description of Business and Summary of
Significant Accounting Policies," the recoverability of intellectual property licenses is evaluated on a quarterly basis with amounts determined as not recoverable being charged to expense. In
connection with the evaluation of capitalized intellectual property licenses, any capitalized amounts for related third-party stock warrants are additionally reviewed for recoverability with amounts
determined as not recoverable being amortized to expense. For the years ended March 31, 2009, 2008 and 2007, $0.4 million,
$0.5 million and $0.7 million, respectively, was amortized and included in cost of saleslicense amortization and royalties expense.

As
a result of the stock option grant practices inquiry, as discussed more fully in our March 31, 2006 Amendment No. 2 on Form 10-K/A, certain of our stock options
were found to have been granted with an exercise price below the fair market value of our common stock on the date determined to be the correct measurement date. Those that vested subsequent to
December 2004 result in nonqualified deferred compensation for purposes of Section 409A of the Internal Revenue Code, and holders are subject to an excise tax on the value of the options in the
year in which the options vest. We have determined that options to purchase 1.1 million shares of our common stock held by current and former employees may be subject to adverse tax
consequences under Section 409A. All of the affected shares pertained to grants made to non-executive employees.

In
order to mitigate the unfavorable personal tax consequences under Section 409A, in December 2006 the Compensation Committee of our Board of Directors, pursuant to the terms and conditions of
our compensatory stock plans under which our stock options had been granted, unilaterally corrected the exercise price of affected options that remained outstanding to increase the exercise price to
the fair market value of our common stock on the revised measurement date. In January 2007, the Compensation Committee determined to give each affected option holder, subject to certain conditions, a
cash payment equal to the aggregate difference between the initial exercise price and the increased exercise price of each holder's affected options ("Cash Payment"). As of March 31, 2007,
$2.3 million was paid out to affected employees, and there were no additional amounts paid in fiscal 2008 and 2009. We accounted for the impact of the corrected options as a stock option
modification under FAS 123R. As a result of this partial cash settlement of these options and the application of the modification accounting, we recognized $0.7 million in additional
compensation cost due to the increase in the fair value of these options and $0.6 million in accelerated compensation cost in fiscal year ended March 31, 2007.

We
also compensated individuals who had exercised affected options prior to December 2006 for excise tax liability and certain other adverse consequences under Section 409A. We incurred
additional compensation expense of $0.9 million in the three months ended December 31, 2006 based upon our best estimate of this liability at that point in time. In the three months
ended March 31, 2007 we increased our estimate of this liability by $1.2 million based upon our review of the IRS Compliance Resolution Program (the "Program"), announced in February
2007 (IRS Announcement 2007-18). At March 31, 2007, it was our intent to participate in this Program, and we estimated our total liability under this Program would be approximately
$2.1 million. This amount was included in accrued and other current liabilities in our consolidated balance sheet at March 31, 2007. In fiscal 2008, we completed the program and the
entire $2.1 million of excise tax liability was paid out to the respective individuals.

17.   Stockholders Rights Plan

THQ's stockholders hold their stock subject to an Amended and Restated Rights Agreement dated August 22, 2001, as amended by the First Amendment to the Amended and
Restated Rights Agreement, dated as of April 9, 2002 (collectively, the "Rights Agreement"). Pursuant to the Rights Agreement, and as adjusted pursuant to Section 11(p) of the Rights
Agreement as a result of the stock splits which occurred on April 9, 2002 and on September 1, 2005, each share of THQ common stock is accompanied by four-ninths (4/9) of a
preferred stock purchase right ("Right") which entitles the registered holder to purchase four nine-thousandths (4/9000) of a share of Series A Junior Participating Preferred Stock
at an

89

---



Table of Contents

exercise
price of $44.44. The Rights become exercisable 10 days after any person or group, subject to certain exceptions, acquires, or 10 business days after any person or group, subject to
certain exceptions, has announced its intention to commence a tender offer for, 15% or more of the outstanding common stock of THQ. In the event that any such person or group acquires 15% or more of
our outstanding common stock, each holder of a Right (other than such person or group) will be entitled to purchase, at the exercise price, the number of shares of common stock having a current market
value equal to two times the exercise price of the Right. If we are acquired in a merger or other business combination, each registered holder of a Right will be entitled to purchase, at the exercise
price, a number of shares of common stock of the acquirer having a current market value equal to two times the exercise price of the Right.

