Electronic Arts 10Q 2006 Q2 Quarterly report

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 September 30, 2005

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

For the Transition Period from to

Commission File No. 0-17948

ELECTRONIC ARTS INC.
(Exact name of registrant as specified in its charter)


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

209 Redwood Shores Parkway Redwood City, California		94065
(Address of principal executive offices)		(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. YESS NOo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YESS NOo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOS

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


		Outstanding as of
	Par Value	November 8, 2005
Common Stock	$0.01	300,578,539

ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005

Table of Contents


	Page
Part I — FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005 and March 31, 2005		3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2005 and 2004		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2005 and 2004		5
Notes to Condensed Consolidated Financial Statements		6
Report of Independent Registered Public Accounting Firm		19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		51
Part II — OTHER INFORMATION
Item 1. Legal Proceedings		52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 4. Submission of Matters to a Vote of Security Holders		53
Item 5. Other Information		53
Item 6. Exhibits		54
Signature		55
Exhibit Index		56
EXHIBIT 10.1
EXHIBIT 15.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)	September 30,		March 31,
(In millions, except par value data)	2005		2005 (a)
ASSETS
Current assets:
Cash and cash equivalents	$	575	$	1,270
Short-term investments		1,655		1,688
Marketable equity securities		182		140
Receivables, net of allowances of $137 and $162, respectively		328		296
Inventories		74		62
Deferred income taxes		85		86
Other current assets		208		164

Total current assets		3,107		3,706
Property and equipment, net		364		353
Investments in affiliates		10		10
Goodwill		155		153
Other intangibles, net		30		36
Deferred income taxes		16		19
Other assets		72		93

TOTAL ASSETS	$	3,754	$	4,370

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	171	$	134
Accrued and other liabilities		558		694

Total current liabilities		729		828
Other liabilities		29		33

Total liabilities		758		861
Commitments and contingencies		–		–
Minority interest		12		11
Stockholders’ equity:
Preferred stock, $0.01 par value. 10 shares authorized		–		–
Common stock, $0.01 par value. 1,000 shares authorized; 300 and 310 shares issued and outstanding, respectively		3		3
Paid-in capital		877		1,434
Retained earnings		1,998		2,005
Accumulated other comprehensive income		106		56

Total stockholders’ equity		2,984		3,498

TOTAL LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY	$	3,754	$	4,370

See accompanying Notes to Condensed Consolidated Financial Statements.


(a)		Derived from audited financial statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended					Six Months Ended
(Unaudited)	September 30,					September 30,
(In millions, except per share data)	2005			2004		2005			2004
Net revenue	$	675		$	716	$	1,040		$	1,147
Cost of goods sold		284			284		434			460

Gross profit		391			432		606			687
Operating expenses:
Marketing and sales		107			107		182			171
General and administrative		52			42		103			77
Research and development		182			157		365			288
Amortization of intangibles		1			1		2			1

Total operating expenses		342			307		652			537

Operating income (loss)		49			125		(46	)		150
Interest and other income, net		13			12		30			21

Income (loss) before provision for (benefit from) income taxes and minority interest		62			137		(16	)		171
Provision for (benefit from) income taxes		9			40		(13	)		50

Income (loss) before minority interest		53			97		(3	)		121
Minority interest		(2	)		–		(4	)		–

Net income (loss)	$	51		$	97	$	(7	)	$	121

Net income (loss) per share:
Basic	$	0.17		$	0.32	$	(0.02	)	$	0.40
Diluted	$	0.16		$	0.31	$	(0.02	)	$	0.38
Number of shares used in computation:
Basic		302			304		305			303
Diluted		314			316		305			316

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
(Unaudited)	September 30,
(In millions)	2005			2004
OPERATING ACTIVITIES
Net income (loss)	$	(7	)	$	121
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		46			33
Minority interest		4			—
Realized (gains) losses on investments and on sale of property and equipment		2			(4	)
Tax benefit from exercise of stock options		92			25
Change in assets and liabilities:
Receivables, net		(20	)		(168	)
Inventories		(9	)		(24	)
Other assets		(16	)		27
Accounts payable		34			58
Accrued and other liabilities		(145	)		(45	)

