UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~December 31, 2002~~September 30, 2003

[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ ~~to______~~to_____

Commission File No. 0-17948

ELECTRONIC ARTS INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		94-2838567 (I.R.S. Employer Identification No.)


209 Redwood Shores Parkway Redwood City, California (Address of principal executive offices)		94065 (Zip Code)

(650) 628-1500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


~~YES~~		~~[X]~~		NO		YES [x] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [x] NO [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding at
Class of Common Stock Par Value February 5, 2003

Class A common stock $0.01 143,112,344


			Outstanding at
Class of Common Stock	Par Value		November 03, 2003
Class A common stock	$	0.01		148,934,841

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2. Management’s Discussion and Analysis Ofof Financial Condition and Results Ofof Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II —– OTHER INFORMATION

Item 1. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K

SIGNATURES

~~CERTIFICATIONS~~

EXHIBIT INDEX

EXHIBIT ~~10.58~~10.29

EXHIBIT ~~10.59~~10.30

EXHIBIT ~~3.05~~10.31

ELECTRONIC ARTS INC. ~~AND SUBSIDIARIES~~
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2003

~~INDEX~~

Table of Contents


			Page
Part I — FINANCIAL INFORMATION

~~Part I — Financial Information~~
Item 1.		Unaudited Condensed Consolidated Financial Statements

		Condensed Consolidated Balance Sheets ~~at December 31, 2002~~as of September 30, 2003 and March 31, ~~2002~~2003		3

		Condensed Consolidated Statements of Operations for the Three Months Ended ~~December 31,~~September 30, 2003 and 2002 and ~~2001 and~~ the ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001~~		4

		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Six Months Ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001~~		5

		Notes to Condensed Consolidated Financial Statements		76

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		2520

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		6241

Item 4.		Controls and Procedures		6443

Part II — ~~Other Information~~OTHER INFORMATION

Item 1.		Legal Proceedings		6544

Item 4.		Submission of Matters to a Vote of Security Holders		6544

Item 6.		Exhibits and Reports on Form 8-K		6544

Signatures				6645
~~Certifications~~	67
Exhibit Index				6946

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
~~(Dollars in thousands)~~
~~(unaudited)~~
December 31, March 31,
2002 2002

ASSETS
Current assets:
Cash, cash equivalents and short-term investments $ 1,165,326 $ 796,936
Marketable securities 1,341 6,869
Receivables, less allowances of $206,651 and $115,870, respectively 609,029 190,495
Inventories, net 33,216 23,780
Deferred income taxes 37,732 38,597
Other current assets 82,639 95,866

Total current assets 1,929,283 1,152,543
Property and equipment, net 302,231 308,827
Investments in affiliates 10,231 19,077
Goodwill and other intangibles, net 119,406 110,512
Long-term deferred income taxes 55,628 64,065
Other assets 44,246 44,350

$ 2,461,025 $ 1,699,374

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 146,816 $ 88,563
Accrued and other liabilities 599,784 364,419

Total current liabilities 746,600 452,982
Minority interest in consolidated joint venture 2,876 3,098
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares — —
Common stock
Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 142,944,370 and 138,429,269 shares, respectively 1,429 1,384
Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 4,233,463 and 6,233,413 shares, respectively 42 62
Paid-in capital 796,950 649,777
Retained earnings 914,652 606,795
Accumulated other comprehensive loss (1,524 ) (14,724 )

Total stockholders’ equity 1,711,549 1,243,294

$ 2,461,025 $ 1,699,374


(unaudited)	September 30,			March 31,
(In thousands, except share data)		2003			2003 (a)


ASSETS
Current assets:
Cash and cash equivalents		$	376,125		$	949,995
Short-term investments			1,358,049			637,623
Marketable equity securities			771			1,111
Receivables, net of allowances of $126,806 and $164,634, respectively			202,802			82,083
Inventories, net			39,209			39,679
Deferred income taxes			117,682			117,180
Other current assets			98,405			83,466

Total current assets			2,193,043			1,911,137

Property and equipment, net			273,305			262,252
Investments in affiliates			12,909			20,277
Goodwill			88,650			86,031
Other intangibles, net			19,784			21,301
Long-term deferred income taxes			13,840			13,523
Other assets			15,503			45,012

		$	2,617,034		$	2,359,533


LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable		$	129,348		$	106,329
Accrued and other liabilities			416,251			464,547

Total current liabilities			545,599			570,876

Commitments and contingencies			—			—
Minority interest in consolidated joint venture			—			3,918

Stockholders’ equity:
Preferred stock, $0.01 par value. 10,000,000 shares authorized			—			—
Common stock
Class A common stock, $0.01 par value. 400,000,000 shares authorized; 296,959,700 and 288,266,610 shares issued and outstanding, respectively			2,970			2,883
Class B common stock, $0.01 par value. 100,000,000 shares authorized; 200,130 and 225,130 shares issued and outstanding, respectively			2			2
Paid-in capital			1,036,717			856,428
Retained earnings			1,018,848			923,892
Accumulated other comprehensive income			12,898			1,534

Total stockholders’ equity			2,071,435			1,784,739

		$	2,617,034		$	2,359,533

See accompanying Notes to Condensed Consolidated Financial Statements.

(a)

Derived from audited financial statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
~~(In thousands, except per share data)~~
~~(unaudited)~~
Three Months Ended Nine Months Ended
December 31, December 31,
2002 2001 2002 2001

Net revenues $ 1,233,726 $ 832,878 $ 2,019,114 $ 1,254,984
Cost of goods sold 558,680 400,853 898,936 607,642

Gross profit 675,046 432,025 1,120,178 647,342

Operating expenses:
Marketing and sales 139,492 93,875 260,380 179,699
General and administrative 42,250 31,833 95,366 80,451
Research and development 112,558 97,406 301,667 285,766
Amortization of intangibles 2,245 6,359 6,736 19,309
Restructuring and asset impairment charges 9,378 14,051 9,378 14,051

Total operating expenses 305,923 243,524 673,527 579,276

Operating income 369,123 188,501 446,651 68,066
Interest and other income (expense), net (4,439 ) 3,515 (115 ) 10,292

Income before provision for income taxes and minority interest 364,684 192,016 446,536 78,358
Provision for income taxes 113,052 59,525 138,426 24,291

Income before minority interest 251,632 132,491 308,110 54,067
Minority interest in consolidated joint venture (1,413 ) (199 ) (253 ) 147

Net income $ 250,219 $ 132,292 $ 307,857 $ 54,214

Class A common stock:
Net income:
Basic $ 253,694 $ 138,998 $ 317,495 $ 72,387

Diluted $ 250,219 $ 132,292 $ 307,857 $ 54,214

Net income per share:
Basic $ 1.79 $ 1.01 $ 2.26 $ 0.53
Diluted $ 1.69 $ 0.92 $ 2.10 $ 0.38
Number of shares used in computation:
Basic 141,889 137,103 140,193 136,457
Diluted 148,025 143,399 146,860 142,847
Class B common stock:
Net loss, net of retained interest in EA.com $ (3,475 ) $ (6,706 ) $ (9,638 ) $ (18,173 )

Net loss per share:
Basic $ (0.86 ) $ (1.11 ) $ (1.84 ) $ (3.02 )
Diluted $ (0.86 ) $ (1.11 ) $ (1.84 ) $ (3.02 )
Number of shares used in computation:
Basic 4,051 6,028 5,247 6,023
Diluted 4,051 6,028 5,247 6,023


	Three Months Ended					Six Months Ended
(unaudited)	September 30,					September 30,
(In thousands, except per share data)	2003		2002			2003		2002


Net revenue	$	530,005	$	453,490		$	883,386	$	785,388
Cost of goods sold		213,762		200,867			363,725		343,321


Gross profit		316,243		252,623			519,661		442,067

Operating expenses:
Marketing and sales		64,041		55,514			123,125		120,888
General and administrative		36,032		27,453			66,792		53,116
Research and development		113,493		96,164			204,615		186,044
Amortization of intangibles		810		2,246			1,490		4,491


Total operating expenses		214,376		181,377			396,022		364,539


Operating income		101,867		71,246			123,639		77,528
Interest and other income, net		9,130		1,177			13,979		4,324


Income before provision for income taxes and minority interest		110,997		72,423			137,618		81,852
Provision for income taxes		34,409		22,451			42,662		25,374


Income before minority interest		76,588		49,972			94,956		56,478
Minority interest in consolidated joint venture		—		262			—		1,160


Net income	$	76,588	$	50,234		$	94,956	$	57,638


Net earnings (loss) per share:
Class A common stock:
Net income:
Basic	$	76,588	$	53,407		$	94,956	$	63,801
Diluted	$	76,588	$	50,234		$	94,956	$	57,638
Net earnings per share:
Basic	$	0.26	$	0.19		$	0.32	$	0.23
Diluted	$	0.25	$	0.17		$	0.31	$	0.20
Number of shares used in computation:
Basic		294,836		279,686			292,263		278,633
Diluted		307,779		293,237			304,013		292,538

Class B common stock:
Net loss, net of retained interest in EA.com		N/A	$	(3,173	)		N/A	$	(6,163	)
Net loss per share:
Basic		N/A	$	(0.57	)		N/A	$	(1.07	)
Diluted		N/A	$	(0.57	)		N/A	$	(1.07	)
Number of shares used in computation:
Basic		N/A		5,547			N/A		5,759
Diluted		N/A		5,547			N/A		5,759

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
~~(Dollars in thousands)~~
~~(unaudited)~~

Nine Months
Ended December 31,
2002 2001

Operating activities:
Net income $ 307,857 $ 54,214
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Minority interest in consolidated joint venture 253 (147 )
Equity in net income of affiliates (4,213 ) (2,134 )
Gain on sale of affiliate — (200 )
Depreciation and amortization 74,329 83,551
Non-cash restructuring and asset impairment charges 1,352 6,503
Permanent impairment of investments in affiliates 10,590 —
Loss on sale of fixed assets 106 372
Loss on marketable securities 273 —
Bad debt expense 7,804 7,142
Stock-based compensation 864 2,263
Tax benefit from exercise of stock options 36,765 16,789
Change in assets and liabilities:
      Receivables (424,567 ) (296,077 )
      Inventories (9,436 ) (9,232 )
      Other assets (13,999 ) (46,892 )
      Accounts payable 58,222 80,638
      Accrued and other liabilities 229,392 95,364
      Deferred income taxes 7,918 (497 )

            Net cash provided by (used in) operating activities 283,510 (8,343 )

Investing activities:
Proceeds from sale of property and equipment 679 258
Proceeds from sale of affiliate — 570
Proceeds from sale of marketable securities 4,794 —
Capital expenditures (34,470 ) (40,056 )
Investment in affiliates, net (531 ) 2,918
Sales/purchases of short-term investments, net (151,630 ) (64,624 )
Distribution from investment in affiliate 3,000 —
Proceeds from minority interest investment (751 ) —
Acquisition, net of cash acquired (12,868 ) —

            Net cash used in investing activities (191,777 ) (100,934 )

Financing activities:
Proceeds from sales of Class A shares through employee stock plans and other plans 109,876 73,556
Proceeds from sales of Class B shares through employee stock plans and other plans 1 —
Purchase of treasury shares — (11,922 )

            Net cash provided by financing activities 109,877 61,634

Translation adjustment 11,632 2,369

Increase (decrease) in cash and cash equivalents 213,242 (45,274 )
Beginning cash and cash equivalents 552,826 419,812

Ending cash and cash equivalents 766,068 374,538
Short-term investments 399,258 112,304

Ending cash, cash equivalents and short-term investments $ 1,165,326 $ 486,842

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)~~
~~(Dollars in thousands)~~
~~(unaudited)~~

Nine Months
Ended December 31,
2002 2001

Supplemental cash flow information:
Cash paid during the period for income taxes $ 5,358 $ 7,582

Non-cash investing activities:
Change in unrealized appreciation (loss) on investments and marketable securities $ 3,075 $ (1,443 )

Non-cash financing activities:
Conversion of 2,000,000 shares of Class B common stock for 206,454 shares of Class A common stock $ 9,353 $ —


	Six Months Ended
(unaudited)	September 30,
(In thousands)	2003			2002


OPERATING ACTIVITIES

Net income	$	94,956		$	57,638
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest in consolidated joint venture		—			(1,160	)
Depreciation and amortization		30,847			49,373
Equity in net income of affiliates		(113	)		(1,313	)
Other-than-temporary impairment of assets		589			2,830
Loss on sale of property, equipment and marketable equity securities		45			115
Stock-based compensation		429			2,161
Tax benefit from exercise of stock options		40,169			16,866
Change in assets and liabilities:
Accounts receivable, net		(133,034	)		52,900
Inventories, net		(406	)		(38,586	)
Other assets		13,167			(59,870	)
Accounts payable		25,309			31,726
Accrued and other liabilities		(43,711	)		(27,111	)


Net cash provided by operating activities		28,247			85,569


INVESTING ACTIVITIES
Proceeds from sale of property and equipment		88			411
Proceeds from sale of investments in affiliate		8,467			—
Capital expenditures		(28,690	)		(23,386	)
Purchase of investments in affiliates		—			(405	)
Purchase of short-term investments		(1,270,579	)		(264,480	)
Proceeds from maturities and sales of short-term investments		547,792			218,268
Distribution from investment in affiliate		—			3,000
Acquisition of subsidiary, net of cash acquired		—			(12,868	)


Net cash used in investing activities		(742,922	)		(79,460	)


FINANCING ACTIVITIES
Proceeds from sales of common stock through employee stock plans and other plans		139,875			61,282
Repurchase of Class B common stock		(225	)		—
Dividend to joint venture and purchase of minority interest		(5,100	)		(751	)
Repayment of Class B notes receivable		128			—


Net cash provided by financing activities		134,678			60,531


Effect of foreign exchange on cash and cash equivalents		6,127			8,005

Increase (decrease) in cash and cash equivalents		(573,870	)		74,645
Beginning cash and cash equivalents		949,995			552,826

Ending cash and cash equivalents		376,125			627,471
Short-term investments		1,358,049			293,297


Ending cash, cash equivalents and short-term investments	$	1,734,174		$	920,768


Supplemental cash flow information:
Cash paid during the period for income taxes	$	4,567		$	4,052


Non-cash investing activities:
Change in unrealized appreciation (loss) on investments and marketable equity securities	$	(2,186	)	$	2,635


Non-cash financing activities:
Conversion of 2,000,000 shares of Class B common stock for 412,908 shares of Class A common stock	$	—		$	9,353

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

~~Note 1. Basis of Presentation~~(1) BASIS OF PRESENTATION

The ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim ~~period~~periods are not necessarily indicative of results to be expected for the current year or any other period. Certain prior year amounts have been reclassified to conform to the fiscal ~~2003~~2004 presentation.

These ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements should be read in conjunction with the ~~consolidated financial statements~~Consolidated Financial Statements and ~~notes~~Notes thereto included in the Electronic Arts Inc. ~~(the “Company”~~(“EA”) Annual Report on Form 10-K for the fiscal year ended March 31, ~~2002~~2003 as filed with the Securities and Exchange Commission on June ~~28, 2002.~~10, 2003.

~~Note 2. Fiscal Year~~On October 20, 2003 EA’s Board of Directors authorized a two-for-one stock split of its Class A common stock which will be distributed on or about November 17, 2003 in the form of a stock dividend for shareholders of record at the close of business on November 3, 2003. All issued and ~~Fiscal Quarter~~outstanding share and per share amounts related to EA’s Class A common stock in the accompanying Condensed Consolidated Financial Statements and Notes thereto have been restated to reflect the stock split for all periods presented.

~~The Company’s~~(2) FISCAL YEAR AND FISCAL QUARTER

EA’s fiscal year is reported on a 52/53-week period that ends on the final Saturday ~~nearest to~~of March 31 in each year. The results of operations for fiscal ~~2003~~2004 and ~~fiscal 2002~~2003 contain 52 weeks. The results of operations for the fiscal quarters ended ~~December 31,~~September 30, 2003 and September 30, 2002 ~~and 2001~~each contain 13 ~~weeks.~~weeks ending on September 27, 2003 and September 28, 2002, respectively. For simplicity of presentation, all fiscal periods are treated as ending on a calendar month end.

(3) STOCK

Tracking Stock

On March 22, 2000, the stockholders of EA authorized the issuance of a new series of common stock, designated as Class B common stock (“Tracking Stock”). The Tracking Stock was intended to reflect the performance of the EA.com business segment. As a result of the approval of the Tracking Stock Proposal, EA’s existing common stock was re-classified as Class A common stock and was intended to reflect the performance of the EA core business segment (see discussion in Note ~~3. Common~~ 8 of the Notes to Condensed Consolidated Financial Statements). With the authorization of the Class B common stock, EA transferred a portion of its consolidated assets, liabilities, revenue, expenses and cash flows to EA.com Inc., a wholly owned subsidiary of EA.

In March 2003, EA consolidated the operations of the EA.com business segment into EA’s core operations in order to increase efficiency, simplify EA’s reporting structure and more directly integrate EA’s online activities into its core console and PC business. As a result, EA has eliminated dual class reporting starting in fiscal 2004. The majority of outstanding Class B options and warrants not directly held by EA have been acquired or converted to Class A shares and warrants.

EA does not intend to issue additional Class B common stock, stock options or warrants to purchase Class B common stock. No further options are available for grant under EA’s Class B Equity Incentive Plan, and EA is currently in the process of repurchasing the remaining outstanding Class B shares acquired pursuant to the Class B Equity Incentive Plan.

Stock Based Compensation

EA accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25,“Accounting for Stock Issued to Employees”and related interpretations. EA has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation”.

In fiscal 2003, EA adopted the disclosure provisions of SFAS No. 148,“Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123”,which provides alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. The Statement also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the methods used on reported results.

Had compensation cost for EA’s stock option plans and employee stock purchase plans been determined based on the estimated fair value at the grant dates in accordance with the provisions of SFAS No. 123, EA’s reported net income and net earnings per share would have been the amounts indicated below. The estimated fair value of each option grant is determined on the date of grant using the Black-Scholes option-pricing model.

The following weighted-average assumptions are used for grants made under the stock plans:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2003			2002			2003			2002

Risk-free interest rate		2.24	%		2.27	%		2.11	%		2.88	%
Expected volatility		54	%		71	%		55	%		71	%
Expected life (in years)		2.64			2.26			2.64			2.26
Assumed dividends	None			None			None			None

EA’s calculations are based on a multiple option valuation approach and forfeitures are recognized when they occur.


	Three Months Ended						Six Months Ended
Consolidated	September 30,						September 30,
(In thousands)	2003			2002			2003			2002


Net income:
As reported	$	76,588		$	50,234		$	94,956		$	57,638
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(23,750	)		(20,689	)		(43,923	)		(37,468	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		25			—			74			—


Pro forma	$	52,863		$	29,545		$	51,107		$	20,170

Earnings per share:
Please see Class A common stock table below for earnings per share information


	Three Months Ended						Six Months Ended
Class A common stock	September 30,						September 30,
(In thousands, except per share data)	2003			2002			2003			2002


Net income:

As reported- basic	$	76,588		$	53,407		$	94,956		$	63,801
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(23,750	)		(20,950	)		(43,923	)		(37,729	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		25			—			74			—

Pro forma — basic	$	52,863		$	32,457		$	51,107		$	26,072


As reported — diluted	$	76,588		$	50,234		$	94,956		$	57,638

Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(23,750	)		(21,023	)		(43,923	)		(37,802	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		25			—			74			—


Pro forma — diluted	$	52,863		$	29,211		$	51,107		$	19,836

Earnings (loss) per share:
As reported — basic	$	0.26		$	0.19		$	0.32		$	0.23
Pro forma — basic		0.18			0.12			0.17			0.09
As reported — diluted		0.25			0.17			0.31			0.20
Pro forma — diluted		0.17			0.10			0.17			0.07

During the three and six month periods ended September 30, 2003 and 2002, compensation cost for EA’s Class B stock option plans, based on the estimated fair value at the grant dates in accordance with the provisions of SFAS No. 123, would not have had a material impact on EA’s reported net income and net earnings per share.

At ~~the Company’s~~EA’s Annual Meeting of Stockholders, held on ~~August 1, 2002,~~July 31, 2003, the stockholders elected (i) to amend the 2000 ~~Class A~~ Equity Incentive Plan to increase by ~~5,500,000~~11,000,000 the number of shares of EA’s Class A common stock reserved for issuance under the ~~Company’s~~Plan and (ii) to amend the 2000 Employee Stock Purchase Plan to increase by 300,000 the number of shares of EA’s Class A common stock reserved for issuance under the Plan.

~~Note 4. Goodwill and Other Intangible Assets~~

~~Effective April 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141,~~~~“Business Combinations”~~, which requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and acquired intangible assets meeting certain criteria to be recorded apart from goodwill. The Company evaluated its goodwill and intangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $41,462,000 of other intangibles to be recorded separately from goodwill and $4,000,000 of acquired workforce intangibles being subsumed into goodwill at April 1, 2002. In addition, effective April 1, 2002, the Company adopted the provisions of SFAS No. 142,~~“Goodwill and Other Intangible Assets”~~. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized; rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. SFAS No. 142 also requires, among other things, reassessment

~~ELECTRONIC ARTS INC.~~(4) GOODWILL AND ~~SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

of the useful lives of existing recognized intangibles and the testing for impairment of existing goodwill and other indefinite-lived intangibles. The Company evaluated the estimated useful lives of existing recognized intangibles and determined that the estimated useful lives of all such assets were appropriate.

In accordance with SFAS No. 142, the Company has ceased to amortize goodwill (see goodwill information in table below). In lieu of amortization, SFAS No. 142 requires a two-step approach to testing goodwill for impairment for each reporting unit. The first step, required to be completed by September 30, 2002, tests for impairment by applying fair value-based tests at the Company’s reporting unit level. The second step (if necessary), required to be completed by March 31, 2003, measures the amount of impairment by applying fair value-based tests to individual assets and liabilities within each reporting unit. The Company completed the first step of transitional goodwill impairment testing during the quarter ended June 30, 2002 and found no indicators of impairment of its recorded goodwill. As a result, the Company has recognized no transitional impairment loss in fiscal 2003 in connection with the adoption of SFAS No. 142. The Company will complete its annual impairment test in the fourth quarter of fiscal 2003 with a measurement date of January 1 and any impairment that arises from that analysis will be accounted for in the fourth quarter of fiscal 2003. There can be no assurance that future impairment tests will not result in a charge to earnings and there is a potential for a write down of goodwill in connection with the annual impairment test.

The following table presents comparative information showing the effects that non-amortization of goodwill would have had on the Condensed Consolidated Statements of Operations for the prior three and nine months ended December 31, 2001 (in thousands, except per share amounts):

Three Months Ended Nine Months Ended
December 31, December 31,

2002 2001 2002 2001

Reported net income $ 250,219 $ 132,292 $ 307,857 $ 54,214
Goodwill amortization, net of tax — 1,995 — 6,039

Adjusted net income $ 250,219 $ 134,287 $ 307,857 $ 60,253

Reported diluted net earnings per share $ 1.69 $ 0.92 $ 2.10 $ 0.38
Goodwill amortization, net of tax — 0.02 — 0.04

Adjusted diluted net earnings per share $ 1.69 $ 0.94 $ 2.10 $ 0.42

OTHER INTANGIBLE ASSETS, NET

During the ~~prior quarter~~six months ended September 30, ~~2002, the Company~~2003, EA recorded an additional ~~$16,139,000~~$1.2 million of goodwill as a result of anEA’s acquisition of ~~a software development company. The Company operates~~Square Co., Ltd.’s (“Square”) 30 percent interest in ~~two business segments, EA Core and EA.com (see~~Electronic Arts Square K.K. in May 2003. See Note 813 of the Notes to Condensed Consolidated Financial ~~Statements).~~Statements for further discussion on the Square joint venture termination. Goodwill information ~~for each business segment~~ is as follows (in thousands):



					Effects of
	Goodwill as				Foreign		Goodwill as of
	of March 31,		Goodwill		Currency		September 30,
	2003		Acquired		Translation		2003

Goodwill	$	86,031	$	1,182	$	1,437	$	88,650

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

As of Effects of Foreign As of
March 31, 2002 Goodwill Acquired Adjustments Currency December 31, 2002

EA Core $ 39,335 $ 16,139 $ — $ (200 ) $ 55,274
EA.com 29,715 — — — 29,715
$ 69,050 $ 16,139 $ — $ (200 ) $ 84,989

Other intangibles consisted of the following (in thousands):

December 31, 2002 March 31, 2002

Gross Other Gross Other
Carrying Accumulated Intangibles, Carrying Accumulated Intangibles,
Amount Amortization Other Net Amount Amortization Other Net

Developed/Core Technology $ 28,263 $ (18,795 ) $ — $ 9,468 $ 28,263 $ (15,455 ) $ — $ 12,808
Tradename 35,169 (12,107 ) — 23,062 35,169 (9,854 ) — 25,315
Subscribers and Other Intangibles 8,694 (6,299 ) (508 ) 1,887 8,694 (5,156 ) (199 ) 3,339

Other Intangibles $ 72,126 $ (37,201 ) $ (508 ) $ 34,417 $ 72,126 $ (30,465 ) $ (199 ) $ 41,462



	September 30, 2003
	Gross											Other
	Carrying		Accumulated									Intangibles,
	Amount		Amortization			Impairment			Other			Net

Developed/Core Technology	$	28,263	$	(18,886	)	$	(9,377	)	$	—		$	—
Tradename		35,169		(14,249	)		(1,211	)		—			19,709
Subscribers and Other Intangibles		8,694		(6,302	)		(1,776	)		(541	)		75

Total	$	72,126	$	(39,437	)	$	(12,364	)	$	(541	)	$	19,784



	March 31, 2003
	Gross											Other
	Carrying		Accumulated									Intangibles,
	Amount		Amortization			Impairment			Other			Net

Developed/Core Technology	$	28,263	$	(18,886	)	$	(9,377	)	$	—		$	—
Tradename		35,169		(12,763	)		(1,211	)		—			21,195
Subscribers and Other Intangibles		8,694		(6,298	)		(1,776	)		(514	)		106

Total	$	72,126	$	(37,947	)	$	(12,364	)	$	(514	)	$	21,301

Amortization expense for the three and six months ended September 30, 2003 was $0.8 million and $1.5 million, respectively. Amortization expense for the three and six months ended September 30, 2002 was $2.2 million and $4.5 million, respectively. Other intangible assets are amortized using the straight-line method over the lesser of their estimated useful lives or the agreement terms, typically from two to twelve years.

As of ~~December 31, 2002,~~September 30, 2003, future intangible asset amortization expense is estimated as follows (in thousands):



Fiscal Year Ended March 31,

2003	$	1,997
2004		7,364
2004 (remaining six months)			$	1,245
2005		5,946		2,489
2006		5,517		2,489
2007		2,489		2,489
2008				2,489
Thereafter		11,104		8,583

	$	34,417	$	19,784

~~Note 5. Prepaid Royalties~~9

Prepaid royalties consist primarily of prepayments for manufacturing royalties, co-publishing and/or distribution affiliates and license fees paid to celebrities, professional sports organizations and other organizations for use of their trade name and content. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the contractual or effective royalty rate as cost of goods sold based on actual net product sales. Management evaluates the future realization of prepaid royalties quarterly and charges to research and development expense any amounts that management deems unlikely to be realized through future product sales.

(5) PREPAID ROYALTIES, NET

Royalty advances are classified as current and non-current assets based upon estimated net product sales for the following year. The current portion of prepaid royalties, included in ~~other~~Other current assets, ~~was $41,487,000~~ and ~~$65,484,000 at December 31, 2002 and March 31, 2002, respectively. The~~the long-term portion, ~~of prepaid royalties,~~ included in ~~other~~Other assets, ~~was $2,885,000 and $1,164,000 at December 31, 2002 and March 31, 2002, respectively.~~is as follows (in thousands):



	September 30, 2003		March 31, 2003

Other current assets	$	33,877	$	25,371
Other assets		5,288		7,382

Prepaid royalties, net	$	39,165	$	32,753

9(6) INVENTORIES, NET

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

~~Note 6.~~ Inventories,

~~Inventories~~ net are stated at the lower of cost (first-in, first-out method) or market. Inventories, net at ~~December 31, 2002~~September 30, 2003 and March 31, ~~2002~~2003 consisted of (in thousands):

December 31, 2002 March 31, 2002
Raw materials and work in process $ 2,612 $ 1,025
Finished goods 30,604 22,755
$ 33,216 $ 23,780



	September 30, 2003		March 31, 2003

Raw materials and work in process	$	3,632	$	2,762
Finished goods		35,577		36,917

Inventories, net	$	39,209	$	39,679

~~Note 7. Accrued and Other Liabilities~~(7) ACCRUED AND OTHER LIABILITIES

Accrued and other liabilities at ~~December 31, 2002~~September 30, 2003 and March 31, ~~2002~~2003 consisted of (in thousands):

December 31, 2002 March 31, 2002
Accrued income taxes $ 181,298 $ 94,444
Accrued royalties 158,423 77,590
Accrued expenses 132,034 87,104
Accrued compensation and benefits 97,933 87,985
Deferred revenue 24,667 13,286
Warranty reserve 5,429 4,010
$ 599,784 $ 364,419



	September 30, 2003		March 31, 2003

Accrued income taxes	$	154,573	$	154,712
Other accrued expenses		95,632		111,878
Accrued compensation and benefits		71,004		109,687
Accrued royalties		85,176		77,681
Deferred revenue		9,866		10,589

Accrued and other liabilities	$	416,251	$	464,547

~~Note 8. Segment Information~~(8) SEGMENT INFORMATION

SFAS No. 131,“Disclosures About Segments of An Enterprise And Related Information”, establishes standards for the reporting by public business enterprises of information about operating segments, product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the ~~Company~~business enterprise for making operational decisions and assessments of financial performance.

~~The Company’s chief operating decision maker~~EA’s Chief Operating Decision Maker is considered to be ~~the Company’s~~EA’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about ~~revenues~~net revenue by geographic region and by product lines for purposes of making operating decisions and assessing financial performance.

~~The Company operates~~In fiscal 2003, EA operated and ~~reviews~~reviewed its business in two business segments:

• ~~EA Core business segment: creation, marketing and distribution of entertainment software.~~
• ~~EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising.~~

EA Core business segment: creation, marketing and distribution of interactive entertainment software.

EA.com business segment: creation, marketing and distribution of interactive entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

~~Our view~~In March 2003, EA consolidated the operations of the EA.com business segment into its core business. EA considers online functionality to be integral to its existing and future products. Accordingly, beginning April 1, 2003, EA no longer manages its online products and services as a separate business segment, and has consolidated the reporting related to its online products and services into reporting for the overall development and publication of ~~business segments may change due to changes~~its core products for all reporting periods ending after that date. EA believes that this better reflects the way in ~~the underlying business facts and circumstances and the evolution of our reporting to our~~which its Chief Operating Decision ~~Maker. Please see~~Maker reviews and manages the ~~discussion regarding segment~~business and reflects the importance of the online products and services relative to the rest of the business. Concurrently, EA also eliminated separate reporting ~~in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).~~for its Class B common stock for all reporting periods ending after April 1, 2003.