The
Board may redeem the Rights at a redemption price of $0.001 per Right, subject to adjustment, at any time until 10 days after the acquisition of 15% or more of the common stock of THQ. At
any time after a person 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 at an exchange ratio of
4/9 shares of common stock for each Right or four nine-thousandths (4/9000) of a share of Series A Junior Participating Preferred Stock ("Preferred Stock") per Right. The
Rights expire on June 21, 2010.

Pursuant
to the Certificate of Designation, as amended (the "Certificate of Designation"), establishing the Preferred Stock, effective as September 1, 2005: (i) each share of Preferred
Stock is entitled to quarterly dividends equal to 2,250 times the aggregate per share amount of all dividends declared on the common stock, (ii) each share of Preferred Stock will be entitled
to 2,250 votes on all matters submitted to a vote of THQ's stockholders, (iii) the "adjustment number" (as defined in the Certificate of Designation) used in Section 6 of the Certificate
of Designation for calculating the liquidation amount for Preferred Stock is 2,250 and (iv) in the event of a consolidation, merger, combination or similar transaction, each share of Preferred
Stock will be exchanged or changed into an amount per share equal to 2,250 times the amount of capital stock, securities, cash or other property for which each share of common stock is exchanged or
changed. The description of the Rights contained herein does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement and the Certificate of Designation.

18.   Agreement with JAKKS Pacific, Inc.

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



90

---



Table of Contents



For
financial reporting purposes, we are deemed to control the venture; therefore, all venture operating results are consolidated with our results.

In
November 2001, through the venture with JAKKS, we entered into an amendment to expand the WWE license to include exclusive rights to other wrestling content produced by the WWE through December
2014. In exchange for these rights we paid a minimum guarantee to WWE that has already been recouped.

We
are currently involved in litigation with WWE and JAKKS with respect to the license and the preferred payment. See "Note 21Commitments and ContingenciesLitigation."

19.   Commitments and Contingencies

A summary of annual minimum contractual obligations and commercial commitments as of March 31, 2009 is as follows (in thousands):

Contractual Obligations and Commercial Commitments(6)Fiscal
Years Ending
March 31,

License /
Software
Development
Commitments(1)

Advertising(2)

Leases(3)

Secured
Credit
Lines(4)

Other(5)

Total2010

$
79,909

$
5,692

$
15,541

$
24,360

$
3,231

$
128,7332011


51,508


4,722


14,402








70,6322012


13,860


3,572


11,994








29,4262013


6,600


3,172


8,749








18,5212014


2,000


2,379


7,759








12,138Thereafter








9,232








9,232$
153,877

$
19,537

$
67,677

$
24,360

$
3,231

$
268,682


---

91

---



Table of Contents



Other
potential future expenditures relate to the following:

Manufacturer Indemnification.We must indemnify the platform manufacturers (Microsoft, Nintendo, Sony) of our games with respect to all loss, liability and
expenses resulting from any claim against such manufacturer involving the development, marketing, sale or use of our games, including any claims for copyright or trademark infringement brought against
such manufacturer. As a result, we bear a risk that the properties upon which the titles of our games are based, or that the information and
technology licensed from others and incorporated into the products, may infringe the rights of third parties. Our agreements with our third-party software developers and property licensors typically
provide indemnification rights for us with respect to certain matters. However, if a manufacturer brings a claim against us for indemnification, the developers or licensors may not have sufficient
resources to, in turn, indemnify us.

Indemnity Agreements.We have entered into indemnification agreements with the members of our Board of Directors, our Chief Executive Officer and our Chief
Financial Officer, to provide a contractual right of indemnification to such persons to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and
damages incurred by the any such person as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which such person is sued as a result of their service as members of
our Board of Directors, Chief Executive Officer or as Chief Financial Officer. The indemnification agreements provide specific procedures and time frames with respect to requests for indemnification
and clarify the benefits and remedies available to the indemnities in the event of an indemnification request.