Net cash provided by (used in) operating activities		(19	)		23

INVESTING ACTIVITIES
Capital expenditures		(56	)		(45	)
Proceeds from sale of property and equipment		—			15
Proceeds from sale of marketable equity securities		4			3
Purchase of short-term investments		(281	)		(1,658	)
Proceeds from maturities and sales of short-term investments		321			812
Acquisition of subsidiary, net of cash acquired		(3	)		—
Other investing activities		(1	)		—

Net cash used in investing activities		(16	)		(873	)

FINANCING ACTIVITIES
Proceeds from sales of common stock through employee stock plans and other plans		60			86
Repurchase and retirement of common stock		(709	)		—

Net cash provided by (used in) financing activities		(649	)		86

Effect of foreign exchange on cash and cash equivalents		(11	)		—

Decrease in cash and cash equivalents		(695	)		(764	)
Beginning cash and cash equivalents		1,270			2,150

Ending cash and cash equivalents		575			1,386
Short-term investments		1,655			1,104

Ending cash, cash equivalents and short-term investments	$	2,230		$	2,490

Supplemental cash flow information:
Cash paid during the period for income taxes	$	10		$	43

Non-cash investing activities:
Change in unrealized gains (losses) on investments, net	$	54		$	(7	)

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Electronic Arts Inc. develops, markets, publishes and distributes interactive software games that are playable by consumers on home video game consoles (such as the Sony PlayStation^® 2, Microsoft Xbox^® and Nintendo GameCube^TM), personal computers, mobile platforms — including hand-held game players (such as the Game Boy^® Advance, Nintendo DS^TM and PlayStation^® Portable “PSP^TM”) and cellular handsets — and online, over the Internet and other proprietary online networks. Some of our games are based on content that we license from others (e.g., Madden NFL Football, Harry Potter and FIFA Soccer), and some of our games are based on intellectual property that is wholly-owned by us (e.g., The Sims^TM and Need for Speed^TM). Our goal is to develop titles that appeal to the mass markets, which often means translating and localizing them for sale in non-English speaking countries. In addition, we also attempt to create software game “franchises” that allow us to publish new titles on a recurring basis that are based on the same property. Examples of this include our annual iterations of our sports-based franchises (e.g., NCAA^® Football and FIFA Soccer), titles based on long-lived movie properties (e.g., James Bond^TMand Harry Potter) and wholly-owned properties that can be successfully sequeled (e.g., The Sims and Need for Speed).

The 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 preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in these condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates. The results of operations for the current interim periods are not necessarily indicative of results to be expected for the current year or any other period.

These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005, as filed with the Securities and Exchange Commission on June 7, 2005.

On October 18, 2004, our Board of Directors authorized a program to repurchase up to an aggregate of $750 million of our common stock. Pursuant to the authorization, we were able to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions over the course of a twelve-month period. Our common stock repurchase program was completed in September 2005. We repurchased and retired the following (in millions):


	Number of Shares Repurchased and Retired		Approximate Amount
Three months ended September 30, 2005		6.3	$	372
Six months ended September 30, 2005		12.6	$	709
From the inception of the program through September 30, 2005		13.4	$	750

(2) FISCAL YEAR AND FISCAL QUARTER

Our fiscal year is reported on a 52/53-week period that, historically, has ended on the final Saturday of March in each year. Beginning with the current fiscal year ending March 31, 2006, we will end our fiscal year on the Saturday nearest March 31. The results of operations for the fiscal years ended March 31, 2006 and 2005 contain the following number of weeks:


Fiscal Years Ended	Number of Weeks	Fiscal Period End Date
March 31, 2006	53 weeks	April 1, 2006
March 31, 2005	52 weeks	March 26, 2005

The results of operations for the three and six months ended September 30, 2005 and 2004 contain the following number of weeks:


Fiscal Period	Number of Weeks	Fiscal Period End Date
Three months ended September 30, 2005	13 weeks	October 1, 2005
Six months ended September 30, 2005	27 weeks	October 1, 2005

Three months ended September 30, 2004	13 weeks	September 25, 2004
Six months ended September 30, 2004	26 weeks	September 25, 2004

Accordingly, for the three months ended June 30, 2005, there was one additional week included in our results of operations as compared to the three months ended June 30, 2004.

For simplicity of presentation, all fiscal periods are treated as ending on a calendar month end.

(3) EMPLOYEE STOCK-BASED COMPENSATION

We account 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”. We have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation”, as amended.