Information about ~~the Company’s business segments is presented below~~EA’s operations in North America and foreign areas for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001~~is presented below (in thousands):

Three Months Ended December 31, 2002
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,211,484 $ 22,242 $ 1,233,726
Cost of goods sold 553,579 5,101 558,680
Gross profit 657,905 17,141 675,046
Operating expenses:
Marketing and sales (a) 124,744 14,748 139,492
General and administrative 40,502 1,748 42,250
Research and development (b) 84,351 28,207 112,558
Amortization of intangibles (c) 927 1,318 2,245
Restructuring and asset impairment charges 9,378 — 9,378
Total operating expenses 259,902 46,021 305,923
Operating income (loss) 398,003 (28,880 ) 369,123
Interest and other income (expense), net (4,359 ) (80 ) (4,439 )
Income (loss) before provision for income taxes and minority interest 393,644 (28,960 ) 364,684
Provision for income taxes 113,052 — 113,052
Income (loss) before minority interest 280,592 (28,960 ) 251,632
Minority interest in consolidated joint venture (1,413 ) — (1,413 )
Net income (loss) before retained interest in EA.com $ 279,179 $ (28,960 ) $ 250,219
Interest income $ 5,010 $ 3 $ 5,013
Depreciation and amortization 12,365 12,591 24,956
Identifiable assets 2,314,494 146,531 2,461,025
Capital expenditures 10,965 119 11,084



					Asia
					Pacific
	North				(excluding
	America		Europe		Japan)		Japan			Total

Three months ended September 30, 2003
Net revenue from unaffiliated customers	$	358,184	$	145,002	$	17,617	$	9,202		$	530,005
Interest income		6,013		690		27		—			6,730
Depreciation and amortization		11,138		6,087		241		158			17,624
Total assets		1,988,171		573,289		29,908		25,666			2,617,034
Capital expenditures		12,610		3,621		324		(52	)		16,503
Long-lived assets		240,050		137,157		2,244		2,288			381,739

Three months ended September 30, 2002
Net revenue from unaffiliated customers	$	313,559	$	116,654	$	13,803	$	9,474		$	453,490
Interest income		4,012		421		41		1			4,475
Depreciation and amortization		20,793		3,893		229		152			25,067
Total assets		1,402,119		408,419		24,156		12,391			1,847,085
Capital expenditures		11,507		3,281		102		87			14,977
Long-lived assets		287,883		136,301		1,847		2,509			428,540

Six months ended September 30, 2003
Net revenue from unaffiliated customers	$	557,025	$	272,928	$	32,088	$	21,345		$	883,386
Interest income		12,271		1,662		64		—			13,997
Depreciation and amortization		20,226		9,831		477		313			30,847
Capital expenditures		22,268		5,804		607		11			28,690

Six months ended September 30, 2002
Net revenue from unaffiliated customers	$	487,138	$	243,184	$	28,992	$	26,074		$	785,388
Interest income		8,284		793		94		1			9,172
Depreciation and amortization		41,299		7,318		462		294			49,373
Capital expenditures		17,833		5,127		262		164			23,386

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

Nine Months Ended December 31, 2002
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,958,297 $ 60,817 $ 2,019,114
Cost of goods sold 887,814 11,122 898,936
Gross profit 1,070,483 49,695 1,120,178
Operating expenses:
Marketing and sales (a) 228,473 31,907 260,380
General and administrative 89,448 5,918 95,366
Research and development (b) 221,716 79,951 301,667
Amortization of intangibles (c) 2,780 3,956 6,736
Restructuring and asset impairment charges 9,378 — 9,378
Total operating expenses 551,795 121,732 673,527
Operating income (loss) 518,688 (72,037 ) 446,651
Interest and other income (expense), net 67 (182 ) (115 )
Income (loss) before provision for income taxes and minority interest 518,755 (72,219 ) 446,536
Provision for income taxes 138,426 — 138,426
Income (loss) before minority interest 380,329 (72,219 ) 308,110
Minority interest in consolidated joint venture (253 ) — (253 )
Net income (loss) before retained interest in EA.com $ 380,076 $ (72,219 ) $ 307,857
Interest income $ 14,109 $ 76 $ 14,185
Depreciation and amortization 36,974 37,355 74,329
Capital expenditures 33,774 696 34,470

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

Nine Months Ended December 31, 2001
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,201,407 $ 53,577 $ 1,254,984
Cost of goods sold 595,468 12,174 607,642
Gross profit 605,939 41,403 647,342
Operating expenses:
Marketing and sales (a) 150,002 29,697 179,699
General and administrative 72,535 7,916 80,451
Research and development (b) 185,138 100,628 285,766
Amortization of intangibles (c) 9,615 9,694 19,309
Restructuring and asset impairment charges — 14,051 14,051
Total operating expenses 417,290 161,986 579,276
Operating income (loss) 188,649 (120,583 ) 68,066
Interest and other income (expense), net 10,865 (573 ) 10,292
Income (loss) before provision for income taxes and minority interest 199,514 (121,156 ) 78,358
Provision for income taxes 24,291 — 24,291
Income (loss) before minority interest 175,223 (121,156 ) 54,067
Minority interest in consolidated joint venture 147 — 147
Net income (loss) before retained interest in EA.com $ 175,370 $ (121,156 ) $ 54,214
Interest income $ 12,493 $ 43 $ 12,536
Depreciation and amortization 38,267 45,284 83,551
Capital expenditures 27,609 12,447 40,056

~~(a)~~ ~~EA.com Marketing~~EA’s sales to Wal-mart Stores represented 15 and Sales includes $4,467,000 and $4,466,000 of Carriage Fee for the three months ended December 31, 2002 and 2001, respectively. EA.com Marketing and Sales includes $13,399,000 and $13,398,000 of Carriage Fee for the nine months ended December 31, 2002 and 2001, respectively.
~~(b)~~ EA.com Research and Development includes $12,422,000 of Network Development and Support and $2,708,000 of Customer Relationship Management (CRM) for the three months ended December 31, 2002; and includes $14,858,000 of Network Development and Support and $2,583,000 of CRM for the three months ended December 31, 2001. EA.com Research and Development includes $36,533,000 of Network Development and Support and $7,052,000 of CRM for the nine months ended December 31, 2002; and includes $46,903,000 of Network Development and Support and $8,493,000 of CRM for the nine months ended December 31, 2001.
~~(c)~~ Results for fiscal 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. Amortization of intangibles for the three months ended December 30, 2001 includes goodwill amortization of $1,485,000 for EA Core and $1,406,000 for EA.com. Amortization of intangibles for the nine months ended December 31, 2001 includes goodwill amortization of $4,456,000 for EA Core and $4,296,000 for EA.com.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

~~The Company’s operations, presented geographically,~~ percent of total net revenue for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2003, respectively. EA’s sales to Wal-mart Stores represented 17 and 14 percent of total net revenue for the three and six months ended September 30, 2002, ~~and 2001 are presented below (in thousands):~~

Asia
North Pacific
America Europe (excluding Japan) Japan Eliminations Total

Three months ended December 31, 2002

Net revenues from unaffiliated customers $ 695,630 $ 470,742 $ 38,208 $ 29,146 $ — $ 1,233,726
Intercompany revenues (5,082 ) 36,726 3,126 — (34,770 ) —

Total net revenues 690,548 507,468 41,334 29,146 (34,770 ) 1,233,726

Operating income 203,408 158,749 4,293 4,773 (2,100 ) 369,123
Interest income 4,404 575 34 — — 5,013
Depreciation and amortization 21,111 3,453 227 165 — 24,956
Identifiable assets 1,750,576 626,301 50,398 33,750 — 2,461,025
Capital expenditures 8,550 1,894 470 170 — 11,084
Long-lived assets 366,503 183,852 5,239 5,151 — 560,745

Three months ended December 31, 2001

Net revenues from unaffiliated customers $ 510,752 $ 279,601 $ 21,801 $ 20,724 $ — $ 832,878
Intercompany revenues 1,222 17,262 2,753 55 (21,292 ) —

Total net revenues 511,974 296,863 24,554 20,779 (21,292 ) 832,878

Operating income 71,022 116,770 167 700 (158 ) 188,501
Interest income 2,742 254 37 — — 3,033
Depreciation and amortization 24,204 3,632 250 171 — 28,257
Identifiable assets 1,202,728 440,991 29,368 22,286 — 1,695,373
Capital expenditures 7,331 2,340 437 237 — 10,345
Long-lived assets 351,891 164,079 4,522 4,406 — 524,898

Nine months ended December 31, 2002

Net revenues from unaffiliated customers $ 1,182,768 $ 713,926 $ 67,200 $ 55,220 $ — $ 2,019,114
Intercompany revenues (7,998 ) 57,561 5,036 57 (54,656 ) —

Total net revenues 1,174,770 771,487 72,236 55,277 (54,656 ) 2,019,114

Operating income 230,976 211,903 5,002 693 (1,923 ) 446,651
Interest income 12,688 1,368 128 1 — 14,185
Depreciation and amortization 62,410 10,771 689 459 — 74,329
Capital expenditures 26,383 7,021 732 334 — 34,470

Nine months ended December 31, 2001

Net revenues from unaffiliated customers $ 783,369 $ 392,615 $ 39,859 $ 39,141 $ — $ 1,254,984
Intercompany revenues 3,553 26,708 6,860 55 (37,176 ) —

Total net revenues 786,922 419,323 46,719 39,196 (37,176 ) 1,254,984

Operating income (loss) (24,683 ) 92,648 (129 ) (302 ) 532 68,066
Interest income 10,974 1,392 170 — — 12,536
Depreciation and amortization 72,408 10,044 616 483 — 83,551
Capital expenditures 29,941 8,604 710 801 — 40,056
respectively.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

Information about ~~the Company’s~~EA’s net ~~revenues~~revenue by product line for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001~~ is presented below (in thousands):

Three Months Ended Nine Months Ended
December 31, December 31,

2002 % of total 2001 % of total 2002 % of total 2001 % of total
PlayStation 2 $ 459,407 37 % $ 227,554 27 % $ 752,717 37 % $ 369,836 30 %
PC 219,083 18 % 194,856 23 % 377,835 19 % 318,818 25 %
Xbox 116,836 9 % 44,629 5 % 174,466 9 % 44,629 4 %
Nintendo GameCube 111,103 9 % 30,026 4 % 153,897 8 % 30,026 2 %
PlayStation 53,066 4 % 122,940 15 % 90,495 4 % 162,129 13 %
Game Boy Advance 68,102 6 % 30,543 4 % 73,919 4 % 30,543 2 %
Advertising 9,461 1 % 10,556 1 % 28,579 1 % 25,317 2 %
Game Boy Color 22,610 2 % 24,176 3 % 25,131 1 % 28,455 2 %
Online Subscriptions 9,193 1 % 7,002 1 % 24,969 1 % 22,146 2 %
License, OEM and Other 7,396 — 19,813 2 % 16,349 1 % 37,464 3 %
Affiliated Label 157,469 13 % 120,783 15 % 300,757 15 % 185,621 15 %
$ 1,233,726 100 % $ 832,878 100 % $ 2,019,114 100 % $ 1,254,984 100 %



	Three Months Ended				Six Months Ended
	September 30,				September 30,

	2003		2002		2003		2002

PlayStation^® 2	$	221,180	$	158,712	$	339,549	$	293,310
PC		93,022		82,686		173,360		158,752
Xbox^™		68,691		37,527		100,212		57,630
Nintendo GameCube^™		24,553		27,838		45,707		42,794
Subscription Services		11,124		8,321		24,755		16,860
Advertising, Programming, Licensing, and Other		7,552		14,161		16,263		29,508
PlayStation^®		7,562		24,206		13,313		37,429
Game Boy^® Advance		3,809		3,679		6,168		5,817
Co-publishing and Distribution		92,512		96,360		164,059		143,288

Total Net Revenue	$	530,005	$	453,490	$	883,386	$	785,388

~~Note 9.~~(9) COMPREHENSIVE INCOME

SFAS No. 130,“Reporting Comprehensive ~~Income~~Income”, requires classification of other comprehensive income in a financial statement and display of other comprehensive income separately from retained earnings and additional paid-in capital. Other comprehensive income primarily includes foreign currency translation adjustments and unrealized gains (losses) on investments.

The components of comprehensive income, net of tax, for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001 were~~are summarized as follows (in thousands):

Three Months Ended Nine Months Ended
December 31, December 31,

2002 2001 2002 2001
Net income $ 250,219 $ 132,292 $ 307,857 $ 54,214
Other comprehensive income:
Change in unrealized appreciation (loss) on investments, net of tax expense of $165, $356, $1,636 and $434 153 1,982 1,317 (1,877 )
Reclassification of (gain) loss realized in net income for marketable securities, net of a tax expense of ($693) and ($252) (1,544 ) — 374 —
Foreign currency translation adjustments 3,737 (839 ) 11,509 3,175
Total other comprehensive income 2,346 1,143 13,200 1,298
Total comprehensive income $ 252,565 $ 133,435 $ 321,057 $ 55,512



	Three Months Ended						Six Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Net income	$	76,588		$	50,234		$	94,956		$	57,638

Other comprehensive income (loss):
Change in unrealized appreciation (loss) on investments, net of tax (benefit)/expense of $(793), $843, $(675) and $1,471, respectively		(1,811	)		1,249			(1,504	)		1,164
Adjustment for loss (gain) realized in net income, net of tax (benefit)/expense of $0, $441, $(3) and $441, respectively		—			1,918			(7	)		1,918

Foreign currency translation adjustments		1,174			(1,538	)		12,875			7,772


Total other comprehensive income (loss)		(637	)		1,629			11,364			10,854


Total comprehensive income	$	75,951		$	51,863		$	106,320		$	68,492

~~The foreign currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.~~

1612

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

~~Note 10. Net Earnings (Loss) Per Share~~(10) NET EARNINGS (LOSS) PER SHARE

The following summarizes the computations of Basic Earnings Per Share (“EPS”) and Diluted EPS. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method.


(In thousands, except per share amounts):
	Three months ended				Six months ended
	September 30, 2003				September 30, 2003

	Class A common		Class A common		Class A common		Class A common
	stock-Basic		stock-Diluted		stock-Basic		stock-Diluted

Net income	$	76,588	$	76,588	$	94,956	$	94,956


Shares used to compute net earnings per share:
Weighted-average common shares		294,836		294,836		292,263		292,263
Dilutive stock equivalents		—		12,943		—		11,750

Dilutive potential common shares		294,836		307,779		292,263		304,013


Net earnings per share:
Basic	$	0.26		N/A	$	0.32		N/A
Diluted		N/A	$	0.25		N/A	$	0.31


(In thousands, except per share amounts):
	Three months ended September 30, 2002

	Class A common			Class A common		Class B common
	Stock- Basic			stock-Diluted		Stock

Net income (loss) before retained interest in EA.com	$	73,561		$	50,234	$	(23,327	)
Net loss related to retained interest in EA.com		(20,154	)		—		20,154

Net income (loss)	$	53,407		$	50,234	$	(3,173	)


Shares used to compute net earnings (loss) per share:
Weighted-average common shares		279,686			279,686		5,547
Dilutive stock equivalents		—			13,551		—

Dilutive potential common shares		279,686			293,237		5,547


Net earnings (loss) per share:
Basic	$	0.19			N/A	$	(0.57	)
Diluted		N/A		$	0.17	$	(0.57	)

~~Net income (loss) per share is computed individually~~13


(In thousands, except per share amounts):
	Six months ended September 30, 2002

	Class A common			Class A common		Class B common
	Stock- Basic			stock-Diluted		Stock

Net income (loss) before retained interest in EA.com	$	100,897		$	57,638	$	(43,259	)
Net loss related to retained interest in EA.com		(37,096	)		—		37,096

Net income (loss)	$	63,801		$	57,638	$	(6,163	)


Shares used to compute net earnings (loss) per share:
Weighted-average common shares		278,633			278,633		5,759
Dilutive stock equivalents		—			13,905		—

Dilutive potential common shares		278,633			292,538		5,759


Net earnings (loss) per share:
Basic	$	0.23			N/A	$	(1.07	)
Diluted		N/A		$	0.20	$	(1.07	)

Excluded from the above computation of weighted-average shares for Class A Diluted EPS for the three and six months ended September 30, 2003, were options to purchase 339,000 and 574,000 shares, respectively, as the options’ exercise prices were greater than the average market price of the common ~~stock~~shares during the respective periods. For the three and six months ended September 30, 2003, the weighted-average exercise prices of these options were $44.49 and $40.78 per share, respectively.

Excluded from the above computation of weighted-average shares for Class BA Diluted EPS for the three and six months ended September 30, 2002, were options to purchase 697,000 and 462,000 shares, respectively, as the options’ exercise prices were greater than the average market price of the common ~~stock. Please see~~shares during the ~~discussion regarding segment reporting in~~respective periods. For the ~~MD&A.~~

(in thousands, except per share amounts):
Three months ended December 31, 2002
Class A common Class A common Class B
stock-Basic stock-Diluted common stock
Net income (loss) before retained interest in EA.com $ 279,179 $ 250,219 $ (28,960 )
Net loss related to retained interest in EA.com (25,485 ) — 25,485
Net income (loss) $ 253,694 $ 250,219 $ (3,475 )
Shares used to compute net income (loss) per share:
Weighted-average common shares 141,889 141,889 4,051
Dilutive stock equivalents — 6,136 —
Dilutive potential common shares 141,889 148,025 4,051
Net income (loss) per share:
Basic $ 1.79 N/A $ (0.86 )
Diluted N/A $ 1.69 $ (0.86 )
three and six months ended September 30, 2002, the weighted-average exercise prices of these options were $31.87 and $31.72 per share, respectively.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

(in thousands, except pershare amounts):
Nine months ended December 31, 2002
Class A common Class A common Class B
stock-Basic stock-Diluted common stock
Net income (loss) before retained interest in EA.com $ 380,076 $ 307,857 $ (72,219 )
Net loss related to retained interest in EA.com (62,581 ) — 62,581
Net income (loss) $ 317,495 $ 307,857 $ (9,638 )
Shares used to compute net income (loss) per share:
Weighted-average common shares 140,193 140,193 5,247
Dilutive stock equivalents — 6,667 —
Dilutive potential common shares 140,193 146,860 5,247
Net income (loss) per share:
Basic $ 2.26 N/A $ (1.84 )
Diluted N/A $ 2.10 $ (1.84 )

(in thousands, except per share amounts):
Three months ended December 31, 2001
Class A common Class A common Class B
stock-Basic stock-Diluted common stock
Net income (loss) before retained interest in EA.com $ 176,999 $ 132,292 $ (44,707 )
Net loss related to retained interest in EA.com (38,001 ) — 38,001
Net income (loss) $ 138,998 $ 132,292 $ (6,706 )
Shares used to compute net income (loss) per share:
Weighted-average common shares 137,103 137,103 6,028
Dilutive stock equivalents — 6,296 —
Dilutive potential common shares 137,103 143,399 6,028
Net income (loss) per share:
Basic $ 1.01 N/A $ (1.11 )
Diluted N/A $ 0.92 $ (1.11 )

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

(in thousands, except per share amounts):
Nine months ended December 31, 2001
Class A common Class A common Class B
stock-Basic stock-Diluted common stock
Net income (loss) before retained interest in EA.com $ 175,370 $ 54,214 $ (121,156 )
Net loss related to retained interest in EA.com (102,983 ) — 102,983
Net income (loss) $ 72,387 $ 54,214 $ (18,173 )
Shares used to compute net income (loss) per share:
Weighted-average common shares 136,457 136,457 6,023
Dilutive stock equivalents — 6,390 —
Dilutive potential common shares 136,457 142,847 6,023
Net income (loss) per share:
Basic $ 0.53 N/A $ (3.02 )
Diluted N/A $ 0.38 $ (3.02 )

~~The~~For the three and six months ended September 30, 2002, the Diluted EPS calculation for Class A common stock, ~~includes~~presented above, included the potential dilution from the conversion of Class B common stock to Class A common stock in the event that anthe initial public offering for Class B common stock ~~does~~did not occur. Net income used for the calculation of Diluted EPS for Class A common stock was ~~$250,219,000 and $132,292,000~~$50.2 million for the three months ended ~~December 31,~~September 30, 2002 and ~~2001, respectively. Net income used~~$57.6 million for the ~~calculation of Diluted EPS for Class A common stock was $307,857,000 and $54,214,000 for the nine~~six months ended ~~December 31, 2002 and 2001, respectively.~~September 30, 2002. This net income ~~includes~~included the remaining interest in EA.com, ~~(100% of EA.com losses),~~ which iswas directly attributable to outstanding Class B ~~shares~~common stock owned by third parties, ~~which~~and would behave been included in the Class A common stock EPS calculation in the event that anthe initial public offering for Class B common stock ~~does~~did not occur.

~~Excluded from the above computation of weighted-average shares for Diluted EPS for Class A common stock were options to purchase 276,000~~ The remaining interest in EA.com was approximately 15 percent through August 2002, 12 percent through February 2003 and 1,333,000 shares of common stock for the three and nine months ended December 31, 2002, respectively, as the options’ exercise price was greater than the average market price of the common shares. For the three and nine months ended December 31, 2002, the weighted-average exercise price of these respective options was $66.18 and $63.54 per share, respectively. Similarly, options to purchase 1,729,000 and 1,425,000 shares of common stock were excluded for the three and nine months ended December 31, 2001, respectively, as the options’ exercise price was greater than the average market price of the common shares. For the three and nine months ended December 31, 2001, the weighted-average exercise price of these respective options was $57.69 and $57.59 per share, respectively.one percent through March 2003.

Due to the net loss attributable for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2002 on a diluted basis to Class B ~~Stockholders,~~common stock, stock options have been excluded from the Diluted EPS

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

calculation as their inclusion would have been antidilutive. Had net income been reported for the ~~nine~~three and six months ended ~~December 31,~~September 30, 2002, an additional ~~297,000~~226,000 and 422,000 shares, respectively, would have been added to diluted potential common shares for Class B common stock. Similarly, an additional 828,000 and 884,000 shares would have been added to diluted potential common shares for Class B common stock for the three and nine months ended December 31, 2001, respectively.

~~Note 11.~~(11) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

2003 Studio Restructuring ~~and Asset Impairment Charges~~

~~EA Core~~

During the third quarter ~~ended December 31, 2002, the Company~~of fiscal 2003, EA closed its office located in San Francisco, California and its studio located in Seattle, Washington. The office and studio closures were a result of ~~the Company’s~~EA’s strategic decision to consolidate local development efforts in Redwood City, California and Vancouver, British Columbia, Canada. ~~The Company~~EA recorded total pre-tax charges of ~~$9,378,000,~~$9.4 million, consisting of ~~$7,310,000~~$7.3 million for consolidation of facilities, ~~$1,452,000~~$1.5 million for the ~~write-off~~ impairment

of non-current assets and ~~$616,000~~$0.6 million for workforce reductions. The facilities charge was net of a reduction in deferred rent of ~~$533,000.~~$0.5 million.

~~The exit plans resulted~~Additionally, during the fourth quarter of fiscal 2003, EA approved a plan to consolidate its Los Angeles, California, Irvine, California and Las Vegas, Nevada, studios into one major game studio in Los Angeles. These measures were taken in order to maximize efficiencies and streamline the creative development process and operations of EA’s studios. In connection with these consolidation activities, EA recorded a total pre-tax restructuring charge of $5.1 million, including $1.6 million for the shutdown of facilities related to non-cancelable lease payments for permanently vacated properties and associated costs, $2.0 million for the impairment of abandoned equipment and leasehold improvements at facilities that were permanently vacated and $1.5 million for employee severance expenses related to involuntary terminations.

Online Restructurings

Fiscal 2003 Restructuring
In March 2003, EA consolidated the operations of the EA.com business segment into its core business segment, and eliminated separate reporting for its Class B common stock for all reporting periods after fiscal 2003. During the fourth quarter of fiscal 2003, EA recorded restructuring charges of $67.0 million, consisting of $1.8 million for workforce ~~reduction~~reductions, $2.3 million for consolidation of ~~approximately 33 personnel in development~~facilities and other administrative ~~departments.~~charges, and $62.9 million for the impairment of non-current assets. The estimated costs for workforce reduction included severance charges for terminated employees, costs for certain outplacement service contracts and costs associated with the tender offer to retire employee Class B options. The consolidation of facilities ~~included contractual rental commitments under the real estate lease for unutilized office space, offset by estimated future sub-lease income. In addition, the exit plans~~ resulted in the ~~write-off~~closure of ~~certain non-current fixed assets, primarily leasehold improvements.~~

~~The following table summarizes the activity in the accrued restructuring account~~EA.com’s Chicago, Illinois, and Charlottesville, Virginia facilities and an adjustment for the ~~period ended December 31, 2002 (in thousands):~~

Facilities Workforce Total
Recorded in the quarter ended December 31, 2002 $ 7,843 $ 616 $ 8,459
Charges utilized in cash for the three months ended December 31, 2002 — (385 ) (385 )
Balance as of December 31, 2002 $ 7,843 $ 231 $ 8,074
closure of EA.com’s San Diego, California studio in fiscal 2002.

The ~~Company expects~~impairment charges on long-lived assets of $62.9 million included $24.9 million relating to customized internal-use software systems for the ~~remaining accrued restructuring balance~~EA.com infrastructure, $25.6 million for other long-lived assets and $12.4 million of ~~$8,074,000~~finite-lived intangibles relating to ~~be fully utilized by December 31, 2006.~~EA.com’s Kesmai and Pogo studios. The fair-value-based tests performed in accordance with EA’s annual procedures did not indicate an impairment of the recorded goodwill at the EA.com reporting unit level.

~~EA.com~~

Fiscal 2002 Restructuring
In October 2001, ~~the Company~~EA announced a restructuring plan for ~~EA.com.~~the EA.com business segment. The restructuring initiatives involved strategic decisions to discontinue certain product offerings and focus only on key online priorities that ~~align~~aligned with its fiscal 2003 operational objectives. During fiscal 2002, EA recorded restructuring charges of $20.3 million, consisting of $4.2 million for workforce reductions, $3.3 million for consolidation of facilities and other administrative charges, and $12.8 million for the write-off of non-current assets and facilities. The estimated costs for workforce reduction included severance charges for terminated employees and costs for certain outplacement service contracts. The consolidation of facilities resulted in the ~~termination~~closure of ~~approximately 270 positions.~~EA.com’s San Diego, California, studio and consolidation of its San Francisco, California, and Charlottesville, Virginia, facilities.

20Impairment charges on long-lived assets amounted to $12.8 million, including $11.2 million relating to abandoned technologies consisting of customized internal-use software systems for the EA.com infrastructure, $1.0 million of Kesmai intangibles associated with discontinued products and services and $0.6 million of goodwill charges relating to EA.com’s San Diego studio closure.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

The following table summarizes the activity in the accrued studio and online restructuring account for the ~~nine~~three and six months ended ~~December 31, 2002~~September 30, 2003 (in thousands):

Workforce Facilities Total
Balance as of March 31, 2002 $ 674 $ 2,214 $ 2,888
Charges utilized in cash for the three months ended June 30, 2002 (494 ) (243 ) (737 )
Charges utilized in non-cash for the three months ended June 30, 2002 — (36 ) (36 )
Balance as of June 30, 2002 180 1,935 2,115
Charges utilized in cash for the three months ended September 30, 2002 (82 ) (100 ) (182 )
Balance as of September 30, 2002 98 1,835 1,933
Charges utilized in cash for the three months ended December 31, 2002 (93 ) (283 ) (376 )
Charges utilized in non-cash for the three months ended December 31, 2002 — (652 ) (652 )
Balance as of December 31, 2002 $ 5 $ 900 $ 905

~~The Company~~15



	Fiscal 2003						Fiscal 2002
	Restructuring Plan						Restructuring Plan
				Facilities-			Facilities-
	Workforce			related			related			Total

Accrued balance as of March 31, 2003	$	1,692		$	8,223		$	840		$	10,755
Charges utilized in cash		(1,452	)		(2,057	)		(103	)		(3,612	)



Accrued balance as of September 30, 2003	$	240		$	6,166		$	737		$	7,143

EA expects the remaining ~~EA.com~~ accrued restructuring balance of ~~$905,000~~$7.1 million to be fully utilized by December 31, 2006.

As of September 30, 2003, the estimated costs for consolidation of facilities included contractual rental commitments of $10.9 million under real estate leases for unutilized office space offset by $4.5 million of estimated future sub-lease income, costs to close or consolidate facilities, and costs to write off a portion of the assets from these facilities.

The ~~accrued~~ restructuring ~~balances are~~accrual is included in other accrued expenses in Note 7 of the Notes to Condensed Consolidated Financial Statements.

~~Note 12. Contingent Liabilities~~
(12) CONTINGENT LIABILITIES

Lease commitments

In July of 2003, EA entered into a lease agreement with Playa Vista-Water’s Edge LLC for a studio facility in Los Angeles, California, which commenced in October 2003 and expires in September 2013 with two five-year options to extend the lease term. Additionally, EA has options to purchase the property after five and ten years based on the fair market value of the property at the date of sale, a right of first offer to purchase the property upon terms offered by the landlord, and a right to share in the profits from a sale of the property. EA accounted for this arrangement as an operating lease in accordance with SFAS No. 13, “Accounting for Leases”, as amended. Existing campus facilities comprise a total of 243,000 square feet and provide space for research and development functions. The rental obligation under this agreement is $50.2 million over the initial ten-year term of the lease. EA will take possession of the property over a period of 18 months as the facilities become available for use. The above commitment is offset by sublease income of $5.8 million for the sublet to Playa Capital Company, LLC of 18,000 square feet of the Los Angeles facility, which commenced in October 2003 and expires September 2013 with options of early termination by Playa Capital Company, LLC after five years and by EA after four and five years.

Residual Value Guarantees

In February of 1995, ~~the Company~~EA entered into a build-to-suit lease with ~~a financial institution~~Keybank National Association on ~~the Company’s~~its headquarters facility in Redwood City, California, which was extended in July 2001 and expires in July 2006. ~~The Company~~EA accounted for this arrangement as an operating lease in accordance with SFAS No. 13,~~“Accounting for Leases”~~, as amended. Existing campus facilities developed in phase one comprise a total of 350,000 square feet and provide space for sales, marketing, administration and research and development functions. ~~The Company~~EA has an option to purchase the property (land and facilities) for ~~$145,000,000~~$145.0 million or, at the end of the lease, to arrange for ~~(1)~~(i) an additional extension of the lease or ~~(2)~~(ii) sale of the property to a third party ~~with the Company retaining~~while EA retains an obligation to the owner for the difference between the sale price and the guaranteed residual value of up to ~~$128,900,000~~$128.9 million if the sales price is less than this amount, subject to certain provisions of the lease.

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~

In December 2000, ~~the Company~~EA entered into a second build-to-suit lease with ~~a financial institution~~Keybank National Association for a ~~five year~~five-year term from December 2000 to expand ~~the Company’s~~its headquarters facilities and develop adjacent property adding approximately 310,000 square feet to its campus. Construction was completed in June 2002. ~~The Company~~EA accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. The facilities will provide space for marketing, sales and research and development. ~~The Company~~EA has an option to purchase the property for ~~$127,000,000~~$127.0 million or, at the end of

the lease, to arrange for ~~(1)~~(i) an extension of the lease or ~~(2)~~(ii) sale of the property to a third party ~~with the Company retaining~~while EA retains an obligation to the owner for the difference between the sale price and the guaranteed residual value of up to ~~$118,800,000~~$118.8 million if the sales price is less than this amount, subject to certain provisions of the lease.

~~Director Indemnity Agreements~~

~~The Company has entered into an indemnification agreement with~~EA believes the ~~members~~estimated fair value of ~~its Board of Directors to indemnify its Directors to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid~~both properties under these operating leases are in ~~settlement and damages incurred by the Directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the Directors are sued as a result~~excess of their ~~service as members of the Board of Directors of the Company.~~respective guaranteed residual values based in part on an independent third party appraisal.

~~Please see~~See the Liquidity and Capital Resources section of ~~the MD&A~~Management’s Discussion and Analysis of Financial Condition and Results of Operations for a schedule of ~~the Company’s~~EA’s contractual obligations and commitments.

~~Note 13. Investments~~
(13) SQUARE JOINT VENTURE

In May 1998, EA and Square, a leading developer and publisher of entertainment software in ~~Affiliates~~

Japan, completed the formation of two new joint ventures in North America and Japan. In ~~accordance~~North America, the companies formed Square Electronic Arts, LLC (“Square EA”), which had exclusive publishing rights in North America for future interactive entertainment titles created by Square. Additionally, EA had the exclusive right to distribute in North America products published by this joint venture. EA contributed $3.0 million and owned a 30 percent minority interest in this joint venture while Square owned 70 percent. This joint venture was accounted for under the equity method. The joint venture agreements with ~~SFAS No. 144,~~~~“Accounting for the Impairment or Disposal~~Square expired as of ~~Long-Lived Assets”~~~~, management evaluates purchased intangible assets and long-lived assets to determine if events or changes~~March 31, 2003. EA’s distribution of Square products in ~~circumstances indicate an other-than-temporary impairment in value. The Company has cost investments in affiliates. Based~~North America terminated on several factors, such as the financial performance of the affiliate, the Company's decision to no longer acquire or continue investing in these affiliates, the limited cash flow from future business arrangements and other information available during the quarter ended December 31, 2002, the Company determined that some of its investments in affiliates were permanently impaired and recorded a permanent impairmentJune 30, 2003. On May 30, 2003 Square acquired EA’s remaining 30 percent ownership interest in the ~~amount~~joint venture for $8.5 million and EA’s investment was removed from the Condensed Consolidated Balance Sheet.