Litigation

WWE Related Lawsuits

WWE Federal Court Actions.On October 19, 2004, World Wrestling Entertainment, Inc. ("WWE") filed a lawsuit in the United States District Court for
the Southern District of New York (the "Court") against JAKKS Pacific, Inc. ("JAKKS"), us, THQ/JAKKS Pacific LLC (the "LLC"), and others, alleging, among other claims, improper conduct
by JAKKS, certain executives of JAKKS, an employee of the WWE and an agent of the WWE in granting the WWE videogame license to the LLC. The complaint sought various forms of relief, including
monetary damages and a judicial determination that, among other things, the WWE videogame license is void. On March 30, 2005, WWE filed an amended complaint, adding both new claims and our
president and chief executive officer, Brian Farrell, as a defendant. On March 31, 2006, the

92

---



Table of Contents

Court
granted the defendants' motion to dismiss claims under the Robinson-Patman Act and the Sherman Act. On December 21, 2007, the Court dismissed the remaining federal claims, based on the
RICO Act, and denied a motion by WWE to reconsider the Court's prior March 2006 order dismissing the antitrust claims. The Court also dismissed WWE's state law claims, without prejudice to refiling
them in state court, for lack of federal jurisdiction. WWE has now asserted its state law claims in Connecticut, as described below. The Court has also granted our motion to dismiss without prejudice
our cross-appeals in this action. WWE appealed the Court's rulings, and a hearing on the appeal was held before the United States Court of Appeal for the Second Circuit on May 6, 2009. On
May 19, 2009, the Court of Appeals affirmed the Court's dismissal of the WWE's claims.

WWE Connecticut State Court Action.On October 12, 2006, WWE filed a separate lawsuit against us and the LLC in the Superior Court of the State of
Connecticut, alleging that the Company's agreements with Yuke's Co., Ltd. ("Yuke's"), a developer and distributor in Japan, violated a provision of the WWE videogame license prohibiting
sublicenses without WWE's prior written consent. The lawsuit seeks, among other things, a declaration that the WWE is entitled to terminate the video game license and seek monetary damages. At a
hearing on May 8, 2007, the Court granted WWE's request to amend its pleadings to add allegations and claims substantially similar to those already pending in WWE's lawsuit in the Southern
District of New York and to "cite in" the other defendants from that action, including our CEO, Brian Farrell. Following the dismissal without prejudice of WWE's lawsuit in the Southern District of
New York, WWE sought leave to refile its state law claims in this action, which was granted. As a result, the claims by WWE in Connecticut represented a combination of the earlier claims relating to
the Yuke's agreements and the Connecticut equivalents of the state law claims that had previously been pending in the Southern District of New York. On August 29, 2008, the Court granted
motions for summary judgment filed by us and other defendants, dismissing the claims that were Connecticut equivalents of the claims previously pending in the Southern District of New York. The Court
subsequently denied a request by WWE to rehear arguments related to this decision. We have now filed an answer to the remaining claims in this action. Discovery is scheduled to be completed by June
2009, and the case is currently scheduled to be ready for trial by May 1, 2010. WWE has filed a motion for summary judgment on the claims related to Yuke's, and we and the LLC have
cross-moved for summary judgment on those same claims. These motions have been continued by the Court until after the close of discovery. On July 1, 2008, we filed a cross-complaint in this
action against JAKKS alleging that, if WWE's allegations are found to be true, then JAKKS breached its contractual, fiduciary and other duties to us.

We
intend to vigorously defend ourselves against the claims raised in this action, including those raised in the amended complaint. We also intend to vigorously pursue our cross-claims against JAKKS.
However, at this time we cannot estimate a possible loss, if any, from an adverse decision in this case. Games we develop based upon our WWE videogame license have contributed to approximately 23% of
our net sales in fiscal 2009, down compared with approximately 25% of our net sales in fiscal 2008, and up compared with approximately 15% of our net sales in fiscal 2007. The loss of the WWE license
would have a negative impact on our future financial results.

Operating Agreement with JAKKS Pacific, Inc.

JAKKS Preferred Return Arbitration.In June 1999 we entered into an operating agreement with JAKKS that governs our relationship with respect to the WWE videogame
license. Pursuant to the terms of this agreement, JAKKS is entitled to a preferred payment from revenues derived from exploitation of the WWE videogame license. The amount of the preferred payment to
JAKKS for the period beginning July 1, 2006 and ending December 31, 2009 (the "First Subsequent Distribution Period") is to be determined by agreement or, failing that, by arbitration.
The parties were unable to reach agreement on the preferred payment for the First Subsequent Distribution Period. Accordingly, as provided in the operating agreement, an arbitration hearing was held
before the arbitrator on March 20, 2009. We are currently awaiting the arbitrator's decision. Although we believe continuation of the previous preferred payment

93

---



Table of Contents

would
represent significantly excessive compensation to JAKKS for the First Subsequent Distribution Period, we are not able to predict the outcome of the arbitration or otherwise estimate the amount
of the preferred payment for the First Subsequent Distribution Period. Accordingly, we are currently accruing for a preferred payment to JAKKS at the previous rate. However, we have advised JAKKS that
we do not intend to make any payment until the amount of the preferred payment payable to JAKKS for the First Subsequent Distribution Period is agreed or otherwise determined as provided in the
operating agreement. We do not expect the resolution of this dispute to have a material adverse impact on our reported financial results.

