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 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 / /

The number of shares of the registrant's Common Stock outstanding as of ~~August 9,~~November 5, 2001 was ~~33,234,417.~~34,693,108.

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

				June 30, 2001 (Unaudited)			March 31, 2001						September 30, 2001 (Unaudited)			March 31, 2001
Assets	Assets									Assets
	Current assets:									Current assets:
		Cash and cash equivalents		$	105,986		$	125,550			Cash and cash equivalents		$	122,152		$	125,550
		Accounts receivable, net of allowances of $29,273 and $28,461 at June 30, 2001 and March 31, 2001, respectively			72,066			73,802			Accounts receivable, net of allowances of $27,450 and $28,461 at September 30, 2001 and March 31, 2001, respectively			86,391			73,802
		Inventories			44,198			43,888			Inventories			33,892			43,888
		Prepaid royalties and capitalized software costs			39,798			27,502			Prepaid royalties and capitalized software costs			38,377			27,502
		Deferred income taxes			13,060			14,292			Deferred income taxes			12,553			14,292
		Other current assets			12,877			13,196			Other current assets			14,758			13,196

			Total current assets		287,985			298,230				Total current assets		308,123			298,230
	Prepaid royalties and capitalized software costs				16,825			14,703			Prepaid royalties and capitalized software costs			23,538			14,703
	Property and equipment, net				16,513			15,240			Property and equipment, net			17,209			15,240
	Deferred income taxes				38,591			13,759			Deferred income taxes			39,697			13,759
	Goodwill				10,283			10,316			Other assets			5,786			7,709
	Other assets				6,226			7,709			Goodwill			10,458			10,316

			Total assets	$	376,423		$	359,957				Total assets	$	404,811		$	359,957

Liabilities and Shareholders' Equity	Liabilities and Shareholders' Equity									Liabilities and Shareholders' Equity
	Current liabilities:									Current liabilities:
		Current portion of long-term debt		$	1,715		$	10,231			Current portion of long-term debt		$	2,337		$	10,231
		Accounts payable			42,691			60,980			Accounts payable			60,417			60,980
		Accrued expenses			41,062			44,039			Accrued expenses			43,612			44,039

			Total current liabilities		85,468			115,250				Total current liabilities		106,366			115,250
	Long-term debt, less current portion				3,303			3,401			Long-term debt, less current portion			3,425			3,401
	Convertible subordinated notes				—			60,000			Convertible subordinated notes			—			60,000

			Total liabilities		88,771			178,651				Total liabilities		109,791			178,651

	Commitments and contingencies									Commitments and contingencies
	Shareholders' equity:									Shareholders' equity:
		Preferred stock, $.000001 par value, 4,500,000 shares authorized, no shares issued at June 30, 2001 and March 31, 2001			—			—			Preferred stock, $.000001 par value, 4,500,000 shares authorized, no shares issued at September 30, 2001 and March 31, 2001			—			—
		Series A Junior Preferred stock, $.000001 par value, 500,000 shares authorized, no shares issued at June 30, 2001 and March 31, 2001			—			—			Series A Junior Preferred stock, $.000001 par value, 500,000 shares authorized, no shares issued at September 30, 2001 and March 31, 2001			—			—
		Common stock, $.000001 par value, 50,000,000 shares authorized, 36,031,570 and 30,166,455 shares issued and 33,147,591 and 27,282,476 shares outstanding at June 30, 2001 and March 31, 2001, respectively			—			—			Common stock, $.000001 par value, 125,000,000 and 50,000,000 shares authorized, 36,201,749 and 30,166,455 shares issued and 33,317,770 and 27,282,476 shares outstanding at September 30, 2001 and March 31, 2001, respectively			—			—
		Additional paid-in capital			307,327			200,786			Additional paid-in capital			310,744			200,786
		Retained earnings			12,175			12,146			Retained earnings			14,390			12,146
		Accumulated other comprehensive loss			(11,601	)		(11,377	)		Accumulated other comprehensive loss			(9,865	)		(11,377	)
		Less: Treasury stock, at cost, 2,883,979 shares at June 30, 2001 and March 31, 2001			(20,249	)		(20,249	)		Less: Treasury stock, at cost, 2,883,979 shares at September 30, 2001 and March 31, 2001			(20,249	)		(20,249	)

			Total shareholders' equity		287,652			181,306				Total shareholders' equity		295,020			181,306

			Total liabilities and shareholders' equity	$	376,423		$	359,957				Total liabilities and shareholders' equity	$	404,811		$	359,957

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

			For the three months ended June 30,								For the six months ended September 30,
			2001			2000					2001			2000
Cash flows from operating activities:	Cash flows from operating activities:								Cash flows from operating activities:
	Net income (loss)		$	29		$	(5,179	)	Net income (loss)		$	2,244		$	(873	)
	Adjustments to reconcile net income (loss) to net cash used in operating activities:								Adjustments to reconcile net income (loss) to net cash used in operating activities:
		Deferred income taxes		(23,600	)		(4,764	)		Deferred income taxes		(24,199	)		(5,275	)
		Depreciation and amortization		1,297			1,480			Depreciation and amortization		2,679			2,964
		Amortization of prepaid royalties and capitalized software costs		6,353			12,546			Amortization of prepaid royalties and capitalized software costs		17,531			34,101
		Tax benefit attributable to employee stock options and common stock warrants		23,153			3			Tax benefit attributable to employee stock options and common stock warrants		24,371			1,445
		Expense related to common stock warrants		283			352			Expense related to common stock warrants		566			703
	Change in assets and liabilities (net of effects of purchases and acquisitions):								Changes in assets and liabilities:
		Accounts receivable		1,294			21,213			Accounts receivable		(12,589	)		(28,760	)
		Inventories		(544	)		(2,435	)		Inventories		9,996			(6,789	)
		Prepaid royalties and capitalized software costs		(20,771	)		(18,095	)		Prepaid royalties and capitalized software costs		(37,241	)		(37,182	)
		Other assets		(36	)		(1,064	)		Other assets		(1,489	)		(1,677	)
		Accounts payable		(17,540	)		(16,168	)		Accounts payable		(563	)		6,200
		Accrued expenses and other liabilities		416			(7,576	)		Accrued expenses and other liabilities		2,790			8,493

	Net cash used in operating activities			(29,666	)		(19,687	)	Net cash used in operating activities			(15,904	)		(26,650	)

Cash flows from investing activities:	Cash flows from investing activities:								Cash flows from investing activities:
	Capital expenditures			(2,812	)		(1,627	)	Capital expenditures			(4,652	)		(3,531	)
	Proceeds from disposal of property and equipment			391			—		Proceeds from disposal of property and equipment			391			1,394

	Net cash used in investing activities			(2,421	)		(1,627	)	Net cash used in investing activities			(4,261	)		(2,137	)

Cash flows from financing activities:	Cash flows from financing activities:								Cash flows from financing activities:
	Proceeds from issuance of common stock pursuant to employee stock option plans and common stock warrants			21,517			29		Proceeds from issuance of common stock pursuant to employee stock option plans, employee stock purchase plan and common stock warrants			23,716			5,451
	Borrowing under line-of-credit agreements			180			144,401		Borrowing under line-of-credit agreements			—			234,296
	Payment under line-of-credit agreements			(98	)		(139,440	)	Payment under line-of-credit agreements			—			(211,055	)
	Payment on term loan			(8,550	)		(4,632	)	Payment on term loan			(8,550	)		(5,000	)
	Other notes payable, net			(99	)		(191	)	Other borrowings, net			680			(458	)
	Redemption of convertible subordinated notes			(62	)		—		Redemption of convertible subordinated notes			(62	)		—
	Purchase of treasury stock			—			(14,971	)	Purchase of treasury stock			—			(14,971	)

Net cash provided by (used in) financing activities				12,888			(14,804	)
Net cash provided by financing activities									Net cash provided by financing activities			15,784			8,263

Effect of exchange rate changes on cash	Effect of exchange rate changes on cash			(365	)		(2,278	)	Effect of exchange rate changes on cash			983			(4,257	)

Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents			(19,564	)		(38,396	)	Net decrease in cash and cash equivalents			(3,398	)		(24,781	)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period			125,550			49,985		Cash and cash equivalents at beginning of period			125,550			49,985

Cash and cash equivalents at end of period	Cash and cash equivalents at end of period		$	105,986		$	11,589		Cash and cash equivalents at end of period		$	122,152		$	25,204

The accompanying notes are an integral part of these consolidated financial statements.