In Japan, the companies established Electronic Arts Square K.K. (“EA Square KK”) in 1998, which localized and published in Japan EA’s properties originally created in North America and Europe, as well as developed and published original videogames in Japan. EA contributed cash and had a 70 percent majority ownership interest, while Square contributed cash and owned 30 percent. Accordingly, the assets, liabilities and results of ~~$10,119,000. This permanent impairment was recorded~~operations for EA Square KK were included in ~~interest~~EA’s Condensed Consolidated Balance Sheets and ~~other income (expense) on the~~ Condensed Consolidated Statements of ~~Operations.~~

~~Note 14. Subsequent Events~~

~~Studio Restructuring~~Operations since June 1, 1998, the date of formation. Square’s 30 percent interest in EA Square KK has been reflected as “Minority interest in consolidated joint venture” on EA’s Condensed Consolidated Balance Sheet as of March 31, 2003, and Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2002.

In May 2003, EA acquired Square’s 30 percent ownership interest in EA Square KK for approximately $2.5 million in cash. As a result of the ~~fourth quarter~~acquisition, EA Square KK has become a wholly owned subsidiary of ~~fiscal 2003,~~EA and has been renamed Electronic Arts K.K. The acquisition was accounted for as a step acquisition purchase and the ~~Company will begin~~excess purchase price over fair value of the ~~consolidation of its Los Angeles, Irvine~~net tangible assets acquired, $1.2 million, was allocated to goodwill.

(14) AMERICA ONLINE, INC. (“AOL”) AGREEMENT

In November 1999, Electronic Arts Inc., EA.com and ~~Las Vegas studios~~AOL entered into a ~~major centralized studio~~five-year $81.0 million carriage fee agreement (the “Prior Agreement”) which gave EA.com the exclusive right to provide online games and interactive entertainment content on the “Games” channels/areas of certain AOL online services and gain access to and sell its products to AOL subscribers and to users of AOL properties. This agreement provided for carriage fees, advertising commitments, advertising revenue sharing and other fees.

During the three months ended June 30, 2003, EA and AOL terminated the Prior Agreement and entered into a new two-year agreement (the “New Agreement”) under which EA will continue to provide its current online game content services, and launch new online game content and services, on the “Games” channels/areas of certain AOL online services in ~~Los Angeles. These measures~~exchange for a programming fee from AOL.

Below is a discussion of the Prior Agreement and the changes in EA’s relationship with AOL that are ~~being taken to maximize efficiencies and streamline~~reflected in the ~~creative development process and operations of our studios.~~New Agreement.

2217

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~Carriage

~~Shelf Registration~~The Prior Agreement provided for EA’s payment of a total of $81.0 million in carriage fees to AOL over the term of the Prior Agreement.

~~On January 29,~~Of this amount, $36.0 million was paid upon signing the Prior Agreement with the remainder due in four equal annual installments of $11.25 million beginning with the first anniversary of the initial payment. EA made carriage payments to AOL of $11.25 million in each of the fiscal years 2003, 2002 and 2001. Due to the termination of the Prior Agreement in June 2003, EA is no longer required to make the last $11.25 million carriage payment. There was no carriage fee expense for the three and six months ended September 30, 2003. Carriage fee expense for the three and six months ended September 30, 2002 was $4.5 million and $8.9 million, respectively.

Carriage fee amounts paid under the Prior Agreement were capitalized as a prepaid asset as payments were made to AOL. Until April 1, 2003, the ~~Company filed~~total carriage fee of $81.0 million that was provided for in the Prior Agreement was being expensed using the straight-line method over the remaining life of the Prior Agreement subsequent to EA.com’s site launch in October 2000. As the carriage fee was expensed, EA applied the portion that had been paid against the prepaid asset and recorded the remaining amount as a ~~“shelf” registration statement~~liability. Amortization expense was classified as “Marketing and sales” expense in EA’s Condensed Consolidated Statements of Operations. The prepaid asset and liability balances were classified as “Other assets” and “Accrued and other liabilities”, respectively, on ~~Form S-3 with~~EA’s Condensed Consolidated Balance Sheets.

Under the ~~U.S. Securities and Exchange Commission which will allow~~New Agreement, in July 2003, AOL refunded $18.0 million in carriage fees that EA had previously paid to AOL under the ~~Company to sell up to $2 billion in equity or debt securities.~~

~~Note 15. Impact of Recently Issued Accounting Standards~~

~~In June 2001,~~Prior Agreement. This refund was applied against the ~~Financial Accounting Standards Board (“FASB”) issued SFAS No. 143,~~~~“Accounting for Asset Retirement Obligations”~~~~. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets~~prepaid balance and the ~~associated~~remaining asset, ~~retirement costs. This statement applies to legal obligations associated with~~$6.4 million, is being amortized over the ~~retirement of long-lived assets that result from the acquisition, construction, development or normal use~~term of the ~~asset. SFAS No. 143 is effective~~New Agreement as a reduction to revenue.

Programming Fee

The New Agreement provides for ~~fiscal years beginning after June 15, 2002. We do not expect~~payments by AOL to EA of $27.5 million over the ~~adoption~~two-year term of ~~SFAS No.143~~the New Agreement as a programming fee. $20.8 million of this $27.5 million pertains to ~~have a material impact~~existing online games content and services that EA currently provides on the ~~Company’s consolidated financial position~~“Games” channels/areas of the AOL properties, and is being recognized as revenue ratably over the term of the New Agreement. The remaining $6.7 million pertains to new online games content and services to be delivered during the term of the New Agreement. This portion of the programming fee will be recognized as revenue as the required new content and services are delivered. During the three and six months ended September 30, 2003, $2.4 million and $4.9 million have been recognized as programming fee revenue, respectively.

Advertising Commitment

Under the Prior Agreement, EA also made a commitment to spend $15.0 million in offline media advertisements prior to March 31, 2005 consisting of:

$10.0 million on television, radio, print and outdoor advertising promoting the availability of EA.com games on certain AOL online services; and

$5.0 million ($1.0 million per year over the five year agreement) on television, radio, print and outdoor advertising promoting the availability of a specific category of EA.com games (so-called “parlor games”) on certain AOL online services.

Under the Prior Agreement, EA was free to purchase this advertising from any television, radio, print or ~~results of operations.~~

~~In April 2002, the FASB issued SFAS No. 145,~~~~“Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”~~~~. SFAS No. 145 rescinds SFAS No. 4,~~~~“Reporting Gains and Losses~~outdoor media property that it chose, not necessarily from ~~Extinguishment of Debt”~~~~, as amended by SFAS No. 64,~~~~“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”~~~~. The adoption of SFAS No. 145~~any AOL-affiliated media property. EA did not ~~have a material impact on~~purchase any advertisements from AOL, though it purchased some qualifying advertising from AOL affiliates. Through March 31, 2003, EA expensed the ~~Company’s consolidated financial statements.~~advertising as it was incurred. These costs were classified as “Marketing and sales” expense in EA’s Condensed Consolidated Statements of Operations. As of March 31, 2003, EA had spent approximately $4.3 million against this commitment.

~~In June 2002,~~Upon the ~~FASB issued SFAS No. 146,~~~~“Accounting for Costs Associated with Exit or Disposal Activities”~~~~. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3,~~~~“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”~~. The Company currently accounts for and reports exit and disposal activities under the provisions of EITF No. 94-3. The Company will adopt the provisions of SFAS No. 146 for all exit and disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material impact on its consolidated financial statements.

~~In November 2002, the FASB issued Interpretation No. 45,~~~~“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”~~ ~~(“FIN 45”). FIN 45 requires a guarantor to (i) include disclosure of certain obligations, and (ii) if applicable, at the inception~~termination of the ~~guarantee, recognize a liability~~Prior Agreement, this advertising commitment was extinguished, and there is no similar commitment provided for the fair value of other certain obligations undertaken in issuing a guarantee. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002 and the Company has adopted those requirements in its condensed consolidated financial statements included in Note 12 of the Notes to Condensed Consolidated Financial Statements and in the Liquidity and Capital Resources section of the MD&A of this Form 10-Q. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespectiveNew Agreement.

2318

~~ELECTRONIC ARTS INC. AND SUBSIDIARIES~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~
~~(unaudited)~~
~~(continued)~~Advertising Revenue and Revenue Sharing

Advertising revenue is derived principally from the sale of banner and in-game advertisements. Banner and in-game advertising is typically generated from contracts in which either EA or AOL provides a minimum number of impressions over the term of the ~~guarantor’s year-end.~~ agreed-upon commitment. Revenue is recognized as the impressions are delivered, provided that no significant obligations remain and collection of the related receivable is probable. Under the Prior Agreement, advertising revenue generated on the AOL Games Channel was recorded net of the applicable revenue share owed to AOL.

The ~~Company~~Prior Agreement required that AOL pay EA 50 percent of all revenue collected by AOL from the sale of advertisements on EA’s online games sites, until advertising revenue reached $16.0 million in a year (measured from October 1 through the following September 30). Thereafter, the Prior Agreement provided that AOL would pay EA 70 percent of all advertising revenue collected by AOL from the sale of advertisements on EA’s game sites. Under the New Agreement, AOL is ~~currently assessing~~entitled to retain all advertising revenue collected by AOL from the ~~impact~~sale of ~~adopting~~advertisements on EA’s games sites on the ~~initial recognition~~AOL properties, until net advertising revenue reaches $20.0 million in the twelve months ended March 31, 2004, and ~~initial measurement requirements~~until net advertising revenue reaches $35.0 million for the remainder of ~~FIN 45 on~~the term of the New Agreement. After advertising revenue exceeds these thresholds, AOL is required to pay EA 50 percent of the additional net advertising revenue.

Other Fee Arrangements

Under the Prior Agreement, EA was also required to pay AOL a percentage of its ~~consolidated financial statements.~~

~~In December 2002, the FASB issued SFAS No. 148,~~~~“Accounting~~subscription, e-commerce and anchor tenancy revenue that exceeded certain amounts. These costs were expensed as incurred and were classified as “Cost of goods sold” in EA’s Condensed Consolidated Statement of Operations. EA does not net these costs against revenue because it maintains responsibility for ~~Stock-Based Compensation — Transition~~providing e-commerce products and ~~Disclosure — an Amendment of FASB Statement No. 123”. SFAS No. 148 amends FASB Statement No. 123,~~~~“Accounting for Stock-Based Compensation”~~~~, to provide alternative methods of transition for an entity that voluntarily changes~~subscription services directly to the ~~fair-value-based method of accounting for stock-based employee compensation. It also amends~~consumer and retains the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income and earnings per share and the entity’s accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to accountprimary inventory risk for its ~~employee incentive stock option plans using~~products and games service.

Under the ~~intrinsic value method~~New Agreement, EA is required to pay AOL a percentage of its revenue derived from game service subscriptions, e-commerce, downloadable games and prize games that EA makes available on the AOL online services. EA accounts for these amounts in ~~accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25,~~~~“Accounting for Stock Issued to Employees.”~~ The amendments to SFAS 123 will be effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. The Company will adopt the disclosure provisions of this statement in its fourth quarter of fiscal year 2003.a similar manner as described above.

(15) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation No. 46, ““Consolidation of Variable Interest ~~Entities”~~Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, ““Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of “variable interests” and requires existing unconsolidated variable interest entities ~~to be consolidated by their primary beneficiaries if the entities~~(“VIEs”) that either: (i) do not ~~effectively disperse risks among~~have sufficient equity investment at risk to permit the ~~parties involved.~~entity to finance its activities without additional subordinated financial support, or (ii) are owned by equity investors who lack an essential characteristic of a controlling financial interest. This interpretation applies immediately to ~~variable interest entities~~VIEs created after January 31, 2003. ItWith regard to VIE’s already in existence prior to February 1, 2003, the implementation of FIN 46 has been delayed and currently applies into the first fiscal year or interim period beginning after ~~June~~December 15, ~~2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1,~~ 2003. ~~If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when~~ FIN 46 ~~becomes effective, the enterprise shall disclose information about those entities~~requires disclosure of VIEs in ~~all~~ financial statements issued after January 31, ~~2003. The interpretation may be applied prospectively with a cumulative-effect adjustment~~2003, if it is reasonably possible that as of the ~~date on which~~transition date: (i) EA will be the primary beneficiary of an existing VIE that will require consolidation, or (ii) EA will hold a significant variable interest in, or have significant involvement with, an existing VIE. EA does not believe that it ~~is first applied~~has any entities that will require disclosure or ~~by restating previously issued financial statements for one or more years with~~new consolidation as a ~~cumulative-effect adjustment as~~result of adopting the ~~beginning of the first year restated. Based on the recent release~~provisions of FIN ~~46, the Company has not completed its assessment as to whether or not the adoption of FIN 46 will have a material impact on its consolidated financial statements.~~46.

2419

Item 2. Management’s Discussion and Analysis Ofof Financial Condition and Results Ofof Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Quarterly Report on Form 10-Q are forward looking. We use words such as ~~anticipates, believes, expects, intends, future~~“anticipates”, “believes”, “expects”, “intends”, “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and management’s expectations, and are inherently uncertain and difficult to predict. Our actual results could differ materially from management’s expectations due to such risks. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results include, but are not limited to, those discussed in this report below under the heading “Risk Factors” ~~at pages 55 to 61,~~, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2002~~2003 as filed with the Securities and Exchange Commission ~~(SEC)~~(“SEC”) on June ~~28, 2002~~10, 2003 and in other documents filed with the SEC.

~~Critical Accounting Policies~~CRITICAL ACCOUNTING POLICIES

~~Management’s Discussion and Analysis of~~Our Condensed Consolidated Financial ~~Condition and Results of Operations discusses our consolidated financial statements. Our financial statements~~Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these ~~consolidated financial statements~~Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and ~~revenues~~revenue and expenses during the reporting period. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations but also because application and interpretation of these policies requires both judgment and estimates ofon matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Sales allowances and bad debt reserves

We principally derive ~~revenues~~revenue from sales of ~~our~~ packaged ~~goods product, subscriptions of online service, sales of packaged goods through our online store~~interactive software games designed for play on videogame consoles (such as the PlayStation 2, Xbox and ~~website advertising.~~Nintendo GameCube), PCs and hand-held game machines (such as the Nintendo Game Boy Advance). Product revenue is recognized net of sales allowances. We also have stock-balancing programs for our ~~personal computer~~PC products, which allow for the exchange of ~~personal computer~~PC products by resellers under certain circumstances. We may decide to provide price protection ~~under certain circumstances~~ for both our personal computer and ~~video game~~videogame system ~~products after~~products. In making this determination we ~~analyze:~~evaluate: inventory remaining in the channel, the rate of inventory sell-through in the channel, and our remaining inventory on hand. It is our ~~policy~~general practice to exchange products or give credits, rather than give cash refunds.

We estimate potential future product returns, price protection and stock-balancing programs related to current period product revenue. We analyze historical returns, current sell-through of distributor and retailer inventory of our products, current trends in the ~~video game~~videogame market and the overall economy, changes in customer demand and acceptance of our products and other related factors when evaluating the adequacy of the sales returns and price protection allowances. In addition, management monitors and manages the volume of our sales to retailers and distributors

and their inventories, as substantial overstocking in the distribution channel can result in high returns or ~~the requirement for~~ substantial price protection requirements in subsequent periods. In the past, actual returns have not generally exceeded our reserves. However, actual returns and price protections may materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. For example, the risk of product returns for our products ~~on mature platforms~~ may increase as ~~new hardware platforms, such as~~the Xbox, Nintendo GameCube and PlayStation 2 ~~become more popular.~~consoles pass the midpoint of their lifecycle and an increasing number and aggregate amount of competitive products heighten pricing and competitive pressures. While management believes it can make reliable estimates ~~for~~regarding these matters, these estimates are inherently subjective. Accordingly, if weour estimates changed, ~~our assumptions and estimates,~~ our returns reserves would change, which would impact the net revenue we report. For example, if actual returns were significantly greater than the reserves we have established, ~~the~~our actual results would decrease our reported net revenue. Conversely, if actual returns were significantly less than our reserves, this would increase our reported net revenue.

Similarly, significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. ~~Our~~We determine our allowance for doubtful accounts ~~is determined~~ by evaluating customer ~~credit-worthiness~~creditworthiness in the context of current economic trends. Depending upon the overall economic climate and the financial condition of our customers, the amount and timing of our bad debt expense could change significantly.

We ~~also have no way of accurately forecasting~~cannot predict customer bankruptcies or an inability of any of our customers to meet their financial obligations to us. Therefore, our estimates could differ materially from actual results.

Our gross accounts receivable balance was $815,680,000 and our allowance for product returns, pricing allowances and doubtful accounts was $206,651,000 as of December 31, 2002. As of March 31, 2002, our gross accounts receivable balance was $306,365,000 and our allowance for product returns, pricing allowances and doubtful accounts was $115,870,000.

Prepaid royalties

Prepaid royalties consist primarily of ~~prepayments for manufacturing royalties,~~ advances paid to our co-publishing and/or distribution affiliates and license fees paid to celebrities, professional sports organizations and other organizations for our use of their trade ~~name~~names and content. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the contractual or effective royalty rate as cost of goods sold based on actual net product sales. We evaluate the future realization of prepaid royalties quarterly ~~and charge~~ to ~~research and development expense any~~determine amounts ~~that~~ we deem unlikely to be realized through product sales. WeAny impairments determined before the launch of a product are charged to research and development expense. Impairments determined post launch are charged to cost of goods sold. In either case, we rely on forecasted revenue to evaluate the future realization of prepaid royalties. If actual ~~revenues,~~revenue, or revised sales forecasts, ~~fall~~falls below the initial forecasted sales, the charge ~~to research and development expense~~taken may be larger than anticipated in any given quarter. ~~Once the~~If a charge has been taken prior to ~~research and development expense,~~the product launch, that amount will not be expensed in future quarters when the product has shipped. The current portion of prepaid royalties, included in other current assets, was $41,487,000 at December 31, 2002 and $65,484,000 at March 31, 2002. The long-term portion of prepaid royalties, included in other assets, was $2,885,000 at December 31, 2002 and $1,164,000 at March 31, 2002.

Valuation of long-lived assets ~~including goodwill and other intangible assets~~

We evaluate both purchased intangible assets and other long-lived assets in order to determine if events or changes in circumstances indicate ~~an other-than-temporary~~a potential impairment in ~~value.~~value exists. This evaluation requires us to estimate, among other things, the remaining useful lives along with future estimates of cash flows of the business. All require the use of judgment and estimates. Our actual results could differ materially from our current estimates. ~~Please see our Risk Factors section for a discussion of risks and uncertainties that may affect our future results.~~

Under current accounting standards, we make judgments about the remaining useful lives of purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate ~~an other-than-temporary~~a potential impairment in the remaining value of the assets recorded on our balance sheet. In order to determine if ~~an other-than-temporary~~a potential impairment has occurred, management makes various assumptions about the future value of the asset, by evaluating future business prospects and estimated cash flows. Please refer to the Operations by Segment discussion of the Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussions of EA Core and EA.com. For our EA Core division, ourOur future net cash flows are primarily dependent on the sale of products for play on proprietary ~~video~~videogame consoles, hand-held game ~~platforms.~~machines and PC’s (“platforms”). The success of our products is affected by ~~the~~our ability to accurately predict which platforms and which products we develop will be successful. Also, our ~~revenues~~revenue and earnings are dependent on our ability to meet our product release schedules. For our EA.com division, the future net cash flows are dependent on the success of online games. Offering games solely for online play is a substantial departure from our traditional business of selling packaged software games. The EA.com business is not yet mature or profitable, therefore evaluating its business and prospects is more difficult than would be the case for a more mature business. For example, on December 17, 2002 we launched~~The Sims Online~~^TM. While we cannot yet accurately predict the ultimate success of this product, sales of this game have not met our expectations and may negatively impact our ability to generate positive cash flows at EA.com. Due to product sales shortfalls, ~~and other factors described in our Risk Factors,~~ we may not realize the future net cash flows necessary to recover our long-lived assets, which may result in an impairment charge being recorded in the future.

~~On April 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142,~~~~“Goodwill and Other Intangible Assets”~~. As a result of adopting this standard, we will continue to amortize finite-lived intangibles, but will no longer amortize certain other intangible assets, most notably goodwill and acquired workforce. In lieu of amortization, SFAS No. 142 requires a two-step approach to testing goodwill for impairment for each reporting unit. The first step, required to be completed by During the six-month periods ended September 30, 2003 or September 30, 2002 ~~tests for~~no impairment by applying fair value-based tests at the Company’s reporting unit level. The second step (if necessary), required to be completed by March 31, 2003, measures the amount of impairment by applying fair value-based tests to individual assets and liabilities within each reporting unit. We completed the first step of transitional goodwill impairment testing during the first quarter of fiscal 2003 and found no indicators of impairment of ourcharges were recorded goodwill. As a result, we have recognized no transitional impairment loss in fiscal 2003 in connection with the adoption of SFAS No. 142. We will complete the annual impairment test in the fourth quarter of fiscal 2003 with a measurement date of January 1 and any impairment that arises from that analysis will be accounted for in the fourth quarter of 2003. There can be no assurance that future impairment tests will not result in a charge to earnings and there is a potential for a write down of goodwill in connection with the annual impairment test. Following adoption of SFAS No. 142, we continue to evaluate whether any event has occurred which might indicate that the carrying value of an intangible asset is not recoverable.on long-lived assets.

Income taxes

In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. As part of the process of preparing our ~~consolidated financial statements,~~Condensed Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations ~~as well as~~and making judgments regarding the recoverability of deferred tax assets. ToA valuation allowance is established to the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each ~~jurisdiction, a valuation allowance is established.~~jurisdiction. Tax exposures can involve complex issues and may require an extended period to resolve. To determine the quarterly tax rate, we are required to estimate full-year income and the related income tax expense in each jurisdiction. The estimated effective tax rate is adjusted for the tax related to significant unusual items. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate.

RESULTS OF OPERATIONS

~~Revenues~~Revenue

We principally derive ~~revenues primarily~~revenue from ~~shipments~~sales of ~~entertainment~~packaged interactive software ~~which includes EA Studio products~~games designed for ~~dedicated entertainment systems (that we call “video game systems” or “consoles” such as PlayStation®, PlayStation® 2, Xbox~~^TM ~~and Nintendo GameCube~~^TM, and handheld systems such as Game Boy® Advance), EA Studio personal computer products (PC), Co-Publishing products that are co-published and distributed by us, and Affiliated Label (AL) products that are published by third parties and distributed by us.play on videogame platforms. We also derive ~~revenues~~additional revenue from ~~licensing of EA Studio products and AL products through hardware companies (or OEM),~~ selling subscriptions onto some of our online ~~game service,~~games, selling advertisements on our online web pages, ~~and~~ selling our packaged goods through our online ~~store.~~store, receiving programming fees for integrated online content and by allowing other companies to manufacture and sell our products in conjunction with other products.

Geographically, our net ~~revenues~~revenue for the three and ~~nine~~six months ended ~~December 31,~~September 30, 2003 and 2002 ~~and 2001 break down as follows~~is presented below (in thousands):

December 31, December 31,
2002 2001 Increase % change

Net Revenues for the Three Months Ended:

North America $ 695,630 $ 510,752 $ 184,878 36.2 %

Europe 470,742 279,601 191,141 68.4 %
Asia Pacific 38,208 21,801 16,407 75.3 %
Japan 29,146 20,724 8,422 40.6 %

International 538,096 322,126 215,970 67.0 %

Consolidated Net Revenues $ 1,233,726 $ 832,878 $ 400,848 48.1 %

December 31, December 31,
2002 2001 Increase % change

Net Revenues for the Nine Months Ended:

North America $ 1,182,768 $ 783,369 $ 399,399 51.0 %

Europe 713,926 392,615 321,311 81.8 %
Asia Pacific 67,200 39,859 27,341 68.6 %
Japan 55,220 39,141 16,079 41.1 %

International 836,346 471,615 364,731 77.3 %

Consolidated Net Revenues $ 2,019,114 $ 1,254,984 $ 764,130 60.9 %



Net Revenue for the Three	September 30,		September 30,		Increase/
Months Ended	2003		2002		(Decrease)			% change


North America	$	358,184	$	313,559	$	44,625			14	%


Europe		145,002		116,654		28,348			24	%
Asia Pacific		17,617		13,803		3,814			28	%
Japan		9,202		9,474		(272	)		(3	%)

International		171,821		139,931		31,890			23	%

Consolidated Net Revenue	$	530,005	$	453,490	$	76,515			17	%



Net Revenue for the Six	September 30,		September 30,		Increase/
Months Ended	2003		2002		(Decrease)			% change


North America	$	557,025	$	487,138	$	69,887			14	%


Europe		272,928		243,184		29,744			12	%
Asia Pacific		32,088		28,992		3,096			11	%
Japan		21,345		26,074		(4,729	)		(18	%)

International		326,361		298,250		28,111			9	%

Consolidated Net Revenue	$	883,386	$	785,388	$	97,998			12	%

28Net Revenue

Net ~~Revenues~~

~~Net Revenues~~revenue for the three months ended ~~December 31, 2002~~September 30, 2003 increased by 4817 percent as compared to the ~~three months ended December 31, 2001. The increase~~same period in the prior fiscal year. Foreign exchange rates (primarily the Euro and the Pound Sterling) strengthened reported net revenue by approximately $14.3 million or 3.0 percent in the current quarter. Strong sales of our PlayStation 2, Xbox and PC platform products were partially offset by a decline in net ~~revenues~~revenue from PlayStation products as we transition away from that platform. In addition, based on reported amounts, the net revenue increase was driven by the following:

• ~~Strong performance of~~~~The Lord of the Rings~~Tiger Woods PGA TOUR^® 2004andNHL^TM®~~, The Two Towers~~ 2004^TMtitles were released ~~during~~in the current quarter, ~~on the PlayStation 2~~while fiscal 2003’s,Tiger Woods PGA TOURand of~~Harry Potter and the Chamber~~NHLtitles were not released until our fiscal third quarter. This accounted for an aggregate increase of ~~Secrets~~^TM~~and~~~~James Bond 007: Nightfire~~^TM ~~released during the current quarter on multiple platforms and across multiple territories.~~
• ~~Higher installed base of game consoles, most notably the PlayStation 2.~~~~Net revenues from sales associated with the PlayStation 2 platform increased by 102 percent to $459,407,000 versus $227,554,000 in the same quarter of the prior fiscal year.~~
• ~~Higher installed base of the Xbox console~~, which is now available in every major market in which we operate. In the prior period, Xbox was only available in North America. In the quarter ended December 31, 2002, we generated $116,836,000 in net revenues from Xbox titles versus $44,629,000 a year ago.
• ~~Higher installed base of the Nintendo GameCube console~~, which is now available in every major market in which we operate. In the prior period, Nintendo GameCube was only available in North America and Japan. In the quarter ended December 31, 2002, we generated approximately $111,103,000 in net revenues from Nintendo GameCube titles versus approximately $30,026,000 a year ago.
• ~~Net revenues from Affiliated Label products~~~~increased by 30 percent to $157,469,000 versus $120,783,000 in the third quarter of the prior fiscal year. The increase was driven by sales of~~~~Kingdom Hearts~~~~in North America and~~~~Anno 1503~~~~in Europe.~~
• ~~Net revenues from PC products~~~~increased by 12 percent to $219,083,000 versus $194,856,000 in the same period of the prior fiscal year.~~
• ~~Net revenues from titles associated with the PlayStation~~~~declined year over year as customers migrated to newer consoles.~~$50.5 million.

~~Net Revenues for the nine months ended December 31, 2002~~~~increased by 61 percent as compared to the nine months ended December 31, 2001. The increase in net revenues was driven by the following:~~

• Strong ~~performance~~sales of other current-quarter sports-related titles including~~Medal of Honor: Frontline~~^TM,~~The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets,~~ Madden NFL 2004, EA SPORT^TM™ ~~2003~~Rugby 2004and~~Need~~NCAA^® Football 2004, as well as strong sales ofSoul Calibur IIandFreedom Fighters^®in Europe and Asia Pacific. These products accounted for ~~Speed~~^TM~~Hot Pursuit 2released in the current fiscal year on multiple platforms and across multiple territories.~~
• ~~Higher installed base~~an aggregate increase of ~~game consoles, most notably the PlayStation 2.~~~~Net revenues from sales associated with the PlayStation 2 platform increased by 104 percent to $752,717,000 versus $369,836,000 in the same period of the prior fiscal year.~~
• ~~Higher installed base of the Xbox console~~, which is now available in every major market in which we operate. In the same period of the prior fiscal year, Xbox was only available in North America after its launch in November 2001. We generated net revenues from Xbox titles for all three quarters of the current fiscal year versus only a portion of the third quarter in the prior fiscal year. In the nine months ended December 31, 2002, we generated $174,466,000 in net revenues from Xbox titles versus $44,629,000 in the same period of the prior fiscal year.$59.6 million.

2922

• ~~Higher installed based~~Partially offset by strong prior year sales of ~~the Nintendo GameCube console~~Kingdom Hearts, (from our Square EA joint venture, which ~~is now available~~was terminated in ~~every major market in which we operate. In the prior period, Nintendo GameCube was only available in North America~~ March 2003),Medal of Honorand ~~Japan. We generated net revenues from Nintendo GameCube titles~~The Simsfranchise products for ~~all three quarters~~an aggregate decrease of the current fiscal year versus only a portion of the prior fiscal year. In the nine months ended December 31, 2002, we generated $153,897,000 in net revenues from Nintendo GameCube titles versus $30,026,000 in net revenues in same period of the prior fiscal year.$42.7 million.

Net revenue for the six months ended September 30, 2003 increased by 12 percent as compared to the same period in the prior fiscal year. Foreign exchange rates (primarily the Euro and the Pound Sterling) strengthened reported net revenue by approximately $35.5 million or 4.5 percent in the current period. Based on reported amounts, the net revenue increase was driven by the following:

• Strong sales of our PlayStation 2, Xbox and PC products for an aggregate increase of $103.4 million. The increase was driven primarily byNBA STREET Vol. 2, Def Jam VENDETTA, Tiger Woods PGA TOUR 2004, Madden NFL 2004andThe Simsfranchise products. These increases were partially offset by strong net revenue in the six months ended September 30, 2002 for2002 FIFA World Cupand theMedal of Honorfranchise products.

• Net ~~revenues~~revenue from ~~Affiliated Label~~co-publishing and distribution productsincreased $20.8 million in the current period. This increase was due in large part to sales ofSoul Calibur II, Aliens Natural Selection, Devil May Cry 2,theBattlefield 1942^TM franchise products andFinal Fantasy Origins,partially offset by 62strong sales in the prior year ofKingdom Hearts(from our Square EA joint venture which was terminated in March 2003).

Partially offset by a 64 percent decrease in PlayStation net revenue from $37.4 million in the six months ended September 30, 2002 to $13.3 million in the same period of the current fiscal year. The decrease has been expected as we transition away from this platform.

North America

For the three months ended September 30, 2003, net revenue from sales in North America increased by 14 percent as compared to the three months ended September 30, 2002. Based upon reported amounts, the net revenue increase was driven by the following:

• Strong sales of our Playstation 2 and Xbox products for an aggregate increase of $81.5 million. The increase was primarily due to strong EA Sports title net revenue onMadden, Tiger Woods PGA TOUR, NHL,andNCAA Footballfranchise products.

• PC net revenue increase of 15 percent to ~~$300,757,000 versus $185,621,000~~$53.6 million from $46.5 million in the three months ended September 30, 2002. The increase was due to strong sales ofSimCity^TM andCommand & Conquer^TM franchise products, partially offset by lower net revenue onThe Simsfranchise products.