Other

We are also involved in additional routine litigation arising in the ordinary course of our business. In the opinion of our management, none of such
pending litigation is expected to have a material adverse effect on our consolidated financial condition or results of operations.

Terminated Proceedings

Lawsuits related to our historical stock option granting practices

Kukor and Ramsey v. Haller, et. Al.On August 25, 2006, following our announcement of the informal inquiry by the SEC, a purported shareholder derivative
action captionedRamsey v. Haller et. Al.was filed against certain of our current and former officers and directors in the California Superior Court,
Los Angeles County. The complaint alleged, among other things, purported improprieties in our issuance of stock options, breach of fiduciary duty and unjust enrichment. Another lawsuit was
subsequently filed by the same law firm on behalf of another purported shareholder, David Kukor, and the parties stipulated to consolidate the two actions. On or about April 19, 2007, a
Consolidated Shareholder Derivative Complaint (the "Consolidated Complaint") was filed, alleging the same types of claims and quoting from various public statements by us since the filing of the
original complaint. We were also named as a nominal defendant. On May 29, 2007, we filed a demurrer to the Consolidated Complaint as a whole, which was denied. The parties reached a settlement
in this matter, which was approved by the Court on February 25, 2009, pursuant to which we agreed to pay a specified amount for plaintiffs' counsel's attorneys fees and to implement certain
corporate governance reforms. Most of the attorney fee payment has been paid by our insurance carrier. The settlement of this action did not have a material adverse impact on our consolidated
financial position or results of operations.

94

---





Table of Contents

20.   Segment and Geographic Information

We operate in one reportable segment in which we are a developer, publisher and distributor of interactive entertainment software for home video game consoles, handheld
platforms and personal computers. The following information sets forth geographic information on our net sales and total assets for the fiscal years ended March 31, 2009, 2008 and 2007 (in
thousands):

North
America

Europe

Asia
Pacific

ConsolidatedYear ended March 31, 2009Net sales to unaffiliated customers

$
457,819

$
314,063

$
58,081

$
829,963Total assets

$
466,895

$
105,407

$
26,027

$
598,329Year ended March 31, 2008Net sales to unaffiliated customers

$
503,134

$
454,880

$
72,453

$
1,030,467Total assets

$
895,145

$
156,351

$
32,824

$
1,084,320Year ended March 31, 2007Net sales to unaffiliated customers

$
600,159

$
365,406

$
61,291

$
1,026,856Total assets

$
900,579

$
89,950

$
23,012

$
1,013,541


Our
largest single customer accounted for 14%, 14%, and 18% of our gross sales in fiscal 2009, 2008, and 2007, respectively. Our second largest customer accounted for 13%, 12%, and 11% of our gross
sales in fiscal 2009, 2008, and 2007, respectively.

Information
about THQ's net sales by platform for fiscal 2009, 2008 and 2007 is presented below (in thousands):

Fiscal Year Ended March 31,Platform

2009

2008

2007ConsolesMicrosoft Xbox 360

$
162,895

$
129,483

$
134,908Nintendo Wii


134,334


91,431


30,025Sony PlayStation 3


106,753


85,533


Sony PlayStation 2


92,003


252,642


304,916Other


121


9,766


81,580496,106


568,855


551,429HandheldNintendo Dual Screen


168,726


226,912


114,143Nintendo Game Boy Advance


3,336


36,655


119,869Sony PlayStation Portable


50,927


84,030


65,402Wireless


22,865


19,751


26,467245,854


367,348


325,881PC


88,003


94,264


149,546Total Net Sales

$
829,963

$
1,030,467

$
1,026,856


95

---



Table of Contents

21.   Quarterly Financial Data (Unaudited)

Twelve Months Ended March 31, 2009

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

June 30,
2008

Sept. 30,
2008

Dec. 31,
2008

March 31,
2009

Fiscal Year
EndedNet sales

$
137,578

$
164,816

$
357,310

$
170,259

$
829,963Costs and expenses


183,590


219,782


556,896


257,408


1,217,676Income (loss) from continuing operations before interest and other income, net, income taxes and minority interest