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the ~~three~~six months ended ~~June~~September 30, 2001
(Unaudited)
(In thousands)

The accompanying notes are an integral part of these consolidated financial statements.

~~ACTIVISION,~~ACTIIVION INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For the three and six months ended ~~June~~September 30, 2001
(Unaudited)

The accompanying consolidated financial statements include the accounts of Activision, Inc. and its subsidiaries. The information furnished is unaudited and reflects all adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the interim periods presented. The financial statements should be read in conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2001 as filed with the Securities and Exchange Commission.

Certain amounts in the consolidated financial statements have been reclassified to conform to the current period's presentation. These reclassifications had no impact on previously reported working capital or results of operations.

Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", was issued on July 20, 2001 and addresses financial accounting and reporting for business combinations. SFAS No. 141 requires that the purchase method be used to account and report for all business combinations. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later.

SFAS No. 142 "Goodwill and Other Intangibles", was issued on July 20, 2001 and addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 addresses how intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. We adopted the provisions of this Statement effective April 1, 2001.

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" was issued, which supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and the accounting and reporting provisions of Accounting Principles Board ("APB") No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No.144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. We ~~are currently assessing transitional goodwill impairment, if any. However, we do~~believe the adoption of SFAS No. 144 will not ~~believe that the assessment of transitional goodwill impairment will~~ have a material impact on our financial ~~position or results of operations.~~statements.

We adopted SFAS No. 142 effective April 1, ~~2001.~~2001, and as a result we were not required to expense goodwill in the amount of $375,000 and $750,000 for the three months and six months ended September 30, 2001, respectively. The following table reconciles net income (loss) and earnings (loss) per share as reported for the three and six months ended ~~June~~September 30, 2001 and 2000 to net income

~~income~~ (loss) and earnings (loss) per share as adjusted to exclude goodwill amortization (amounts in thousands, except per share data).

Prepaid royalties include payments made to independent software developers under development agreements and license fees paid to intellectual property rights holders for use of their trademarks or copyrights. Intellectual property rights which have alternative future uses are capitalized. Capitalized software costs represent costs incurred for internal development of products.

We account for prepaid royalties relating to development agreements and capitalized software costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Software development costs and prepaid royalties are capitalized once technological feasibility is established and such costs are determined to be recoverable. For products where proven game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product by product basis. Prior to a product's release, we expense, as part of product development costs, capitalized costs when we believe such amounts are not recoverable. Amounts related to software development which are not capitalized are charged immediately to product development expense.

We evaluate the future recoverability of capitalized amounts on a quarterly basis. The following criteria is used to evaluate recoverability of software development costs: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to our budgeted amount.

Commencing upon product release prepaid royalties and capitalized software development costs are amortized to cost of sales—royalties and software amortization on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of one year or less. For products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

As of ~~June~~September 30, 2001, prepaid royalties and unamortized capitalized software costs totaled ~~$48.5~~$51.8 million (including ~~$16.8~~$23.5 million classified as non-current) and ~~$8.1~~$10.2 million, respectively. As of

March 31, 2001, prepaid royalties and unamortized capitalized software costs totaled $38.3 million (including $14.7 million classified as non-current) and $3.9 million, respectively.

We recognize revenue from the sale of our products once they are shipped and are available for general release to customers. Subject to certain limitations, we permit customers to exchange and return our products within certain specified periods and we provide our customers with price protection on certain unsold merchandise. Price protection policies, when negotiated and applicable, allow customers to take a deduction on unsold merchandise.

Revenue from product sales is reflected after deducting the estimated allowance for returns and price protection. We estimate the amount of future returns and price protection based upon historical results and current known circumstances. With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery. Per copy royalties on sales that exceed the guarantee are recognized as earned.

Interest income (expense), net is comprised of the following (amounts in thousands):

Non-cash investing and financing activities and supplemental cash flow information is as follows (amounts in thousands):

We publish, develop and distribute interactive entertainment software products. Our products cover the action, adventure, extreme sports, racing, role playing, simulation and strategy game categories. We offer our products in versions which operate on the Sega Dreamcast, Sony PlayStation, Sony PlayStation 2 and Nintendo 64 console systems, the Nintendo Game Boy Color and Game Boy Advance hand held devices, as well as on personal computers. We have also begun product

development for next generation console systems, including Microsoft's Xbox and Nintendo's GameCube.

Based upon our organizational structure, we operate two business segments: (i) publishing of interactive entertainment software and (ii) distribution of interactive entertainment software and hardware products.

Publishing refers to the development, marketing and sale of products, either directly, by license or through our affiliate label program with third party publishers. In the United States, our products are sold primarily on a direct basis to major computer and software retailing organizations, mass market retailers, consumer electronic stores, discount warehouses and mail order companies. We conduct our international publishing activities through offices in the United Kingdom, Germany, France, Australia, Canada and Japan. Our products are sold internationally on a direct to retail basis and through third party distribution and licensing arrangements and through our wholly-owned distribution subsidiaries located in the United Kingdom, the Netherlands and Germany.

Distribution refers to our operations in the United Kingdom, the Netherlands and Germany that provide logistical and sales services to third party publishers of interactive entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware.

Resources are allocated to each of these segments using information on their respective net revenues and operating profits before interest and taxes. The segments are not evaluated based on assets or depreciation.

The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended March 31, 2001. Revenue derived from sales between segments is eliminated in consolidation.

Information on the reportable segments for the three and six months ended ~~June~~September 30, 2001 and 2000 is as follows (amounts in thousands):

Geographic information for the three and six months ended ~~June~~September 30, 2001 and 2000 is based on the location of the selling entity. Revenues from external customers by geographic region were as follows (amounts in thousands):

The following table sets forth the computations of basic and diluted earnings (loss) per share (amounts in thousands, except per share data):

Options to purchase ~~5,280~~56,050 shares of common stock at exercise prices ranging from ~~$29.49~~$32.70 to $37.90 and options to purchase ~~10,650,240~~38,145 shares of common stock at exercise prices ranging from $31.05 to $37.90 were outstanding for the three and six months ended September 30, 2001, respectively, but were not included in the calculation of diluted earnings per share because their effect would be

antidilutive. Options to purchase 3,212,806 of common stock at exercise prices ranging from $11.05 to $23.04 and options to purchase 10,804,882 shares of common stock at exercise prices ranging from $0.75 to $23.04 were outstanding for the three and six months ended ~~June~~September 30, ~~2001 and~~ 2000, respectively, but were not

included in the ~~calculations~~calculation of diluted earnings (loss) per share because their effect would be antidilutive. ~~Additionally, for the three months ended June 30, 2000, shares~~Shares issuable upon the conversion of convertible subordinated notes were not included in the ~~calculations~~calculation of diluted ~~loss~~earnings (loss) per share for the three and six months ended September 30, 2000 because their effect would be antidilutive.

On July 30, 2001, we filed with the Securities and Exchange Commission a Registration Statement on Form S-3 for purposes of registering 5,000,000 shares of our common stock, $.000001 par value, (excluding shares registered to cover the underwriters' over-allotment option). The Registration Statement is currently under review by the Securities and Exchange Commission.