Had compensation cost for our stock-based compensation plans been measured based on the estimated fair value at the grant dates in accordance with the provisions of SFAS No. 123, as amended, we estimate that our reported net income (loss) and net income (loss) per share would have been the pro forma amounts indicated below. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants made under our stock-based compensation plan during the three and six months ended September 30, 2005 and 2004:


	Three Months Ended						Six Months Ended
	September 30,						September 30,
	2005			2004			2005			2004

Risk-free interest rate		3.9	%		3.0	%		3.8	%		3.0	%
Expected volatility		33.9	%		37.5	%		34.4	%		38.4	%
Expected life of stock options (in years)		3.49			2.96			3.38			3.04
Expected life of employee stock purchase plans (in months)		6			6			6			6
Assumed dividends	None			None			None			None

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


	Three Months Ended						Six Months Ended
	September 30,						September 30,
(In millions, except per share data)	2005			2004			2005			2004

Net income (loss):
As reported	$	51		$	97		$	(7	)	$	121
Deduct: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of related tax effects		(26	)		(23	)		(51	)		(42	)


Pro forma	$	25		$	74		$	(58	)	$	79

Net income (loss) per share:
As reported – basic	$	0.17		$	0.32		$	(0.02	)	$	0.40
Pro forma – basic	$	0.08		$	0.24		$	(0.19	)	$	0.26
As reported – diluted	$	0.16		$	0.31		$	(0.02	)	$	0.38
Pro forma – diluted	$	0.08		$	0.24		$	(0.19	)	$	0.25

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”),“Share-Based Payment”. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements using a fair-value-based method. The statement replaces SFAS No. 123, supersedes APB No. 25, and amends SFAS No. 95, “Statement of Cash Flows”. While the fair value method under SFAS No. 123R is similar to the fair value method under SFAS No. 123 with regards to measurement and recognition of stock-based compensation, management is currently evaluating the impact of several of the key differences between the two standards on our consolidated financial statements. For example, SFAS No. 123 permits us to recognize forfeitures as they occur while SFAS No. 123R will require us to estimate future forfeitures and adjust our estimate on a quarterly basis. SFAS No. 123R will also require a classification change in the statement of cash flows, whereby a portion of the tax benefit from stock options will move from operating cash flow activities to financing cash flow activities (total cash flows will remain unchanged).

In March 2005, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 107,“Share-Based Payment”, which provides the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations for public companies. In April 2005, the SEC adopted a rule that amends the compliance dates of SFAS No. 123R. Under the revised compliance dates, we will be required to adopt the provisions of SFAS No. 123R no later than our first quarter of fiscal 2007. While management continues to evaluate the impact of SFAS No. 123R on our consolidated financial statements, we currently believe that the expensing of stock-based compensation will have an impact on our Condensed Consolidated Statements of Operations similar to our pro forma disclosure under SFAS No. 123, as amended.

(4) GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill information is as follows (in millions):


					Effects of
	As of				Foreign			As of
	March 31,		Goodwill		Currency			September 30,
	2005		Acquired		Translation			2005

Goodwill	$	153	$	3	$	(1	)	$	155

Finite-lived intangibles consist of the following (in millions):


	As of September 30, 2005
	Gross											Other
	Carrying		Accumulated									Intangibles,
	Amount		Amortization			Impairment			Other			Net

Developed/Core Technology	$	47	$	(26	)	$	(9	)	$	–		$	12
Tradename		37		(20	)		(1	)		–			16
Subscribers and Other Intangibles		12		(7	)		(2	)		(1	)		2

Total	$	96	$	(53	)	$	(12	)	$	(1	)	$	30


	As of March 31, 2005
	Gross											Other
	Carrying		Accumulated									Intangibles,
	Amount		Amortization			Impairment			Other			Net

Developed/Core Technology	$	47	$	(22	)	$	(9	)	$	1		$	17
Tradename		37		(18	)		(1	)		–			18
Subscribers and Other Intangibles		11		(7	)		(2	)		(1	)		1

Total	$	95	$	(47	)	$	(12	)	$	–		$	36

Amortization of intangibles for the three and six months ended September 30, 2005 was $3 million (of which $2 million was recognized as cost of goods sold) and $6 million (of which $4 million was recognized as cost of goods sold), respectively. Amortization of intangibles for the three and six months ended September 30, 2004 was approximately $1 million in both periods. Finite-lived 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 September 30, 2005 and March 31, 2005, the weighted-average remaining useful life for finite-lived intangible assets was approximately 4.0 years and 4.3 years, respectively.