(46,012
)

(54,966
)

(199,586
)

(87,149
)

(387,713
)Interest and other income, net


2,494


(2,438
)

1,946


(1,519
)

483Income (loss) from continuing operations before income taxes and minority interest


(43,518
)

(57,404
)

(197,640
)

(88,668
)

(387,230
)Income taxes


(14,252
)

57,892


(5,780
)

8,366


46,226Income (loss) from continuing operations before minority interest


(29,266
)

(115,296
)

(191,860
)

(97,034
)

(433,456
)Minority Interest





36


106


160


302Income (loss) from continuing operations


(29,266
)

(115,260
)

(191,754
)

(96,874
)

(433,154
)Gain on sale of discontinued operations, net of tax


2,042











2,042Net income (loss)

$
(27,224
)
$
(115,260
)
$
(191,754
)
$
(96,874
)
$
(431,112
)Earnings (loss) per sharebasic:Continuing operations

$
(0.44
)
$
(1.73
)
$
(2.86
)
$
(1.44
)
$
(6.48
)Discontinued operations


0.03











0.03Earnings (loss) per sharebasic

$
(0.41
)
$
(1.73
)
$
(2.86
)
$
(1.44
)
$
(6.45
)Earnings (loss) per sharediluted:Continuing operations

$
(0.44
)
$
(1.73
)
$
(2.86
)
$
(1.44
)
$
(6.48
)Discontinued operations


0.03











0.03Earnings (loss) per sharediluted

$
(0.41
)
$
(1.73
)
$
(2.86
)
$
(1.44
)
$
(6.45
)


96

---



Table of Contents

Twelve Months Ended March 31, 2008

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

June 30,
2007

Sept. 30,
2007

Dec. 31,
2007

March 31,
2008

Fiscal Year
EndedNet sales

$
104,485

$
229,349

$
509,609

$
187,024

$
1,030,467Costs and expenses


137,419


242,448


493,803


244,865


1,118,535Income (loss) from continuing operations before interest and other income, net, income taxes and minority interest


(32,934
)

(13,099
)

15,806


(57,841
)

(88,068
)Interest and other income, net


7,356


2,569


3,412


2,096


15,433Income (loss) from continuing operations before income taxes and minority interest


(25,578
)

(10,530
)

19,218


(55,745
)

(72,635
)Income taxes


(16,304
)

3,491
)

5,224


(21,214
)

(35,785
)Income (loss) from continuing operations before minority interest


(9,274
)

(7,039
)

13,994


(34,531
)

(36,850
)Minority interest














Income (loss) from continuing operations


(9,274
)

(7,039
)

13,994


(34,531
)

(36,850
)Gain on sale of discontinued operations, net of tax








1,513





1,513Net income (loss)

$
(9,274
)
$
(7,039
)
$
15,507

$
(34,531
)
$
(35,337
)Earnings (loss) per sharebasic:Continuing operations

$
(0.14
)
$
(0.11
)
$
0.21

$
(0.52
)
$
(0.55
)Discontinued operations








0.02





0.02Earnings (loss) per sharebasic

$
(0.14
)
$
(0.11
)
$
0.23

$
(0.52
)
$
(0.53
)Earnings (loss) per sharediluted:Continuing operations

$
(0.14
)
$
(0.11
)
$
0.21

$
(0.52
)
$
(0.55
)Discontinued operations








0.02





0.02Earnings (loss) per sharediluted

$
(0.14
)
$
(0.11
)
$
0.23

$
(0.52
)
$
(0.53
)


Due
to rounding and reclassifications, some of the figures above may differ slightly from the 10-Q's previously filed.

22.   Discontinued Operations

In December 2006, we sold our 50% interest in Minick. As of March 31, 2009, we received $20.6 million in cash from the sale of Minick and we recognized gains of
$2.1 million and $1.5 million in fiscal 2009 and fiscal 2008, respectively. These gains are presented as "Gain on sale of discontinued operations, net of tax" in our consolidated
statements of operations. Pursuant to the Minick sale agreement, no additional consideration is outstanding as of March 31, 2009.

23.   Subsequent Events

On May 6, 2009 we signed a commitment letter for a revolving credit facility of up to $35.0 million with Bank of America, NA ("B of A"). The new credit facility
will provide us with a revolving line of credit for working capital and other corporate purposes and will be secured by the company's assets. Available borrowings under the facility will be subject to
borrowing base calculations based on the value of our eligible North American accounts receivable. Revolving loans will bear interest, at THQ's option, at the

97

---



Table of Contents

base
rate plus a spread of 1.0% to 2.5% or LIBOR plus 2.5% to 4.0%, depending on the company's fixed charge coverage ratio. The credit facility will be guaranteed by certain of our subsidiaries.