In June 1999, we obtained a $100.0 million revolving credit facility and a $25.0 million term loan with a syndicate of banks (the "U.S. Facility"). The revolving portion of the U.S. Facility provided us with the ability to borrow up to $100.0 million and issue letters of credit up to $80 million on a revolving basis against eligible accounts receivable and inventory. The term loan had a three year term with principal amortization on a straight-line quarterly basis beginning December 31, 1999 and a borrowing rate based on the banks' base rate (which is generally equivalent to the published prime rate) plus 2% or LIBOR plus 3% and was to ~~mature~~expire June 2002. The revolving portion of the U.S Facility had a borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus 2.75%. In May 2001, we accelerated our repayment of the outstanding balance under the term loan portion of the U.S. Facility. In connection with the accelerated repayment, we amended the U.S. Facility (the "Amended and Restated U.S. Facility"). The Amended and Restated U.S. Facility eliminated the term loan, reduced the revolver to $78.0 million and reduced the interest rate to the banks' base rate plus 1.25% or LIBOR plus 2.25% ~~(weighted average interest rate of approximately 9.6% for the three months ended June 30, 2001)~~. We pay a commitment fee of¹/4% on the unused portion of the revolver. The Amended and Restated U.S. Facility is collateralized by substantially all of our assets and ~~matures~~expires June 2002. The Amended and Restated U.S. Facility contains various covenants that limit our ability to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. We are also required to maintain specified financial ratios related to net worth and fixed charges. We were in compliance with these covenants as of ~~June~~September 30, 2001. As of ~~June~~September 30, 2001, there were no borrowings outstanding under the Amended and ~~$24.3 million of letters~~Restated U.S. Facility. Letters of credit of $27.4 million were outstanding against the Amended and Restated U.S. ~~Facility.~~Facility as of September 30, 2001.

We have a revolving credit facility through our CD Contact subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands Facility permits revolving credit loans and letters of credit up to Netherlands Guilders ("NLG") 2610 million ($~~10.2~~4.2 million) as of ~~June~~September 30, 2001, based upon eligible accounts receivable and inventory balances. The Netherlands Facility is due on demand, bears interest at a Eurocurrency rate plus 1.50% and ~~matures~~expires August 2003. Borrowings outstanding and letters of credit outstanding under the Netherlands Facility were ~~$1.7~~$1.6 million and NLG 0.3 million ($0.1 million), respectively, as of ~~June~~September 30, 2001.

We also have revolving credit facilities with our CentreSoft subsidiary located in the United Kingdom (the "UK Facility") and our NBG subsidiary located in Germany (the "German Facility"). The UK Facility provides for British Pounds ("GBP") 7.0 million ($~~9.9~~10.3 million) of revolving loans and GBP ~~3.0~~1.5 million ($~~4.3~~2.2 million) of letters of credit as of ~~June~~September 30, 2001. The UK Facility bears interest at LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and ~~matures~~expires in October ~~2001.~~2002. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of ~~June~~September 30, 2001, we were in compliance with these covenants. No borrowings were outstanding against the UK facility as of ~~June~~September 30, 2001. Letters of credit of GBP ~~3.0~~1.5 million ($~~4.3~~2.2 million) were outstanding against the UK

Facility as of ~~June~~September 30, 2001. As of ~~June~~September 30, 2001, the German Facility provides for revolving loans up to ~~Deutsche Marks~~Euro dollar ("~~DM"~~EUR") 42.6 million ($~~1.8~~2.3 million), bears interest at 7.0%, is

collateralized by a cash deposit of approximately GBP 650,000 ($~~0.9~~1.0 million) made by our CentreSoft subsidiary and has no expiration date. ~~No borrowings were~~Borrowings outstanding against the German Facility as of ~~June~~September 30, ~~2001.~~2001 were $0.6 million.

In December 1997, we completed the private placement of $60.0 million principal amount of 6³/4% convertible subordinated notes due 2005 (the "Notes"). The Notes were convertible, in whole or in part, at the option of the holder at any time after December 22, 1997 (the date of original issuance) and prior to the close of business on the business day immediately preceding the maturity date, unless previously redeemed or repurchased, into our common stock, $.000001 par value, at a conversion price of $18.875 per share, (equivalent to a conversion rate of 52.9801 shares per $1,000 principal amount of Notes), subject to adjustment in certain circumstances. During the three months ended June 30, 2001, we called for the redemption of the Notes. In connection with that call, holders converted to common stock approximately $59.9 million aggregate principal amount of their Notes. The remaining Notes were redeemed for cash.

In the normal course of business, we enter into contractual arrangements with third parties for the development of products. Under these agreements, we commit to provide specified payments to a developer, contingent upon the developer's achievement of contractually specified milestones. Assuming all contractually specified milestones are achieved, the total future minimum contract commitment for contracts in place as of ~~June~~September 30, 2001 is approximately ~~$73.2~~$61.7 million and is scheduled to be distributed as follows (amounts in thousands):

We are party to routine claims and suits brought against us in the ordinary course of business, including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on our business, financial condition, results of operations or liquidity.

Fiscal year ending March 31,	Fiscal year ending March 31,		Fiscal year ending March 31,
2002	2002	$	35,894	2002		$	23,178
2003	2003	24,116	2003		25,314
2004	2004	6,070	2004		6,070
2005	2005	2,925	2005		2,925
2006	2006	1,675	2006		1,675
Thereafter	Thereafter	2,500	Thereafter		2,500

	Total	$	73,180	Total		$	61,662

On July 30, 2001, we filed with the Securities and Exchange Commission a Registration Statement on Form S-3, as amended, for purposes of registering ~~5,000,000~~6,000,000 shares of our common stock, $.000001 par value (excluding shares registered to cover the underwriters' over-allotment option)~~. The Registration Statement is currently under review by~~, in connection with a proposed public offering of such shares. On October 22, 2001, we withdrew the Securities and Exchange Commission. We intend to use the net proceeds from the offering for general corporate purposes, including, among other things, additions to working capital, financing of product development, capital expenditures, joint ventures and strategic acquisitions.registration statement.

Effective October 1, 2001, we acquired all of the outstanding capital of Treyarch Invention, LLC ("Treyarch"), a privately held interactive software development company in exchange for 545,974 shares of Activision, Inc. common stock with a market value of $14.9 million based on our opening stock price as of October 1, 2001. Additional shares of Activision common stock also may be issued to Treyarch's equity holders and employees over the course of several years, depending on the satisfaction of certain performance requirements and other criteria.

On October 23, 2001, the Board of Directors authorized a three-for-two split of our outstanding common shares. The split is payable on November 20, 2001 to shareholders of record as of November 6, 2001. The par value of our common stock will be maintained at the pre-split amount of $.000001. Following is the pro forma effect of the split on earnings per share data (in thousands, except per share data).

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

We are a leading international publisher of interactive entertainment software products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and that is used on a variety of game hardware platforms and operating systems.

Our products cover the action, adventure, extreme sports, racing, role playing, simulation and strategy game categories. We offer our products in versions which operate on the Sega Dreamcast, Sony PlayStation, Sony PlayStation 2 and Nintendo 64 console systems, the Nintendo Game Boy Color and Game Boy Advance hand held devices, as well as on personal computers ("PC's"). Over the next few years, we plan to produce many titles for the recently released Sony PlayStation 2 console system and Game Boy Advance hand held device, and the Microsoft Xbox and Nintendo GameCube console systems, which are expected to launch in North America ~~and Japan later this year~~in November 2001 and in Europe in the next calendar year. Driven partly by the enhanced capabilities of the next generation platforms, we believe that in the next few years there will be significant growth in the market for interactive entertainment software and we plan to leverage our skills and resources to extend our leading position in the industry.

We operate two business segments: (i) publishing of interactive entertainment software and (ii) distribution of interactive entertainment software and hardware products. Publishing refers to the development, marketing and sale of products, either directly, by license or through our affiliate label program with third party publishers. Distribution refers to our operations in Europe that provide logistical and sales services to third party publishers of interactive entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware.

Cost of sales-product costs represents the cost to purchase, manufacture and distribute personal computer and console product units. Manufacturers of our software are located worldwide and are readily available. Console compact discs and cartridges are manufactured by the respective video game console manufacturers, Sony and Nintendo or our ~~agents, who often require significant lead time to fulfill our orders.~~agents.