• Partially offset by a 55 percent decrease in net revenue from co-publishing and distribution products to $20.2 million from $44.7 million in the same period of the prior fiscal year. The ~~increase~~decrease was ~~driven by sales of~~~~Kingdom Hearts~~due in ~~North America and~~~~Battlefield 1942~~^TM ~~primarily in North America and Europe.~~
• ~~PC-based revenues~~~~increased 19 percent~~large part to ~~$377,835,000 versus $318,818,000 a year ago driven by~~ strong sales in the ~~current period~~three months ended September 30, 2002 of~~The Sims~~Kingdom Hearts^TM ~~products. Titles released~~(from our Square EA joint venture which was terminated in March 2003) andBuffy the Vampire Slayer,partially offset by the current fiscal year ~~include~~release of~~The Sims Unleashed Expansion Pack~~Aliens Natural Selection~~and~~~~The Sims Deluxe.~~~~Prior releases continued to generate strong sales including~~~~The Sims Vacation~~,~~The Sims~~~~and~~~~The Sims Hot Date.~~
• ~~Revenues from titles associated with the PlayStation~~~~declined year over year as customers migrated to newer consoles.~~.

~~North America~~

For the ~~three~~six months ended ~~December 31, 2002, revenues~~September 30, 2003, net revenue from sales in North America increased by 3614 percent as compared to ~~$695,630,000~~~~versus $510,752,000 in~~ the ~~same period of the prior fiscal year. Growth in North American~~six months ended September 30, 2002. The net revenue increase was driven ~~by:~~by the following:

• ~~Higher installed base of the PlayStation 2,~~~~due in part to Sony’s price cut of the hardware in North America in May 2002. This was reflected in strong~~Strong sales of ~~titles~~our Playstation 2 and Xbox products for ~~the PlayStation~~an aggregate increase of $93.2 million.NBA STREET vol. 2 ~~most notably~~~~The Lord of the Rings, The Two Towers~~,~~Harry Potter and the Chamber of Secrets~~and~~Need For Speed Hot Pursuit 2.~~Def Jam VENDETTAreleases plus additional strong sports title net revenue onMadden, Tiger Woods PGA TOUR, NHLandNCAA Footballfranchises were partially offset by a decrease in net revenue fromMedal of Honor Frontline.

• ~~Higher installed base~~PC net revenue increase of 11 percent to $90.5 million versus $81.3 million in the six months ended September 30, 2002. Strong sales ofSimCity^TM,Command & Conquer^TM,Medal of HonorandTiger Woods PGA TOUR franchise products were partially offset by lower net revenue onThe Simsfranchise products.

Partially offset by an expected decrease in net revenue from products for Playstation of 68 percent or $17.3 million as we transition away from this platform.

• Also partially offset by a 26 percent decrease in net revenue from co-publishing and distribution products to $44.4 million versus $59.7 million in the six months ended September 30, 2002. The decrease was due in large part to net revenue in the six months ended September 30, 2002 forKingdom HeartsandBuffy the

Vampire Slayer, partially offset by net revenue in the same period of the ~~Xbox~~current fiscal year ofBattlefield 1942franchise products and ~~Nintendo GameCube consoles,~~ ~~which both launched in North America in November 2001. We also shipped more titles on each~~the current fiscal year release of ~~these platforms~~Aliens Natural Selection.

International

Europe

For the three months ended September 30, 2003, net revenue from sales in Europe increased by 24 percent as compared to the three months ended September 30, 2002. Foreign exchange rates strengthened reported European net revenue by approximately $11.7 million or 10 percent. Based upon reported amounts, the net revenue increase was driven by the following:

• Co-publishing and distribution product sales increased by $20.4 million, or 48 percent, primarily due to net revenue fromSoul Calibur IIandFreedom Fighters,partially offset by decreases in the current ~~quarter versus~~fiscal year onResident EvilandBuffy the Vampire Slayer.

• Playstation 2, Xbox and PC product sales increased by $11.8 million, or 31 percent, primarily due to the additional titles available on the Xbox console and strong current fiscal year net revenue onEA SPORTS Rugby 2004,Command & Conquer: Generals,andTiger Woods PGA TOURfranchise products, as well asLord of the Rings: The Two Towers, partially offset by strong sales in the same period of the prior fiscal ~~year.~~
• ~~Net revenues from titles associated with PlayStation~~~~declined~~ year ~~over year as customers migrated to newer consoles.~~ofMedal of Honor Frontline.

~~For the nine months ended December 31, 2002, revenues in North America increased by 51 percent to $1,182,768,000~~~~versus $783,369,000 in the same period of the prior fiscal year. Growth in North American revenue was driven by:~~

• ~~Higher installed base of the~~This increase was also partially offset by a $4.6 million decrease for our PlayStation 2,~~due in part to Sony’s price cut of the hardware in North America in May 2002. This was reflected in strong sales of titles for the PlayStation 2, most notably~~~~Medal of Honor: Frontline~~,~~The Lord of the Rings, The Two Towers~~~~and~~~~Harry Potter and the Chamber of Secrets.~~
• ~~Higher installed base of the Xbox~~ and Nintendo GameCube ~~consoles,~~ ~~which both launched~~products primarily due to stronger sales in ~~North America in November 2001. Net revenues were generated on titles for these consoles for all~~the three ~~quarters of the current fiscal year versus only one quarter of the prior fiscal year.~~
• ~~Higher AL revenues primarily~~months ended September 30, 2002 from key ~~title~~titles, including~~Kingdom Hearts~~F1 Challenge, SSX Trickyand ourJames Bondfranchise products. The decrease in Playstation net revenue has been expected as we transition away from the ~~current period~~.
• ~~Net revenues from titles associated with PlayStation declined year over year as customers migrated to newer platform consoles.~~Playstation platform.

~~International~~

~~Europe~~

For the ~~three~~six months ended ~~December 31, 2002,~~September 30, 2003, net ~~revenues~~revenue from sales in Europe increased by 6812 percent as compared to ~~$470,742,000~~~~versus $279,601,000 a year ago. Net~~the six months ended September 30, 2002. Foreign exchange rates strengthened reported European net revenue ~~growth in Europe~~by approximately $30.8 million or 13 percent. Based upon reported amounts, the increase was driven ~~by:~~by the following:

• ~~Strong~~Co-publishing and distribution product sales ~~of titles for the PlayStation~~which increased by $32.8 million, or 48 percent, primarily due to net revenue fromSoul Calibur II,Freedom Fighters, Devil May Cry 2,~~, most notably~~~~The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~ Aliens Natural Selection and~~FIFA 2003~~Anno.
• ~~Higher installed base of the PlayStation 2 hardware,~~~~due in part to Sony’s hardware price cut in Europe in August, 2002.~~
• ~~New net revenues from titles associated with the Nintendo GameCube and Xbox platforms,~~~~which both launched in Europe~~franchise products, partially offset by decreases in the ~~Spring of 2002.~~current fiscal year onResident Evil, Onimusha WarlordsandBuffy the Vampire Slayer.

~~For the nine months ended December 31, 2002, net revenues in Europe increased by 82 percent to $713,926,000~~~~versus $392,615,000 a year ago. Net revenue growth in Europe was driven by:~~

• ~~Strong~~Xbox, PC and Game Boy Advance product sales, ofwhich increased by $12.9 million, or 17 percent, primarily due to additional titles ~~associated with~~available on the ~~PlayStation 2~~~~, most notably~~~~Medal of Honor: Frontline~~,~~The Lord of the Rings, The Two Towers~~~~and~~~~Harry Potter~~Xbox and ~~the Chamber of Secrets~~.
• ~~Higher installed base of the PlayStation 2 hardware,~~~~due in part to Sony’s hardware price cut in Europe in August, 2002.~~
• ~~New revenues from titles associated with the Nintendo GameCube and Xbox platforms~~,Game Boy Advance consoles as well as strong current fiscal year net revenue onThe SimsandCommand & Conquerfranchise ~~titles on the PC and higher AL net revenues.~~products.

~~Asia Pacific~~

~~For the three months ended December 31, 2002, net revenues in Asia Pacific increased by 75 percent to $38,208,000~~~~versus $21,801,000 a year ago. Growth in net revenues in Asia Pacific was driven by strong sales of PlayStation 2 and Xbox titles.~~

~~For the nine months ended December 31, 2002, net revenues in Asia Pacific increased by 69 percent to $67,200,000~~~~versus $39,859,000 a year ago. Growth in net revenues in Asia Pacific was driven by strong sales of PlayStation 2 titles, most notably~~~~The Lord of the Rings, The Two Towers~~~~and~~~~Medal of Honor: Frontline~~~~and Affiliated Label titles.~~

~~Japan~~

~~For the three months ended December 31, 2002, net revenues in Japan increased by 41 percent to $29,146,000~~~~versus $20,724,000 a year ago. Growth in net revenues in Japan was driven by strong sales of Affiliated Label and PlayStation 2 titles.~~

~~For the nine months ended December 31, 2002, net revenues in Japan increased by 41 percent to $55,220,000~~~~versus $39,141,000 a year ago. Growth in net revenues in Japan was driven by strong sales of titles associated with the PlayStation 2, most notably~~~~2002 FIFA World Cup~~~~and~~~~Project FIFA World Cup~~~~, and Affiliated Label titles.~~

~~Information about our worldwide net revenues by product line for the three and nine months ended December 31, 2002 and 2001 is presented below (in thousands):~~

December 31, December 31, Increase/
2002 2001 (Decrease) % change

Net Revenues for the Three Months Ended:

PlayStation 2 $ 459,407 $ 227,554 $ 231,853 101.9 %
PC 219,083 194,856 24,227 12.4 %
Xbox 116,836 44,629 72,207 161.8 %
Nintendo GameCube 111,103 30,026 81,077 270.0 %
PlayStation 53,066 122,940 (69,874 ) (56.8 %)
Game Boy Advance 68,102 30,543 37,559 123.0 %
Advertising 9,461 10,556 (1,095 ) (10.4 %)
Game Boy Color 22,610 24,176 (1,566 ) (6.5 %)
Online Subscriptions 9,193 7,002 2,191 31.3 %
License, OEM and Other 7,396 19,813 (12,417 ) (62.7 %)

1,076,257 712,095 364,162 51.1 %
Affiliated Label 157,469 120,783 36,686 30.4 %

Consolidated Net Revenues $ 1,233,726 $ 832,878 $ 400,848 48.1 %

December 31, December 31, Increase/
2002 2001 (Decrease) % change

Net Revenues for the Nine Months Ended:

PlayStation 2 $ 752,717 $ 369,836 $ 382,881 103.5 %
PC 377,835 318,818 59,017 18.5 %
Xbox 174,466 44,629 129,837 290.9 %
Nintendo GameCube 153,897 30,026 123,871 412.5 %
PlayStation 90,495 162,129 (71,634 ) (44.2 %)
Game Boy Advance 73,919 30,543 43,376 142.0 %
Advertising 28,579 25,317 3,262 12.9 %
Game Boy Color 25,131 28,455 (3,324 ) (11.7 %)
Online Subscriptions 24,969 22,146 2,823 12.7 %
License, OEM and Other 16,349 37,464 (21,115 ) (56.4 %)

1,718,357 1,069,363 648,994 60.7 %
Affiliated Label 300,757 185,621 115,136 62.0 %

Consolidated Net Revenues $ 2,019,114 $ 1,254,984 $ 764,130 60.9 %

PlayStation 2 Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 459,407 37.2 % $ 227,554 27.3 % 101.9 %
Nine Months Ended $ 752,717 37.3 % $ 369,836 29.5 % 103.5 %

~~Net revenues increased for the three months ended December 31, 2002 by 102 percent to $459,407,000~~~~versus $227,554,000 a year ago. The increase was primarily due to the following:~~

• ~~Strong consumer acceptance of the~~This increase was partially offset by an $8.2 million decrease for PlayStation 2 ~~game console~~and Nintendo GameCube products primarily due to stronger sales in ~~every major market in which we operate.~~
• ~~Higher installed base~~the six months ended September 30, 2002 from key titles, includingMedal of ~~the PlayStation 2 console~~~~due in part to Sony’s hardware price cut in North America in May,~~ Honor Frontlineand2002 ~~and in Europe in August, 2002.~~
• ~~Sales of~~FIFA World Cup.Strong current fiscal year net revenue onThe ~~Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~~~and~~~~Need For Speed Hot Pursuit 2~~~~in multiple territories.~~
• ~~Strength of other PlayStation 2 franchise titles~~~~with higher net revenues on current year releases versus prior year release versions including:~~~~FIFA 2003, James Bond 007:Nightfire~~Sims, Def Jam VENDETTAand~~Tiger Woods PGA Tour 2003~~EA SPORTS Rugby 2004partially offset these decreases.
• ~~In total, we released nine PlayStation 2 titles~~~~during the quarter versus six PlayStation 2 titles a year ago.~~

~~Net revenues increased for the nine months ended December 31, 2002~~

Playstation product sales decreased by ~~104 percent to $752,717,000~~~~versus $369,836,000 for the comparable period in 2001. The increase was~~$6.7 million primarily due to our transition away from this platform.

Asia Pacific

For the three months ended September 30, 2003, net revenue from sales in the Asia Pacific region, excluding Japan, increased by 28 percent to $17.6 million versus $13.8 million for the three months ended September 30, 2002. Foreign exchange rates strengthened reported Asia Pacific net revenue by approximately $2.4 million or 18 percent. Based upon reported amounts, the net revenue increase was driven by the following:

• ~~Strong consumer acceptance of the~~ PlayStation 2 ~~game console~~~~in every major market in~~product sales, which ~~we operate.~~
• ~~Higher installed base of the PlayStation 2 console~~increased $2.2 million primarily due ~~in part~~ to ~~Sony’s hardware price cut in North America in May, 2002 and in Europe in August, 2002.~~
• ~~Sales of~~stronger sales from key titles, including~~Medal of Honor: Frontline, The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~EA SPORTS Rugby 2004 and~~Need For Speed Hot Pursuit 2~~Tiger Woods PGA TOUR 2004.~~in multiple territories.~~
• ~~Strength of other PlayStation 2 franchise titles~~~~with higher net revenues on current year releases versus prior year releases including:~~~~James Bond 007:Nightfire~~,~~Madden NFL 2003~~,~~FIFA 2003~~~~and~~~~NCAA Football 2003~~.
• ~~In total, we released 17 PlayStation 2 titles~~~~during the current nine-month period versus 12 PlayStation 2 titles a year ago.~~

We expect net revenues from PlayStation 2 products to continue to grow in fiscal 2003, but as net revenues for these products increase, we expect our growth rates to decrease. We expect that premium titles will continue to hold their current price points, however we expect lower price points for non-premium titles.

Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America as of April 2000, as amended, we are authorized to develop and distribute DVD-based software products compatible with the PlayStation 2. Pursuant to this agreement, we engage Sony to supply PlayStation 2 CD’s and DVDs for distribution by us. Accordingly, we have limited ability to control our supply of PlayStation 2 CD and DVD products or the timing of their delivery.

Personal Computer Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 219,083 17.8 % $ 194,856 23.4 % 12.4 %
Nine Months Ended $ 377,835 18.7 % $ 318,818 25.4 % 18.5 %

~~Net revenues increased for the three months ended December 31, 2002 by 12 percent to $219,083,000~~~~versus $194,856,000 a year ago. The increase was primarily due to the following:~~

• ~~Sales of~~~~James Bond 007:Nightfire~~~~and~~~~Need For Speed Hot Pursuit 2~~ ~~in North America, Europe and Asia Pacific.~~
• ~~Partially offset by lower net revenues on the current year release of franchise title~~~~Harry Potter and the Chamber of Secrets~~~~versus the prior year release~~~~Harry Potter and the Sorceror’s Stone~~~~, particularly in Europe.~~
• ~~In total, we released nine PC titles~~~~during the quarter versus five PC titles a year ago.~~

~~Net revenues increased for the nine months ended December 31, 2002 by 19 percent to $377,835,000~~~~versus $318,818,000 for the comparable period in 2001. The increase was primarily due to the following:~~

• ~~Sales of~~~~The Sims Unleashed Expansion Pack~~~~and~~~~The Sims Deluxe~~~~in the current fiscal year. Prior years releases, including~~~~The Sims, The Sims Vacation Expansion Pack, The Sims Hot Date, The Sims: Livin’ Large~~ ~~and~~~~The Sims House Party,~~~~continued to generate strong sales in the current fiscal year.~~~~The Sims~~~~and~~~~The Sims Expansion Packs~~~~have now sold over 21 million units.~~
• ~~Catalogue sales from~~~~Medal of Honor Allied Assault~~~~, which was released in the prior year, and sales from current release title~~~~Medal of Honor Allied Assault~~^TM ~~Spearhead~~.
• ~~In total, we released 14 PC titles~~~~during the current nine-month period versus ten PC titles a year ago.~~

~~Due to the strong sales of~~~~The Sims~~~~products in fiscal 2002, we expect revenues from PC products to be up only slightly in fiscal 2003.~~

Xbox Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 116,836 9.5 % $ 44,629 5.4 % 161.8 %
Nine Months Ended $ 174,466 8.6 % $ 44,629 3.6 % 290.9 %

~~Net revenues increased for the three months ended December 31, 2002~~~~by 162 percent to $116,836,000 versus $44,629,000 a year ago. The increase was primarily due to the following:~~

• ~~Higher installed base of the Xbox console~~~~which is now available in every major market in which we operate. In the prior period, the Xbox console was only available in North America.~~
• ~~Sales of~~~~Medal of Honor: Frontline~~,~~James Bond 007:Nightfire~~~~and~~~~Harry Potter and the Chamber of Secrets~~~~in North America, Europe and Asia Pacific.~~
• ~~In total, we released eight Xbox titles~~~~during the quarter versus six Xbox titles a year ago.~~

~~Net revenues increased for the nine months ended December 31, 2002~~~~by 291 percent to $174,466,000 versus $44,629,000 for the comparable period in 2001. The increase was primarily due to the following:~~

• ~~Higher installed base of the Xbox console~~which is now available in every major market in which we operate. In the prior period, the Xbox console was only available in North America. Net revenues were generated on titles associated with the Xbox for all three quarters of the current fiscal year versus only one quarter of the prior fiscal year.
• ~~Sales of~~~~Medal of Honor: Frontline~~,~~James Bond 007: Nightfire~~~~and~~~~NCAA Football 2003~~~~in North America.~~
• ~~Sales of~~~~FIFA 2003, James Bond 007: Nightfire~~~~and~~~~Harry Potter and the Chamber of Secrets~~~~in Europe.~~
• ~~In total, we released 13 Xbox titles~~~~during the current nine-month period versus six Xbox titles a year ago.~~

We expect net revenues from Xbox products to continue to grow in fiscal 2003, but as net revenues for these products increase, we expect our growth rates to decrease. We expect that premium titles will continue to hold their current price points, however we expect lower price points for non-premium titles.

Nintendo GameCube Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 111,103 9.0 % $ 30,026 3.6 % 270.0 %
Nine Months Ended $ 153,897 7.6 % $ 30,026 2.4 % 412.5 %

~~Net revenues increased for the three months ended December 31, 2002~~~~by 270 percent to $111,103,000 versus $30,026,000 a year ago. The increase was primarily due to the following:~~

• ~~Higher installed base of the Nintendo GameCube console,~~~~which is now available in every major market in which we operate. In the prior period, the Nintendo Gamecube console was only available in North America and Japan.~~
• ~~Sales of~~~~Harry Potter and the Chamber of Secrets~~~~in all territories.~~
• ~~Sales of~~~~James Bond 007: Nightfire, Medal of Honor: Frontline~~~~and~~~~Need For Speed Hot Pursuit 2~~~~in North America, Europe and Asia Pacific.~~
• ~~In total, we released nine Nintendo GameCube titles~~~~during the quarter versus three Nintendo GameCube titles a year ago.~~

~~Net revenues increased for the nine months ended December 31, 2002~~~~by 413 percent to $153,897,000 versus $30,026,000 for the comparable period in 2001. The increase was primarily due to the following:~~

• ~~Higher installed base of the Nintendo GameCube platform~~, which is now available in every major market in which we operate. In the prior period, the Nintendo GameCube platform was only available in North America and Japan. Net revenues were generated on Nintendo GameCube titles for all three quarters of the current fiscal year versus only a portion of the prior fiscal year.
• ~~Sales of~~~~Harry Potter and the Chamber of Secrets~~~~in all territories.~~
• ~~Sales of~~~~James Bond 007: Nightfire, Medal of Honor: Frontline~~ ~~and~~~~Need for Speed Hot Pursuit 2~~~~in North America.~~

3524

• ~~Sales~~Co-publishing and distribution product sales, which increased by $1.6 million, or 39 percent. The increase was due primarily to net revenue fromSoul Calibur II,Knights of the Old Republic,~~FIFA 2003~~Aliens Natural Selectionand~~James Bond 007: Nightfire~~Freedom Fighters,partially offset by decreases in ~~Europe.~~the current fiscal year onBuffy the Vampire SlayerandBattlefield 1942.

For the six months ended September 30, 2003, net revenue from sales in the Asia Pacific region, excluding Japan, increased by 11 percent to $32.1 million versus $29.0 million for the six months ended September 30, 2002. Foreign exchange rates strengthened reported Asia Pacific net revenue by approximately $3.9 million or 14 percent. Based upon reported amounts, the net revenue increase was driven by the following:

• ~~In total, we released 15 Nintendo GameCube~~PlayStation 2 product sales, which increased $2.0 million primarily due to stronger sales from titles~~during~~ including EA SPORTSRugby 2004,The Simsfranchise products,Tiger Woods PGA TOUR 2004, NBA STREET Vol. 2, Madden NFL 2004, Def Jam VENDETTAandLord of the Rings: The Two Towers,partially offset by strong net revenue in the same period of the prior fiscal year forMedal of Honor Frontline.

• Co-publishing and distribution product sales, which increased by $1.1 million, or 13 percent, primarily due to net revenue fromSoul Calibur II.

Japan

For the three months ended September 30, 2003, net revenue from sales in Japan decreased by 3 percent to $9.2 million from $9.5 million. Foreign exchange rates strengthened reported net revenue in Japan by approximately $0.1 million or 1 percent. Based upon reported amounts, the net revenue decrease was driven by the following:

• Co-publishing and distribution product sales, which decreased by $1.4 million, or 26 percent, primarily due to strong prior year net revenue in the three months ended September 30, 2002 fromEver17,Tenkatouitsu 4andGundam Net Op,partially offset by the current ~~nine-month period versus three Nintendo GameCube titles a~~fiscal year ~~ago.~~release ofMemo Off Mix.

~~We expect~~
• Partially offset by PlayStation 2 and PC product sales, which increased $0.9 million primarily due to stronger sales from key products, includingF1 Career Challenge, SimCity 4andDef Jam VENDETTA.

For the six months ended September 30, 2003, net ~~revenues~~revenue from sales in Japan decreased by 18 percent to $21.3 million versus $26.1 million for the six months ended September 30, 2002. Foreign exchange rates strengthened reported net revenue in Japan by approximately $0.8 million or 3 percent. Based upon reported amounts, the net revenue decrease was driven by the following:

• PlayStation 2 product sales, which decreased $6.9 million, primarily due to reduced sales onFIFAfranchise products, partially offset byThe Sims, MVP BaseballandNBA STREET Vol. 2.

• Offset partially by co-publishing and distribution product sales, which increased by $2.2 million, or 31 percent, primarily due to net revenue fromMax PayneandMemo Off Mix.

Revenue by Product Line

Our worldwide net revenue by product line for the three and six months ended September 30, 2003 and 2002 is summarized below (in thousands):



Net Revenue for the Three	September 30,		September 30,		Increase/
Months Ended	2003		2002		(Decrease)			% change


PlayStation 2	$	221,180	$	158,712	$	62,468			39.4	%
PC		93,022		82,686		10,336			12.5	%
Xbox		68,691		37,527		31,164			83.0	%
Nintendo GameCube		24,553		27,838		(3,285	)		(11.8	%)
Subscription Services		11,124		8,321		2,803			33.7	%
Advertising, Programming, Licensing, and Other		7,552		14,161		(6,609	)		(46.7	%)
PlayStation		7,562		24,206		(16,644	)		(68.8	%)
Game Boy Advance		3,809		3,679		130			3.5	%

		437,493		357,130		80,363			22.5	%
Co-publishing and Distribution		92,512		96,360		(3,848	)		(4.0	%)

Total Net Revenue	$	530,005	$	453,490	$	76,515			16.9	%



Net Revenue for the Six	September 30,		September 30,		Increase/
Months Ended	2003		2002		(Decrease)			% change


PlayStation 2	$	339,549	$	293,310	$	46,239			15.8	%
PC		173,360		158,752		14,608			9.2	%
Xbox		100,212		57,630		42,582			73.9	%
Nintendo GameCube		45,707		42,794		2,913			6.8	%
Subscription Services		24,755		16,860		7,895			46.8	%
Advertising, Programming, Licensing, and Other		16,263		29,508		(13,245	)		(44.9	%)
PlayStation		13,313		37,429		(24,116	)		(64.4	%)
Game Boy Advance		6,168		5,817		351			6.0	%

		719,327		642,100		77,227			12.0	%
Co-publishing and Distribution		164,059		143,288		20,771			14.5	%

Total Net Revenue	$	883,386	$	785,388	$	97,998			12.5	%


*PlayStation 2 Net Revenue*(In thousands)

	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	221,180		41.7	%	$	158,712		35.0	%		39.4	%

Six months ended	$	339,549		38.4	%	$	293,310		37.3	%		15.8	%

For the three months ended September 30, 2003, net revenue from PlayStation 2 products increased by 39 percent to $221.2 million versus $158.7 million for the three months ended September 30, 2002. The increase was primarily due to strong sales ofMaddenandTiger Woods PGA TOURfranchise products in the current quarter.This increase was partially offset by lower net revenue from theMedal of Honorfranchise compared to the same period in the prior fiscal year.

For the six months ended September 30, 2003, net revenue from PlayStation 2 products increased by 16 percent to $339.5 million versus $293.3 million for the six months ended September 30, 2002. The increase was primarily due to current fiscal year sales of hit titlesDef Jam VENDETTA, The Sims, and franchise products includingNBA STREET, Madden, Tiger Woods PGA TOUR, andNHL. This increase was partially offset by lower net revenue fromMedal of Honor Frontlinecompared to the same period in the prior fiscal year.


*Personal Computer Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	93,022		17.6	%	$	82,686		18.2	%		12.5	%

Six months ended	$	173,360		19.6	%	$	158,752		20.2	%		9.2	%

For the three months ended September 30, 2003, net revenue from products for the PC increased by 13 percent to $93.0 million versus $82.7 million in the three months ended September 30, 2002. The increase was primarily due to strong sales of hit franchise products includingSimCityfranchise products, (particularlySimCity 4 DeluxeandSimCity 4 Rush Hour) andCommand & Conquer,Medal of HonorandNHLfranchise products. This was partially offset by a decrease in net revenue onThe Simsfranchise products. Ten titles were released in the current fiscal quarter versus three in the same period in the prior fiscal year.

For the six months ended September 30, 2003, net revenue from products for the PC increased by 9 percent to $173.4 million versus $158.8 million in the six months ended September 30, 2002. The increase was primarily due to stronger current year net revenue of products fromCommand & Conquer,SimCityandMedal of Honorfranchise products, partially offset by lower net revenue from prior fiscal year hit title2002 FIFA World Cup. Current fiscal year releases includedThe Sims Superstar,The Sims Double Deluxe,SimCity 4 Deluxe, andSimCity 4 Rush Hour. Other prior fiscal year releases continued to generate strong sales, particularlyThe Sims DeluxeandThe Sims Unleashed. Twelve titles were released in the six months ended September 30, 2003 versus five titles released in the same period of the prior fiscal year.


*Xbox Net Revenue*(In thousands)
	September 30,		% of			September 30,		% of
	2003		net revenue			2002		net revenue			% change

Three months ended	$	68,691		13.0	%	$	37,527		8.3	%		83.0	%

Six months ended	$	100,212		11.3	%	$	57,630		7.3	%		73.9	%

For the three months ended September 30, 2003, net revenue of Xbox products increased by 83 percent to $68.7 million versus $37.5 million in the three months ended September 30, 2002. The increase was primarily due to the higher installed base of Xbox consoles as well as the sales ofTiger Woods PGA TOUR,MaddenandNHLfranchise products. Other significant titles contributing to the increase wereMedal of Honor Frontline,FIFA 2003andNBA STREET Vol. 2. Five titles were released in the current fiscal quarter versus three in the same period in the prior fiscal year.

For the six months ended September 30, 2003, net revenue of Xbox products increased by 74 percent to $100.2 million versus $57.6 million in the six months ended September 30, 2002. The increase was primarily due toNBA STREET Vol. 2,The SimsandMedal of Honor Frontline, and strong sales ofTiger Woods PGA TOUR,MaddenandNHLfranchise products. This increase was partially offset by lower net revenue for prior fiscal year hit title2002 FIFA World Cup. Seven titles were released in the six months ended September 30, 2003 versus five in the same period in the prior fiscal year.


*Nintendo GameCube Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	24,553		4.6	%	$	27,838		6.1	%		(11.8	%)

Six months ended	$	45,707		5.2	%	$	42,794		5.4	%		6.8	%

For the three months ended September 30, 2003, net revenue from Nintendo GameCube products decreased by 12 percent to continue to grow in fiscal 2003, but as net revenues for these products increase, we expect our growth rates to decrease. We expect that premium titles will continue to hold their current price points, however we expect lower price points for non-premium titles.

Under the terms of a licensing agreement entered into with Nintendo of America (effective as of November 1, 2001), we are authorized to develop and distribute proprietary optical format disk products compatible with the Nintendo GameCube. Pursuant to this agreement, we engage Nintendo to supply Nintendo GameCube proprietary optical format disk products for distribution by us. Accordingly, we have limited ability to control our supply of Nintendo GameCube proprietary optical format disk products or the timing of their delivery.

PlayStation Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 53,066 4.3 % $ 122,940 14.8 % (56.8 %)
Nine Months Ended $ 90,495 4.5 % $ 162,129 12.9 % (44.2 %)

~~The decrease in PlayStation net revenues~~$24.6 million versus $27.8 million for the three ~~and nine~~ months ended September 30, 2002. The decrease was

primarily due to strong sales ofFreekstyleandNASCAR Thunder^TM 2003 in the prior year quarter, partially offset by current quarter sales ofTiger Woods PGA TOUR 2004.

For the six months ended September 30, 2003, net revenue from Nintendo GameCube products increased by 7 percent to $45.7 million versus $42.8 million for the six months ended September 30, 2002. The slight increase was attributable to significant new releases in the current year includingNBA STREET Vol. 2andDef Jam VENDETTA, partially offset by lower net revenue onJames Bond 007 in...Agent Under Fire. Seven titles were released in the six months ended September 30, 2003 versus six in the same period in the prior fiscal year.


*Subscription Services Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	11,124		2.1	%	$	8,321		1.8	%		33.7	%

Six months ended	$	24,755		2.8	%	$	16,860		2.1	%		46.8	%

For the three months ended September 30, 2003, net revenue from subscription fees for our online games increased 34 percent to $11.1 million compared to $8.3 million for the three months ended September 30, 2002 primarily due to subscription net revenue fromThe Sims OnlineandEarth & Beyond,partially offset by a decrease in subscription net revenue fromMotor City Online(which was discontinued during the three months ended September 30, 2003).

For the six months ended September 30, 2003, net revenue from subscription fees for our online games increased 47 percent to $24.8 million compared to $16.9 million for the six months ended September 30, 2002. This increase was primarily due toThe Sims Online, which was launched in December ~~31,~~ 2002, and higher subscription net revenue fromEarth & Beyond.


*Advertising, Programming, Licensing and Other Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	7,552		1.4	%	$	14,161		3.1	%		(46.7	%)

Six months ended	$	16,263		1.8	%	$	29,508		3.8	%		(44.9	%)

For the three months ended September 30, 2003, net revenue from advertising, programming, licensing and other decreased 47 percent to $7.6 million versus $14.2 million in the three months ended September 30, 2002. The decrease was primarily due to the discontinuance (as of April 1, 2003) of advertising revenue received from AOL, partially offset by AOL programming fees initiated during the quarter ended June 30, 2003. In addition, Game Boy Color net revenue decreased in the current quarter compared to the same ~~periods last~~period in the prior fiscal year primarily due to lower net revenue from ourHarry Potter franchise products.

For the six months ended September 30, 2003, net revenue from advertising, programming, licensing and other decreased 45 percent to $16.3 million versus $29.5 million for the six months ended September 30, 2002. The decrease was primarily due to the discontinuance (as of April 1, 2003) of advertising revenue received from AOL, partially offset by AOL programming fees initiated during the quarter ended June 30, 2003. In addition, Game Boy Color net revenue decreased in the six months ended September 30, 2003 versus the same period in the prior fiscal year primarily due to lower net revenue for ourHarry Potterfranchise products.