The
commitment letter for the credit facility will expire on July 5, 2009. We paid a $350,000 closing fee and will be required to pay other customary fees regardless of whether the credit
facility is consummated. The commitment of B of A for the credit facility is subject to, among other things, the final negotiation and execution of definitive agreements and other customary terms and
conditions. There can be no assurance that we will enter into the credit facility or that the credit facility will occur on the terms and conditions described herein.

98

---





Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

(a)Definition and limitations of disclosure controls.  Our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) are controls and other procedures that are designed to ensure
that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including
the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing
basis to determine if improvements or modifications are necessary.

There
are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of
the controls 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, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable
assurance, but not absolute assurance, of achieving their objectives.

(b)Evaluation of disclosure controls and procedures.  Our Chief Executive Officer and Chief Financial Officer, after
evaluating the effectiveness of our disclosure controls and procedures, believe that as of the end of the period covered by this report, our disclosure controls and procedures were effective in
providing the requisite reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

(c)Changes in internal control over financial reporting.  There were no changes in our internal control over financial
reporting that occurred during our fourth quarter of fiscal 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

99

---



Table of Contents

Management Report on Internal Control Over Financial Reporting

We, as management of THQ Inc. and its subsidiaries (the "Company"), are responsible for establishing and maintaining adequate internal
controls over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the
supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that:



Management
has conducted an assessment of the effectiveness of the Company's internal control over financial reporting as of March 28, 2009 based on the control criteria established in a report
entitled Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, we have concluded that the
Company's internal control over financial reporting is effective as of March 28, 2009.

Deloitte &
Touche LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this annual report on Form 10-K, has issued an
audit report on our internal control over financial reporting. That report appears on page 103.

/s/ BRIAN J. FARRELL Brian J. Farrell
Chairman of the Board, President and
Chief Executive Officer
May 22, 2009

/s/ PAUL J. PUCINO Paul J. Pucino
Executive Vice President,
Chief Financial Officer (Principal Financial Officer)
May 22, 2009


Item 9B.    Other Information

None.

100

---





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders of THQ Inc.
Agoura Hills, California

We
have audited the internal control over financial reporting of THQ Inc. and subsidiaries (the "Company") as of March 28, 2009, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of
the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control
over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing
similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

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

In
our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 28, 2009, based on the criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of March 28, 2009 and the related
consolidated statements of operations, stockholders' equity and cash flows for the year then ended of
the Company and our report dated May 22, 2009 expressed an unqualified opinion on those financial statements.

DELOITTE & TOUCHE LLPLos Angeles, California

May 22,
2009

101

---





Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The following information required by Item 10 is incorporated herein by reference from our definitive Proxy Statement for the 2009 Annual
Meeting of Stockholders, which will
be filed within 120 days after the close of our fiscal year (the "Proxy Statement"):



Information
regarding our code of ethics applicable to our directors, principal executive officer, principal financial officer, principal accounting officer, and other senior financial officers
appears under the caption "Charters, Code of Ethics, and Code of Business Conduct and Ethics."

Item 11.    Executive Compensation

The information required under this Item relating to executive compensation will be included in the Proxy Statement under the heading "Executive
Compensation," and is incorporated herein by reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 related to securities authorized for issuance under equity compensation plans is included in Item 5
herein. The information required by Item 12 related to security ownership of certain beneficial owners and management is incorporated herein by reference to the information in the Proxy
Statement under the caption "Security Ownership of Certain Beneficial Owners and Management."

Item 13.    Certain Relationships and Related Transactions, and Director Independence

There were no reportable business relationships, transactions with management, or indebtedness of management during the fiscal year ended
March 31, 2009.

Item 14.    Principal Accounting Fees and Services

The information regarding principal accounting fees and services and the Company's pre-approval policies and procedures for audit and
non-audit services provided by the Company's independent accountant is incorporated by reference to the Proxy Statement under the caption "Proposal
Number 43Ratification of Independent Registered Public Accounting Firm."

