Activision, Inc. is a leading international publisher of interactive entertainment software products. The company maintains a diverse portfolio of products that span a wide range of categories and target markets and can be used on a variety of game hardware platforms and operating systems. The company has created, licensed and acquired a group of highly recognizable brands that it markets to a growing variety of consumer demographics.

Activision's products cover the action, adventure, action sports, racing, role-playing, simulation and strategy game categories. The company offers its products in versions that operate on the PlayStation®2 computer entertainment system console from Sony Computer Entertainment, Xbox™ video game system from Microsoft, Nintendo® GameCube™, Nintendo Game Boy® Advance ("GBA"), Sony PlayStation Portable™ ("PSP") and Nintendo Dual Screen™ ("NDS") hand-held devices as well as on personal computers ("PC").

The installed base for this current generation of hardware platforms is significant and growing and the recent release of two new handheld devices, NDS, which was released worldwide, and the PSP, which was released in North America, will help expand the software market. Activision successfully executed its strategy of having a high-quality product presence at the launch of the NDS and PSP and is currently developing additional titles for the PSP and the NDS while continuing to develop games for the GBA.

Activision also intends to develop titles for the next-generation console systems which are being developed by Sony, Nintendo and Microsoft. Microsoft recently unveiled their next-generation console, the Xbox360, which is expected to be released in November 2005. We are currently developing four titles for release on the Xbox360, Tony Hawk's American Wasteland, Call of Duty 2, QUAKE 4 and GUN. Sony and Nintendo recently unveiled their next-generation consoles PlayStation 3 and Revolution, respectively and both are expected to be released in calendar 2006. Though there are many unknowns to these new platforms, our aim is to have a significant presence at the launch of each new platform while being careful not to move away too quickly from the current generation platforms given their large and still growing installed base.

The company's publishing business involves the development, marketing, and sale of products directly, by license or through its affiliate label program with certain third-party publishers. Its distribution business consists of operations in Europe that provide logistical and sales services to third-party publishers of interactive entertainment software, its own publishing operations and manufacturers of interactive entertainment hardware.

Activision completed a number of acquisitions of both software development companies and interactive entertainment product distribution companies. During fiscal 2005, we continued to enhance our internal product development capabilities with the acquisition of game developer, Vicarious Visions, Inc. During the first quarter of fiscal 2006, we acquired two additional game developers, Toys for Bob, Inc. and Beenox, Inc.

Activision's objective is to be a worldwide leader in the development, publishing and distribution of quality interactive entertainment software products that deliver a highly satisfying consumer entertainment experience. Our business strategy, the key components of our business operations and the risk factors that could impact our business are detailed below.

Create, Acquire and Maintain Strong Brands. Activision focuses its development and publishing activities principally on products that are, or have the potential to become, franchise properties with sustainable consumer appeal and brand recognition. It is the company's experience that these products can then serve as the basis for sequels, prequels and related new products that can be released over an extended period of time. The company believes that the publishing and distribution of products based in large part on franchise properties enhances predictability of revenues and the probability of high unit volume sales and operating profits.

Activision has entered into a series of strategic relationships with the owners of intellectual property pursuant to which it has acquired the rights to publish products based on franchises such as Marvel Comics' properties, including Spider-Man, X-Men, Iron Man and Fantastic Four. Additionally, it has a multi-year, multi-property, publishing agreement with DreamWorks LLC that grants Activision the exclusive rights to publish video games based on DreamWorks Animation SKG's theatrical release "Shrek 2," which was released in May 2004, "Shark Tale," which was released in September 2004, "Madagascar," which was released in May 2005, as well as the upcoming computer-animated film "Over the Hedge" and all of their respective sequels, including "Shrek 3." Activision also has a strategic relationship with professional skateboarder Tony Hawk through an exclusive multi-year agreement to develop video games using his name and likeness. Through fiscal 2005, the company has released six successful titles in the Tony Hawk franchise. It also has created a number of successful internally developed intellectual properties such as the True Crime and Call of Duty franchise properties. It believes that its fiscal 2006 release, GUN, also has the potential to join this list of franchise properties.

Execute Disciplined Product Selection and Development Processes. The success of Activision's publishing business depends, in significant part, on the company's ability to develop high quality games that will generate high unit volume sales. Its publishing units have implemented a formal control process for the selection, development, production and quality assurance of its products. The company applies this process, which it refers to as the "Greenlight Process," to all of its products, whether externally or internally developed. The Greenlight Process includes in-depth reviews of each project at six important stages of development by a team that includes many of the company's highest-ranking operating managers and coordination between its sales and marketing personnel and development staff at each step in the process.