*PlayStation Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	7,562		1.4	%	$	24,206		5.3	%		(68.8	%)

Six months ended	$	13,313		1.5	%	$	37,429		4.8	%		(64.4	%)

For the three months ended September 30, 2003, net revenue from PlayStation products decreased 69 percent to $7.6 million versus $24.2 million for the three months ended September 30, 2002. As we expected, the decrease in net revenue from sales of PlayStation products for the three months ended September 30, 2003 was attributable to the market transition to ~~next~~newer generation console systems. Although our PlayStation products are playable on the PlayStation 2 console, we expect sales of current PlayStation products to continue to decline throughout the remainder of fiscal 2004.

For the six months ended September 30, 2003, net revenue from PlayStation products decreased 64 percent to $13.3 million versus $37.4 million for the six months ended September 30, 2002. As we expected, the decrease in net revenue was attributable to the market transition to newer generation console systems. Two new titles were released in the six months ended September 30, 2003 versus three titles in the same period in the prior fiscal ~~2003.~~year. Titles and franchises that generated lower net revenue in the six months ended September 30, 2003 include2002 FIFA World CupandMadden,Medal of HonorandNASCAR franchise products.


*Game Boy Advance Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	3,809		0.7	%	$	3,679		0.8	%		3.5	%

Six months ended	$	6,168		0.7	%	$	5,817		0.7	%		6.0	%

Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America in July 1994, as amended, we are authorized to develop and distribute CD-based software products compatible with the PlayStation. Pursuant to this agreement, we engage Sony to supply its PlayStation CDs for distribution by us. Accordingly, we have limited ability to control our supply of PlayStation CD products or the timing of their delivery.

Game Boy Advance Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 68,102 5.5 % $ 30,543 3.7 % 123.0 %
Nine Months Ended $ 73,919 3.7 % $ 30,543 2.4 % 142.0 %

~~Net revenues increased for~~For the three months ended ~~December 31, 2002~~~~by 123~~September 30, 2003, net revenue from Game Boy Advance increased 4 percent to ~~$68,102,000~~$3.8 million versus ~~$30,543,000~~$3.7 million in the three months ended September 30, 2002. Net revenue from Game Boy Advance products increased slightly due to strong sales of ourLord of the Ringsfranchise products, partially offset by lower net revenue from ourHarry Potterfranchise products. Twelve titles were available in the three months ended September 30, 2003 versus seven in the same period in the prior fiscal year.

For the six months ended September 30, 2003, net revenue from Game Boy Advance increased 6 percent to $6.2 million versus $5.8 million for the six months ended September 30, 2002. This slight increase in net revenue in the current fiscal year was primarily attributable to strong sales ofJames Bond 007: Nightfire, partially offset by lower net revenue on ourHarry Potterfranchise products.


*Co-publishing and Distribution Net Revenue*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	92,512		17.5	%	$	96,360		21.2	%		(4.0	%)

Six months ended	$	164,059		18.6	%	$	143,288		18.2	%		14.5	%

For the three months ended September 30, 2003, net revenue from co-publishing products and distribution products decreased 4 percent to $92.5 million compared to $96.4 million in the three months ended September 30, 2002. This decrease was primarily due to strong sales in the three months ended September 30, 2002, ofKingdom Hearts,Buffy the Vampire Slayer,Resident EvilandFinal Fantasy Xpartially offset by a net revenue increase in the same period of the current fiscal year ~~ago. The~~from current fiscal year releases,Soul Calibur IIandFreedom Fighters.

For the six months ended September 30, 2003, net revenue from co-publishing products and distribution products increased 15 percent to $164.1 million compared to $143.3 million in the six months ended September 30, 2002. This increase was primarily due to ~~the following:~~

• ~~Sales of~~~~The Lord of the Rings, The Two Towers~~~~in North America, Europe and Asia Pacific.~~
• ~~Higher net revenues on the current year release of franchise title~~~~Harry Potter and the Chamber of Secrets~~~~versus the prior year release~~~~Harry Potter and the Sorceror’s Stone~~~~in all territories.~~
• ~~In total, we released four Game Boy Advance~~~~titles during the quarter versus two Game Boy Advance titles a year ago.~~

~~Net revenues increased for the nine months ended December 31, 2002~~~~by 142 percent to $73,919,000 versus $30,543,000 a year ago. The increase was primarily due to the following:~~

• ~~Sales of~~~~The Lord of the Rings, The Two Towers~~~~in North America, Europe and Asia Pacific.~~
• ~~Higher net revenues on the current year release of franchise title~~~~Harry Potter and the Chamber of Secrets~~~~versus the prior year release~~~~Harry Potter and the Sorceror’s Stone~~~~in all territories.~~
• ~~In total, we released six Game Boy Advance titles~~~~during the current nine-month period versus two Game Boy Advance titles a year ago.~~

Game Boy Color Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 22,610 1.8 % $ 24,176 2.9 % (6.5 %)
Nine Months Ended $ 25,131 1.2 % $ 28,455 2.3 % (11.7 %)

Net revenues for Game Boy Color decreased six percent for the three months ended December 31, 2002 compared to the same period last year. Net revenues for Game Boy Color decreased 12 percent during the nine months ended December 31, 2002 compared to the same period last year primarily due to the release of the hit title last year,strong net revenue from~~Harry Potter and the Sorceror’s Stone,~~Soul Calibur II~~as well as~~,~~The World is Not Enough~~Freedom Fighters,Aliens Natural Selectionand~~Madden NFL 2002~~Devil May Cry 2, ~~versus only one new title released in the current period,~~~~Harry Potter and the Chamber of Secrets~~.

Advertising Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 9,461 0.8 % $ 10,556 1.3 % (10.4 %)
Nine Months Ended $ 28,579 1.4 % $ 25,317 2.0 % 12.9 %

Advertising revenues decreased for the three months ended December 31, 2002 compared to the same period last year primarily due to lower advertising revenues generated from AOL and co-branded AOL properties along with a decrease in anchor tenancy banners.

Advertising revenues increased for the nine months ended December 31, 2002 compared to the same period last year primarily due to higher advertising revenues generated from AOL and co-branded AOL properties. This increase was partially offset by lower ~~advertising revenues generated~~net revenue from EA.com and Pogo websites and a decrease in anchor tenancy banners. AOL is our exclusive advertising representative for advertising sold through AOL related links. We have been advised by AOL to expect significant declines in future advertising-related revenue. We expect advertising revenues to decline in future quarters.

License, OEM and Other Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 7,396 0.6 % $ 19,813 2.4 % (62.7 %)
Nine Months Ended $ 16,349 0.8 % $ 37,464 3.0 % (56.4 %)

The decrease in license, OEM and other net revenues for the three and nine months ended December 31, 2002 was primarily attributable to lower Nintendo 64 net revenues due to the platform transition to next-generation consoles. Nintendo 64 net revenues decreased 100 percent

~~for the three months ended December 31, 2002 and 97 percent for the nine months ended December 31, 2002. We do not intend to release any new Nintendo 64 products in fiscal 2003.~~

Online Subscription Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 9,193 0.7 % $ 7,002 0.8 % 31.3 %
Nine Months Ended $ 24,969 1.2 % $ 22,146 1.8 % 12.7 %

Net revenues for online subscriptions increased 31 percent for the three months ended December 31, 2002 and 13 percent for the nine months ended December 31, 2002 compared to the same periods last year primarily due to higher subscription revenues from~~Motor City Onlineand~~~~Earth & Beyond,~~~~as well as the launch of~~~~The Sims Online~~in December 2002. These increases were partially offset by our Platinum and Sports subscription offerings which we discontinued in November 2001. The increase for the nine months ended December 31, 2002 was also partially offset by a decrease in subscription revenues from~~Ultima Online. Securing and maintaining subscriptions to such products will be critical to the success of EA.com both in the current fiscal year and for the long term.~~

~~The success of~~~~The Sims Online~~~~is important to the financial success of EA.com. While~~~~The Sims Online~~~~only shipped in December 2002 and it is premature to judge its commercial success, early results have been below our expectations.~~

We have also indicated that EA.com will not reach profitability, as originally expected, in the quarter ending March 31, 2003, and long-term profitability of this business segment cannot be assured. We may determine that further cost reductions are necessary.

Affiliated Label Product Net Revenues
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 157,469 12.8 % $ 120,783 14.5 % 30.4 %
Nine Months Ended $ 300,757 14.9 % $ 185,621 14.8 % 62.0 %

~~AL net revenues increased 30 percent to $157,469,000 for the three months ended December 31, 2002 compared to $120,783,000 in the same period last year primarily due to strong sales of~~~~Kingdom Hearts~~~~, under a distribution arrangement with Square EA, and~~~~Anno 1503.~~~~The growth in the current quarter was also due to sales from co-publishing deals with Krome Studios and LEGO Interactive.~~

~~AL net revenues increased 62 percent to $300,757,000 for the nine months ended December 31, 2002 compared to $185,621,000 in the same period last year primarily due to strong sales of hit titles~~Kingdom Heartsand~~Battlefield 1942~~Final Fantasy X~~, under a co-publishing arrangement with Digital Illusions. The increase was also due to products released under co-publishing deals with Krome Studios and LEGO Interactive during the current year.~~.

~~Operations by Segment~~

~~We operate in two business segments:~~

EA.com represents Electronic Arts’ online and e-Commerce businesses. EA.com’s business includes subscription revenues collected for Internet game play on our websites, website advertising, sales of packaged goods for Internet-only based games and sales of Electronic Arts games sold through the EA.com web store. The Condensed Consolidated Statements of Operations includes all revenues and costs directly attributable to EA.com, including charges for shared facilities, functions and services. Certain costs and expenses are subjective and allocations are based on management’s estimates.

~~Our view and reporting of business segments may change due to changes in the underlying business facts and circumstances and the evolution of our reporting to our Chief Operating Decision Maker.~~

~~Information about our operations by segment for the three and nine months ended December 31, 2002 and 2001 is presented below (in thousands):~~

Three Months Ended December 31, 2002
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,211,484 $ 22,242 $ 1,233,726
Cost of goods sold 553,579 5,101 558,680
Gross profit 657,905 17,141 675,046
Operating expenses:
Marketing and sales (a) 124,744 14,748 139,492
General and administrative 40,502 1,748 42,250
Research and development (b) 84,351 28,207 112,558
Amortization of intangibles (c) 927 1,318 2,245
Restructuring and asset impairment charges 9,378 — 9,378
Total operating expenses 259,902 46,021 305,923
Operating income (loss) 398,003 (28,880 ) 369,123
Interest and other income (expense), net (4,359 ) (80 ) (4,439 )
Income (loss) before provision for income taxes and minority interest 393,644 (28,960 ) 364,684
Provision for income taxes 113,052 — 113,052
Income (loss) before minority interest 280,592 (28,960 ) 251,632
Minority interest in consolidated joint venture (1,413 ) — (1,413 )
Net income (loss) before retained interest in EA.com 279,179 (28,960 ) 250,219
Net loss related to retained interest in EA.com (25,485 ) 25,485 —
Net income (loss) $ 253,694 $ (3,475 ) $ 250,219

Three Months Ended December 31, 2001
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 810,930 $ 21,948 $ 832,878
Cost of goods sold 395,261 5,592 400,853
Gross profit 415,669 16,356 432,025
Operating expenses:
Marketing and sales (a) 84,192 9,683 93,875
General and administrative 29,116 2,717 31,833
Research and development (b) 66,030 31,376 97,406
Amortization of intangibles (c) 3,205 3,154 6,359
Restructuring and asset impairment charges — 14,051 14,051
Total operating expenses 182,543 60,981 243,524
Operating income (loss) 233,126 (44,625 ) 188,501
Interest and other income (expense), net 3,597 (82 ) 3,515
Income (loss) before provision for income taxes and minority interest 236,723 (44,707 ) 192,016
Provision for income taxes 59,525 — 59,525
Income (loss) before minority interest 177,198 (44,707 ) 132,491
Minority interest in consolidated joint venture (199 ) — (199 )
Net income (loss) before retained interest in EA.com 176,999 (44,707 ) 132,292
Net loss related to retained interest in EA.com (38,001 ) 38,001 —
Net income (loss) $ 138,998 $ (6,706 ) $ 132,292

Nine Months Ended December 31, 2002
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,958,297 $ 60,817 $ 2,019,114
Cost of goods sold 887,814 11,122 898,936
Gross profit 1,070,483 49,695 1,120,178
Operating expenses:
Marketing and sales (a) 228,473 31,907 260,380
General and administrative 89,448 5,918 95,366
Research and development (b) 221,716 79,951 301,667
Amortization of intangibles (c) 2,780 3,956 6,736
Restructuring and asset impairment charges 9,378 — 9,378
Total operating expenses 551,795 121,732 673,527
Operating income (loss) 518,688 (72,037 ) 446,651
Interest and other income (expense), net 67 (182 ) (115 )
Income (loss) before provision for income taxes and minority interest 518,755 (72,219 ) 446,536
Provision for income taxes 138,426 — 138,426
Income (loss) before minority interest 380,329 (72,219 ) 308,110
Minority interest in consolidated joint venture (253 ) — (253 )
Net income (loss) before retained interest in EA.com 380,076 (72,219 ) 307,857
Net loss related to retained interest in EA.com (62,581 ) 62,581 —
Net income (loss) $ 317,495 $ (9,638 ) $ 307,857

Nine Months Ended December 31, 2001
EA Core
(excl. EA.com) EA.com Electronic Arts
Net revenues $ 1,201,407 $ 53,577 $ 1,254,984
Cost of goods sold 595,468 12,174 607,642
Gross profit 605,939 41,403 647,342
Operating expenses:
Marketing and sales (a) 150,002 29,697 179,699
General and administrative 72,535 7,916 80,451
Research and development (b) 185,138 100,628 285,766
Amortization of intangibles (c) 9,615 9,694 19,309
Restructuring and asset impairment charges — 14,051 14,051
Total operating expenses 417,290 161,986 579,276
Operating income (loss) 188,649 (120,583 ) 68,066
Interest and other income (expense), net 10,865 (573 ) 10,292
Income (loss) before provision for income taxes and minority interest 199,514 (121,156 ) 78,358
Provision for income taxes 24,291 — 24,291
Income (loss) before minority interest 175,223 (121,156 ) 54,067
Minority interest in consolidated joint venture 147 — 147
Net income (loss) before retained interest in EA.com 175,370 (121,156 ) 54,214
Net loss related to retained interest in EA.com (102,983 ) 102,983 —
Net income (loss) $ 72,387 $ (18,173 ) $ 54,214

~~(a)~~ EA.com Marketing and Sales includes $4,467,000 and $4,466,000 of Carriage Fee for the three months ended December 31, 2002 and 2001, respectively. EA.com Marketing and Sales includes $13,399,000 and $13,398,000 of Carriage Fee for the nine months ended December 31, 2002 and 2001, respectively.
~~(b)~~ EA.com Research and Development includes $12,422,000 of Network Development and Support and $2,708,000 of Customer Relationship Management (CRM) for the three months ended December 31, 2002; and includes $14,858,000 of Network Development and Support and $2,583,000 of CRM for the three months ended December 31, 2001. EA.com Research and Development includes $36,533,000 of Network Development and Support and $7,052,000 of CRM for the nine months ended December 31, 2002; and includes $46,903,000 of Network Development and Support and $8,493,000 of CRM for the nine months ended December 31, 2001.
~~(c)~~ Results for fiscal 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. Amortization of intangibles for the three months ended December 31, 2001 includes goodwill amortization of $1,485,000 for EA Core and $1,406,000 for EA.com. Amortization of intangibles for the nine months ended December 31, 2001 includes goodwill amortization of $4,456,000 for EA Core and $4,296,000 for EA.com.

Costs and Expenses, Interest and Other Income, Net, and Income Taxes ~~and Net Income (Loss) for both EA Core and EA.com Segments~~

Cost of Goods Sold.Cost of goods sold for our ~~packaged goods business~~disk-based and cartridge-based products consists of actual product costs, royalties expense for celebrities, professional sports and other organizations and independent software

developers, manufacturing royalties, net of volume discounts, expense for defective products, write-off of post-launch prepaid royalty costs, and operations expense. Cost of goods sold for our online product subscription business consists primarily of data center and bandwidth costs associated with hosting our websites, credit card fees and royalties for use of ~~EA and~~ third party properties. Cost of goods sold for our website advertising business consists primarily of ad serving costs.

Marketing and Sales.Marketing and sales expenses consist of personnel-related costs, advertising, ~~and~~ marketing and promotional ~~expenses.~~expenses, net of co-op advertising expense reimbursements. In addition, marketing and sales ~~includes~~expense in fiscal year 2003 included the amortization of the “carriage” fees payable for the distribution of our online games on AOL, ~~carriage fee (“Carriage Fee”),~~ which ~~began with the launch of EA.com in October 2000. The Carriage Fee is being amortized straight-line over the five-year term of the AOL agreement entered into in November 1999.~~we are no longer required to pay.

General and Administrative.General and administrative expenses consist of personnel and related expenses of executive and administrative staff, fees for professional services such as legal and accounting, and allowances for bad debts.

Research and Development.Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, consulting, equipment depreciation, customer relationship management expenses associated with ~~Electronic Arts’~~our products and ~~online games and write-offs~~any impairments of prepaid ~~royalties. EA.com has research~~royalties for pre-launch products. Research and development expenses for our online business include expenses incurred by ~~Electronic Arts’~~our studios consisting of direct development costs and related overhead costs in connection with the development and production of ~~EA.com~~our online games. ~~Research and development expenses also include network development and support costs directly incurred by EA.com.~~ Network development and support costs consist of expenses associated with development of website content, depreciation on server equipment to support online games, network infrastructure direct expenses, software licenses and maintenance, and network and management overhead.

Cost of Goods Sold
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 558,680 45.3 % $ 400,853 48.1 % 39.4 %
Nine Months Ended $ 898,936 44.5 % $ 607,642 48.4 % 47.9 %


*Cost of Goods Sold*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	213,762		40.3	%	$	200,867		44.3	%		6.4	%

Six months ended	$	363,725		41.2	%	$	343,321		43.7	%		5.9	%

~~Cost~~For the three months ended September 30, 2003, cost of goods sold as a percentage of ~~revenues~~net revenue decreased by 4.0 percentage points to 40.3 percent from 44.3 percent for the three months ended ~~December 31,~~September 30, 2002 ~~as compared to the same periods last year~~ primarily due to:

Favorable product mix contributing 1.7 percentage points to total gross margin due to an increase in the percentage of net revenue being derived from our higher-gross-margin product lines, such as products for the PlayStation 2 and PC, and a decrease in the percentage of net revenue derived from lower-gross-margin product lines such as those for the PlayStation and co-publishing and distribution products. The increase was partially offset by a decrease in the percentage of net revenue from advertising, programming, licensing and other product lines that generally have higher gross margins.

• ~~Product mix,~~Higher overall gross margins by platform and on co-publishing and distribution products, contributing 1.8 percentage points to total gross margin. The increase was due to athe higher ~~mix~~volume of ~~next-generation console titles~~sales of co-publishing products, such as ~~well as a higher mix of co-published titles~~ Soul Caliber II, Aliens Natural Selection, andFreedom Fightersin ~~our AL business.~~
• ~~Higher PC margins~~~~due to:~~

• ~~Higher weighted average sales prices on new release titles.~~ ~~Expansion packs,~~the three months ended September 30, 2003, which have a ~~lower average sales price, represented two~~higher gross margin than distribution products, such asKingdom Hearts, which contributed a higher proportion of this category’s net revenue in the same period of the ~~five titles released in the~~ prior ~~year, while there was only one expansion pack released out of the nine new titles in the current quarter.~~
• ~~Lower developer royalty rates on~~~~Harry Potter and the Chamber of Secrets~~~~, the biggest-selling title in the quarter, compared to~~~~Harry Potter and the Sorceror’s Stone~~~~, the biggest-selling PC title in the previous~~fiscal year.

• Higher ALPC gross margins contributing 0.7 percentage points to total gross margin. The increase was due to ~~more~~lower overall direct and indirect costs of goods sold primarily onThe Simsfranchise products and new products for the PC released ~~under co-publishing deals~~ in the current ~~year, such as~~Tyquarter compared to the ~~Tasmanian Tiger~~~~and~~~~Battlefield 1942~~.same period of the prior fiscal year.

• ~~Lower royalty rates~~~~because of volume discounts received from console manufacturers.~~
• ~~Partially offset by lower margins on~~Higher Nintendo GameCube ~~products~~gross margins contributing 0.4 percentage points to total gross margin due ~~to:~~to pricing discounts from Nintendo on current year sales and higher royalties in the prior year due toF1 2002.

• ~~Higher reserves for inventory obsolescence.~~
• ~~Higher royalty expense on new titles~~~~such as~~~~Harry Potter and the Chamber of Secrets~~ ~~and~~~~James Bond 007: Nightfire~~.

Partially offset by lower Xbox gross margins, which reduced total gross margin by 0.4 percentage points. This decrease was due to a higher percentage of net revenue from older titles at lower price points and lower margins compared to a higher percentage of net revenue from new titles in the same period of the prior fiscal year.

~~Cost~~30

For the six months ended September 30, 2003, cost of goods sold as a percentage of ~~revenues~~net revenue decreased ~~for the nine months ended December 31, 2002 as compared~~by 2.5 percentage points to ~~the same period last year primarily due to:~~

~~Higher PC margins~~~~due to:~~

• ~~Higher sales of wholly owned intellectual properties~~~~such as~~~~The Sims~~~~and~~~~Medal of Honor~~~~franchise of titles, compared to~~~~Black and White~~~~and~~~~NHL 2002~~~~in the prior year.~~
• ~~Lower developer royalty rates on~~~~Harry Potter and the Chamber of Secrets~~~~, the biggest-selling PC title in the year, compared to~~~~Harry Potter and the Sorceror’s Stone~~~~, the biggest-selling PC title in the previous year.~~
• ~~Higher average sales prices on new release titles.~~ Expansion packs, which have a lower average sales price, represented three of the ten titles released in the prior year, while there was only two expansion packs released out of the 14 new titles in the current period.

~~Higher PlayStation 2 margins~~~~due to:~~

• ~~Lower royalties on PlayStation 2, primarily due to sales of~~~~Medal of Honor: Frontline~~~~, a wholly owned intellectual property, developed internally, on which we pay no royalties (other than console royalties).~~
• ~~Volume discounts~~~~received from console manufacturers.~~

• ~~Higher AL margins~~~~due to higher volume of products released under co-publishing deals in the current year, such as~~~~Battlefield 1942~~~~and~~~~Buffy the Vampire Slayer.~~
• ~~Product mix,~~~~due to a higher mix of next-generation console titles offset by a higher mix of AL titles.~~
• ~~Partially offset by lower margins on Nintendo GameCube products~~~~due to:~~

• ~~Higher reserves for inventory obsolescence~~.
• ~~Higher royalty expense on new titles~~~~such as~~~~Harry Potter and the Chamber of Secrets~~~~and~~~~James Bond 007: Nightfire~~.

Marketing and Sales
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 139,492 11.2 % $ 93,875 11.3 % 48.6 %
Nine Months Ended $ 260,380 13.0 % $ 179,699 14.3 % 44.9 %

~~Marketing and sales expenses for the three months ended December 31, 2002 increased in absolute dollars by 49~~41.2 percent ~~primarily attributable to:~~

• ~~The release of 44 products this year versus 29 products last year.~~~~A large portion of our marketing and sales expense in the current year related to advertising spending to support key releases on multiple platforms and across multiple territories including~~~~Lord of the Rings, The Two Towers~~,~~Harry Potter and the Chamber of Secrets~~,~~NBA Live 2003~~,~~Need For Speed: Hot Pursuit 2~~~~as well as catalogue sales of~~~~Madden NFL 2003~~.
• ~~Increase in headcount-related expenses~~~~to support the growth of the marketing and sales functions in North America and Europe.~~

• ~~Higher consumer promotions and advertising media placement costs~~ ~~incurred by EA.com to promote~~~~The Sims Online~~.

~~As a percentage of revenue, marketing and sales expenses were relatively consistent at 11.3 percent of revenue in the year ago quarter versus 11.2 percent of revenue in the current period.~~

~~Marketing and sales expenses increased in absolute dollars by 45~~from 43.7 percent for the ~~nine~~six months ended ~~December 31, 2002 primarily attributed to:~~

• ~~The release of 74 products this year versus 45 products last year~~~~. A large portion of our marketing and sales expense in the current year related to advertising spending to support key releases on multiple platforms and across multiple territories including~~~~Madden NFL 2003~~,~~NBA Live 2003~~,~~Medal of Honor: Frontline~~,~~Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~~~and~~~~Need for Speed: Hot Pursuit 2.~~
• ~~Increase in headcount-related spending~~~~to support the growth of the marketing and sales functions in North America and Europe.~~
• ~~Higher public relations and consumer promotion spending~~~~to support key titles in the current year.~~

As a percentage of revenue, marketing and sales expenses declined from 14.3 percent of revenue in the prior nine-month period ended December 31, 2001 to 13.0 percent of revenue in the current nine-month period ended December 31, 2002.

General and Administrative
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 42,250 3.5 % $ 31,833 3.8 % 32.7 %
Nine Months Ended $ 95,366 4.7 % $ 80,451 6.4 % 18.5 %

~~General and administrative expenses for the three months ended December 31, 2002 increased in absolute dollars by 33 percent primarily due to:~~

• ~~An increase in payroll and occupancy costs~~~~to support the increased growth of these functions in North America and Europe.~~
• ~~Partially offset by lower EA.com spending due to the headcount reductions and office closures~~~~for EA.com in October 2001 as part of the restructuring of that segment (see Restructuring and Asset Impairment Charges discussion below).~~

~~As a percentage of revenue, general and administrative expenses declined from 3.8 percent of revenue in the year ago quarter to 3.5 percent of revenue in the current period.~~

~~General and administrative expenses increased in absolute dollars by 19 percent for the nine months ended December 31,~~September 30, 2002 primarily due to:

• AnHigher overall gross margins by platform and for co-publishing and distribution products contributing 1.4 percentage points to total gross margin. The increase ~~in payroll and occupancy costs~~~~to support the increased growth of these functions in North America and Europe.~~
• ~~Partially offset by lower EA.com spending~~was due to the ~~headcount reductions~~higher volume of sales of co-publishing products, such asSoul Caliber II, Aliens Natural Selection, and ~~office closuresfor EA.com~~ Freedom Fightersin ~~October 2001~~the six months ended September 30, 2003, which have a higher gross margin than distribution products, such as ~~part~~Kingdom Hearts, which contributed a higher proportion of this category’s net revenue in the same period of the ~~restructuring of that segment (see Restructuring and Asset Impairment Charges discussion below).~~prior fiscal year.

As a percentage of revenue, general and administrative expenses declined from 6.4 percent of revenue in the prior nine-month period ended December 31, 2001 to 4.7 percent of revenue in the current nine-month period ended December 31, 2002.

Research and Development
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 112,558 9.1 % $ 97,406 11.7 % 15.6 %
Nine Months Ended $ 301,667 14.9 % $ 285,766 22.8 % 5.6 %

~~Research and development expenses increased for the three months ended December 31, 2002 in absolute dollars by 16 percent primarily due to:~~

• Higher ~~EA Core expenses, which increased by 28 percent in absolute dollars,~~gross margins for Nintendo GameCube products contributing a 0.6 percentage point increase to the total gross margin. The increase was due to ~~additional headcount-related~~pricing discounts received from Nintendo on current year sales. In addition, we also had lower royalty expenses~~attributable~~ in the current period. The decrease in royalties was due to ~~increased in-house development capacity, net~~higher sales in the current year of ~~co-development arrangements.~~lower royalty bearing titles such asThe Simscompared with higher sales of higher royalty bearing titles such as2002 FIFA World CupandF1 2002in the same period in the prior fiscal year.In addition, high returns onHarry Potter and the Chamber of Secrets resulted in lower effective royalty rates in the current period.

• ~~Partially offset by~~Higher gross margins for PC products contributing a 0.5 percentage point increase to total gross margin. The increase in PC product margins was due primarily to lower ~~EA.com spending, which decreased by 10 percent~~direct costs of goods sold and indirect cost of goods sold on new products released in ~~absolute dollars, due to:~~

• ~~Headcount reductions and office closures~~~~for EA.com~~current quarter. In addition, royalties on current year releases were lower than on products released in ~~October 2001 as part~~the same period of the ~~restructuring of that segment (see Restructuring and Asset Impairment Charges discussion below).~~
• ~~Prior~~prior fiscal year ~~development spending~~onsuch as,~~Majestic~~2002 FIFA World Cupand~~Motor City Online~~F1 2002..
• ~~Partially offset by higher development spending~~on~~The Sims Onlineand~~~~Earth & Beyond~~~~in the current year.~~


*Marketing and Sales*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	64,041		12.1	%	$	55,514		12.2	%		15.4	%

Six months ended	$	123,125		13.9	%	$	120,888		15.4	%		1.9	%

~~As a percentage of revenue, research~~For the three months ended September 30, 2003, marketing and ~~development expenses declined from 11.7 percent of revenue in the year ago quarter to 9.1 percent of revenue in the current period.~~

~~Research and development~~sales expenses increased ~~in absolute dollars~~ by 615.4 percent ~~for~~as compared to the ~~nine~~three months ended ~~December 31,~~September 30, 2002 primarily due to:

• ~~Higher EA Core expenses~~~~, which increased by 20 percent in absolute dollars, due to additional headcount-related expenses attributable to increased in-house development capacity, net~~The release of ~~co-development arrangements.~~
• ~~Partially offset by lower EA.com spending~~~~, which decreased by 21 percent in absolute dollars, due to:~~

• ~~Headcount reductions and office closures~~~~for EA.com in October 2001 as part of the restructuring of that segment (see Restructuring and Asset Impairment Charges discussion below).~~
• ~~Prior year development spending~~on~~Majesticand~~~~Motor City Online~~.
• ~~Partially offset by higher development spending~~on~~The Sims Onlineand~~~~Earth & Beyond~~11 titles in the current fiscal quarter versus eight titles in the same period of the prior fiscal year. The primary increase related to higher advertising spending of $6.5 million to support product releases includingTiger Woods PGA TOUR 2004,NASCAR Thunder 2004andNCAA Football 2004on multiple platforms.

Increase in headcount and related expenses by 18 percent and increases in promotional expenses to support the growth of our marketing and sales functions worldwide.

Partially offset by the discontinuance of carriage fee payments to AOL, which resulted in a ~~percentage~~decrease of revenue, research and development expenses declined from 22.8 percent of revenue in the prior nine-month period ended December 31, 2001 to 14.9 percent of revenue in the current nine-month period ended December 31, 2002.
Amortization of Intangibles
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 2,245 0.2 % $ 6,359 0.8 % (64.7 %)
Nine Months Ended $ 6,736 0.3 % $ 19,309 1.6 % (65.1 %)
$4.5 million.

For the ~~three and nine~~six months ended ~~December 31,~~September 30, 2003, marketing and sales expenses increased by 1.9 percent as compared to the six months ended September 30, 2002 ~~amortization~~primarily due to:

Increase in headcount and related expenses by 20 percent and promotional expenses to support the growth of ~~intangibles relates~~our marketing and sales functions worldwide.

Partially offset by the discontinuance of carriage fee payments to ~~amortization~~AOL, which resulted in a decrease of ~~definite-lived identifiable intangible assets from acquisitions of Westwood, Pogo, Kesmai and DreamWorks.~~$8.9 million.


*General and Administrative*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	36,032		6.8	%	$	27,453		6.1	%		31.2	%

Six months ended	$	66,792		7.6	%	$	53,116		6.8	%		25.7	%

4531

For the three ~~and nine~~ months ended ~~December 31, 2001, amortization~~September 30, 2003, general and administrative expenses increased by 31.2 percent as compared to the three months ended September 30, 2002 due to:

Increase in headcount related expenses, depreciation, professional services, information technology and facilities expenses for an aggregate increase of $12.9 million.

Partially offset by a $4.3 million decrease in bad debt expense.

