Activision Blizzard (ATVI)

Cost of Sales — Intellectual Property Licenses (in thousands)

“Cost of sales — intellectual property licenses” for the three months ended June 30, 2007 increased $22.6 million from the three months ended June 30, 2006, from $9.9 million to $32.5 million.  As a percentage of publishing net revenues, “cost of sales — intellectual property licenses” increased slightly from 7% to 8%.  The increase in absolute dollars for the three months ended June 30, 2007 is due to the release of more titles with associated third party intellectual property.  Titles released with associated intellectual property during the first quarter of fiscal 2008 included Spider-Man 3, Shrek The Third, and TRANSFORMERS: The Game. This compares to two titles with associated intellectual property in the first quarter of fiscal 2007, Over the Hedge and X-Men: The Official Game.

We expect “cost of sales — intellectual property licenses” as a percentage of publishing net revenues for the remainder of fiscal 2008 to be lower than the first quarter as many of our planned titles, such as Call of Duty 4: Modern Warfare and Guitar Hero III, are original intellectual properties that are developed and owned by Activision.

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Cost of Sales – Intellectual Property Licenses (in thousands)

Cost of sales – intellectual property licenses for the year ended March 31, 2006 decreased in absolute dollars and as a percentage of publishing net revenues over the same period last year, from $62.2 million to $57.7 and from 6% to 5%, respectively. The decreases in both absolute dollars and as a percentage of publishing net revenues were due mainly to a one-time benefit related to the settlement of an intellectual property claim in the second quarter of fiscal 2006. The number of titles with associated intellectual property remained relatively flat year over year. In fiscal 2006, we released the following titles with associated intellectual property: Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, X-Men Legends II, THAW, Quake IV, and Shrek SuperSlam. In fiscal 2005 we released the following titles with associated intellectual property: Spider-Man 2, Shrek 2, Shark Tale, X-Men Legends, THUG 2, Lemony Snicket’s A Series of Unfortunate Events, and Doom 3.

Cost of Sales — Intellectual Property Licenses (in thousands)

“Cost of sales — intellectual property licenses” for the three months ended September 30, 2006 decreased in absolute dollars by 48% from $8.4 million for the three months ended September 30, 2005 to $4.4 million for the three months ended September 30, 2006 while the percentage of “cost of sales — intellectual property licenses” to publishing net revenues also decreased from 5% to 3%.  The decrease in the amount is mainly due to a decrease in the number of titles released and strong catalog sales of titles with no associated intellectual property royalties.  During the second quarter we had strong sales from our Call of Duty 2 and Guitar Hero titles, both of which are based upon intellectual property owned by us.  In addition, during the second quarter of fiscal 2006, we released Ultimate Spider-Man, X-Men Legends II, and World Series of Poker compared to only two new releases during the second quarter of fiscal 2007, World Series of Poker: Tournament of Champions and Cabela’s Alaskan Adventure.

“Cost of sales — intellectual property licenses” decreased in both absolute dollars and as a percentage of publishing net revenues from $29.4 million and 8% of publishing net revenues to $14.3 million and 5% of publishing net revenues for the six months ended September 30, 2005 and 2006, respectively.  The decreases in both absolute dollars and as a percentage of publishing net revenues were mainly due to strong catalog sales of titles with no associated intellectual property royalties and the release of fewer titles in the first six months of the current fiscal year with lower associated intellectual property royalties.  During the first six months of fiscal 2007, we had strong sales from our Call of Duty 2 and Guitar Hero titles, both of which are based upon intellectual property owned by us.  In addition, we released five titles with associated intellectual property during the first six months of fiscal 2006, Doom 3 for the Xbox, Madagascar, Fantastic Four, Ultimate Spider-Man, and X-Men Legends II.  This compares to four titles with associated intellectual property in the first six months of fiscal 2007, Over the Hedge, X-Men: The Official Game, World Series of Poker: Tournament of Champions and Cabela’s Alaskan Adventure.

Cost of Sales — Intellectual Property Licenses (in thousands)

Cost of sales — intellectual property licenses for the three months ended June 30, 2006 decreased $11.0 million from June 30, 2005, a decrease of 53% from $20.9 million to $9.9 million.  As a percentage of publishing net revenues, cost of sales — intellectual property licenses declined from 11% to 7%.  The decreases in both absolute dollars and as a percentage of publishing net revenues were due mainly to the release of more titles in the prior year fiscal quarter with associated intellectual property combined with higher royalty rates on certain titles, such as Doom 3.  Titles released with associated intellectual property during the first quarter of fiscal 2006 included Doom 3, Madagascar, and Fantastic Four.  This compares to two titles with associated intellectual property in the first quarter of fiscal 2007, Over the Hedge and X-Men: The Official Game.  We expect cost of sales — intellectual property licenses for the remainder of fiscal 2007 to decrease in both absolute dollars and as a percentage of publishing net revenues due to the planned slate of titles having lower associated intellectual property royalty rates compared to fiscal 2006 releases.

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Cost of Sales – Intellectual Property Licenses (in thousands)

Cost of sales – intellectual property licenses for the year ended March 31, 2005 increased in absolute dollars and as a percentage of publishing net revenues over the same period last year, from 5% to 6%.  The increases in both absolute dollars and as a percentage of publishing net revenues were due to the release of more titles with associated licensed intellectual property as well as continued strong catalog sales of titles with associated licensed intellectual property compared to the titles released in fiscal 2004 for which a higher proportion of revenues was derived from titles that were internally developed with no associated intellectual property.  In fiscal 2005 we released the following titles with associated intellectual property: Spider-Man 2, Shrek 2, Shark Tale, X-Men Legends, THUG 2, Lemony

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Cost of Sales – Intellectual Property Licenses (in thousands)

Cost of sales – intellectual property licenses for the three months ended June 30, 2006 decreased $11.0 million from June 30, 2005, a decrease of 53% from $20.9 million to $9.9 million.  As a percentage of publishing net revenues, cost of sales – intellectual property licenses declined from 11% to 7%.  The decreases in both absolute dollars and as a percentage of publishing net revenues were due mainly to the release of more titles in the prior year fiscal quarter with associated intellectual property combined with higher royalty rates on certain titles, such as Doom 3.  Titles released with associated intellectual property during the first quarter of fiscal 2006 included Doom 3, Madagascar, and Fantastic Four.  This compares to two titles with associated intellectual property in the first quarter of fiscal 2007, Over the Hedge and X-Men: The Official Game.  We expect cost of sales – intellectual property licenses for the remainder of fiscal 2007 to decrease in both absolute dollars and as a percentage of publishing net revenues due to the planned slate of titles having lower associated intellectual property royalty rates compared to fiscal 2006 releases.

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Cost of Sales – Intellectual Property Licenses (in thousands)

Cost of sales – intellectual property licenses for the year ended March 31, 2005 increased in absolute dollars and as a percentage of publishing net revenues over the same period last year, from 5% to 6%. The increases in both absolute dollars and as a percentage of publishing net revenues were due to the release of more titles with associated licensed intellectual property as well as continued strong catalog sales of titles with associated licensed intellectual property compared to the titles released in fiscal 2004 for which a higher proportion of revenues was derived from titles that were internally developed with no associated intellectual property. In fiscal 2005 we released the following titles with associated intellectual property: