Activision Blizzard (ATVI)

Cost of Sales — Product Costs (in thousands)

“Cost of sales — product costs” represented 44% and 58% of consolidated net revenues for the three months ended June 30, 2007 and 2006, respectively.  In absolute dollars, “cost of sales — product costs” increased $108.6 million from $108.6 million for the three months ended June 30, 2006 to $217.2 million for the three months ended June 30, 2007.  The increase in absolute dollars is due to an increase in consolidated net revenues of 163%, from $188.1 million for the first quarter of fiscal 2007, to $495.5 million for the first quarter of fiscal 2008.  The decrease in “cost of sales — product costs” as a percentage of consolidated net revenues is partially due to a higher percentage of our first quarter results relating to our publishing business (87% of consolidated net revenues in the first quarter of fiscal 2008, as compared to 72% for the comparable period in fiscal 2007) which carries a lower product cost than our distribution business.  In addition, the fiscal 2008 first quarter publishing net revenues included a higher mix of next-generation product sales which carries a higher gross margin than the other console platforms.  In the first quarter of fiscal 2007, “cost of sales — product costs”

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as a percentage of consolidated net revenues was impacted by reduced pricing on current generation title releases and a number of catalog titles.

We expect “cost of sales — product costs” as a percentage of consolidated net revenues for fiscal 2008 to be lower than fiscal 2007 due to a larger proportion of our business being derived from the publishing segment and the continued migration of consumers to next generation products.

Cost of Sales – Product Costs (in thousands)

Cost of sales – product costs represented 50% and 47% of consolidated net revenues for the years ended March 31, 2006 and 2005, respectively. In absolute dollars, cost of sales – product costs increased 12% from $658.9 million for the year ended March 31, 2005 to $734.9 million for the year ended March 31, 2006. The primary factors affecting the increase in cost of sales – product costs in absolute dollars and as a percentage of consolidated net revenues were:

•                  Volume growth in our European territories of LucasArts’ Star Wars: Episode III Revenge of the Sith, and Star Wars Battlefront II. LucasArts’ titles are part of our affiliate label program and carry a significantly higher product cost than Activision developed titles.

•                  Write-downs of inventory costs for certain titles in fiscal 2006 in the amount of $14.5 million due to the high level of inventory for certain titles at the end of our third quarter of fiscal 2006. At the end of the third quarter of fiscal 2006 we reviewed the levels of inventory and determined that, due to lower than expected re-orders caused by weaker market conditions and the ongoing console transition, we anticipated that certain titles in our inventory would likely be sold below its original cost.

•                  A decrease in our PC net revenues as a percentage of publishing net revenues from 21% in fiscal 2005 to 16% in fiscal 2006. Products for PC typically have lower costs of sales – product costs associated with them as they do not require royalty payments to hardware manufacturers.

•                  An increase in provision for returns and price protection throughout fiscal 2006 from 12% of net revenues in fiscal 2005 compared to 18% of net revenues in fiscal 2006, due to challenging market conditions and the ongoing console transition.

•                  An increase in consolidated net revenues of 4% from $1,405.9 million for the year ended March 31, 2005 to $1,468.0 million for the year ended March 31, 2006.

•                  Reduced pricing on a number of catalog titles as well as new releases in our kids genre.

Cost of Sales — Product Costs (in thousands)

Cost of sales — product costs represented 58% and 57% of consolidated net revenues for the three months ended June 30, 2006 and 2005, respectively.  In absolute dollars, cost of sales — product costs decreased $28.1 million from $136.8 million for the three months ended June 30, 2005 to $108.6 million for the three months ended June 30, 2006.  The decrease in absolute dollars is due to higher sales volume in the first quarter of fiscal 2006 combined with a change in the mix of mainline business and affiliate business.  In the first quarter of fiscal 2006, we had strong sales volume in our European territories of LucasArts’ Star Wars: Episode III Revenge of the Sith.  We did not have any LucasArts’ releases in the first quarter of fiscal 2007.  The primary factor that affected cost of sales — product costs as a percentage of consolidated net revenues was reduced pricing on current generation title releases and a number of catalog titles in the first quarter of fiscal 2007.

We expect cost of sales — product costs as a percentage of net revenues to remain relatively flat for the remainder of fiscal 2007 as compared to fiscal 2006.  This is primarily due to slightly higher product costs related to next-generation titles and a greater mix of distribution business offset by higher retail pricing on next-generation titles which are anticipated to launch at a $59.99 retail price.

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Cost of Sales – Product Costs (in thousands)

Cost of sales – product costs represented 47% and 50% of consolidated net revenues for the years ended March 31, 2005 and 2004, respectively.  In absolute dollars, cost of sales — product costs increased 39% due to significantly higher sales in fiscal 2005 as compared to fiscal 2004.  The primary factors affecting the reduction in the cost of sales — product costs as a percentage of consolidated net revenues were:

·                  Increased ability to maintain premium pricing on “big proposition” titles for the year ended March 31, 2005.

·                  An increase in publishing net revenues from sales of PC titles by 66% year over year.  PC publishing revenues as a percent of publishing net revenues for the year also grew from 20% to 21%.  PC titles typically have lower product costs associated with them.

·                  A lower percentage of revenues generated from our distribution business, which is a lower margin business, in fiscal 2005 as compared to fiscal 2004.

Cost of Sales – Product Costs (in thousands)

Cost of sales – product costs represented 58% and 57% of consolidated net revenues for the three months ended June 30, 2006 and 2005, respectively.  In absolute dollars, cost of sales – product costs decreased $28.1 million from $136.8 million for the three months ended June 30, 2005 to $108.6 million for the three months ended June 30, 2006.  The decrease in absolute dollars is due to higher sales volume in the first quarter of fiscal 2006, combined with a change in the mix of mainline business and affiliate business.  In the first quarter of fiscal 2006, we had strong sales volume in our European territories of LucasArts’ Star Wars: Episode III Revenge of the Sith.  We did not have any LucasArts’ releases in the first quarter of fiscal 2007.  The primary factor that affected cost of sales – product costs as a percentage of consolidated net revenues was reduced pricing on current generation title releases and a number of catalog titles in the first quarter of fiscal 2007.

We expect cost of sales — product costs as a percentage of net revenues to remain relatively flat for the remainder of fiscal 2007 as compared to fiscal 2006.  This is primarily due to slightly higher product costs related to next-generation titles and a greater mix of distribution business offset by higher retail pricing on next-generation titles which are anticipated to launch at a $59.99 retail price.

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Cost of Sales – Product Costs (in thousands)

Cost of sales – product costs represented 50% and 47% of consolidated net revenues for the years ended March 31, 2006 and 2005, respectively. In absolute dollars, cost of sales — product costs increased 12% from $658.9 million for the year ended March 31, 2005 to $734.9 million for the year ended March 31, 2006. The primary factors affecting the increase in cost of sales – product costs in absolute dollars and as a percentage of consolidated net revenues were:

•                  Volume growth in our European territories of LucasArts’

Cost of Sales – Product Costs (in thousands)

Cost of sales – product costs represented 57% and 42% of consolidated net revenues for the three months ended June 30, 2005 and 2004, respectively.  In absolute dollars, cost of sales – product costs increased due to the mix of affiliate label and mainline business combined with higher sales volume in the first quarter of

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