For the six months ended September 30, 2003, general and administrative expenses increased by 25.7 percent as compared to the six months ended September 30, 2002 due to:

Increase in headcount related expenses, professional services, depreciation and information technology, and facilities related expenses of $20.4 million.

Partially offset by a decrease in bad debt expense of $6.7 million.


*Research and Development*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	113,493		21.4	%	$	96,164		21.2	%		18.0	%

Six months ended	$	204,615		23.2	%	$	186,044		23.7	%		10.0	%

For the three months ended September 30, 2003, research and development expenses increased by 18.0 percent as compared to the three months ended September 30, 2002 due to:

Increase in headcount and related expenses by 29 percent and outside services to support the growth of the research and development function.

Partially offset by a decrease in pre-launch write-offs of prepaid royalties and a decrease in depreciation expense due to $66.3 million of asset impairments recorded in the third and fourth quarters of fiscal 2003.

For the six months ended September 30, 2003, research and development expenses increased by 10.0 percent as compared to the six months ended September 30, 2002 due to:

Increase in headcount and related expenses by 26 percent and outside services to support the growth of the research and development function.

Partially offset by a decrease in the pre-launch write-offs of prepaid royalties and a decrease in depreciation expense due to $66.3 million of asset impairments recorded in the third and fourth quarters of fiscal 2003.

The increase in research and development spending is expected to continue in fiscal 2004 due to an increase in development spending for current generation console products including the PlayStation 2, Xbox and Nintendo GameCube, as well as extending our investment in the PC and future platforms.


*Amortization of Intangibles*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	810		0.2	%	$	2,246		0.5	%		(63.9	%)

Six months ended	$	1,490		0.2	%	$	4,491		0.6	%		(66.8	%)

Amortization of intangibles ~~relates primarily~~decreased $1.4 million and $3.0 million for the three and six months ended September 30, 2003 compared to ~~amortization of purchased goodwill and intangibles from acquisitions of Westwood, Pogo, Kesmai, DreamWorks, ABC Software and other acquisitions.~~

the same periods in the prior year. The decrease in amortization for ~~the three months ended December 31, 2002~~both periods was due primarily to the impairment of certain ~~identifiable~~finite-lived intangible assets ~~related to Westwood and DreamWorks being fully amortized~~recognized in the prior fiscal 2002, as well as the result of adopting SFAS No. 142 which required, among other things, the discontinuance of goodwill amortization. As of April 1, 2002, we have ceased to amortize approximately $69,050,000 of goodwill. year.


*Interest and Other Income, Net*(In thousands)
	September 30,		% of net			September 30,		% of net
	2003		revenue			2002		revenue			% change

Three months ended	$	9,130		1.7	%	$	1,177		0.3	%		675.7	%

Six months ended	$	13,979		1.6	%	$	4,324		0.6	%		223.3	%

For the three months ended ~~December 31, 2001, amortization of goodwill totaled $2,891,000. As a percentage of revenue, amortization of intangibles expense declined~~September 30, 2003, interest and other income, net, increased from ~~0.8 percent of revenue in the year ago quarter to 0.2 percent of revenue in the current period.~~

The decrease in amortization for the nine months ended December 31, 2002 was due to certain identifiable intangible assets related to Westwood and DreamWorks being fully amortized in fiscal 2002, as well as the result of adopting SFAS No. 142. For the nine months ended December 31, 2001, amortization of goodwill totaled $8,752,000. As a percentage of revenue, amortization of intangibles expense declined from 1.6 percent of revenue in the prior nine-month period ended December 31, 2001 to 0.3 percent of revenue in the current nine-month period ended December 31, 2002.

~~In addition, during~~ the three months ended ~~December 31, 2001, we recorded intangible impairment charges of $1,641,000 relating to EA.com’s restructuring.~~

Restructuring and Asset Impairment Charges
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 9,378 0.8 % $ 14,051 1.7 % (33.3 %)
Nine Months Ended $ 9,378 0.5 % $ 14,051 1.1 % (33.3 %)
September 30, 2002 primarily due to:

~~During the quarter ended December 31, 2002, the Company closed its office located in San Francisco, California and its studio located in Seattle, Washington. The office and studio closures were~~

Foreign currency gains as a result of the Company’s strategic decision to consolidate local development efforts in Redwood City, California and Vancouver, Canada. The Company recorded total pre-tax charges of $9,378,000, consisting of $7,310,000 for consolidation of facilities, $1,452,000favorable rates primarily for the ~~write-off of non-current assets~~Euro and ~~$616,000 for workforce reductions. The facilities charge was net of a reduction in deferred rent of $533,000. At December 31, 2002, there was $8,074,000 remaining~~British Pound at the end of the ~~accrued restructuring balance. We expect this remaining balance~~current year quarter compared to ~~be fully utilized by December 31, 2006. (See Note 11 of the Notes to Condensed Consolidated Financial Statements).~~

~~The exit plans resulted~~losses on foreign exchange hedge contracts in a workforce reduction of approximately 33 personnel in development and administrative departments. The estimated costs for consolidation of facilities included contractual rental commitments under the real estate lease for unutilized office space, offset by estimated future sub-lease income. In addition, the exit plans resulted in the write-off of certain non-current fixed assets, primarily leasehold improvements.

In October 2001, we announced a restructuring plan for EA.com to reduce EA.com’s workforce and consolidate facilities. The restructuring initiatives involved strategic decisions to discontinue certain product offerings and focus only on key online priorities that align with its fiscal 2003

operational objectives. The restructuring and asset impairment charge of $14,051,000 incurred in the third quarter of fiscal 2002 is comprised of charges of approximately $3,763,000 for workforce reduction, $3,785,000 for consolidation of facilities and other administrative charges and $6,503,000 for the write-off of non-current assets. The workforce reduction resulted in the termination of approximately 240 positions in the third quarter of fiscal 2002. At December 31, 2002, there was $905,000 remaining of the EA.com accrued restructuring balance. We expect this remaining balance to be fully utilized by December 31, 2006. (See Note 11 of the Notes to Condensed Consolidated Financial Statements).

Interest and Other Income (Expense), Net
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ (4,439 ) (0.3 %) $ 3,515 0.5 % (226.3 %)
Nine Months Ended $ (115 ) (0.0 %) $ 10,292 0.8 % (101.1 %)

~~Interest and other income (expense), net, for the three months ended December 31, 2002 decreased from~~ the same period inof the prior fiscal year ~~primarily due to~~for an aggregate increase of $4.7 million.

Higher interest income of $2.3 million, as a ~~permanent impairment~~result of ~~investments in affiliates of $10,119,000,~~higher average cash balances partially offset by ~~gains on sales of marketable securities of $2,086,000~~lower interest rates in the ~~third quarter of~~current fiscal ~~2003. As a percentage of revenue,~~quarter.

For the six months ended September 30, 2003, interest and other income, ~~(expense),~~ net, ~~declined~~increased from ~~0.5 percent~~the six months ended September 30, 2002 primarily due to:

Higher interest income of ~~revenue in the year ago quarter to (0.3) percent~~$4.8 million, as a result of ~~revenue~~higher average cash balances partially offset by lower interest rates in the current ~~period.~~fiscal year.

~~Interest and other income (expense), net,~~

Foreign currency gains as a result of favorable rates primarily for the ~~nine~~Euro and British Pound as of September 30, 2003 compared to losses on foreign exchange hedge contracts in the six months ended ~~December 31,~~September 30, 2002 ~~decreased from the same period in the prior year primarily due to a permanent impairment~~for an aggregate increase of investments in affiliates of $10,590,000 and losses on sales of marketable securities of $273,000 in fiscal 2003. As a percentage of revenue, interest and other income (expense), net, declined from 0.8 percent of revenue in the prior nine-month period ended December 31, 2001 to 0.0 percent of revenue in the current nine-month period ended December 31, 2002.
Income Taxes
(in thousands) December 31, 2002 Effective tax rate December 31, 2001 Effective tax rate % change
Three Months Ended $ 113,052 31.0 % $ 59,525 31.0 % 89.9 %
Nine Months Ended $ 138,426 31.0 % $ 24,291 31.0 % 469.9 %
$3.6 million.


*Income Taxes*(In thousands)
	September 30,		Effective			September 30,		Effective
	2003		tax rate			2002		tax rate			% change

Three months ended	$	34,409		31.0	%	$	22,451		31.0	%		53.3	%

Six months ended	$	42,662		31.0	%	$	25,374		31.0	%		68.1	%

Our effective tax rate was ~~31%~~31 percent for the three and ~~nine~~six months ended ~~December 31, 2002~~September 30, 2003 and ~~2001.~~

Net Income
(in thousands) December 31, 2002 % of net revenues December 31, 2001 % of net revenues % change
Three Months Ended $ 250,219 20.3 % $ 132,292 15.9 % 89.1 %
Nine Months Ended $ 307,857 15.2 % $ 54,214 4.3 % 467.9 %

~~In absolute dollars, reported net income increased for~~2002. The effective tax rate is the ~~three months ended December 31, 2002 primarily related to:~~

• ~~Higher revenues and gross profits~~.
• ~~Partially offset by an increase in expenses~~~~compared to the same period last year primarily due to:~~

• ~~Increases in marketing and advertising costs~~~~to support a higher number of key releases in multiple territories and spending on the Xbox and Nintendo GameCube consoles which, in fiscal 2003, have been available in all territories.~~
• ~~Higher research and development spending~~~~in the current year attributable to increased in-house development capacity, net of co-development arrangements.~~

Although expenses rose on an absolute basis versus the comparable period, net income as a percentage of sales increased to 20.3 percent versus 15.9 percent as expenses grew at a slower rate than did our revenues.

~~In absolute dollars, reported net income increased for the nine months ended December 31, 2002 primarily related to:~~

• ~~Higher revenues and gross profits~~.
• ~~Partially offset by an increase in expenses~~compared to the same period last year. The increase in expenses was primarily due to increases in marketing and advertising costs to support a higher number of key releases in multiple territories and spending on the Xbox and Nintendo GameCube consoles which, in fiscal 2003, have been available in all territories.

Although expenses rose on an absolute basis versus the comparable period, net income as a percentage of sales increased to 15.2 percent versus 4.3 percent as expenses grew at a slower rate than did our revenues.

~~We have indicated that the EA.com segment will not reach profitability in the quarter ending March 31, 2003. For fiscal 2003, we expect full year losses for EA.com as a~~ result of ~~higher~~the mix of income earned in various tax jurisdictions that apply a broad range of tax rates. The effective tax rate may change period-to-period based on nonrecurring events, as well as recurring factors including the geographical mix of income before taxes, the timing and amount of foreign dividends, and state and local taxes. Future effective tax rates could be adversely affected if earnings are lower than anticipated ~~marketing spend, delays~~ in ~~launching key products resulting~~countries where we have lower statutory rates, by unfavorable changes in ~~fewer subscribers~~tax laws and ~~lower-than-expected advertising revenues. For fiscal 2004,~~regulations or by adverse rulings in tax related litigation. In addition, we are ~~committed~~subject to ~~minimizing~~ the ~~losses~~continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for ~~our online business and expect to see some improvement in net loss year over year.~~income taxes.

LIQUIDITY AND CAPITAL RESOURCES

~~EA Core and EA.com~~

As of ~~December 31, 2002,~~September 30, 2003, our working capital was ~~$1,182,683,000~~$1.65 billion compared to ~~$699,561,000~~$1.34 billion at March 31, ~~2002.~~2003. Cash, cash equivalents and short-term investments increased by ~~approximately $368,390,000~~$146.6 million during the ~~nine~~first six months ~~ended December 31, 2002.~~of fiscal 2004. We generated ~~$283,510,000 of cash from operations, $109,877,000~~$139.9 million of cash through the sale of equity securities under our stock plans and $28.2 million of cash provided by operations, which was partially offset by ~~$34,470,000~~$28.7 million of cash used infor capital expenditures during the ~~nine~~six months ended ~~December 31, 2002.~~September 30, 2003.

~~Reserves for bad debts and sales allowances increased from $115,870,000 at March 31, 2002 to $206,651,000 at December 31, 2002. Reserves have been charged for returns~~As of product and price protection credits issued for products sold in prior periods. Management believes these reserves are adequate based on historical experience and its current estimate of potential returns and allowances.

~~Our~~September 30, 2003, our principal source of liquidity is ~~$1,165,326,000~~$1.7 billion in cash, cash equivalents and short-term investments ~~at December 31, 2002. Management believes~~and $0.8 million in marketable equity securities. We believe the existing cash, cash equivalents, short-term investments, marketable equity securities and cash generated from operations will be sufficient to meet cash and investment requirements for at least the next 12 months. ~~However,~~A portion of our cash is generated from operations domiciled in foreign tax jurisdictions (approximately $329.4 million) that is designated as permanently invested in

the respective tax jurisdiction. While we do not currently believe there is a need to repatriate these funds to the United States in the short term, if these funds are required for our operations in the United States, we would be required to accrue and pay additional taxes to repatriate these funds.

Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, those related to customer demand and acceptance of our titles on new platforms and new ~~title~~ versions of our titles on existing platforms, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, the impact of competition, the economic conditions in the domestic and international markets, seasonality in operating results, risks of product returns and the other risks listed in the “Risk Factors” section.

~~EA.com~~

~~Included~~Our gross accounts receivable balance was $329.6 million and $246.7 million as of September 30, 2003 and March 31, 2003, respectively. Reserves for product returns, pricing allowances and doubtful accounts decreased 23 percent from $164.6 million at March 31, 2003 to $126.8 million at September 30, 2003. The decrease in the ~~amounts above is~~overall reserves as of September 30, 2003 was due to the ~~following~~high volume of return and price protection credits processed in the first six months of fiscal year 2004, for products sold in prior periods. Although the ~~EA.com business:~~

•      With the exception of the proceeds from the sale to AOL in fiscal 2000 of stock and a warrant to purchase stock in the amount of $20,000,000, to date, EA.com has been funded solely by Electronic Arts. This funding has been accounted for as capital contributions from Electronic Arts. Excess cash generated from operations is transferred to Electronic Arts, and has been accounted for as a return of capital. We anticipate these funding procedures will continue in the near-term. However, Electronic Arts may, at its discretion, provide funds to EA.com under a debt arrangement, instead of treating such funding as a capital contribution.
•      During the nine months ended December 31, 2002, EA.com used $38,602,000 of cash in operations, $696,000 in capital expenditures for computer equipment, internal use software and related third party software, offset by $35,708,000 in capital contributions from Electronic Arts. As a result of the net operating loss generated, we realized a tax benefit of approximately $22,388,000.
•      During the nine months ended December 31, 2001, EA.com used $88,700,000 of cash in operations, $12,447,000 in capital expenditures for computer equipment, network infrastructure, internal use software and related third party software, offset by $107,571,000

~~in capital contributions from Electronic Arts. As a result of the net operating loss generated, we realized a tax benefit of approximately $37,558,000.~~

~~Under the AOL agreement entered into in November 1999, EA.com is required to pay $81,000,000 to AOL over the life~~absolute dollar amounts of the ~~five-year agreement. Of this amount, $36,000,000 was paid upon signing the agreement with the remainder due in four equal annual installments beginning with the first anniversary~~sales return and price protection reserves have decreased as of ~~the initial payment. EA.com paid AOL $11,250,000 in each of the fiscal years 2001, 2002 and 2003.~~

~~Future liquidity needs of EA.com will be met by Electronic Arts as Electronic Arts intends to continue to fund the cash requirements of EA.com for the foreseeable future.~~

~~Other Commitments~~

~~Advertising Commitments~~

~~We made a commitment to spend $15,000,000 in offline media advertisements promoting our online games, including those on the AOL service, prior~~September 30, 2003, both have remained relatively constant compared to March 31, ~~2005. As~~2003 as a percentage of ~~December 31, 2002, we have spent approximately $4,322,000 against this commitment.~~trailing nine months net revenue. We believe these reserves are adequate based on historical experience and our current estimate of potential returns and allowances.

In addition, under an agreement amended on August 30, 2002, we made a commitment to spend $17,000,000 in advertising with News America Corporation and its affiliates through the period ended December 31, 2006. As of December 31, 2002, we have fulfilled approximately $7,303,000 of this commitment. See “News America Corporation Exchange” below.Commitments

Lease Commitments

We lease certain of our current facilities and certain equipment under non-cancelable capital and operating lease agreements. We are required to pay property taxes, insurance and normal maintenance costs for certain of our facilities and will be required to pay any increases over the base year of these expenses on the remainder of our facilities.

In February 1995, we entered into a build-to-suit lease with ~~a financial institution~~Keybank National Association on our headquarters facility in Redwood City, California, which was extended in July 2001 and expires in July 2006. We accounted for this arrangement as an operating lease in accordance with ~~SFAS~~Statement of Finance Accounting Standards (“SFAS”) No. 13,“Accounting for ~~Leases~~Leases””, as amended. Existing campus facilities developed in phase one comprise a total of 350,000 square feet and provide space for sales, marketing, administration and research and development functions. We have an option to purchase the property (land and facilities) for ~~$145,000,000~~$145.0 million or, at the end of the lease, to arrange for ~~(1)~~(i) an ~~additional~~ extension of the lease or ~~(2)~~(ii) sale of the property to a third party ~~with us retaining~~while we retain an obligation to the owner for the difference between the sale price and the guaranteed residual value of up to ~~$128,900,000~~$128.9 million if the sales price is less than this amount, subject to certain provisions of the lease.

In December 2000, we entered into a second build-to-suit lease with ~~a financial institution~~Keybank National Association for a ~~five year~~five-year term ~~from~~beginning December 2000 to expand our Redwood City, California headquarters facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. The facilities ~~will~~ provide space for marketing, sales and research and development. We have an option to purchase the property for ~~$127,000,000~~$127.0 million or, at the end of the lease, to arrange for ~~(1)~~(i) an extension of the lease, or ~~(2)~~(ii) sale of the property to a third party ~~with us retaining~~while we retain an obligation to the owner for the difference between the sale price and the

guaranteed residual value of up to ~~$118,800,000~~$118.8 million if the sales price is less than this amount, subject to certain provisions of the lease. We believe the estimated fair value of the properties under the operating leases are in excess of the guaranteed residual values based in part on a independent third party appraisal.

In July of 2003, we entered into a lease agreement with Playa Vista-Water’s Edge LLC for a studio facility in Los Angeles, California, which commenced in October 2003 and expires in September 2013 with two five-year options to extend the lease term. Additionally, we have options to purchase the property after five and ten years based on the fair market value of the property at the date of sale, a right of first offer to purchase the property upon terms offered by the landlord, and a right to share in the profits from a sale of the property. We have accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. Existing campus facilities comprise a total of 243,000 square feet and provide space for research and development functions. Our rental obligation under

this agreement is $50.2 million over the initial ten-year term of the lease. We will take possession of the property over a period of 18 months as the facilities become available for use. The above commitment is offset by sublease income of $5.8 million for the sublet to Playa Capital Company, LLC of 18,000 square feet of the Los Angeles facility, which commenced in October 2003 and expires September 2013 with options of early termination by Playa Capital Company, LLC after five years and by EA after four and five years. The contractual obligations table below has been updated for this lease based on our gross lease commitment.

Lease rates are based upon the Commercial Paper Rate. The ~~two~~three lease agreements described above require us to maintain certain financial covenants related to consolidated net worth, fixed charge coverage ratio, total consolidated debt to total consolidated capital and quick ratio, all of which we were in compliance with as of ~~December 31, 2002.~~September 30, 2003.

Letters of Credit

In connection with our purchases of Nintendo GameCube optical disks for distribution in North America, Nintendo requires us to provide irrevocable letters of credit prior to Nintendo’s acceptance of purchase orders from us for purchases of these optical disks. For purchases of Nintendo GameCube optical disks for distribution in Japan and Europe, Nintendo typically requires us to make cash deposits.

In July 2002, we provided an irrevocable standby letter of credit to Nintendo of Europe. The standby letter of credit guarantees performance of our obligations to pay Nintendo of Europe for trade payables of up to ~~8,000,000~~18.0 million Euros. The standby letter of credit expires in July 2005. ~~At December 31, 2002,~~As of September 30, 2003, we had ~~$319,000 of payables~~$7.8 million payable to Nintendo of Europe covered by this standby letter of credit.

In August 2003, we provided an irrevocable standby letter of credit to 300 California Associates II, LLC in replacement of our security deposit for office space. The standby letter of credit guarantees performance of our obligations to pay our lease commitment up to $1.1 million. The standby letter of credit expires in December 2006. As of September 30, 2003, we had no payable on this standby letter of credit.

Development, Celebrity, League and Content Licenses: Payments and Commitments

The products ~~published~~produced by ~~EA Studios~~our studios are designed and created by our ~~in-house~~employee designers, ~~and~~ artists, software programmers and by ~~independent~~non-employee software developers (“independent artists”). We typically ~~pay~~advance development funds to the independent artists during development of our games, usually in installment payments made upon the completion of specified development milestones. These payments are considered advances against subsequent royalties based on the sales of the ~~specific products, as defined in~~products. These terms are typically set forth-in written agreements entered into with the ~~related~~ independent ~~artist agreements. Advance payments on these royalties are paid to independent artists upon meeting deliverables as detailed in the contractual agreements.~~artists. In addition, we have certain celebrity, league and content license contracts that contain minimum guarantee payments and marketing commitments that are not dependent on any deliverables. Celebrities and organizations with whom we have contracts include: FIFA (soccer), NASCAR (stock car racing), John Madden (professional football), National Basketball Association, PGA TOUR (golf), Tiger Woods (golf), National Hockey League and NHLPA (Hockey), Warner Bros. (Harry ~~Potter)~~Potter and Superman), MGM/Danjaq (James Bond), ~~The Saul Zaentz Company d/b/a Tolkien Enterprises~~New Line Productions (The Lord of ~~The~~the Rings), National Football League and Players Inc. (Professional Football) Collegiate Licensing Company ~~(March Madness~~(collegiate football and ~~NCAA Football)~~basketball), ISC ~~-Major track company,~~(stock car racing), Major League Baseball Properties, MLB Players Association (baseball) and Island Def ~~Jam.~~Jam (wrestling). These developer and content license commitments represent the sum of (i) the cash payments due under non-royalty-bearing licenses and services agreements, and (ii) the minimum payments and advances against royalties due under royalty-bearing licenses and services agreements. These minimum guarantee payments and marketing commitments are included in the following table.

The following table ~~below.~~

~~Summary of~~summarizes our minimum contractual obligations and commercial commitments as of ~~December 31, 2002~~September 30, 2003 (in thousands):

Contractual Obligations Commercial Commitments

Developer/
Fiscal Year Ended Licensee Bank and Other
March 31, Leases Advertising Commitments AOL Marketing Guarantees Letters of Credit Total

2003 $ 4,083 $ 2,678 $ 8,862 $ — $ 2,554 $ 1,667 $ 319 $ 20,163
2004 13,054 3,697 25,407 11,250 14,401 171 — 67,980
2005 9,397 8,000 21,408 — 6,582 171 — 45,558
2006 8,853 3,000 16,781 — 4,572 171 — 33,377
2007 8,149 3,000 3,141 — 3,571 170 — 18,031
Thereafter 11,609 — — — 3,571 170 — 15,350

$ 55,145 $ 20,375 $ 75,599 $ 11,250 $ 35,251 $ 2,520 $ 319 $ 200,459

, and the effect we expect them to have on our liquidity and cash flow in future periods:

Commercial
Contractual Obligations Commitments
Fiscal Year Developer/ Bank and Letters
Ended Licensee Other of
March 31, Leases Advertising Commitments Marketing Guarantees Credit Total

2004
(remaining
six months) $ 12,392 $ — $ 16,711 $ 27,300 $ 220 $ 7,759 $ 64,382
2005 24,499 747 37,611 14,109 234 — 77,200
2006 25,817 3,000 32,053 9,692 234 — 70,796
2007 19,064 3,000 11,276 9,692 204 — 43,236
2008 15,966 — 13,116 9,692 203 — 38,977
Thereafter 43,820 — 14,521 16,952 203 — 75,496