102

---



Table of Contents

PART IV

Item 15.    Exhibits and Consolidated Financial Statement Schedules

(a)   Financial Statements and Financial Statement Schedules

The following financial statements of the Company are included in Part II Item 8:



PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

53CONSOLIDATED FINANCIAL STATEMENTSConsolidated balance sheetsMarch 31, 2009 and 2008

54Consolidated statements of operations for the fiscal years ended March 31, 2009, 2008 and
2007

55Consolidated statements of stockholders' equity for the fiscal years ended March 31, 2009, 2008 and
2007

56Consolidated statements of cash flows for the fiscal years ended March 31, 2009, 2008 and
2007

57NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

58


(b)   Exhibits.

The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the SEC. We will furnish copies of the exhibits for a reasonable
fee (covering the expense of furnishing copies) upon request:

|    |  |                                                                                                                                                                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|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 |  | Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2007).                                                                                                               
|3.5 |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on March 12,
2009).                                                                                                                                                
|3.6 |  | 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")).
|3.7 |  | 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).                                                   

103

---



Table of Contents

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                          
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|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#* |  | Second Amended and Restated Employment Agreement dated as of December 31, 2008 between the Company and Brian J. Farrell.                                                                                                                                                                                                                                                                                 
|10.2#  |  | 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")).
|10.3#  |  | 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).                                                                                                                                                                                              
|10.4#  |  | Indemnification Agreement, dated as of January 31, 2008 between the Company and Gary Rieschel (the form of which is incorporated by reference to
Exhibit 10.4 to the Registrant's December 2004 10-Q).                                                                                                                                                                                                   
|10.5#  |  | Indemnification Agreement, dated as of March 2, 2009 between the Company and Paul J. Pucino (the form of which is incorporated by reference to
Exhibit 10.4 to the Registrant's December 2004 10-Q).                                                                                                                                                                                                     
|10.6#  |  | THQ Inc. Amended and Restated 2006 Long Term Incentive Plan (incorporated by reference to Exhibit A to Company's Proxy Statement on
Schedule 14A filed July 1, 2008).                                                                                                                                                                                                                                    
|10.7#  |  | THQ Inc. Amended and Restated Employee Stock Purchase Plan (incorporated by reference to Exhibit B to Company's Proxy Statement on Schedule 14A
filed July 1, 2008).                                                                                                                                                                                                                                     
|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 Quarterly Report on Form 10-Q for the period ended September 30, 2005).                                                                                                                                                                               
|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. Stock Unit Deferred Compensation Plan, effective as of August 18, 2005 (incorporated by reference to Exhibit 10.11 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31, 2007 (the "March 2007 10-K)).                                                                                                                                                             
|10.11# |  | Form of Severance Agreement with Executive Officers (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2006 (the "June 2006 10-Q")).                                                                                                                                                                                            
|10.12# |  | Form of Severance Agreement with Senior Officers (incorporated by reference to Exhibit 10.2 to the Registrant's June 2006 10-Q).                                                                                                                                                                                                                                                                         
|10.13# |  | Form of Severance Agreement with Officers (incorporated by reference to Exhibit 10.3 to the Registrant's June 2006 10-Q).                                                                                                                                                                                                                                                                                

104

---



Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|10.14#  |  | Form of Change-in-Control Agreement with Executive and Senior Officers (incorporated by reference to Exhibit 10.4 to the Registrant's June
2006 10-Q).                                                                                                                                                                           
|10.15#  |  | Form of Change-in-Control Agreement with Officers (incorporated by reference to Exhibit 10.5 to the Registrant's June 2006 10-Q).                                                                                                                                                                                                
|10.16#  |  | 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).                                                                                                                           
|10.17+  |  | 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 Quarterly Report on Form 10-Q for the period ended September 30, 2002 (the "September 2002 10-Q")).     
|10.18*+ |  | Amendment to the PlayStation® 2 CD-Rom / DVD-Rom Licensed Publisher Agreement dated January 1, 2004 between Sony Computer Entertainment
America Inc. and the Company.                                                                                                                                                            
|10.19*  |  | Latin American Rider to the PlayStation® 2 CD-Rom / DVD-Rom Licensed Publisher Agreement effective as of December 17, 2008 between Sony Computer
Entertainment America Inc. and the Company.                                                                                                                                     
|10.20+  |  | 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 Quarterly Report on Form 10-Q for the period ended September 30, 2003).                                   
|10.21+  |  | 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).                                                                                           
|10.22*  |  | Latin American Rider to the PlayStation® Portable Licensed Publisher Agreement effective as of December 17, 2008 between Sony Computer Entertainment
America Inc. and the Company.                                                                                                                                               
|10.23+  |  | Global PlayStation 3 Format Licensed Publisher Agreement and North American Territory Rider, effective as of March 5, 2007 by and between Sony Computer
Entertainment America Inc. and the Company (incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended March 31, 2008).
|10.24*  |  | Latin American Rider to the Global PlayStation 3 Format Licensed Publisher Agreement effective as of December 12, 2008 between Sony Computer
Entertainment America Inc. and the Company.                                                                                                                                         
|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+  |  | Amendment to the Xbox 360 Publisher License Agreement, effective as of October 1, 2006, 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, 2006).                                            
|10.27+  |  | Amendment to the Xbox 360 Publisher License Agreement, dated as of January 17, 2007, by and between Microsoft Licensing, GP and the Company
(incorporated by reference to Exhibit 10.25 to the Registrant's Annual Report on the March 2007 10-K).                                                                               