As of September 30, 2005, future amortization of finite-lived intangibles that will be recorded in cost of goods sold and operating expenses is estimated as follows (in millions):


Fiscal Year Ending March 31,
2006 (remaining six months)	$	5
2007		10
2008		6
2009		3
2010		2
Thereafter		4

Total	$	30

(5) RESTRUCTURING AND ASSET IMPAIRMENT CHARGES

Restructuring and asset impairment information as of September 30, 2005 and March 31, 2005 was as follows (in millions):


	Accrual							Accrual
	Beginning		Charges Utilized			Adjustments		Ending
	Balance		in Cash			to Operations		Balance

Six Months Ended September 30, 2005
Facilities-related	$	10	$	(2	)	$	–	$	8


Year Ended March 31, 2005
Workforce	$	2	$	(2	)	$	–	$	–
Facilities-related		12		(4	)		2		10

Total	$	14	$	(6	)	$	2	$	10

In fiscal 2004, 2003 and 2002, we entered into various restructurings based on management decisions. As of September 30, 2005, an aggregate of $25 million in cash had been paid out under the restructuring plans. The remaining projected net cash outlay of $8 million is expected to be utilized by January 2009. The facilities-related accrued obligation shown above is net of $11 million of estimated future sub-lease income. The restructuring accrual is included in other accrued expenses presented in Note 7 of the Notes to Condensed Consolidated Financial Statements.

(6) ROYALTIES AND LICENSES

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers and (3) co-publishing and/or distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademarks, copyrights, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for delivery of product.

Royalty-based payments made to content licensors and distribution affiliates are generally capitalized as prepaid royalties and expensed to cost of goods sold at the greater of the contractual or effective royalty rate based on expected net product sales. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally made in connection with the development of a particular product and, therefore, we are generally subject to development risk prior to the general release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed as research and development as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of goods sold at the higher of the contractual or effective royalty rate based on expected net product sales.

Minimum guaranteed royalty obligations are initially recorded as an asset and as a liability at the contractual amount when payment is not contingent upon performance by the licensor. When payment is contingent upon performance by the licensor, we record royalty payments as an asset when actually paid and as a liability when incurred rather than upon execution of the contract. Minimum royalty payment obligations are classified as current liabilities to the extent such royalty payments are contractually due within the next twelve months. As of September 30, 2005 and March 31, 2005, approximately $38 million and $51 million, respectively, of minimum guaranteed royalty obligations had been recognized and are included in the tables below.

Each quarter, we also evaluate the future realization of our royalty-based assets as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any 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 estimated revenue to evaluate the future realization of prepaid royalties. If actual sales or revised revenue estimates fall below the initial revenue estimates, then the actual charge taken may be greater in any given quarter than anticipated. We had no impairments during the three and six months ended September 30, 2005. Impairments for the three and six months ended September 30, 2004 were $2 million.

The current and long-term portions of prepaid royalties and minimum guaranteed royalty-related assets, included in other current assets and other assets, consisted of (in millions):


	As of		As of
	September 30,		March 31,
	2005		2005
Other current assets	$	114	$	59
Other assets		56		76

Royalty-related assets	$	170	$	135

At any given time, depending on the timing of our payments to our co-publishing and/or distribution affiliates, content licensors and/or independent software developers, we recognize unpaid royalty amounts due to these parties as either accounts payable or accrued liabilities. The current and long-term portions of accrued royalties, included in accrued and other liabilities as well as other liabilities, consisted of (in millions):


	As of		As of
	September 30,		March 31,
	2005		2005
Accrued liabilities	$	76	$	88
Other liabilities		29		33

Accrued royalties	$	105	$	121

In addition, as of September 30, 2005, we had approximately $1,463 million that we were committed to pay co-publishing and/or distribution affiliates and content licensors but that were generally contingent upon performance by the counterparty (i.e., delivery of the product or content or other factors) and were therefore not recorded in our Condensed Consolidated Financial Statements. See Note 8 of the Notes to Condensed Consolidated Financial Statements.

