Activision Blizzard (ATVI)

Operating Income (amounts in thousands)

        Publishing operating income for the year ended March 31, 2007 increased $70.8 million from the same period last year, from an operating loss of $6.7 million to operating income of $64.1 million. The increase was primarily due to:

•

The strong performance of our fiscal 2007 titles.



•

A decrease in provision for returns and price protection in fiscal 2007 from 18% of consolidated net revenues in fiscal 2006 compared to 9% of consolidated net revenues in fiscal 2007, primarily due to improved market conditions and stronger sell through of our 2007 title releases.



•

A significant decrease in sales and marketing spending as a result of improved efficiency in executing our marketing programs.



•

The implementation of certain cost control initiatives resulting in decreased product development and general and administrative expenses (excluding expenses related to our internal review of historical stock option granting practices and expenses relating to the informal SEC inquiry and derivative litigation).



•

Fiscal 2006 results included cancellation, impairment, and earn-out recoverability charges totaling $24.0 million. See additional description of charges incurred in the cost of sales—software royalties and amortization and the product development discussions.



•

Fiscal 2006 results also included write-downs of inventory costs of $14.5 million. See additional description in the cost of sales—product costs discussion.

Partially offset by:

•

Stock-based compensation expenses of $22.4 million for the year ended March 31, 2007 as a result of the implementation of SFAS No. 123R.



•

Legal and other professional fees of $26.9 million associated with our internal review of historical stock option granting practices, including expenses relating to the informal SEC inquiry and derivative litigation.



•

Amortization of intangible assets related to the RedOctane acquisition of $11.7 million.

        Distribution operating income for the year ended March 31, 2007 decreased over the same period last year, from $21.9 million to $9.1 million. The decrease in operating income in 2007 was primarily due to increased business from large mass-market customers for which we earn smaller margins, an

64

increase in hardware sales which carries a lower margin than software, and higher reserves for inventory obsolescence.

Operating Income (amounts in thousands)

        Publishing
operating income for the year ended March 31, 2007 increased $70.8 million from the same period last year, from an operating loss of $6.7 million to
operating income of $64.1 million. The increase was primarily due to:

•

The
strong performance of our fiscal 2007 titles.




•

A
decrease in provision for returns and price protection in fiscal 2007 from 18% of consolidated net revenues in fiscal 2006 compared to 9% of consolidated net revenues in
fiscal 2007, primarily due to improved market conditions and stronger sell through of our 2007 title releases.




•

A
significant decrease in sales and marketing spending as a result of improved efficiency in executing our marketing programs.




•

The
implementation of certain cost control initiatives resulting in decreased product development and general and administrative expenses (excluding expenses related to our
internal review of historical stock option granting practices and expenses relating to the informal SEC inquiry and derivative litigation).




•

Fiscal
2006 results included cancellation, impairment, and earn-out recoverability charges totaling $24.0 million. See additional description of charges
incurred in the cost of sales—software royalties and amortization and the product development discussions.




•

Fiscal
2006 results also included write-downs of inventory costs of $14.5 million. See additional description in the cost of sales—product costs
discussion.

Partially
offset by:

•

Stock-based
compensation expenses of $22.4 million for the year ended March 31, 2007 as a result of the implementation of SFAS No. 123R.




•

Legal
and other professional fees of $26.9 million associated with our internal review of historical stock option granting practices, including expenses relating to
the informal SEC inquiry and derivative litigation.




•

Amortization
of intangible assets related to the RedOctane acquisition of $11.7 million.

        Distribution
operating income for the year ended March 31, 2007 decreased over the same period last year, from $21.9 million to $9.1 million. The decrease in
operating income in 2007 was primarily due to increased business from large mass-market customers for which we earn smaller margins, an

64

increase
in hardware sales which carries a lower margin than software, and higher reserves for inventory obsolescence.