Activision develops its products using a combination of its internal development resources and external development resources acting under contract with the company. It typically selects external developers based on their track record and expertise in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the original game. The company believes that selecting and using development resources in this manner allows it to leverage the particular expertise of its internal and external development resources, which it believe adds to the quality of its products.

Create and Maintain Diversity in Product Mix, Platforms and Markets. Activision believes that maintaining a diversified mix of products can reduce its operating risks and enhance profitability. Therefore, the company develops and publishes products spanning a wide range of product categories, including action/adventure, action sports, racing, role-playing, simulation, first-person action and strategy. The company also develops products designed for target audiences ranging from casual players to game enthusiasts, children to adults and mass-market consumers to "value" buyers. Presently, it concentrates on developing, publishing and distributing products that operate on PS2, GameCube and Xbox console systems, GBA, PSP, and NDS hand-held devices and the PC. The company intends to develop products for the next-generation console systems: Microsoft Xbox 360, Sony PlayStation 3 and Nintendo Revolution. It typically offer its products for use on multiple platforms in order to reduce the risks associated with any single platform, leverage its costs over a larger installed hardware base and increase unit sales.

Activision also actively supports emerging platforms (wireless devices, closed and open online networks and interactive television) by publishing and licensing key brands, such as Shrek 2™, Tony Hawk's Underground 2 and Call of Duty™ for these platforms. The company develops and optimizes many of its titles for consoles that support online play, such as PS2 and Xbox Live. It has published and licensed rights to various brands, such as Spider-Man 2™ , Shrek 2, Call of Duty and X-Men™ Legends, for various hand-held wireless devices, such as Nokia's N-Gage™ wireless platform, as well as many traditional wireless handsets. Activision believes that more of its brands can be successfully published for wireless and online platforms, as well as exploited through other emerging technologies, as they continue to evolve.

Continue to Improve Profitability. Activision continually strives to manage risk and increase its operating leverage and efficiency with the goal of increased profitability. The company believes the key factor affecting its future profitability will be the success rate of its product releases. Therefore, its product selection and development process includes, as a significant component, periodic evaluations of the expected commercial success of products under development. Through this process, for titles that the company determines to be less promising, corrections are made in the development process or, if necessary, they are discontinued before it incurs additional development costs. In addition, it believes its focus on cross platform releases and branded products will contribute to improved profitability.

Activision continues to focus on increasing its margins. The company has, for example, acquired certain experienced and specialized developers in instances where it can enhance profitability through the elimination of royalty obligations. Additionally, it often relies on independent third-party interactive entertainment software developers to develop some of its software products, thereby taking advantage of specialized independent developers without incurring the fixed overhead obligations associated with increased internally employed staff.

Activision's sales and marketing staff work with its studio resources to increase the visibility of new product launches and to coordinate the timing and promotion of product releases. The company's finance and sales and marketing personnel work together to improve inventory management and receivables collections. It has instituted broad, objective-based reward programs that provide incentives to management and staff throughout the organization to produce results that meet its financial objectives.

Grow Through Continued Strategic Acquisitions and Alliances. The interactive entertainment industry has been consolidating, and Activision believes that success in this industry will be driven in part by the ability to take advantage of scale. Specifically, smaller companies are more capital constrained, enjoy less predictability of revenues and cash flow, lack product diversity and must spread fixed costs over a smaller revenue base. Several industry leaders are emerging that combine the entrepreneurial and creative spirit of the industry with professional management, the ability to access the capital markets and the ability to maintain favorable relationships with developers, intellectual property owners and retailers. Through numerous completed acquisitions since 1997, Activision believes that the company has successfully diversified its operations, channels of distribution, development talent pool and library of titles, and has emerged as one of the industry's leaders. It intends to continue to evaluate the expansion of its resources through acquisitions, strategic relationships and key license transactions. The company also intends to continue expanding its intellectual property library through key license transactions and strategic relationships with intellectual property owners and to continue to evaluate opportunities to increase its development capacity through the acquisition of or investment in selected experienced software development firms.

Activision's headquarters is located at 3100 Ocean Park Boulevard, Santa Monica, California 90405. The company also maintains offices in the U.S., Canada, the United Kingdom, France, Germany, Italy, Japan, Australia, Scandinavia, Spain and the Netherlands. More information about Activision and its products can be found on the company's World Wide Web site, which is located at www.activision.com.