Total $ 141,558 $ 6,747 $ 125,288 $ 87,437 $ 1,298 $ 7,759 $ 370,087

51The lease commitments disclosed above exclude commitments included in our restructuring activities for contractual rental commitments of $10.9 million under real estate leases for unutilized office space, offset by $4.5 million of estimated future sub-lease income. These amounts were expensed in the periods of the related restructuring and are included in our accrued liabilities reported on our Condensed Consolidated Balance Sheet as of September 30, 2003. (See Note 11 in Notes to Condensed Consolidated Financial Statements.)
Transactions with Related Parties
~~Square EA~~
~~In May 1998,~~Executive Officer Compensation
On June 24, 2002, we ~~entered into a joint venture with Square Co., Ltd. (“Square”), a leading developer~~hired Warren Jenson as our Executive Vice President and ~~publisher~~Chief Financial and Administrative Officer and agreed to loan Mr. Jenson $4.0 million, to be forgiven over four years based on his continuing employment. Two million dollars of ~~entertainment software in Japan. In North America,~~ the companies formed Square Electronic Arts, LLC (“Square EA”), which has exclusive publishing rights in North America for future interactive entertainment titles created by Square. Additionally, we havenote will be forgiven after two years employment, and the ~~exclusive right to distribute in North America products published by this joint venture. We own a 30% minority interest in this joint venture while Square owns 70%. This joint venture~~remainder forgiven after four years. The entire balance of the loan is ~~accounted for under the equity method. Our joint venture and distribution agreements with Square will expire~~outstanding as of ~~March 31,~~September 30, 2003. We are discussing with Square the possibility of continuing to distribute Square products in North America on a limited, title-by-title basis. Even if those discussions are successful, our revenue from distributing Square titles in North America may be reduced going forward. If these discussions are not successful, this revenue stream will be lost.
We generated $38,895,000 and $72,501,000 in net revenues from sales of Square EA products during the three and nine months ended December 31, 2002. We generated $39,583,000 and $54,685,000 in net revenues from sales of Square EA products during the three and nine months ended December 31, 2001.
~~Indebtedness of Management~~
As of December 31, 2002, we had loans outstanding to executive officers in the amount of $4,104,000. All loans were in effect prior to the enactment of the Sarbanes-Oxley Act of 2002. As of February 2, 2003, all loans to executive officers made in connection with their purchase of restricted Class B common stock, totaling $854,000, were repaid in full.
~~News America Corporation Exchange~~
On February 7, 2000, we acquired Kesmai from News America Corporation (“News Corp”) in exchange for $22,500,000 in cash and approximately 206,000 shares of our existing common stock valued at $8,650,000. Under the original agreements, we agreed to spend $12,500,000 through the period ended June 1, 2002 in advertising with News Corp or any of its affiliates. In addition, under these agreements if certain conditions were met, including that a qualified public offering of Class B common stock did not occur within twenty-four months of News Corp’s purchase of such shares and all of the Class B outstanding shares had been converted to Class A common stock, then (1) News Corp would have the right to (i) exchange Class B common stock for approximately 206,000 shares of Class A common stock, and (ii) receive cash from us in the amount of $9,650,000, and (2) we would agree to spend an additional $11,675,000 in advertising with News Corp and its affiliates.
On August 30, 2002, we entered into a new agreement with News Corp under which (i) News Corp exchanged its 2,000,000 shares of Class B common stock for 206,454 shares of Class A common stock and (ii) we paid News Corp $1,000,000 in cash and committed to spend an additional $17,000,000 in advertising with News Corp and its affiliates through the period ended December 31, 2006. All of our other obligations to News Corp under the original agreements were terminated.
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Impact of Recently Issued Accounting Standards
~~In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “~~~~Accounting for Asset Retirement Obligations~~”. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No. 143 to have a material impact on our consolidated financial position or results of operations.
~~In April 2002, the FASB issued SFAS No. 145, “~~~~Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections~~~~”. SFAS No. 145 rescinds SFAS No. 4, “~~~~Reporting Gains and Losses from Extinguishment of Debt~~~~”, as amended by SFAS No. 64, “~~~~Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements~~~~”. The adoption of SFAS No. 145 did not have a material impact on our consolidated financial statements.~~
~~In June 2002, the FASB issued SFAS No. 146, “~~~~Accounting for Costs Associated with Exit or Disposal Activities~~~~”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “~~~~Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)~~”. We currently account for and report exit and disposal activities under the provisions of EITF No. 94-3. We will adopt the provisions of SFAS No. 146 for all exit and disposal activities that are initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material impact on our consolidated financial statements.
~~In November 2002, the FASB issued Interpretation No. 45, “~~~~Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others~~” (“FIN 45”). FIN 45 requires a guarantor to (i) include disclosure of certain obligations, and (ii) if applicable, at the inception of the guarantee, recognize a liability for the fair value of other certain obligations undertaken in issuing a guarantee. The disclosure provisions of the Interpretation are effective for financial statements of interim or annual reports that end after December 15, 2002 and we have adopted those requirements in our condensed consolidated financial statements included in Note 12 of the Notes to Condensed Consolidated Financial Statements and in the Liquidity and Capital Resources section of the MD&A of this Form 10-Q. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of the guarantor’s year-end. We are currently assessing the impact of adopting the initial recognition and initial measurement requirements of FIN 45 on our consolidated financial statements.
~~In December 2002, the FASB issued SFAS No. 148, “~~~~Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123~~~~”. SFAS No. 148 amends FASB Statement No. 123, “~~~~Accounting for Stock-Based Compensation~~”, to provide alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure about the effects on reported net income and earnings per share and the entity’s accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of whether the fair value method or intrinsic value method is used to
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account for stock-based employee compensation arrangements. We continue to account for our employee incentive stock option plans using the intrinsic value method in accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25,~~“Accounting for Stock Issued to Employees.”~~The amendments to SFAS 123 will be effective for financial statements for fiscal years ended after December 15, 2002 and for interim periods beginning after December 15, 2002. We will adopt the disclosure provisions of this statement in our fourth quarter of fiscal year 2003.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). This interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” addresses consolidation by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of “variable interests” and requires existing unconsolidated variable interest entities ~~to be consolidated by their primary beneficiaries if the entities~~(“VIEs”) that either: (i) do not ~~effectively disperse risks among~~have sufficient equity investment at risk to permit the ~~parties involved.~~entity to finance its activities without additional subordinated financial support, or (ii) are owned by equity investors who lack an essential characteristic of a controlling financial interest. This interpretation applies immediately to ~~variable interest entities~~VIEs created after January 31, 2003. ItWith regard to VIE’s already in existence prior to February 1, 2003, the implementation of this FASB has been delayed and currently applies into the first fiscal year or interim period beginning after ~~June~~December 15, ~~2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1,~~ 2003. ~~If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when~~ FIN 46 ~~becomes effective, the enterprise shall disclose information about those entities~~requires disclosure of VIEs in ~~all~~ financial statements issued after January 31, ~~2003. The interpretation may be applied prospectively with a cumulative-effect adjustment~~2003, if it is reasonably possible that as of the ~~date on which it is first applied~~transition date: (i) the company will be the primary beneficiary of an existing VIE that will require consolidation, or ~~by restating previously issued financial statements for one~~(ii) the company will hold a significant variable interest in, or ~~more years~~have significant involvement with, an existing VIE. We do not believe that we will have any entities that require disclosure or new consolidation as a ~~cumulative-effect adjustment as~~result of adopting the ~~beginning of the first year restated. Based on the recent release~~provisions of FIN ~~46, we have not completed our assessment as to whether or not the adoption of FIN 46 will have a material impact on our consolidated financial statements.~~46.
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RISK FACTORS
~~Electronic Arts’~~Our business is subject to many risks and uncertainties, which may affect our future financial performance. ~~Some of those important~~These risks and uncertainties ~~which~~are discussed below. There may ~~cause~~be additional risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the events or circumstances described below occurs, our ~~operating results to vary or which may materially~~business and ~~adversely affect our operating results are as follows:~~
~~Risk Factors Relating to Our Core Business~~
~~New Video Game Platforms Create Additional Technical~~financial performance could be harmed and ~~Business Model Uncertainties~~
     ~~A majority~~the market value of our ~~revenues are derived~~securities could decline.
The success of our business is highly dependent on being able to predict which new videogame platforms will be successful, and on the market acceptance and timely release of those platforms.
We derive most of our revenue from the sale of products for play on proprietary ~~video game~~videogame platforms of third parties, such as ~~the~~Sony’s PlayStation 2. ~~The~~Therefore, the success of our products is ~~significantly affected~~driven in large part by ~~acceptance~~the success of ~~the~~ new ~~video game~~videogame hardware systems ~~and the life span of older hardware platforms~~ and our ability to accurately predict which platforms will be most ~~successful.~~
     ~~Sometimes we will spend development and marketing resources on products designed for new video game systems that have not yet achieved large installed bases or will continue~~successful in the marketplace. We must make product development decisions and commit significant resources well in advance of the anticipated introduction of a new platform. A new platform for ~~older hardware platforms that~~which we are developing products may be delayed, may not succeed or may have ~~shorter life cycles than we expected. Conversely, if we do not develop for~~ a ~~platform that achieves significant market acceptance, or discontinue development for a platform that has a longer~~shorter life cycle than ~~expected, our revenue growth may be adversely affected.~~
     ~~For example,~~anticipated. If the ~~Sega Dreamcast console launched in Japan in early 1999 and in the United States in September of 1999. We did~~platforms for which we are developing products are not ~~develop products for this platform. Had this platform achieved~~released when anticipated or do not attain wide market acceptance, our revenue growth will suffer.
Our platform licensors set the royalty rates and other fees that we must pay to publish games for their platforms, and therefore have significant influence on our costs. If one or more of the platform licensors adopt a different fee structure for future game consoles, our profitability may suffer.
In the next few years, we expect our platform licensors to introduce new game machines into the market. In order to publish products for a new game machine, we must take a license from the platform licensor which gives the platform licensor the opportunity to set the fee structure that we must pay in order to publish games for that platform. Similarly, the platform licensors have retained the flexibility to change their fee structures for online gameplay and features for their consoles. The control that platform licensors have over the fee structures for their future platforms and online access makes it difficult for us to predict our costs and profitability in the medium to long term. Because publishing products for videogame consoles is the largest portion of our business, any increase in fee structures would have ~~been adversely affected. Similarly,~~a significant negative impact on our business model and profitability.
If we do not accurately predict the importance to consumers of online game play for different console products, our sales may be limited in the future.
Sony and Microsoft have introduced online game play for their respective PlayStation 2 and Xbox consoles. We anticipate that Nintendo will do so for its Nintendo GameCube console. We have agreed to support online game features for our Sony PlayStation 2 products but do not currently offer similar capability for our Xbox products. We currently cannot predict how important these features are ~~developing~~(or will be) to consumers, or whether, and to what extent, our support for online game features will affect our sales of console products. For example, if consumers consider online play capability to be a “must have” component of games for the Xbox, our sales of products for the Xbox would decline significantly.
Our business is both seasonal and ~~Nintendo GameCube.~~cyclical. If ~~these platforms do not achieve wide commercial acceptance,~~we, or our ~~revenue growth~~platform licensors, fail to deliver products at the right times, our sales will ~~be adversely impacted.~~suffer.
~~Our Business Is Both Seasonal and Cyclical~~
Our business is highly seasonal, with the highest levels of consumer demand, and a significant percentage of our ~~revenues~~revenue, occurring in the December quarter. ~~In fiscal 2002, these seasonal trends were magnified by general~~The timing of hardware platform introduction is often tied to the year-end holiday season and is not within our control. If we miss this key selling period, due to product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Our industry ~~factors, including the platform transition, the fall 2001 launches of the Xbox and Nintendo GameCube in North America and the economic slowdown in the United States and other territories. Our business~~ is also ~~cyclical; video game~~cyclical. Videogame platforms have historically had a life cycle of four to six ~~years, and decline as more advanced platforms are being introduced.~~years. As one group of platforms is reaching the end of its cycle and new platforms are emerging, ~~buying patterns~~consumers often defer game software purchases until the new platforms are available, causing sales to decline. This decline may ~~change. Purchases~~not be offset by increased sales of products for the new platform. For example, the market for products for Sony’s older ~~platforms may slow at a faster rate than sales~~PlayStation game console has declined significantly since the launch of ~~new platforms. There can~~the PlayStation 2 platform.
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Our business is intensely competitive and increasingly “hit” driven. If we do not continue to deliver “hit” products, our success will be ~~no guarantee that the current platform cycle will mirror past cycles in length or in terms of consumer behavior.~~limited.
~~Our Business is Intensely Competitive and Increasingly “Hit” Driven~~
Competition in our industry is intense, ~~in all areas. We~~and new products are regularly ~~facing strong competition by our competitors on a product-by-product and brand-by-brand basis.~~introduced. During calendar year 2002, approximately 22 percent of the sales of videogames in North America consisted of only 20 “hit” products out of thousands published. These “hit” titles are increasingly expensive to produce. If our competitors develop more successful products, or if we do not continue to develop consistently high-quality and popular products, our ~~revenues~~revenue will decline.
If we are unable to maintain or acquire licenses to intellectual property, we will publish fewer hit titles and our revenue will decline. Competition for these licenses may make them more expensive, and increase our costs.
Many of our products are based on or incorporate intellectual property owned by others. For example, ourEA SPORTSproducts include intellectual property licenses from the major sports leagues and players associations. Similarly, many of our hitEA Gamesfranchises, such asJames Bond, Harry PotterandLord of the Rings, are based on key film and literary licenses. Competition for these licenses is intense. If we are unable to maintain these licenses and obtain additional licenses with significant commercial value, we will be ~~adversely affected.~~unable to increase our revenue in the future. Competition for these licenses may also drive up the advances, guarantees and royalties that must be paid to the licensor, which could significantly increase our costs.
~~Impact~~If patent claims continue to be asserted against us, we may be unable to sustain our current business models or profits.
Many patents have been issued that may apply to widely used game technologies. Additionally, infringement claims under many recently issued patents are now being asserted against Internet implementations of ~~e-Commerce~~existing games. Several such claims have been asserted against us. Such claims can harm our business. We incur substantial expenses in evaluating and ~~Online Games~~defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third-party patent, we could incur significant monetary liability and be prevented from using the rights in the future.
Other intellectual property claims may increase our product costs or require us to cease selling affected products.
Many of our products include extremely realistic graphical images, and we expect that as technology continues to advance, images will become even more realistic. Some of the images and other content are based on real-world examples that may inadvertently infringe upon the intellectual property rights of others. Although we believe that we make reasonable efforts to ensure that our products do not violate the intellectual property rights of others, it is possible that third parties still may claim infringement. From time to time, we receive communications from third parties regarding such claims. Existing or future infringement claims against us, whether valid or not, may be time consuming and expensive to defend. Such claims or litigations could require us to stop selling the affected products, redesign those products to avoid infringement, or obtain a license, all of which would be costly and harm our business.
Our ~~Business Is Not Known~~
     ~~While~~business, our products and our distribution are subject to increasing regulation in key territories of content, consumer privacy and online delivery. If we do not ~~currently derive significant revenues from online sales of~~successfully respond to these regulations, our ~~packaged products, online distribution~~business may become a more significant channel for distribution of our products in the future. How online distribution ultimately affects the more traditional retail distribution, at which we have historically had success, and over what time period, is uncertain. We also expect the number and popularity of online games to increase and become a significant factor in the interactive games businesssuffer.
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~~generally. We do not know how that increase generally, or the emerging business of EA.com specifically, will affect the sales of packaged goods.~~
~~Our Business, Our Products, and Our Distribution Are Subject to Increasing Regulation of Content, Consumer Privacy and Online Delivery in Key Territories~~
Legislation is continually being introduced ~~which~~that may affect both the content of our products and their distribution. For example, privacy ~~rules~~laws in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory ~~while of course~~although the Internet recognizes no geographical boundaries. Other countries, such as Germany, have adopted laws regulating content both in packaged goods and those transmitted over the Internet that are stricter than current United States laws. In the United States, the federal and several state governments are considering content restrictions on products such as ~~those made by us~~ours, as well as restrictions on distribution of such products. Any one or more of these factors could harm our ~~business.~~
~~Risk Factors Relating to Our Online Business~~
~~EA.com Has a History of Losses and Expects To Continue To Incur Losses and May Never Achieve Profitability~~
     ~~EA.com has incurred substantial losses to date, including~~business by limiting the current fiscal year. We expect EA.com to continue to incur losses at least through the current fiscal year. EA.com will be required to maintain the significant support, service and product enhancement demands of online users, andproducts we ~~cannot be certain that EA.com will produce sufficient revenues from its operations to support these costs. Even if profitability is achieved, EA.com may not be~~are able to ~~sustain it over a period of time. We may determine that further cost reductions are necessary.~~offer to our customers and by requiring additional differentiation between products for different territories to address varying regulations. This additional product differentiation would be costly.
~~Our Agreements with America Online May Not Prove Successful to the Development of EA.com’s Business~~
     We have a series of agreements with America Online (“AOL”) for the offering of our games for online play. These agreements require that we make substantial guaranteed payments to AOL and that we commit our resources to the pursuit of the online game opportunity. We cannot be assured that the substantial costs associated with the AOL agreements will be justified by the revenues generated from that relationship. In addition, restrictions included in the AOL agreements limiting other channels we may develop for offering online games may limit our ability to diversify our online distribution strategies. The success for us of the AOL agreements will also be a result of AOL’s performance under the agreements, a factor over which we will have very little control.
~~We Have Limited Experience with Online Games and May Not Be Able To Operate This Business Effectively~~
     Offering games solely for online play is a substantial departure from our traditional business of selling packaged software games. We have employed various revenue models, including subscription fees, ''pay to play fees’’ and advertising. We have limited experience with developing optimal pricing strategies for online games. For example, our product~~Majesticand our~~~~Platinum~~ offering, which contained certain browser-based entertainment games, were launched with a monthly subscription pricing model and obtained only limited commercial success. Accordingly, we did not realize our projected cash flows and discontinued these offerings. Similarly, we continue to evaluate the content, marketing programs and pricing strategy for~~The Sims Onlinewhich launched in December 2002.~~
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~~Development of EA.com’s Business Continues to Require Significant Capital, and We Cannot Be Assured That It Will Be Available~~
     ~~EA.com will~~If we do not be successful if it does not continue to receive substantial financing. Electronic Arts has agreed to provide a limited amount of funding to EA.com, but this financing alone may not be sufficient. Any additional funding that is obtained from Electronic Arts may either be treated as a debt arrangement or alternatively may increase Electronic Arts’ retained interest in EA.com and correspondingly decrease the interest of the holders of outstanding shares of Class B common stock. To date, nearly all funding (except warrants and cash from revenues) has been provided by Electronic Arts. We cannot provide assurance that Electronic Arts will be able to recover its investment in EA.com.
~~To Become and Remain Competitive, EA.com Must Continually Develop New Content. This Is Inherently Risky and Expensive.~~
     ~~EA.com’s success depends on~~consistently meet our ability to develop new products and services for the EA.com site. Our agreement with AOL requires us to develop new games for the EA.com site. We cannot assure you that products will be developed on time, in a cost-effective manner, or that they will be commercially successful. The release of~~The Sims Online,for which we currently generate subscription revenue, was delayed due to longer than anticipated~~product development ~~schedules. Similarly, the online product~~~~Majestic~~~~achieved only limited commercial success due in part to the length of time it took to download the online software component. Accordingly, we discontinued~~~~Majestic~~~~on May 1, 2002.~~
~~Increasing Governmental Regulation of the Internet Could Limit the Market for Our Products~~
     As Internet commerce continues to evolve, we expect that federal, state and foreign governments will adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided over the Internet, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in electronic commerce to liability, taxation or other increased costs, any of which could limit the growth of electronic commerce generally. Legislation could dampen the growth in Internet usage and decrease its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit the market for EA.com’s products.
~~Our Revenues Have Been Heavily Dependent on a Single Product and Would Be Adversely Affected if That Product’s Popularity Were To Decline; Our Future Success Depends on the Success of~~~~The Sims Online~~
     ~~In the near term, EA.com’s subscription revenues to date have consisted primarily of revenues from sales of our online product~~~~Ultima Online~~, and we would be adversely affected if revenues from that product were to decline for any reason and not be replaced. We expect the online game market to become increasingly competitive, and it is possible that competing products could cause revenues from~~Ultima Onlineto decline. In addition, popularity of~~~~Ultima Online~~~~could decline over time simply because of consumer preference for new game experiences.~~
     ~~Going forward, the success of~~~~The Sims Online~~~~is critical to the success of EA.com. While~~~~The Sims Online~~~~only shipped in December 2002 and it is premature to judge its commercial success, early results have been below our expectations.~~
~~We Continue to Invest in Research and Development and Network Technology and Operations for EA.com, and We Cannot Be Assured That We Will Achieve Revenues That Support This Level of Spending~~
     We have invested heavily, and expect to continue to invest, in research and development and network technology and operations for our website and online games. While we have reduced the overall level of spending for EA.com,schedules, we will ~~continue to invest~~experience fluctuations in ~~the technologies, tools and network infrastructure that are necessary for us to support our key product,~~~~The Sims Online~~~~. Accordingly, there~~
57
are no assurances that the revenues from this product will exceed the associated costs in order for EA.com to achieve profitability. If we cannot increase revenues to profitable levels, the value of EA.com will be impaired. In order to develop the game offerings that we envision for our online operations it will continue to be necessary to engage in significant developmental efforts both to adapt existing Electronic Arts games to the online format and to create new online games. Our agreements with AOL require us to maintain a substantial commitment to online game development and we cannot be assured that we will realize acceptable returns from this investment.
We Derive a Portion Of Our Revenue From Advertisements and Advertising Services, Which Revenues Tend to be Cyclical and Dependent on the Economic Prospects Of Advertisers and Direct Marketers and the Economy in General. A Continued Decrease in Expenditures By Advertisers and Direct Marketers Or a Continued Downturn in the Economy Could Cause Our Revenues to Decline Significantly in any Given Period
     We derive, and expect to continue to derive for the foreseeable future, a portion of our revenue from products and services we provide to advertisers, direct marketers and agencies, advertising sold through our agreement with AOL and from advertisements we deliver to Web sites. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including Internet advertising, has been characterized in recent quarters by increasing softness of demand, lower prices for advertisements, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from customers and the reduction of marketing and advertising budgets, especially for online advertising and by Internet-related companies. As a result of these reductions, advertising spending across traditional media, as well as the Internet, has decreased. We have seen a decline in our advertising revenues in the current quarter compared to the same period a year ago. We expect further declines to occur in the near term.
We Are Heavily Dependent on a Few Internet Infrastructure Service Providers to Host and Manage Our Servers at Co-Location Facilities and Our Operating Results May Be Adversely Affected if We Must Change Service Providers
     We are dependent on a few third-party Internet infrastructure service providers to host and manage the majority of our servers that support our online games. The performance of these service providers is outside of our control. Many Internet infrastructure service providers require substantial financial resources to build, maintain and manage co-location facilities. Many of these service providers have experienced significant financial difficulties during the recent economic downturn. To the extent that industry, economic, financial or competitive factors influence the level of performance that we receive from service providers we currently use for co-location space (bandwidth and rack), we may need to re-locate our servers to another co-location facility which would increase our expenses and may result in delays or reduced shipments of our online products, thereby adversely impacting our operating results.
~~General Risk Factors~~
~~Product Development Schedules Are Frequently Unreliable and Make Predicting Quarterly Results Difficult~~
Product development schedules, particularly for new hardware platforms, high-end multimedia ~~personal computers, or~~ PCs and the Internet, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process, research and experimentation associated with development for new technologies. ~~For example,~~~~EMPEROR: Battle for Dune~~~~for~~We have in the ~~PC, which was expected to ship in fiscal 2001 was not released until the first quarter of fiscal 2002 due to development delays. Also,~~~~James Bond 007 in...Agent Under Fire~~~~for the PS2, which was expected to ship in fiscal 2001, released in October of fiscal 2002 due to development delays. Likewise,~~~~The Sims Online~~past experienced development delays ~~and was released later than planned.~~~~The~~
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~~Sims Online~~~~was launched in December 2002.~~for several of our products. Failure to meet anticipated production or “go live” schedules may ~~adversely impact~~cause a shortfall in our ~~revenues~~revenue and profitability and cause our ~~actual~~operating results to be materially different ~~than any financial guidance given by~~from expectations. Delays that prevent release of our products during peak selling seasons may reduce lifetime sales of those products.
Technology changes rapidly in our business, and if we fail to anticipate new technologies, the ~~Company.~~quality, timeliness and competitiveness of our products will suffer.
Rapid technology changes in our industry require us to anticipate, ~~(sometimes~~sometimes years in ~~advance)~~advance, which technologies our products must take advantage of in order to make them competitive in the market at the time they are released. Therefore, we usually start our product development with a range of technical development goals that we hope to be able to achieve. We may not be able to achieve these goals, or our competition may be able to achieve them more quickly than we can. In either case, our products may be technologically inferior to competitive products, or less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule of our products, then we may delay products until these technology goals can be achieved, ~~(which~~which may ~~adversely affect our revenues~~delay or reduce revenue and increase our development ~~expenses).~~expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, ~~(either~~either to preserve our product launch schedule or to keep up with our ~~competition),~~competition, which ~~will~~would increase our development expenses.
~~We May Not Be Able To Attract~~If we do not continue to attract and ~~Retain the Personnel Necessary for~~retain key personnel, we will be unable to effectively conduct our ~~Businesses~~business.
The market for technical, creative, marketing and other personnel essential to the development and marketing of our products and management of our businesses is extremely competitive. In the last fiscal year, notwithstanding the downturn of the economy generally, competitive recruiting efforts aimed at ~~Electronic Arts’~~our employees and executives continued. ~~Electronic Arts’~~For example, in fiscal 2003, a team of employees that developed one of our hitMedal of Honorproducts left the company to develop products for a competitor. Our leading position within the interactive entertainment industry makes us a prime target for recruiting of executives and key creative talent. In addition, the cost of real estate in the San Francisco Bay area – the location of our headquarters and one of our largest studios – remains ~~relatively~~ high, and has made recruiting from other areas and relocating employees to our headquarters more difficult. If we cannot successfully recruit and retain the employees we need, our ability to develop and manage our businesses will be impaired.
Our ~~Platform Licensors Are Our Chief Competitors~~platform licensors are our chief competitors and ~~Frequently Control~~frequently control the ~~Manufacturing~~manufacturing of and/or ~~Access To Our Video Game Products~~access to our videogame products. If they do not approve our products, we will be unable to ship to our customers.
Our agreements with hardware licensors ~~which~~(such as Sony for the PlayStation 2, Microsoft for the Xbox and Nintendo for the Nintendo GameCube), who are also our chief competitors, typically give significant control to the licensor over the approval and manufacturing of our ~~products. This fact~~products, which could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. In most events, control of the approval and manufacturing process by the platform licensors increases both our manufacturing lead times and costs as compared to those we can achieve independently. ~~For example, in prior years,~~While we ~~experienced delays in obtaining approvals for and manufacturing of PlayStation products which caused delays in shipping those products. The~~believe that our relationships with our hardware licensors are currently good, the potential for ~~additional~~ delay or refusal to approve or manufacture our products ~~continues with our platform licensors.~~exists. Such occurrences would harm our business and ~~adversely affect~~ our financial performance. Additionally, we have not negotiated a final publishing agreement with Nintendo for the Nintendo GameCube platform for territories outside of the Western Hemisphere, and although we are currently operating under an understanding with Nintendo, we cannot be assured that the final terms of the formal agreements for Europe and/or Asia will be favorable.
In addition, as online capabilities for videogame platforms emerge, our platform licensors will control our ability to provide online game capabilities for our console platform ~~products.~~products and will in large part establish the financial terms on which these services are offered to consumers. Currently, both Microsoft and Sony ~~provide, or have announced plans to~~ provide online capabilities for Xbox and PlayStation 2 products, respectively. In each case, compatibility code and the consent of the licensor are
39
required for us to include online capabilities in our products. In addition, the business model for Microsoft’s and Sony’s online businesses for their videogame products may compete with our ~~EA.com~~online business. As these capabilities become more significant, the failure or refusal of our licensors to approve
59
our products, or the successful deployment by these licensors of services competitive to ~~EA.com,~~ours, may harm our business.
~~Proliferation and Assertion of Patents Poses Serious Risks~~Our international net revenue is subject to ~~our Business~~currency fluctuations.
     Many patents have been issued that may apply to widely used game technologies. Additionally, many recently issued patents are now being asserted against Internet implementations of existing games. Several such patents have been asserted against us. Such claims can harm our business. For example, in June of 2002 we were sued for alleged infringement of a patent which the plaintiff claims generally describes the distribution of a software program on CD-ROMs to users containing a link capability (e.g., hyperlinks) to additional information stored on a remote server. We will incur substantial expenses in evaluating and defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third-party patent, we could incur significant monetary liability and be prevented from using the rights in the future.
~~Foreign Sales and Currency Fluctuations~~
For the ~~nine~~six months ended ~~December 31, 2002,~~September 30, 2003 international net ~~revenues~~revenue comprised ~~41%~~37 percent of total consolidated net ~~revenues.~~revenue. For the fiscal year ended March 31, ~~2002,~~2003, international net ~~revenues~~revenue comprised ~~37%~~42 percent of total consolidated net ~~revenues.~~revenue. We expect foreign sales to continue to account for a significant and growing portion of our ~~revenues.~~revenue. Such sales are subject to unexpected regulatory requirements, tariffs and other barriers. Additionally, foreign sales are primarily made in local currencies, which may ~~fluctuate.~~fluctuate against the dollar. While we utilize foreign exchange contracts to hedge ~~against~~ foreign currency ~~fluctuations,~~exposures of underlying assets and liabilities, primarily certain intercompany receivables that are denominated in foreign currencies, we cannot control translation issues.
~~Increased Difficulties~~Our reported financial results could be affected if significant changes in ~~Forecasting Results~~current accounting principles are adopted.
     During platform transition periods, where the success of our products is significantly impacted by the changing market for our products, forecasting our revenues and earnings is more difficult than in more stable or rising product markets. The demand for our products may decline during a transition faster than we anticipate, negatively impacting both revenues and earnings. At launch, Sony shipped only half of the number of PlayStation 2 units to retail in North America than it had originally planned, and it shipped significantly fewer units than planned at launch in Europe as well. Shortages were announced as being caused by shortages of components for manufacturing. Due to these shortages, our results of operations for fiscal 2001 were adversely affected. Consequently, if Sony, Microsoft or Nintendo do not ship the number of units planned for the PlayStation 2, the Xbox and Nintendo GameCube, our sales of products for these platforms may be adversely affected in fiscal 2004.
The Current Legislative and Regulatory Environment Affecting Accounting Principles Generally Accepted in the United States of America is Uncertain and Volatile, and Significant Changes in Current Principles Could Affect Our Financial Statements Going Forward
Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally. Similarly, Congress has considered a variety of bills that could affect certain accounting principles. ~~In addition, the~~The FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, such as accounting for stock options, some of which represent a significant change from current ~~industry~~ practices. ~~While we believe that~~Changes in our ~~financial statements have~~accounting for stock options could materially increase our reported expenses.
Our stock price has been prepared in accordance with accounting principles generally accepted in the United States of America, we cannot predict the impact of the adoption of any such proposals on our financial statements going forward.volatile and may continue to fluctuate significantly.
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~~Fluctuations in Stock Price~~
     Industry and financial analysts provide investors with estimates of our future production and financial performance. We also give guidance as to our expectations for future performance. We may not meet those expectations. This may create an immediate and significant adverse effect on the trading price of our common stock. As a result of the factors discussed in this report and other factors that may arise in the future, the market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to factors specific to us, to changes in analysts’ earnings estimates, or to factors affecting the computer, software, Internet, entertainment, media or electronics businesses.
The majority of our sales are made to a relatively small number of key customers. If these customers reduce their purchases of our products or become unable to pay for them, our business could be harmed.
In ~~addition, fluctuations may be due~~the U.S. in fiscal 2003, over 66 percent of our sales were made to ~~uncertainties~~six key customers. In Europe, our top ten customers accounted for over 40 percent of our sales in that territory in fiscal 2003. Worldwide, we had sales to one customer, Wal-Mart Stores, Inc., which represented 12 percent of net revenue in fiscal 2003. Though our products are available to consumers through a variety of retailers, the concentration of our sales in one, or a few, large customers could lead to short-term disruption in our sales if one or more of these customers significantly reduced their purchases or ceased to carry our products, and could make us more vulnerable to collection risk if one or more of these large customers became unable pay for our products. Additionally, our receivables from these large customers increase significantly in the ~~securities markets in general. For example, during~~last quarter of the ~~fiscal~~calendar year ~~ended March 31, 2002,~~as they stock up for the ~~price per share~~holiday selling season. Also, having such a large portion of our ~~Class A common stock ranged from $42.40 to $66.01 and $51.48 to $72.14 during the nine months ended December 31, 2002.~~net revenue concentrated in a few customers reduces our negotiating leverage with these customers.
~~World Events~~
     The terrorist attacks of September 11, 2001 in the United States, the subsequent US military action, the continuing concerns over potential additional terrorist attacks against US interests and citizens and the current potential for war with Iraq pose serious uncertainties in our business. Consumer spending, consumer preferences in entertainment, and the securities markets and the economy generally may be affected on an ongoing and unpredictable basis by these events, all of which may make prediction of our results more difficult.
Because of these and other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
6140
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
We are exposed to various market risks, including ~~the~~ changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange contracts used to hedge foreign currency exposures and short-term investments are subject to market risk. We do not consider our cash and cash equivalents to be subject to interest rate risk due to their short maturities. We do not enter into derivatives or other financial instruments for trading or speculative purposes.
Foreign Currency Exchange Rate Risk

We utilize foreign exchange contracts to hedge foreign currency exposures of underlying assets and liabilities, primarily certain intercompany receivables that are denominated in foreign currencies, thereby limiting our risk. Our foreign exchange contracts are accounted for as derivatives whereby the gains and losses on these contracts are reflected in the Condensed Consolidated ~~Statement~~Statements of Operations. Gains and losses on open contracts at the end of each accounting period resulting from changes in the forward rate are recognized in earnings and are designed to offset gains and losses on the underlying foreign currency denominated assets and liabilities. At ~~December 31, 2002,~~September 30, 2003, we had foreign exchange contracts, all with maturities of less than one month, to ~~purchase and~~ sell approximately ~~$508,133,000~~$144.8 million in foreign currencies, primarily British Pounds, ~~European Currency Units (“Euros”), Australian~~Euros, Japanese Yen, Canadian Dollars and other currencies. Of this amount, $127.0 million represents contracts to sell foreign currency in exchange for U.S. dollars and $17.8 million represents contracts to sell foreign currency in exchange for British Pounds.
~~Fair value represents the difference in value of the contracts at the spot rate and the forward rate.~~ The counterparties to these contracts are substantial and creditworthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be material. Notwithstanding our efforts to manage foreign exchange risks, there can be no assurances that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations.
The following table below provides information about our foreign currency forward exchange contracts at ~~December 31, 2002.~~September 30, 2003. The information is provided in U.S. dollar equivalents and presents the notional amount (forward amount), the weighted average contractual foreign currency exchange rates and fair value.

Weighted-Average Fair Value
Contract Amount Contract Rate Gain/(Loss)
(In thousands) (In thousands)
Foreign currency to be sold under contract:
British Pound $ 193,734 1.5945 $ (411 )
Euro 178,781 1.0263 (1,741 )
Swedish Krona 20,269 0.1126 (184 )
Australian Dollar 19,176 0.5640 61
Japanese Yen 10,896 0.0083 (120 )
Norwegian Krone 8,525 0.1398 (139 )
Canadian Dollar 8,382 0.6448 56
Danish Krone 6,909 0.1382 (76 )
Swiss Franc 5,592 0.6990 (117 )
South African Rand 4,260 0.1092 (93 )
New Zealand Dollar 1,032 0.5160 (3 )
Brazilian Real 422 0.2814 3
Total $ 457,978 $ (2,764 )
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Foreign currency to be purchased under contract:
British Pound $ 50,155 1.6003 $ (601 )
Total $ 50,155 $ (601 )
Grand total $ 508,133 $ (3,365 )
Fair value represents the difference in value of the contracts at the spot rate and the forward rate.