Cost of sales-royalties and software amortization represents amounts due to developers, product owners and other royalty participants as a result of product sales, as well as amortization of capitalized software development costs. Our costs to develop products are accounted for in accordance with accounting standards that provide for the capitalization of certain software development costs once technological feasibility is established and such costs are determined to be recoverable. Additionally, various contracts are maintained with developers, product owners or other royalty participants, which state a royalty rate, territory and term of agreement, among other items. Upon product release, prepaid royalties and capitalized software costs are amortized to cost of sales-royalties and software amortization based on the ratio of current revenues to total projected revenues, generally resulting in an amortization period of one year or less.

For products that have been released, we evaluate the future recoverability of prepaid royalties and capitalized software costs on a quarterly basis based on actual title performance. Prior to a product's release, we expense, as part of product development costs, capitalized costs when we believe that such amounts are not recoverable. The following criteria are used to evaluate recoverability of unreleased titles: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to our budgeted amount.

Our profitability is directly affected by the mix of revenues from our publishing and distribution segments. Publishing operating margins are substantially higher than margins realized from our distribution segment. Operating margins in our distribution segment are also affected by the mix of hardware and software sales, with software producing higher margins than hardware.

The following table sets forth certain consolidated statements of operations data for the periods indicated as a percentage of total net revenues and also breaks down net revenues by territory, platform and ~~segment:~~segment (amounts in thousands):

			2001					2000								Three months ended September 30,									Six months ended September 30,
			Three months ended June 30,
			(In thousands)													2001				2000					2001				2000
Net revenues	Net revenues		$	110,577		100	%	$	84,558		100	%	Net revenues			$	139,604	100	%	$	144,363		100	%	$	250,181	100	%	$	228,921		100	%
Costs and expenses:	Costs and expenses:												Costs and expenses:
	Cost of sales—product costs			64,124		58			43,633		52		Cost of sales—product costs				88,157	63	%		64,351		45	%		152,281	61	%		107,984		47	%
	Cost of sales—royalties and software amortization			9,996		9			13,647		16		Cost of sales—royalties and software amortization				13,165	9	%		24,819		17	%		23,161	9	%		38,465		17	%
	Product development			9,191		8			7,424		9		Product development				9,020	7	%		11,107		8	%		18,210	7	%		18,531		8	%
	Sales and marketing			18,756		17			17,872		21		Sales and marketing				16,425	12	%		23,909		16	%		35,181	14	%		41,779		18	%
	General and administrative			9,745		9			8,480		10		General and administrative				9,693	7	%		10,641		7	%		19,439	8	%		19,124		9	%

		Total costs and expenses		111,812		101			91,056		108				Total costs and expenses		136,460	98	%		134,827		93	%		248,272	99	%		225,883		99	%

Loss from operations				(1,235	)	(1	)		(6,498	)	(8	)
Operating income													Operating income				3,144	2	%		9,536		7	%		1,909	1	%		3,038		1	%
Interest income (expense), net	Interest income (expense), net			1,281		1			(1,723	)	(2	)	Interest income (expense), net				372	1	%		(2,683	)	(2	%)		1,653	1	%		(4,406	)	(2	%)

	Income (loss) before income tax provision			46		0			(8,221	)	(10	)	Income (loss) before income tax provision				3,516	3	%		6,853		5	%		3,562	2	%		(1,368	)	(1	%)
Income tax provision (benefit)	Income tax provision (benefit)			17		0			(3,042	)	4		Income tax provision (benefit)				1,301	1	%		2,547		2	%		1,318	1	%		(495	)	0	%

Net income (loss)	Net income (loss)		$	29		0	%	$	(5,179	)	(6	)%	Net income (loss)			$	2,215	2	%	$	4,306		3	%	$	2,244	1	%	$	(873	)	(1	%)

NET REVENUES BY TERRITORY:	NET REVENUES BY TERRITORY:												NET REVENUES BY TERRITORY:
	United States		$	66,264		60	%	$	45,995		54	%	United States			$	71,680	51	%	$	92,308		64	%	$	137,944	55	%	$	138,303		61	%
	Europe			41,833		38			37,370		44		Europe				65,537	47	%		48,039		33	%		107,370	43	%		85,409		37	%
	Other			2,480		2			1,193		2		Other				2,387	2	%		4,016		3	%		4,867	2	%		5,209		2	%

	Total net revenues		$	110,577		100	%	$	84,558		100	%			Total net revenues	$	139,604	100	%	$	144,363		100	%	$	250,181	100	%	$	228,921		100	%

ACTIVITY/PLATFORM MIX:	ACTIVITY/PLATFORM MIX:												ACTIVITY/PLATFORM MIX:
	Publishing:												Publishing:
		Console	$	69,217		63	%	$	31,259		37	%		Console		$	79,490	81	%	$	99,057		81	%	$	148,699	82	%	$	129,100		71	%
		PC		13,613		12			29,740		35			PC			18,137	19	%		22,573		19	%		31,758	18	%		53,529		29	%

		Total publishing net revenues	$	82,830		75		$	60,999		72				Total publishing net revenues		97,627	70	%		121,630		84	%		180,457	72	%		182,629		80	%

	Distribution:												Distribution:
		Console	$	24,202		22		$	16,489		20			Console			35,596	85	%		16,102		71	%		59,920	86	%		32,704		71	%
		PC		3,545		3			7,070		8			PC			6,381	15	%		6,631		29	%		9,804	14	%		13,588		29	%

		Total distribution net revenues	$	27,747		25		$	23,559		28				Total distribution net revenues		41,977	30	%		22,733		16	%		69,724	28	%		46,292		20	%

		Total net revenues	$	110,577		100	%	$	84,558		100	%			Total net revenues	$	139,604	100	%	$	144,363		100	%	$	250,181	100	%	$	228,921		100	%

OPERATING INCOME (LOSS) BY SEGMENT:													OPERATING INCOME (LOSS) BY SEGMENT:
	OPERATING INCOME (LOSS) BY SEGMENT:												Publishing			$	2,118	2	%	$	10,461		7	%	$	812	0	%	$	4,554		2	%
		Publishing	$	(1,307	)	(1	)%	$	(5,907	)	(7	)%	Distribution				1,026	0	%		(925	)	0	%		1,097	0	%		(1,516	)	(1	%)
		Distribution		72		0			(591	)	(1	)
															Total operating income	$	3,144	2	%	$	9,536		7	%	$	1,909	0	%	$	3,038		1	%
		Total operating loss	$	(1,235	)	(1	)%	$	(6,498	)	(8	)%

Results of Operations—Three and Six Months Ended ~~June~~September 30, 2001 and 2000

Net revenues for the three months ended ~~June~~September 30, 2001 decreased 3% over the same period last year, from $144.4 million to $139.6 million. This decrease was primarily attributable to a decline in publishing net revenues, partially offset by an increase in distribution net revenues. Net revenues for the six months ended September 30, 2001 increased ~~31%~~9% over the same period last year, from ~~the comparable prior year period, from $84.6~~$228.9 million to ~~$110.6~~$250.2 million. This increase was ~~principally~~driven primarily by our distribution business.

