Activision Blizzard (ATVI)

Product Development (amounts in thousands)

Product development expenses for the three months ended June 30, 2008 increased by 52% compared to the three months ended June 30, 2007 from $32.9 million to $50.0 million.  As a percentage of publishing net revenues, product development expense increased from 8% to 9%, as compared to the three months ended June 30, 2007.  The increase in absolute dollars and as a percentage of publishing net revenues is the result of greater slate of titles in development to support the future releases and additional product development expenses from Bizarre Creations, which was acquired in September 2007.

Product Development (amounts in thousands)

        Product development expenses of $133.1 million and $132.7 million represented 12% and 11% of publishing net revenues for the years ended March 31, 2007 and 2006, respectively. The increases in both absolute dollars and as a percentage of net revenues was primarily generated by:

•

Increased costs incurred to fund more product development capacity at certain studios as well as the addition of Red Octane.



•

Increases in product development expenses of $4.8 million in fiscal 2007 related to stock-based compensation expense as a result of the implementation of SFAS No. 123R.



•

Compensation provided to employees in fiscal 2007 to cure tax penalties related to previously-exercised stock options.

Partially offset by:

•

Product cancellation charges of $11.4 million, including termination fees, incurred during fiscal 2006. Given the market conditions, the lower than expected performance of some of our third quarter fiscal 2006 releases, and risks associated with console transition, we performed a thorough review of the then pending product slate. To better align opportunities associated with the next-generation console platforms with income potential and risks associated with certain titles in development, we canceled development of certain titles and permanently removed them from our future title slate. There were no product cancellation charges during fiscal 2007.



•

The implementation during fiscal 2007 of certain cost control initiatives including sharing technologies and tools across multiple platforms and studios, increasing our development schedules to facilitate a longer pre-production phase and more predictable workflow times, and outsourcing certain areas of game development to lower cost service providers.

Product Development (amounts in thousands)

        Product
development expenses of $133.1 million and $132.7 million represented 12% and 11% of publishing net revenues for the years ended March 31, 2007 and 2006,
respectively. The increases in both absolute dollars and as a percentage of net revenues was primarily generated by:

•

Increased
costs incurred to fund more product development capacity at certain studios as well as the addition of Red Octane.




•

Increases
in product development expenses of $4.8 million in fiscal 2007 related to stock-based compensation expense as a result of the implementation of SFAS
No. 123R.




•

Compensation
provided to employees in fiscal 2007 to cure tax penalties related to previously-exercised stock options.

Partially
offset by:

•

Product
cancellation charges of $11.4 million, including termination fees, incurred during fiscal 2006. Given the market conditions, the lower than expected
performance of some of our third quarter fiscal 2006 releases, and risks associated with console transition, we performed a thorough review of the then pending product slate. To better align
opportunities associated with the next-generation console platforms with income potential and risks associated with certain titles in development, we canceled development of certain titles
and permanently removed them from our future title slate. There were no product cancellation charges during fiscal 2007.




•

The
implementation during fiscal 2007 of certain cost control initiatives including sharing technologies and tools across multiple platforms and studios, increasing our
development schedules to facilitate a longer pre-production phase and more predictable workflow times, and outsourcing certain areas of game development to lower cost service providers.