Weighted-
Average
Contract Contract
Amount Rate Fair Value

Foreign currency to be sold under contract:
British Pound $ 90,851 1.6518 $ (237 )
Euro 16,064 1.1475 (17 )
Japanese Yen 14,738 0.0090 79
Canadian Dollar 9,957 0.7375 (37 )
Swedish Krona 5,497 0.1278 (44 )
South African Rand 4,025 0.1388 (33 )
Danish Krone 2,021 0.1554 9
Norwegian Krone 1,693 0.1411 (15 )

Total $ 144,846 $ (295 )

While the contract amounts provide one measurement of the volume of these transactions, they do not represent the amount of our exposure to credit risk. The amounts (arising from the possible inabilities of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations exceed our obligations as these contracts can be settled on a net basis at our option. We control credit risk through credit approvals, limits and monitoring procedures.
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Interest Rate Risk

Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We manage our interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments of high credit quality and relatively short average maturities. ~~We also manage our interest rate risk by maintaining~~Though we maintain sufficient cash and cash equivalent balances such that we are typically able to hold our investments to ~~maturity.~~ maturity, currently, the majority of our short-term investments are callable by the issuer. As there can be no assurance as to how long these investments will be held, classification of these securities as short-term investments is based on call date.
At ~~December 31, 2002,~~September 30, 2003, our cash equivalents and short-term investments included debt securities, typically government agency bonds and money market funds, of ~~$986,616,000.~~$1.4 billion. Notwithstanding our efforts to manage interest rate risks, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.
The table below presents the amounts (in thousands) and related weighted average interest rates of our investment portfolio at ~~December 31, 2002:~~

Average Interest Rate Cost Fair Value
(Dollars in thousands)
Cash equivalents
Variable rate 1.43 % $ 587,358 $ 587,358
Short-term investments
Fixed rate 3.28 % $ 387,029 $ 390,858
Variable rate 6.35 % $ 8,400 $ 8,400
September 30, 2003:

Average
Interest Rate Cost Fair Value

Cash equivalents
Fixed rate 1.86 % $ 503,701 $ 503,873
Variable rate 1.18 % $ 496,251 $ 496,241
Short-term investments
Fixed rate 2.16 % $ 295,658 $ 295,262
Fixed-step rate 1.53 % $ 85,293 $ 84,387
Maturity dates for short-term investments range from 58 months to 3635 months with call dates ranging from 03 months to 118 months.
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~~Item 4.~~ Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.
(b) Changes in internal controls. There were no significant changes in the Company’s internal controls or, to our knowledge in other factors, that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date. However, in the last several months, in response to the certification requirements of the Sarbanes-Oxley Act and new Securities and Exchange Commission Regulations, the Company has enhanced its internal controls and disclosure systems, through various measures including: detailing its internal accounting policies; establishing a formal disclosure committee for preparation of all periodic reports; and requiring certifications from various trial balance controllers and other financial personnel responsible for the Company’s financial statements.
DEFINITION AND LIMITATIONS OF DISCLOSURE CONTROLS
64Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Because we have designed our system of controls based on certain assumptions about the likelihood of future events, which we believe are reasonable, our system of controls may not achieve its desired purpose under all possible future conditions. Further, the design of our system of controls reflects reasonable resource constraints - the benefits of controls must be considered relative to their costs. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving our control objectives.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures, have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective and designed to ensure that material information required to be disclosed in the reports that we file or submit under the Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding the required disclosure.
CHANGES IN INTERNAL CONTROLS
During out last fiscal quarter, no change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, in the last several months, in response to the certification requirements of the Sarbanes-Oxley Act and new SEC Regulations, we have enhanced our internal controls and disclosure systems, through various measures including: detailing certain internal accounting policies; establishing a formal disclosure committee for the preparation of all periodic SEC reports; and requiring certifications from various trial balance controllers and other financial personnel responsible for our financial statements.
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PART II —– OTHER INFORMATION
~~Item 1.~~
Item 1.
Legal Proceedings
The Company is subject to pending claims and litigation. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits in the aggregate would not have a material adverse effect upon the consolidated financial position or results of operations of the Company.
~~Item 4.~~
Item 4.
Submission of Matters to a Vote of Security Holders
None.
~~Item 6.~~
Item 6.
Exhibits and Reports on Form 8-K

(a) ~~Exhibits:~~ The following exhibits, other than exhibits 32.1 and 32.2, are filed as part of this report:

Exhibit
Number Title
10.29
~~10.58~~ ~~Form of Indemnity~~Lease Agreement ~~with Directors~~
~~10.59~~ ~~Participation Agreement among Electronic Arts Redwood, Inc.,~~by and between Playa Vista-Waters Edge, LLC and Electronic Arts Inc., ~~Selco Service Corporation, Victory Receivables Corporation, The Bank of Tokyo-Mitsubishi, Ltd., various Liquidity Banks and Keybank National Association,~~ dated ~~December 6, 2000~~July 31, 2003.
~~3.05~~ ~~Amended~~
10.30 Agreement Re: Right of First Offer to Purchase and ~~Restated Bylaws~~Option to Purchase by and between Playa Vista-Waters Edge, LLC and Electronic Arts Inc., dated July 31, 2003.
10.31 Profit Participation Agreement by and between Playa Vista-Waters Edge, LLC and Electronic Arts Inc., dated July 31, 2003.
10.32 Sublease Agreement by and between Electronic Arts Inc. and Playa Capital Company, LLC, dated July 31, 2003.
31.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14 (a) of the Exchange Act.
31.2 Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14 (a) of the Exchange Act.
Additional exhibits accompanying this report:
32.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14 (b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14 (b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:

On ~~November 8, 2002,~~July 23, 2003, the Company ~~furnished~~filed a current report on Form 8-K ~~attaching under Item 9 certifications made by~~relating to the ~~Chief Executive Officer and Chief Financial Officer pursuant to Section 906~~announcement of ~~the Sarbanes-Oxley Act of 2002 to accompany the Company’s Form 10-Q~~its financial results for the ~~quarterly period~~quarter ended ~~September~~June 30, ~~2002.~~2003.
6544
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ELECTRONIC ARTS INC.
(Registrant)

/s/ ~~WARREN~~Warren C. ~~JENSON~~Jenson

~~DATED:~~
~~February 7, 2003~~ ~~WARREN C. JENSON~~
~~Executive Vice President,~~
~~Chief Financial and Administrative Officer~~
66
~~CERTIFICATIONS~~
~~I, Lawrence F. Probst III, certify that:~~
1. ~~I have reviewed this quarterly report on Form 10-Q of Electronic Arts Inc.;~~
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) ~~Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and~~
c) ~~Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) ~~Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

~~Dated: February~~DATED: WARREN C. JENSON
November 7, 2003 ~~By:~~Executive Vice President, ~~/s/ LAWRENCE F. PROBST III~~

~~Lawrence F. Probst III~~
~~Chairman and Chief Executive Officer~~
67
~~I, Warren C. Jenson, certify that:~~
1. ~~I have reviewed this quarterly report on Form 10-Q of Electronic Arts Inc.;~~
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) ~~Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and~~
c) ~~Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) ~~Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
~~Dated: February 7, 2003~~ ~~By:~~ ~~/s/ WARREN C. JENSON~~
~~Warren C. Jenson~~
~~Executive Vice President,~~
Chief Financial and Administrative Officer
6845
ELECTRONIC ARTS INC. ~~AND SUBSIDIARIES~~
FORM 10-Q ~~QUARTERLY REPORT~~
FOR THE ~~QUARTERLY~~ PERIOD ENDED ~~DECEMBER 31, 2002~~SEPTEMBER 30, 2003
EXHIBIT INDEX

EXHIBIT
NUMBER EXHIBIT TITLE
10.29
~~10.58~~ ~~Form of Indemnity~~Lease Agreement ~~with Directors~~
~~10.59~~ ~~Participation Agreement among Electronic Arts Redwood, Inc.,~~by and between Playa Vista-Waters Edge, LLC and Electronic Arts, Inc., ~~Selco Service Corporation, Victory Receivables Corporation, The Bank of Tokyo-Mitsubishi, Ltd., various Liquidity Banks and Keybank National Association,~~ dated ~~December 6, 2000~~July 31, 2003.
~~3.05~~ ~~Amended~~
10.30 Agreement Re: Right of First Offer to Purchase and ~~Restated Bylaws~~Option to Purchase by and between Playa Vista-Waters Edge, LLC and Electronic Arts Inc., dated July 31, 2003.
10.31 Profit Participation Agreement by and between Playa Vista-Waters Edge, LLC and Electronic Arts Inc., dated July 31, 2003.
10.32 Sublease Agreement by and between Electronic Arts, Inc. and Playa Capital Company, LLC, dated July 31, 2003.
31.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14 (a) of the Exchange Act.
31.2 Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14 (a) of the Exchange Act.
Additional exhibits accompanying this report:
32.1 Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14 (b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14 (b) of the Exchange Act and 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
6946


			December 31,			March 31,
			2002			2002

ASSETS
Current assets:
	Cash, cash equivalents and short-term investments		$	1,165,326		$	796,936
	Marketable securities			1,341			6,869
	Receivables, less allowances of $206,651 and $115,870, respectively			609,029			190,495
	Inventories, net			33,216			23,780
	Deferred income taxes			37,732			38,597
	Other current assets			82,639			95,866

		Total current assets		1,929,283			1,152,543
Property and equipment, net				302,231			308,827
Investments in affiliates				10,231			19,077
Goodwill and other intangibles, net				119,406			110,512
Long-term deferred income taxes				55,628			64,065
Other assets				44,246			44,350

			$	2,461,025		$	1,699,374

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	146,816		$	88,563
	Accrued and other liabilities			599,784			364,419

		Total current liabilities		746,600			452,982
Minority interest in consolidated joint venture				2,876			3,098
Stockholders’ equity:
	Preferred stock, $0.01 par value. Authorized 10,000,000 shares			—			—
	Common stock
		Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 142,944,370 and 138,429,269 shares, respectively		1,429			1,384
		Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 4,233,463 and 6,233,413 shares, respectively		42			62
	Paid-in capital			796,950			649,777
	Retained earnings			914,652			606,795
	Accumulated other comprehensive loss			(1,524	)		(14,724	)

		Total stockholders’ equity		1,711,549			1,243,294

			$	2,461,025		$	1,699,374


					Three Months Ended						Nine Months Ended
					December 31,						December 31,
					2002			2001			2002			2001

Net revenues					$	1,233,726		$	832,878		$	2,019,114		$	1,254,984
Cost of goods sold						558,680			400,853			898,936			607,642

			Gross profit			675,046			432,025			1,120,178			647,342

Operating expenses:
	Marketing and sales					139,492			93,875			260,380			179,699
	General and administrative					42,250			31,833			95,366			80,451
	Research and development					112,558			97,406			301,667			285,766
	Amortization of intangibles					2,245			6,359			6,736			19,309
	Restructuring and asset impairment charges					9,378			14,051			9,378			14,051

				Total operating expenses		305,923			243,524			673,527			579,276

			Operating income			369,123			188,501			446,651			68,066
Interest and other income (expense), net						(4,439	)		3,515			(115	)		10,292

			Income before provision for income taxes and minority interest			364,684			192,016			446,536			78,358
Provision for income taxes						113,052			59,525			138,426			24,291

			Income before minority interest			251,632			132,491			308,110			54,067
Minority interest in consolidated joint venture						(1,413	)		(199	)		(253	)		147

		Net income			$	250,219		$	132,292		$	307,857		$	54,214

Class A common stock:
Net income:
	Basic				$	253,694		$	138,998		$	317,495		$	72,387

	Diluted				$	250,219		$	132,292		$	307,857		$	54,214

Net income per share:
	Basic				$	1.79		$	1.01		$	2.26		$	0.53
	Diluted				$	1.69		$	0.92		$	2.10		$	0.38
Number of shares used in computation:
	Basic					141,889			137,103			140,193			136,457
	Diluted					148,025			143,399			146,860			142,847
Class B common stock:
Net loss, net of retained interest in EA.com					$	(3,475	)	$	(6,706	)	$	(9,638	)	$	(18,173	)

Net loss per share:
	Basic				$	(0.86	)	$	(1.11	)	$	(1.84	)	$	(3.02	)
	Diluted				$	(0.86	)	$	(1.11	)	$	(1.84	)	$	(3.02	)
Number of shares used in computation:
	Basic					4,051			6,028			5,247			6,023
	Diluted					4,051			6,028			5,247			6,023


					Nine Months
					Ended December 31,
					2002			2001

Operating activities:
	Net income				$	307,857		$	54,214
		Adjustments to reconcile net income to net cash
			provided by (used in) operating activities:
				Minority interest in consolidated joint venture		253			(147	)
				Equity in net income of affiliates		(4,213	)		(2,134	)
				Gain on sale of affiliate		—			(200	)
				Depreciation and amortization		74,329			83,551
				Non-cash restructuring and asset impairment charges		1,352			6,503
				Permanent impairment of investments in affiliates		10,590			—
				Loss on sale of fixed assets		106			372
				Loss on marketable securities		273			—
				Bad debt expense		7,804			7,142
				Stock-based compensation		864			2,263
				Tax benefit from exercise of stock options		36,765			16,789
				Change in assets and liabilities:
				Receivables		(424,567	)		(296,077	)
				Inventories		(9,436	)		(9,232	)
				Other assets		(13,999	)		(46,892	)
				Accounts payable		58,222			80,638
				Accrued and other liabilities		229,392			95,364
				Deferred income taxes		7,918			(497	)

				Net cash provided by (used in) operating activities		283,510			(8,343	)

Investing activities:
	Proceeds from sale of property and equipment					679			258
	Proceeds from sale of affiliate					—			570
	Proceeds from sale of marketable securities					4,794			—
	Capital expenditures					(34,470	)		(40,056	)
	Investment in affiliates, net					(531	)		2,918
	Sales/purchases of short-term investments, net					(151,630	)		(64,624	)
	Distribution from investment in affiliate					3,000			—
	Proceeds from minority interest investment					(751	)		—
	Acquisition, net of cash acquired					(12,868	)		—

				Net cash used in investing activities		(191,777	)		(100,934	)

Financing activities:
	Proceeds from sales of Class A shares through employee stock plans and other plans					109,876			73,556
	Proceeds from sales of Class B shares through employee stock plans and other plans					1			—
	Purchase of treasury shares					—			(11,922	)

				Net cash provided by financing activities		109,877			61,634

Translation adjustment						11,632			2,369

Increase (decrease) in cash and cash equivalents						213,242			(45,274	)
Beginning cash and cash equivalents						552,826			419,812

Ending cash and cash equivalents						766,068			374,538
Short-term investments						399,258			112,304

Ending cash, cash equivalents and short-term investments					$	1,165,326		$	486,842



	As of						Effects of Foreign			As of
	March 31, 2002		Goodwill Acquired		Adjustments		Currency			December 31, 2002

EA Core	$	39,335	$	16,139	$	—	$	(200	)	$	55,274
EA.com		29,715		—		—		—			29,715

	$	69,050	$	16,139	$	—	$	(200	)	$	84,989

	•		~~EA Core business segment: creation, marketing and distribution of entertainment software.~~

	•		~~EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising.~~



		Three Months Ended December 31, 2002
		EA Core
		(excl. EA.com)			EA.com			Electronic Arts

Net revenues		$	1,211,484		$	22,242		$	1,233,726
Cost of goods sold			553,579			5,101			558,680

Gross profit			657,905			17,141			675,046
Operating expenses:
	Marketing and sales (a)		124,744			14,748			139,492
	General and administrative		40,502			1,748			42,250
	Research and development (b)		84,351			28,207			112,558
	Amortization of intangibles (c)		927			1,318			2,245
	Restructuring and asset impairment charges		9,378			—			9,378

Total operating expenses			259,902			46,021			305,923

Operating income (loss)			398,003			(28,880	)		369,123
Interest and other income (expense), net			(4,359	)		(80	)		(4,439	)

Income (loss) before provision for income taxes and minority interest			393,644			(28,960	)		364,684
Provision for income taxes			113,052			—			113,052

Income (loss) before minority interest			280,592			(28,960	)		251,632
Minority interest in consolidated joint venture			(1,413	)		—			(1,413	)

Net income (loss) before retained interest in EA.com		$	279,179		$	(28,960	)	$	250,219

Interest income		$	5,010		$	3		$	5,013
Depreciation and amortization			12,365			12,591			24,956
Identifiable assets			2,314,494			146,531			2,461,025
Capital expenditures			10,965			119			11,084



		Three Months Ended December 31, 2001
		EA Core
		(excl. EA.com)			EA.com			Electronic Arts

Net revenues		$	810,930		$	21,948		$	832,878
Cost of goods sold			395,261			5,592			400,853

Gross profit			415,669			16,356			432,025
Operating expenses:
	Marketing and sales (a)		84,192			9,683			93,875
	General and administrative		29,116			2,717			31,833
	Research and development (b)		66,030			31,376			97,406
	Amortization of intangibles (c)		3,205			3,154			6,359
	Restructuring and asset impairment charges		—			14,051			14,051

Total operating expenses			182,543			60,981			243,524

Operating income (loss)			233,126			(44,625	)		188,501
Interest and other income (expense), net			3,597			(82	)		3,515

Income (loss) before provision for income taxes and minority interest			236,723			(44,707	)		192,016
Provision for income taxes			59,525			—			59,525

Income (loss) before minority interest			177,198			(44,707	)		132,491
Minority interest in consolidated joint venture			(199	)		—			(199	)

Net income (loss) before retained interest in EA.com		$	176,999		$	(44,707	)	$	132,292

Interest income		$	3,025		$	8		$	3,033
Depreciation and amortization			13,438			14,819			28,257
Identifiable assets			1,502,949			192,424			1,695,373
Capital expenditures			8,660			1,685			10,345



		Nine Months Ended December 31, 2002
		EA Core
		(excl. EA.com)			EA.com			Electronic Arts

Net revenues		$	1,958,297		$	60,817		$	2,019,114
Cost of goods sold			887,814			11,122			898,936

Gross profit			1,070,483			49,695			1,120,178
Operating expenses:
	Marketing and sales (a)		228,473			31,907			260,380
	General and administrative		89,448			5,918			95,366
	Research and development (b)		221,716			79,951			301,667
	Amortization of intangibles (c)		2,780			3,956			6,736
	Restructuring and asset impairment charges		9,378			—			9,378

Total operating expenses			551,795			121,732			673,527

Operating income (loss)			518,688			(72,037	)		446,651
Interest and other income (expense), net			67			(182	)		(115	)

Income (loss) before provision for income taxes and minority interest			518,755			(72,219	)		446,536
Provision for income taxes			138,426			—			138,426

Income (loss) before minority interest			380,329			(72,219	)		308,110
Minority interest in consolidated joint venture			(253	)		—			(253	)

Net income (loss) before retained interest in EA.com		$	380,076		$	(72,219	)	$	307,857

Interest income		$	14,109		$	76		$	14,185
Depreciation and amortization			36,974			37,355			74,329
Capital expenditures			33,774			696			34,470



		Nine Months Ended December 31, 2001
		EA Core
		(excl. EA.com)		EA.com			Electronic Arts

Net revenues		$	1,201,407	$	53,577		$	1,254,984
Cost of goods sold			595,468		12,174			607,642

Gross profit			605,939		41,403			647,342
Operating expenses:
	Marketing and sales (a)		150,002		29,697			179,699
	General and administrative		72,535		7,916			80,451
	Research and development (b)		185,138		100,628			285,766
	Amortization of intangibles (c)		9,615		9,694			19,309
	Restructuring and asset impairment charges		—		14,051			14,051

Total operating expenses			417,290		161,986			579,276

Operating income (loss)			188,649		(120,583	)		68,066
Interest and other income (expense), net			10,865		(573	)		10,292

Income (loss) before provision for income taxes and minority interest			199,514		(121,156	)		78,358
Provision for income taxes			24,291		—			24,291

Income (loss) before minority interest			175,223		(121,156	)		54,067
Minority interest in consolidated joint venture			147		—			147

Net income (loss) before retained interest in EA.com		$	175,370	$	(121,156	)	$	54,214

Interest income		$	12,493	$	43		$	12,536
Depreciation and amortization			38,267		45,284			83,551
Capital expenditures			27,609		12,447			40,056

~~(a)~~		~~EA.com Marketing~~EA’s sales to Wal-mart Stores represented 15 and Sales includes $4,467,000 and $4,466,000 of Carriage Fee for the three months ended December 31, 2002 and 2001, respectively. EA.com Marketing and Sales includes $13,399,000 and $13,398,000 of Carriage Fee for the nine months ended December 31, 2002 and 2001, respectively.

~~(b)~~		EA.com Research and Development includes $12,422,000 of Network Development and Support and $2,708,000 of Customer Relationship Management (CRM) for the three months ended December 31, 2002; and includes $14,858,000 of Network Development and Support and $2,583,000 of CRM for the three months ended December 31, 2001. EA.com Research and Development includes $36,533,000 of Network Development and Support and $7,052,000 of CRM for the nine months ended December 31, 2002; and includes $46,903,000 of Network Development and Support and $8,493,000 of CRM for the nine months ended December 31, 2001.

~~(c)~~		Results for fiscal 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. Amortization of intangibles for the three months ended December 30, 2001 includes goodwill amortization of $1,485,000 for EA Core and $1,406,000 for EA.com. Amortization of intangibles for the nine months ended December 31, 2001 includes goodwill amortization of $4,456,000 for EA Core and $4,296,000 for EA.com.




	Facilities		Workforce			Total

Recorded in the quarter ended December 31, 2002	$	7,843	$	616		$	8,459
Charges utilized in cash for the three months ended December 31, 2002		—		(385	)		(385	)

Balance as of December 31, 2002	$	7,843	$	231		$	8,074

	•		~~Strong performance of~~~~The Lord of the Rings~~Tiger Woods PGA TOUR^® 2004andNHL^TM®~~, The Two Towers~~ 2004^TMtitles were released ~~during~~in the current quarter, ~~on the PlayStation 2~~while fiscal 2003’s,Tiger Woods PGA TOURand of~~Harry Potter and the Chamber~~NHLtitles were not released until our fiscal third quarter. This accounted for an aggregate increase of ~~Secrets~~^TM~~and~~~~James Bond 007: Nightfire~~^TM ~~released during the current quarter on multiple platforms and across multiple territories.~~

	•		~~Higher installed base of game consoles, most notably the PlayStation 2.~~~~Net revenues from sales associated with the PlayStation 2 platform increased by 102 percent to $459,407,000 versus $227,554,000 in the same quarter of the prior fiscal year.~~

	•		~~Higher installed base of the Xbox console~~, which is now available in every major market in which we operate. In the prior period, Xbox was only available in North America. In the quarter ended December 31, 2002, we generated $116,836,000 in net revenues from Xbox titles versus $44,629,000 a year ago.

	•		~~Higher installed base of the Nintendo GameCube console~~, which is now available in every major market in which we operate. In the prior period, Nintendo GameCube was only available in North America and Japan. In the quarter ended December 31, 2002, we generated approximately $111,103,000 in net revenues from Nintendo GameCube titles versus approximately $30,026,000 a year ago.

	•		~~Net revenues from Affiliated Label products~~~~increased by 30 percent to $157,469,000 versus $120,783,000 in the third quarter of the prior fiscal year. The increase was driven by sales of~~~~Kingdom Hearts~~~~in North America and~~~~Anno 1503~~~~in Europe.~~

	•		~~Net revenues from PC products~~~~increased by 12 percent to $219,083,000 versus $194,856,000 in the same period of the prior fiscal year.~~

	•		~~Net revenues from titles associated with the PlayStation~~~~declined year over year as customers migrated to newer consoles.~~$50.5 million.

	•		Strong ~~performance~~sales of other current-quarter sports-related titles including~~Medal of Honor: Frontline~~^TM,**~~The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets,~~ Madden NFL 2004, EA SPORT^TM™ ~~2003~~Rugby 2004and**~~Need~~NCAA^® Football 2004, as well as strong sales ofSoul Calibur IIandFreedom Fighters^®in Europe and Asia Pacific. These products accounted for ~~Speed~~^TM~~Hot Pursuit 2released in the current fiscal year on multiple platforms and across multiple territories.~~

	•		~~Higher installed base~~an aggregate increase of ~~game consoles, most notably the PlayStation 2.~~~~Net revenues from sales associated with the PlayStation 2 platform increased by 104 percent to $752,717,000 versus $369,836,000 in the same period of the prior fiscal year.~~

	•		~~Higher installed base of the Xbox console~~, which is now available in every major market in which we operate. In the same period of the prior fiscal year, Xbox was only available in North America after its launch in November 2001. We generated net revenues from Xbox titles for all three quarters of the current fiscal year versus only a portion of the third quarter in the prior fiscal year. In the nine months ended December 31, 2002, we generated $174,466,000 in net revenues from Xbox titles versus $44,629,000 in the same period of the prior fiscal year.$59.6 million.

	•		~~Higher installed based~~Partially offset by strong prior year sales of ~~the Nintendo GameCube console~~Kingdom Hearts, (from our Square EA joint venture, which ~~is now available~~was terminated in ~~every major market in which we operate. In the prior period, Nintendo GameCube was only available in North America~~ March 2003),Medal of Honorand ~~Japan. We generated net revenues from Nintendo GameCube titles~~The Simsfranchise products for ~~all three quarters~~an aggregate decrease of the current fiscal year versus only a portion of the prior fiscal year. In the nine months ended December 31, 2002, we generated $153,897,000 in net revenues from Nintendo GameCube titles versus $30,026,000 in net revenues in same period of the prior fiscal year.$42.7 million.

	•		Partially offset by a 55 percent decrease in net revenue from co-publishing and distribution products to $20.2 million from $44.7 million in the same period of the prior fiscal year. The ~~increase~~decrease was ~~driven by sales of~~~~Kingdom Hearts~~due in ~~North America and~~~~Battlefield 1942~~^TM ~~primarily in North America and Europe.~~

	•		~~PC-based revenues~~~~increased 19 percent~~large part to ~~$377,835,000 versus $318,818,000 a year ago driven by~~ strong sales in the ~~current period~~three months ended September 30, 2002 of~~The Sims~~Kingdom Hearts^TM ~~products. Titles released~~(from our Square EA joint venture which was terminated in March 2003) andBuffy the Vampire Slayer,partially offset by the current fiscal year ~~include~~release of~~The Sims Unleashed Expansion Pack~~Aliens Natural Selection~~and~~~~The Sims Deluxe.~~~~Prior releases continued to generate strong sales including~~~~The Sims Vacation~~,~~The Sims~~~~and~~~~The Sims Hot Date.~~

	•		~~Revenues from titles associated with the PlayStation~~~~declined year over year as customers migrated to newer consoles.~~.

	•		~~Higher installed base of the PlayStation 2,~~~~due in part to Sony’s price cut of the hardware in North America in May 2002. This was reflected in strong~~Strong sales of ~~titles~~our Playstation 2 and Xbox products for ~~the PlayStation~~an aggregate increase of $93.2 million.NBA STREET vol. 2 ~~most notably~~~~The Lord of the Rings, The Two Towers~~,~~Harry Potter and the Chamber of Secrets~~and~~Need For Speed Hot Pursuit 2.~~Def Jam VENDETTAreleases plus additional strong sports title net revenue onMadden, Tiger Woods PGA TOUR, NHLandNCAA Footballfranchises were partially offset by a decrease in net revenue fromMedal of Honor Frontline.

	•		Playstation 2, Xbox and PC product sales increased by $11.8 million, or 31 percent, primarily due to the additional titles available on the Xbox console and strong current fiscal year net revenue onEA SPORTS Rugby 2004,Command & Conquer: Generals,andTiger Woods PGA TOURfranchise products, as well asLord of the Rings: The Two Towers, partially offset by strong sales in the same period of the prior fiscal ~~year.~~

	•		~~Net revenues from titles associated with PlayStation~~~~declined~~ year ~~over year as customers migrated to newer consoles.~~ofMedal of Honor Frontline.

	•		~~Higher installed base of the~~This increase was also partially offset by a $4.6 million decrease for our PlayStation 2,~~due in part to Sony’s price cut of the hardware in North America in May 2002. This was reflected in strong sales of titles for the PlayStation 2, most notably~~~~Medal of Honor: Frontline~~,~~The Lord of the Rings, The Two Towers~~~~and~~~~Harry Potter and the Chamber of Secrets.~~

	•		~~Higher installed base of the Xbox~~ and Nintendo GameCube ~~consoles,~~ ~~which both launched~~products primarily due to stronger sales in ~~North America in November 2001. Net revenues were generated on titles for these consoles for all~~the three ~~quarters of the current fiscal year versus only one quarter of the prior fiscal year.~~

	•		~~Higher AL revenues primarily~~months ended September 30, 2002 from key ~~title~~titles, including~~Kingdom Hearts~~F1 Challenge, SSX Trickyand ourJames Bondfranchise products. The decrease in Playstation net revenue has been expected as we transition away from the ~~current period~~.

	•		~~Net revenues from titles associated with PlayStation declined year over year as customers migrated to newer platform consoles.~~Playstation platform.

	•		~~Strong~~Co-publishing and distribution product sales ~~of titles for the PlayStation~~which increased by $32.8 million, or 48 percent, primarily due to net revenue fromSoul Calibur II,Freedom Fighters, Devil May Cry 2,~~, most notably~~~~The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~ Aliens Natural Selection* and~~FIFA 2003~~Anno.*

	•		~~Higher installed base of the PlayStation 2 hardware,~~~~due in part to Sony’s hardware price cut in Europe in August, 2002.~~

	•		~~New net revenues from titles associated with the Nintendo GameCube and Xbox platforms,~~~~which both launched in Europe~~franchise products, partially offset by decreases in the ~~Spring of 2002.~~current fiscal year onResident Evil, Onimusha WarlordsandBuffy the Vampire Slayer.

	•		~~Strong~~Xbox, PC and Game Boy Advance product sales, ofwhich increased by $12.9 million, or 17 percent, primarily due to additional titles ~~associated with~~available on the ~~PlayStation 2~~~~, most notably~~~~Medal of Honor: Frontline~~,~~The Lord of the Rings, The Two Towers~~~~and~~~~Harry Potter~~Xbox and ~~the Chamber of Secrets~~.

	•		~~Higher installed base of the PlayStation 2 hardware,~~~~due in part to Sony’s hardware price cut in Europe in August, 2002.~~

	•		~~New revenues from titles associated with the Nintendo GameCube and Xbox platforms~~,Game Boy Advance consoles as well as strong current fiscal year net revenue onThe SimsandCommand & Conquerfranchise ~~titles on the PC and higher AL net revenues.~~products.


PlayStation 2 Product Net Revenues

(in thousands)	December 31, 2002		% of net revenues			December 31, 2001		% of net revenues			% change

Three Months Ended	$	459,407		37.2	%	$	227,554		27.3	%		101.9	%

Nine Months Ended	$	752,717		37.3	%	$	369,836		29.5	%		103.5	%

	•		~~Strong consumer acceptance of the~~This increase was partially offset by an $8.2 million decrease for PlayStation 2 ~~game console~~and Nintendo GameCube products primarily due to stronger sales in ~~every major market in which we operate.~~

	•		~~Higher installed base~~the six months ended September 30, 2002 from key titles, includingMedal of ~~the PlayStation 2 console~~~~due in part to Sony’s hardware price cut in North America in May,~~ Honor Frontlineand2002 ~~and in Europe in August, 2002.~~

	•		*~~Sales of~~FIFA World Cup.Strong current fiscal year net revenue onThe ~~Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~~~and~~~~Need For Speed Hot Pursuit 2~~***~~in multiple territories.~~

	•		~~Strength of other PlayStation 2 franchise titles~~~~with higher net revenues on current year releases versus prior year release versions including:~~~~FIFA 2003, James Bond 007:Nightfire~~Sims, Def Jam VENDETTAand~~Tiger Woods PGA Tour 2003~~EA SPORTS Rugby 2004partially offset these decreases.

	•		~~In total, we released nine PlayStation 2 titles~~~~during the quarter versus six PlayStation 2 titles a year ago.~~

	•		~~Strong consumer acceptance of the~~ PlayStation 2 ~~game console~~~~in every major market in~~product sales, which ~~we operate.~~

	•		~~Higher installed base of the PlayStation 2 console~~increased $2.2 million primarily due ~~in part~~ to ~~Sony’s hardware price cut in North America in May, 2002 and in Europe in August, 2002.~~

	•		~~Sales of~~stronger sales from key titles, including~~Medal of Honor: Frontline, The Lord of the Rings, The Two Towers, Harry Potter and the Chamber of Secrets~~EA SPORTS Rugby 2004 and~~Need For Speed Hot Pursuit 2~~Tiger Woods PGA TOUR 2004.~~in multiple territories.~~

	•		~~Strength of other PlayStation 2 franchise titles~~~~with higher net revenues on current year releases versus prior year releases including:~~~~James Bond 007:Nightfire~~,~~Madden NFL 2003~~,~~FIFA 2003~~~~and~~~~NCAA Football 2003~~.

	•		~~In total, we released 17 PlayStation 2 titles~~~~during the current nine-month period versus 12 PlayStation 2 titles a year ago.~~


Personal Computer Product Net Revenues

(in thousands)	December 31, 2002		% of net revenues			December 31, 2001		% of net revenues			% change

Three Months Ended	$	219,083		17.8	%	$	194,856		23.4	%		12.4	%

Nine Months Ended	$	377,835		18.7	%	$	318,818		25.4	%		18.5	%

	•		*~~Sales of~~~~James Bond 007:Nightfire~~~~and~~~~Need For Speed Hot Pursuit 2~~*** ~~in North America, Europe and Asia Pacific.~~

	•		*~~Partially offset by lower net revenues on the current year release of franchise title~~~~Harry Potter and the Chamber of Secrets~~**~~versus the prior year release~~~~Harry Potter and the Sorceror’s Stone~~*~~, particularly in Europe.~~

	•		~~In total, we released nine PC titles~~~~during the quarter versus five PC titles a year ago.~~

	•		*~~Sales of~~~~The Sims Unleashed Expansion Pack~~~~and~~~~The Sims Deluxe~~**~~in the current fiscal year. Prior years releases, including~~~~The Sims, The Sims Vacation Expansion Pack, The Sims Hot Date, The Sims: Livin’ Large~~* ~~and~~~~The Sims House Party,~~~~continued to generate strong sales in the current fiscal year.~~~~The Sims~~~~and~~~~The Sims Expansion Packs~~~~have now sold over 21 million units.~~

	•		*~~Catalogue sales from~~~~Medal of Honor Allied Assault~~**~~, which was released in the prior year, and sales from current release title~~~~Medal of Honor Allied Assault~~^TM ~~Spearhead~~*.

	•		~~In total, we released 14 PC titles~~~~during the current nine-month period versus ten PC titles a year ago.~~


Xbox Product Net Revenues

(in thousands)	December 31, 2002		% of net revenues			December 31, 2001		% of net revenues			% change

Three Months Ended	$	116,836		9.5	%	$	44,629		5.4	%		161.8	%

Nine Months Ended	$	174,466		8.6	%	$	44,629		3.6	%		290.9	%

	•		~~Higher installed base of the Xbox console~~~~which is now available in every major market in which we operate. In the prior period, the Xbox console was only available in North America.~~

	•		*~~Sales of~~~~Medal of Honor: Frontline~~*,~~James Bond 007:Nightfire~~~~and~~~~Harry Potter and the Chamber of Secrets~~**~~in North America, Europe and Asia Pacific.~~

	•		~~In total, we released eight Xbox titles~~~~during the quarter versus six Xbox titles a year ago.~~

	•		~~Higher installed base of the Xbox console~~which is now available in every major market in which we operate. In the prior period, the Xbox console was only available in North America. Net revenues were generated on titles associated with the Xbox for all three quarters of the current fiscal year versus only one quarter of the prior fiscal year.

	•		*~~Sales of~~~~Medal of Honor: Frontline~~*,~~James Bond 007: Nightfire~~~~and~~~~NCAA Football 2003~~~~in North America.~~**

	•		*~~Sales of~~~~FIFA 2003, James Bond 007: Nightfire~~~~and~~~~Harry Potter and the Chamber of Secrets~~~~in Europe.~~*

	•		~~In total, we released 13 Xbox titles~~~~during the current nine-month period versus six Xbox titles a year ago.~~


Nintendo GameCube Product Net Revenues

(in thousands)	December 31, 2002		% of net revenues			December 31, 2001		% of net revenues			% change

Three Months Ended	$	111,103		9.0	%	$	30,026		3.6	%		270.0	%

Nine Months Ended	$	153,897		7.6	%	$	30,026		2.4	%		412.5	%