Publishing net revenues decreased 20% for the three months ended September 30, 2001, over the same period last year, from $121.6 million to $97.6 million. Publishing console net revenues decreased from $99.1 million to $79.5 million, and publishing PC net revenues decreased from $22.6 million to $18.1 million. These decreases are due to the fact that in the prior year, we released most of our major holiday titles by September 30th, including Tony Hawk's Pro Skater 2, Spider-Man, Tenchu II and X-Men Mutant Academy for the PlayStation and two Star Trek titles for the PC. However, in fiscal 2002, a number of our major holiday titles, including Tony Hawk's Pro Skater 3 and Shaun Palmer's Pro Snowboarder for the PlayStation 2, Spider-Man 2: Enter Electro for the PlayStation and Return to Castle Wolfenstein for the PC, have been slated to be released in the third quarter. Additionally, the release of our titles for the Microsoft Xbox and Nintendo GameCube platforms will coincide with the North American hardware launches, which are expected to occur in November 2001. The decrease in our publishing ~~segment and, to a lesser degree,~~net revenues was offset by the increase in net revenues from our distribution ~~segment.~~

~~Publishing~~business. Distribution net revenues for the three months ended ~~June~~September 30, 2001 increased ~~36%~~85% from ~~$61.0~~the same period last year, from $22.7 million to ~~$82.8 million. This~~$42.0 million, primarily driven by an increase ~~primarily was due to publishing~~in our distribution console net revenues. Distribution console net revenues ~~partially offset by a decrease~~for the three months ended September 30, 2001 increased 121% over the same period last year, from $16.1 million to $35.6 million. We are the sole distributor of Sony products in the independent channel in the UK. Accordingly, we have benefited from the launch of the PlayStation 2, as well as from the subsequent price reduction, effective September 28, 2001, on the hardware. Additionally, in fiscal 2002, we began distributing Nintendo products within the UK, including titles for the recently released Game Boy Advance. These items, along with the improved market conditions in Europe, have resulted in the improvements in our distribution business.

For the six months ended September 30, 2001, publishing ~~PC net revenues. Publishing console~~ net revenues ~~increased 121% from $31.3~~remained flat, at $180.5 million as of September 30, 2001, compared to ~~$69.2 million. The~~$182.6 as of September 30, 2000. We experienced a 15% increase in publishing console net revenues ~~was attributable~~over the same period last year, from $129.1 million to $148.7 million due to the release ~~in the three months ended June 30, 2001~~ of several titles that sold ~~very~~ well in the marketplace, including titles for Nintendo's Game Boy Advance hand held device which was released early in June 2001. Such titles includedTony ~~Hawk~~Hawk's Pro Skater 2 ~~(Game Boy Advance),~~~~Mat Hoffman Pro BMX~~ ~~(PlayStation and~~ for the Game Boy ~~Color),~~~~Bloody Roar 3~~ ~~(PlayStation 2),~~~~Simpson's Wrestling~~ ~~(PlayStation),~~~~Pinnobee~~ ~~(Game Boy Advance)~~Advance and~~Bomberman~~ ~~(Game Boy Advance). We also released a higher volume of console titles in~~ the ~~three months ended June 30, 2001, 14 titles, as compared to the comparable prior year period, 4 titles. Publishing PC net revenues~~Nintendo 64 and Matt Hoffman's Pro BMX and Spiderman: Mysterio's Menace for the three months ended June 30, 2001 decreased 54% from $29.7 million to $13.6 million. The decrease is attributable to the lower number of PC titles released in the three months ended June 30, 2001, 6 titles, as compared to the comparable prior year period, 15 titles.

For the three months ended June 30, 2001, distribution net revenues increased 18% over the comparable prior year period, from $23.6 million to $27.7 million primarily due to an increase in distributionPlayStation. This publishing console net ~~revenues, partially~~revenue increase was offset by a decrease in ~~distribution~~our publishing PC net revenues. For the six months ended September 30, 2001, publishing PC net revenues decreased 41% over the same period last year, from $53.5 million to $31.8 million. This decrease was primarily attributable to the fact that there were several PC launches in the six months ended September 30, 2000 that performed well in the marketplace, including Vampire: The Masquerade Redemption and Star Trek Voyager: Elite Force. We did not have such PC releases in the six months ended September 30, 2001 as our major holiday PC titles such as Return to Castle Wolfenstein and Star Trek Armada 2 are not being released until the third quarter. Distribution net revenues for the six months ended September 30, 2001 increased 51% from $46.3 million to $69.7 million, primarily driven by an increase in our distribution console net revenues. For the six months ended September 30, 2001, our distribution console net revenues ~~reflects~~ increased 83% from $32.7 million for the six months ended September 30, 2000 to $59.9 million for the six months ended September 30, 2001. As described above, our distribution console net revenues reflect

the accelerating benefits our distribution business has experienced from the introduction of next generation console systems and hand held ~~devices such as PlayStation 2 and Game Boy Advance.~~devices.

Domestic net revenues ~~grew 44%~~decreased 22% for three months ended September 30, 2001, over the same period last year, from ~~$46.0~~$92.3 million to ~~$66.3~~$71.7 million. This decrease is due to the decrease in our publishing net revenues as described above. Domestic net revenues for the six months ended September 30, 2001 remained level with the comparable prior year period.

International net revenues increased ~~by 15%~~30% and 24% for the three months and six months ended September 30, 2001, respectively, over the same period last year, from ~~$38.6~~$52.1 million to ~~$44.3 million. The~~$67.9 million for the three month period and from $90.6 million to $112.2 million for the six month period. These increases are due primarily to the increase in ~~domestic and international~~ net revenues ~~is reflective of the increases in~~from our ~~console~~distribution business as described above.

Cost of sales—product costs represented ~~58%~~63% and ~~52%~~45% of net revenues for the three months ended ~~June~~September 30, 2001 and 2000, respectively. Cost of sales—product costs represented 61% and 47% of net revenues for the six months ended September 30, 2001 and 2000, respectively. The increase in cost of sales—product costs as a percentage of net revenues for the three months and six months ended ~~June~~September 30, 2001 was due to the increase in ~~publishing and~~ distribution ~~console~~ net revenues as a percentage of total net revenues, as well as an increase in console ~~products~~net revenues as a percentage of total net revenues. Distribution net revenues and console net revenues have a higher per unit ~~product~~ cost ~~than~~as compared to publishing net revenues and PC ~~products.~~net revenues, respectively. Additionally, of console net revenues, the product mix for the three months and six months ended ~~June~~September 30, 2001 reflects a heavier concentration of hand held devices due to the release of Game Boy Advance in June 2001. Hand held devices generally have a higher manufacturing per unit cost than PC's and other console systems.

Cost of sales—royalty and software amortization expense represented 9% and ~~16%~~17% of net revenues for the three months ended ~~June~~September 30, 2001 and 2000, respectively. Cost of sales—royalty and software amortization expense also represented 9% and 17% of net revenues for the six months ended September 30, 2001 and 2000, respectively. The decrease in cost of ~~sales-royalty~~sales—royalty and software amortization expense as a percentage of net revenues is reflective of the increase in net revenues from hand held devices as a percentage of our total net revenues as hand held devices generally have lower product development costs than PC's or other console systems.

Product development expenses of ~~$9.2~~$9.0 million and ~~$7.4~~$11.1 million represented 8%7% and 9%8% of net revenues for the three months ended ~~June~~September 30, 2001 and 2000, respectively. ~~The dollar increase in product~~Product development expenses ~~reflects~~of $18.2 million and $18.5 million represented 7% and 8% of net revenues for the ~~Company's~~six months ended September 30, 2001 and 2000, respectively. Product development expenses for the three and six months ended September 30, 2001 remained level with the comparable prior year period, reflecting our continued investment in ~~the development of products for~~

next generation console systems and hand held ~~devices, including PlayStation 2, Xbox, GameCube and Game Boy Advance.~~devices.

Sales and marketing expenses ~~of $18.8 million and $17.9 million represented 17% and 21% of net revenues~~ for the three months ended ~~June~~September 30, 2001 and 2000 were $16.4 million, 12% of net revenues, and $23.9 million, 16% of net revenues, respectively. ~~The percentage decrease reflects~~Sales and marketing expenses for the six months ended September 30, 2001 and 2000 were $35.2 million, 14% of net revenues, and $41.8 million, 18% of net revenues, respectively. These decreases reflect our ability to generate savings by building on the existing awareness of our branded products and sequel titles sold during ~~the~~ fiscal ~~2002 quarter.~~2002.

General and administrative expenses ~~expenses of $9.7 million~~remained level with prior year amounts. General and ~~$8.5 million~~administrative expenses for the three months ended ~~June~~September 30, 2001 and 2000 ~~respectively, remained relatively constant as a percentage~~were $9.7 million, 7% of net revenues, ~~at approximately~~and $10.6 million, 7% of net revenues, respectively. General and administrative

expenses for the six months ended September 30, 2001 and 2000 were $19.4 million, 8% of net revenues, and $19.1 million, 9% ~~to 10%. The dollar increase in general and administrative expenses was due to an increase in worldwide administrative support needs and headcount related expenses.~~of net revenues, respectively.