105

---



Table of Contents

|        |  |                                                                                                                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|10.28+  |  | Amendment to the Xbox 360 Publisher License Agreement effective as of July 8, 2008 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 September 30, 2008).                                                                  
|10.29+  |  | Amendment No. 2 to the Xbox 360 Publisher License Agreement effective as of October 21, 2008 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, 2008).                                                                
|10.30+  |  | Confidential License Agreement for Game Boy Advance (Western Hemisphere), dated as of July 18, 2001 between Nintendo of America, Inc. and the
Company (incorporated by reference to Exhibit 10.6 to the Registrant's September 2002 10-Q).                                                                                                         
|10.31   |  | 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).                                                    
|10.32   |  | Second Amendment to the Confidential License Agreement for Game Boy Advance effective as of April 9, 2007 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 June 30, 2007).                                                      
|10.33+  |  | 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 Annual Report on Form 10-K for the year ended March 31, 2005).                                                                 
|10.34   |  | First Amendment to the Confidential License Agreement for Nintendo DS effective as of October 15, 2007 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 June 30, 2008).                                                         
|10.35*  |  | Side Letter Agreement to the Confidential License Agreement for Nintendo DS dated February 25, 2009 between Nintendo of America Inc. and the
Company.                                                                                                                                                                                              
|10.36+  |  | Confidential First Renewal License agreement for Nintendo DS (EEA, Australia, and New Zealand) effective as July 20, 2008 between Nintendo Co.,
 Ltd., the Company and certain of the Company's subsidiaries (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended December 31, 2008).
|10.37+  |  | Confidential License Agreement for the Wii Console (Western Hemisphere), dated as of October 12, 2007 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 period ended December 31, 2007).                                                       
|10.38*+ |  | Add On Content Addendum to the Confidential License Agreement for the Wii Console (Western Hemisphere) effective as of March 23, 2009 between Nintendo of
America Inc. and the Company.                                                                                                                                                            
|10.39   |  | 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).                                                                                                

106

---



Table of Contents

|      |  |                                                                                                                                                                                                         
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|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.                                                                                                                                                                         
|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 Paul J. Pucino, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                     
|32*   |  | Certification of Brian J. Farrell, Chief Executive Officer, and Paul J. Pucino, Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                                      

---

107

---





Table of Contents

SIGNATURES

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

Dated: May 22, 2009

THQ INC.By:

/s/ Brian J. Farrell Brian J. Farrell, Chairman of the Board,
President and Chief Executive OfficerDated: May 22, 2009

THQ INC.By:

/s/ Paul J. Pucino Paul J. Pucino, Executive Vice President, Chief
Financial Officer (Principal Financial Officer)


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.

Signature

Title

Date/s/ BRIAN J. FARRELL Brian J. Farrell

Director, Chairman of the Board, President
and Chief Executive Officer (Principal
Executive Officer)

May 22, 2009/s/ PAUL J. PUCINO Paul J. Pucino

Executive Vice President, Chief Financial
Officer (Principal Financial Officer)

May 22, 2009/s/ LAWRENCE BURSTEIN Lawrence Burstein

Director

May 22, 2009/s/ HENRY DENERO Henry DeNero

Director

May 22, 2009/s/ BRIAN DOUGHERTY Brian Dougherty

Director

May 22, 2009/s/ JEFFREY W. GRIFFITHS Jeffrey W. Griffiths

Director

May 22, 2009/s/ GARY RIESCHEL Gary Rieschel

Director

May 22, 2009/s/ JAMES L. WHIMS James L. Whims

Director

May 22, 2009


108

---