Operating ~~loss~~income for the three months ended ~~June~~September 30, 2001 and 2000 was ~~$(1.2)~~$3.1 million ~~compared to $(6.5)~~and $9.5 million, inrespectively. Operating income for the ~~comparable prior year period. This~~six months ended September 30, 2001 and 2000 was $1.9 million and $3.0 million, respectively.

The decrease in ~~consolidated~~ operating ~~loss is primarily the result of an improved performance in our publishing business.~~

~~Publishing operating loss~~income for the three months ended ~~June~~September 30, 2001 ~~decreased~~over the same period last year was primarily due to ~~$(1.3)~~a decrease in publishing operating income from $10.5 million ~~compared~~ to ~~$(5.9)~~$2.1 million, slightly offset by an increase in distribution operating income, from an operating loss of ($925,000) to operating income of $1.0 million. The decrease in operating income for the six months ended September 30, 2001 over the same period last year was primarily due to a decrease in publishing operating income, from operating income of $4.6 million to $812,000, partially offset by an increase in the ~~comparable prior year period. The improvement~~distribution operating income, from an operating loss of ($1.5) million to operating income of $1.1 million. Publishing operating income decreases were primarily the result of a change in our ~~publishing business principally~~product mix. Our product mix for the three months and six months ended September 30, 2001, reflects a heavier concentration of hand held devices due to the ~~increased number~~release of ~~console titles released, including titles for the~~ Game Boy Advance ~~platform released~~ in June 2001. Hand held devices generally have a higher manufacturing per unit cost than PC's and other console systems. The increases in distribution operating income is reflective of the accelerating benefits our distribution business has experienced from the introduction of next generation console systems and hand held devices as previously described.

Interest income (expense), net ~~changed $3.0~~increased to $372,000 and $1.7 million ~~from $(1.7) million of interest expense, net~~ for the three months and six months ended ~~June~~September 30, ~~2000, to $1.3~~2001, respectively, from ($2.7) million ~~interest income, net~~and ($4.4) million for the three months and six months ended ~~June~~September 30, ~~2001.~~2000, respectively. This change was due to our improved cash position resulting in higher investment income and ~~the~~ elimination of borrowings and the conversion and/or redemption of our $60.0 million convertible subordinated notes.

The income tax ~~benefit~~provision of ~~$17 thousand~~$1.3 million for the three months and six months ended ~~June~~September 30, 2001, reflects our effective income tax rate of approximately 37%. The significant item that generated the variance between our effective rate and our statutory rate of 35% was state taxes. The realization of deferred tax assets primarily is dependent on the generation of future taxable income. We believe that it is more likely than not that we will generate taxable income sufficient to realize the benefit of net deferred tax assets recognized.

Our cash and cash equivalents ~~decreased $19.6~~were $122.2 million ~~from~~at September 30, 2001 compared to $125.6 million at March 31, ~~2001 to $106.0 million at June 30,~~ 2001. This was in comparison to ~~a $38.4 million decrease in cash flows in~~ the comparable prior year ~~period from~~periods of $25.2 million at September 30, 2000 compared to $50.0 million at March 31, ~~2000 to $11.6 million at June 30,~~ 2000. This ~~decrease~~change in cash inand cash equivalents for the ~~three~~six months ended ~~June~~September 30, 2001, resulted from ~~$29.7~~$15.9 million and ~~$2.4~~$4.3 million utilized in operating and investing activities, respectively, offset by ~~$12.9~~$15.8 million provided by financing activities. Cash used in operating activities was primarily the result of our continued investment in product development and changes in accounts receivable and accounts payable, driven by a seasonal change in working capital needs. Approximately ~~$20.8~~$37.2 million was utilized in connection with the acquisition of publishing or distribution rights to products being developed by third parties, the execution of new license agreements granting ~~the~~ us long-term rights to intellectual property of third

parties, as well as the capitalization of product development costs relating to internally developed products. The cash used

in investing activities primarily was the result of capital expenditures. The cash provided by financing activities primarily was the result of proceeds from the issuance of common stock pursuant to employee ~~options~~option and stock purchase plans and common stock warrants, offset by the accelerated repayment of our term loan.

In connection with our purchases of Nintendo 64 and Game Boy hardware and software cartridges for distribution in North America and Europe, Nintendo requires us to provide irrevocable letters of credit prior to accepting purchase orders. Furthermore, Nintendo maintains a policy of not accepting returns of Nintendo 64 and Game Boy hardware and software cartridges. Because of these and other factors, the carrying of an inventory of Nintendo 64 and Game Boy hardware and software cartridges entails significant capital and risk. As of ~~June~~September 30, 2001, we had ~~$4.3~~$2.5 million of ~~Nitendo~~Nintendo 64 and ~~$15.4~~$7.0 million of Game Boy hardware and software cartridge inventory on hand, which represented approximately ~~10%~~8% and ~~35%~~20%, respectively, of all inventory.

In December 1997, we completed the private placement of $60.0 million principal amount of 6³/4% convertible subordinated notes due 2005 (the "Notes"). During the three months ended June 30, 2001, we called for the redemption of the Notes. In connection with that call, holders converted to common stock approximately $59.9 million aggregate principal amount of their Notes. The remaining Notes were redeemed for cash.

In June 1999, we obtained a $100.0 million revolving credit facility and a $25.0 million term loan with a syndicate of banks (the "U.S. Facility"). The revolving portion of the U.S. Facility provided us with the ability to borrow up to $100.0 million and issue letters of credit up to $80 million on a revolving basis against eligible accounts receivable and inventory. The term loan had a three year term with principal amortization on a straight-line quarterly basis beginning December 31, 1999 and a borrowing rate based on the banks' base rate (which is generally equivalent to the published prime rate) plus 2% or LIBOR plus 3% and was to ~~mature~~expire June 2002. The revolving portion of the U.S Facility had a borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus 2.75%. In May 2001, we accelerated our repayment of the outstanding balance under the term loan portion of the U.S. Facility. In connection with the accelerated repayment, we amended the U.S. Facility (the "Amended and Restated U.S. Facility"). The Amended and Restated U.S. Facility eliminated the term loan, reduced the revolver to $78.0 million and reduced the interest rate to the banks' base rate plus 1.25% or LIBOR plus 2.25% ~~(weighted average interest rate of approximately 9.6% for the three months ended June 30, 2001)~~. We pay a commitment fee of ~~1/4%~~¹/4% on the unused portion of the revolver. The Amended and Restated U.S. Facility is collateralized by substantially all of our assets and ~~matures~~expires June 2002. The Amended and Restated U.S. Facility contains various covenants that limit our ability to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. We are also required to maintain specified financial ratios related to net worth and fixed charges. We were in compliance with these covenants as of ~~June~~September 30, 2001. As of ~~June~~September 30, 2001, there were no borrowings outstanding under the Amended and ~~$24.3 million of letters~~Restated U.S. Facility. Letters of credit of $27.4 million were outstanding against the Amended and Restated U.S. ~~Facility.~~Facility as of September 30, 2001.

We also have revolving credit facilities with our CentreSoft subsidiary located in the United Kingdom (the "UK Facility") and our NBG subsidiary located in Germany (the "German Facility").

The UK Facility provides for British Pounds ("GBP") 7.0 million ($~~9.9~~10.3 million) of revolving loans and GBP ~~3.0~~1.5 million ($~~4.3~~2.2 million) of letters of credit as of ~~June~~September 30, 2001. The UK Facility bears interest at

LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and ~~matures~~expires in October ~~2001.~~2002. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of ~~June~~September 30, 2001, we were in compliance with these covenants. No borrowings were outstanding against the UK facility as of ~~June~~September 30, 2001. Letters of credit of GBP ~~3.0~~1.5 million ($~~4.3~~2.2 million) were outstanding against the UK Facility as of ~~June~~September 30, 2001. As of ~~June~~September 30, 2001, the German Facility provides for revolving loans up to ~~Deutsche Marks~~Euro dollar ("~~DM"~~EUR") 42.6 million ($~~1.8~~2.3 million), bears interest at 7.0%, is collateralized by a cash deposit of approximately GBP 650,000 ($~~0.9~~1.0 million) made by our CentreSoft subsidiary and has no expiration date. ~~No borrowings were~~Borrowings outstanding against the German Facility as of ~~June~~September 30, ~~2001.~~2001 were $0.6 million.

We have historically financed our acquisitions through the issuance of shares of common stock. We will continue to evaluate potential acquisition candidates as to the benefit they bring to us and as to our ability to make such acquisitions and maintain compliance with our bank facilities.

Fiscal year ending March 31,		Fiscal year ending March 31,
2002	$	35,894	2002		$	23,178
2003	24,116	2003		25,314
2004	6,070	2004		6,070
2005	2,925	2005		2,925
2006	1,675	2006		1,675
Thereafter	2,500	Thereafter		2,500

Total	$	73,180
		Total		$	61,662

On July 30, 2001, we filed with the Securities and Exchange Commission a Registration Statement on Form S-3, as amended, for purposes of registering ~~5,000,000~~6,000,000 shares of our common stock, $.000001 par value (excluding shares registered to cover the underwriters' over-allotment option)~~. The Registration Statement is currently under review by~~, in connection with a proposed public offering of such shares. On October 22, 2001, we withdrew the Securities and Exchange Commission. We estimate that our net proceeds from this offering without the exercise of the over-allotment option will be approximately $179.8 million. We intend to use the net proceeds for general corporate purposes, including, among other things, additions to working capital, financing of product development, capital expenditures, joint ventures and strategic acquisitions.registration statement.

We believe that we have sufficient working capital ($~~202.5~~201.8 million at ~~June~~September 30, 2001), as well as proceeds available from the U.S. Facility, the UK Facility, the Netherlands Facility and the German Facility, to finance our operational requirements for at least the next twelve months, including acquisitions of inventory and equipment, the funding of the development, production, marketing and sale of new products and the acquisition of intellectual property rights for future products from third parties.

In connection with the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"), we have disclosed certain cautionary information to be used in connection with written materials (including this Quarterly Report on Form 10-Q) and oral statements made by or on behalf of our employees and representatives that may contain "forward-looking statements" within the meaning of

the Litigation Reform Act. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The listener or reader is cautioned that all forward-looking statements are necessarily speculative and there are numerous risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. For a discussion that highlights some of the more important risks identified by management, but which should not be assumed to be the only factors that could affect future performance, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2001 and Registration Statement on Form S-3, Registration No. 333-66280, filed with the Securities and Exchange Commission on July 30, 2001, as amended, which are incorporated herein by reference. The reader or listener is cautioned that we do not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management over time means that actual events are bearing out as estimated in such forward-looking statements.

SFAS No. 142 "Goodwill and Other Intangibles", was issued July 20, 2001 and addresses financial accounting and reporting for acquired goodwill and other intangible assets. SFAS No. 142 addresses how intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Company has adopted the provisions of this Statement effective April 1, 2001.

Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates and foreign currency exchange rates. Our market risk sensitive instruments are classified as "other than trading." Our exposure to market risk as discussed below includes "forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or foreign currency exchange rates. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in foreign currency exchange rates, interest rates and the timing of transactions.

We have had a number of variable rate and fixed rate debt obligations, denominated both in U.S. dollars and various foreign currencies as detailed in Note 10 to the Consolidated Financial Statements appearing elsewhere in this Quarterly Report. We manage interest rate risk by monitoring our ratio of

fixed and variable rate debt obligations in view of changing market conditions. Additionally, in the future, we may consider the use of interest rate swap agreements to further manage potential interest rate risk.

During the three months ended June 30, 2001, our holdings of market risk sensitive instruments changed. During that period, we called for the redemption of $60.0 million of the Notes. In connection with that call, holders converted to common stock approximately $59.9 million aggregate principal amount of their Notes. The remaining Notes were redeemed for cash. Additionally, in May 2001, we repaid in full the remaining $8.5 million balance of the term loan portion of the U.S. Facility.

As of ~~June~~September 30, 2001, the carrying value of our variable rate debt was approximately ~~$1.7 million, comprised entirely of the Netherlands Facility.~~$2.2 million. A hypothetical 1% increase in the applicable interest rates of our variable rate debt would increase annual interest expense by approximately ~~$17,000 as of June 30, 2001.~~$22,000.

We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly GBP. The volatility of GBP (and all other applicable currencies) will be monitored frequently throughout the coming year. While the we have not traditionally engaged in foreign currency hedging, we may in the future use hedging programs, currency forward contracts, currency options and/or other derivative financial instruments commonly utilized to reduce financial market risks if it is determined that such hedging activities are appropriate to reduce risk.

We are party to routine claims and suits brought against us in the ordinary course of business including disputes arising over the ownership of intellectual property rights and collection matters. In the opinion of management, the outcome of such routine claims will not have a material adverse effect on our business, financial condition or results of operations.

The Company held its 2001 Annual Meeting of the Stockholders on August 23, 2001 in Beverly Hills, California. Four items were submitted to a vote of the stockholders: (1) the election of six directors to hold office for one year terms and until their respective successors are duly elected and qualified; (2) the approval of an amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock from 50,000,000 to 125,000,000; (3) the approval of the adoption of the Company's 2001 Incentive Plan; and (4) the approval of the selection of PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending March 31, 2002.

All six directors were recommended by the Board of Directors and all were elected. Set forth below are the results of the voting for each director.

	For	Withheld
Kenneth L. Henderson	27,638,824	1,700,902
Barbara S. Isgur	28,483,589	856,137
Brian G. Kelly	23,983,240	5,356,486
Robert A. Kotick	23,936,038	5,403,688
Steven T. Mayer	28,456,038	883,688
Robert J. Morgado	28,488,411	851,315

The approval of the amendment to our Amended and Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of common stock from 50,000,000 to 125,000,000 was approved. Set forth below are the results of the voting.

For		Against		Abstain
21,913,885		7,419,439		6,402

The approval of the adoption of the Company's 2001 Incentive Plan was approved. Set forth below are the results of the voting.

For		Against		Abstain
15,334,756		13,887,654		117,316

The approval of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ending March 31, 2002 was approved. Set forth below are the results of the voting.

For		Against		Abstain
29,169,975		165,358		4,393

3.1		Our Amended and Restated Certificate of Incorporation, dated June 1, 2000 (incorporated by reference to Exhibit 2.5 of our Current Report on Form 8-K, filed on June 16, 2000).
3.2		Our certificate of Amendment of Amended and Restated Certificate of Incorporation, dated June 9, 2000 (incorporated by reference to Exhibit 2.7 of our Current Report on Form 8-K, filed on June 16, 2000).
3.3		Our Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated August 23, 2001 (incorporated by reference to Exhibit 3.3 of our Registration Statement on Form S-3, Registration No. 333-66280, filed on July 30, 2001).
3.4		Our Amended and Restated By-laws dated August 1, 2000 (incorporated by reference to our Current Report on Form 8-K, filed July 11, 2001).
4.1		Rights Agreement dated as of April 18, 2000, between us and Continental Stock Transfer & Trust Company, which includes as exhibits the form of Right Certificates as Exhibit A, the Summary of Rights to Purchase Series A Junior Preferred Stock as Exhibit B and the form of Certificate of Designation of Series A Junior Preferred Stock of the Company as Exhibit C (incorporated by reference to our Registration Statement on Form 8-A, Registration No. 001-15839, filed April 19, 2000).
10.1		Our 2001 Incentive Plan adopted on July 11, 2001 (incorporated by reference to our Proxy Statement on Schedule 14A for the 2001 Annual Meeting of Stockholders filed on July 30, 2001).
10.2		Our 2001 Incentive Plan as amended through October 17, 2001.
10.3		Our 1999 Incentive Plan as amended through October 17, 2001.
10.4		Our 1998 Incentive Plan as amended through October 17, 2001.
10.5		Our 1991 Stock Option and Stock Award Plan as amended through October 17, 2001.

Pursuant to the requirements ~~of Section 13 or 15(d)~~ 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.

(Mark one)
/x/		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2001

Delaware		95-4803544
(State or other jurisdiction of incorporation or organization)		~~95-4803544~~ (I.R.S. Employer Identification No.)
3100 Ocean Park Boulevard, Santa Monica, CA		90405
(Address of principal executive offices)		~~90405~~ (Zip Code)

			Page No.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
		Consolidated Balance Sheets as of ~~June~~September 30, 2001 ~~(unaudited)~~(Unaudited) and March ~~31, 2001~~31,2001	3
		Consolidated Statements of Operations for the three and six months ended ~~June~~September 30, 2001 and 2000 ~~(unaudited)~~(Unaudited)	4
		Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~June~~September 30, 2001 and 2000 ~~(unaudited)~~(Unaudited)	5
		Consolidated Statement of Changes in Shareholders' Equity for the ~~three~~six months ended ~~June~~September 30, 2001 ~~(unaudited)~~(Unaudited)	6
		Notes to Consolidated Financial Statements for the three and six months ended ~~June~~September 30, 2001 ~~(unaudited)~~(Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1416
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2024
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	2226
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 6.	Exhibits and Reports on Form 8-K	2227
SIGNATURES		2328

		Three months ended June 30,						Three months ended September 30,				Six months ended September 30,
		2001		2000				2001		2000		2001		2000
Reported net income (loss)	Reported net income (loss)	$	29	$	(5,179	)	Reported net income (loss)	$	2,215	$	4,306	$	2,244	$	(873	)
Add back: Goodwill amortization	Add back: Goodwill amortization		—		378		Add back: Goodwill amortization		—		375		—		753

Adjusted net income (loss)	Adjusted net income (loss)	$	29	$	(4,801	)	Adjusted net income (loss)	$	2,215	$	4,681	$	2,244	$	(120	)

Basic earnings (loss) per share:	Basic earnings (loss) per share:						Basic earnings (loss) per share:
	Reported net income (loss)	$	—	$	(0.21	)	Reported net income (loss)	$	0.07	$	0.18	$	0.07	$	(0.04	)
	Goodwill amortization		—		0.02		Goodwill amortization		—		0.02		—		0.03

	Adjusted net income (loss)	$	—	$	(0.19	)	Adjusted net income (loss)	$	0.07	$	0.20	$	0.07	$	(0.01	)

Diluted earnings (loss) per share:	Diluted earnings (loss) per share:						Diluted earnings (loss) per share:
	Reported net income (loss)	$	—	$	(0.21	)	Reported net income (loss)	$	0.06	$	0.17	$	0.06	$	(0.04	)
	Goodwill amortization		—		0.02		Goodwill amortization		—		0.01		—		0.03

	Adjusted net income (loss)	$	—	$	(0.19	)	Adjusted net income (loss)	$	0.06	$	0.18	$	0.06	$	(0.01	)

		Three months ended June 30,					Six months ended September 30,
		2001		2000			2001			2000
Non-cash investing and financing activities:	Non-cash investing and financing activities:					Non-cash investing and financing activities:
	Conversion of convertible subordinated notes	$	59,938	$	—	Conversion of convertible subordinated notes	$	59,938		$	—
	Tax benefit derived from net operating loss carryforward utilization		—		533	Tax benefit derived from net operating loss carryforward utilization		—			533
	Other		1,933		—	Other		1,933			—
Supplemental cash flow information:	Supplemental cash flow information:					Supplemental cash flow information:
	Cash paid for income taxes		600		2,187	Cash paid for income taxes		978			2,723
	Cash paid for interest		539		2,874	Cash paid (received) for interest		(1,211	)		3,174

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

															Accumulated Other Comprehensive Income (Loss)																				Accumulated Other Comprehensive Income (Loss)
			Common Stock							Treasury Stock													Common Stock							Treasury Stock
			Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock									Accumulated Other Comprehensive Income (Loss)				Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock								Accumulated Other Comprehensive Income (Loss)
			Shares	Amount		Additional Paid-In Capital		Retained Earnings		Shares		Amount											Shares	Amount		Additional Paid-In Capital		Retained Earnings		Shares		Amount
Balance, March 31, 2001	Balance, March 31, 2001		30,166	$	—	$	200,786	$	12,146	(2,884	)	$	(20,249	)	$	(11,377	)				Balance, March 31, 2001		30,166	$	—	$	200,786	$	12,146	(2,884	)	$	(20,249	)	$	(11,377
Components of comprehensive income (loss):	Components of comprehensive income (loss):																				Components of comprehensive income (loss):
	Net income		—		—		—		29	—			—			—			29		Net income		—		—		—		2,244	—			—			—			2,244
	Foreign currency translation adjustment		—		—		—		—	—			—			(224	)		(224	)	Foreign currency translation adjustment		—		—		—		—	—			—			1,512			1,512

		Total comprehensive loss																	(195	)		Total comprehensive income																	3,756

Issuance of common stock pursuant to conversion of convertible subordinated notes	Issuance of common stock pursuant to conversion of convertible subordinated notes		3,175		—		59,938		—	—			—			—			59,938		Issuance of common stock pursuant to conversion of convertible subordinated notes		3,175		—		59,938		—	—			—			—			59,938
Issuance of common stock pursuant to employee stock options and common stock warrants			2,691		—		21,517		—	—			—			—			21,517
Issuance of common stock pursuant to employee stock option plans, employee stock purchase plan and common stock warrants																					Issuance of common stock pursuant to employee stock option plans, employee stock purchase plan and common stock warrants		2,861		—		23,716		—	—			—			—			23,716
Tax benefit attributable to employee stock options and common stock warrants	Tax benefit attributable to employee stock options and common stock warrants		—		—		23,153		—	—			—			—			23,153		Tax benefit attributable to employee stock options and common stock warrants		—		—		24,371		—	—			—			—			24,371
Other	Other		—		—		1,933		—	—			—			—			1,933		Other		—		—		1,933		—	—			—			—			1,933

Balance, June 30, 2001			36,032	$	—	$	307,327	$	12,175	(2,884	)	$	(20,249	)	$	(11,601	)	$	287,652
Balance, September 30, 2001																					Balance, September 30, 2001		36,202	$	—	$	310,744	$	14,390	(2,884	)	$	(20,249	)	$	(9,865	)	$	295,020

	(Unaudited)
	Three months ended September 30,				Six months ended September 30,
	2001		2000		2001		2000
Basic earnings (loss) per share	$	0.04	$	0.12	$	0.05	$	(0.02	)

Weighted average common shares outstanding		49,862		35,753		47,525		36,582

Diluted earnings (loss) per share	$	0.04	$	0.11	$	0.04	$	(0.02	)

Weighted average common shares outstanding assuming dilution		57,150		38,699		55,128		36,582

1.1		We have filed a Form 8-K on October 4, 2001, reporting under "Item 5. Other Events" the acquisition of Treyarch Inventions LLC, under "Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits" and under "Item 9. Regulation FD Disclosure" the postponement of our proposed common stock offering.
1.2		We have filed a Form 8-K on July 31, 2001, reporting under "Item 7. Financial Statements, Pro Forma Financial Statements and Exhibits" and "Item 9. Regulation FD Disclosure", reaffirming our Fiscal 2002 and 2003 earnings guidance.
1.3		We have filed a Form 8-K on July 11, 2001, reporting under "Item 5. Other Events" and "Items 7. Financial Statements, Pro Forma Financial Statements and Exhibits" the adoption by the Board of Directors of certain amendments to our by-laws and the execution of new employment agreements with Kathy Vrabeck and Lawrence Goldberg.



/s/ WILLIAM J. CHARDAVOYNE William J. Chardavoyne Chief Financial Officer and Chief Accounting Officer