(7) BALANCE SHEET DETAILS

Inventories
Inventories as of September 30, 2005 and March 31, 2005 consisted of (in millions):


	As of		As of
	September 30,		March 31,
	2005		2005
Raw materials and work in process	$	5	$	2
Finished goods (including manufacturing royalties)		69		60

Inventories	$	74	$	62

Property and Equipment, Net
Property and equipment, net, as of September 30, 2005 and March 31, 2005 consisted of (in millions):


	As of			As of
	September 30,			March 31,
	2005			2005
Computer equipment and software	$	404		$	381
Buildings		125			106
Leasehold improvements		77			73
Land		58			60
Office equipment, furniture and fixtures		56			53
Warehouse equipment and other		12			12
Construction in progress		42			43

		774			728
Less: Accumulated depreciation and amortization		(410	)		(375	)

Property and equipment, net	$	364		$	353

Depreciation and amortization expenses associated with property and equipment amounted to $20 million and $40 million for the three and six months ended September 30, 2005, respectively. Depreciation and amortization expenses associated with property and equipment amounted to $16 million and $32 million for the three and six months ended September 30, 2004, respectively.

Accrued and Other Liabilities
Accrued and other liabilities as of September 30, 2005 and March 31, 2005 consisted of (in millions):


	As of		As of
	September 30,		March 31,
	2005		2005
Other accrued expenses	$	190	$	172
Accrued income taxes		147		267
Accrued compensation and benefits		91		132
Accrued royalties		76		88
Deferred revenue		54		35

Accrued and other liabilities	$	558	$	694

Income taxes
Change in Effective Income Tax Rate

During the three months ended September 30, 2005, our effective income tax rate was 15 percent. This differs from our previously projected annual effective income tax rate of 29 percent and reflects various adjustments recorded in the three months ended September 30, 2005 for the resolution of certain tax-related matters with foreign tax authorities, offset by additional income tax provisions resulting from certain intercompany transactions during the three months ended September 30, 2005. The net impact of these adjustments was that we recognized $9 million (or $0.03 per basic and diluted share) less income tax expense during the three and six months ended September 30, 2005 than we would have recognized had our projected effective income tax rate remained at 29 percent. In addition, we adjusted our current projected annual effective income tax rate from 29 percent to 28 percent primarily due to a change in projected geographic mix of taxable income subject to lower tax rates for fiscal 2006.

(8) COMMITMENTS AND CONTINGENCIES

Lease Commitments and Residual Value Guarantees
We lease certain of our current facilities and certain equipment under non-cancelable 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 third party for our headquarters facility in Redwood City, California, which was refinanced with Keybank National Association in July 2001 and expires in July 2006. We 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. We have an option to purchase the property (land and facilities) for a maximum of $145 million or, at the end of the lease, to arrange for (i) an extension of the lease or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $129 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 Keybank National Association for a five and one-half year term 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 provide space for sales, marketing, administration and research and development functions. We have an option to purchase the property for a maximum of $130 million or, at the end of the lease, to arrange for (i) an extension of the lease or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $119 million if the sales price is less than this amount, subject to certain provisions of the lease.

We believe the estimated fair values of both properties under these operating leases are in excess of their respective guaranteed residual values as of September 30, 2005.

For the two lease agreements with Keybank National Association, as described above, the lease rates are based upon the LIBOR plus a margin and require us to maintain certain financial covenants as shown below, all of which we were in compliance with as of September 30, 2005.


				Actual as of
Financial Covenants	Requirement			September 30, 2005
Consolidated Net Worth (in millions)	equal to or greater than	$	2,099	$	2,984
Fixed Charge Coverage Ratio	equal to or greater than		3.00		13.42
Total Consolidated Debt to Capital	equal to or less than		60%		7.6%
Quick Ratio – Q1 & Q2	equal to or greater than		1.00		10.36
Q3 & Q4	equal to or greater than		1.75		N/A

Letters of Credit
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. The original letter of credit guaranteed our trade payable obligations to Nintendo of Europe of up to€18 million. In April 2005, we reduced the guarantee to€8 million and in September 2005 we increased the guarantee to€15 million. This standby letter of credit expired in July 2005 and was renewed through July 2006. As of September 30, 2005, we had€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 approximately $1 million. The standby letter of credit expires in December 2006. As of September 30, 2005, we did not have a payable balance covered by this standby letter of credit.

Development, Celebrity, League and Content Licenses: Commitments
The products produced by our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones.

Contractually, these payments are considered advances against subsequent royalties on the sales of the products. These terms are set forth in written agreements entered into with the independent artists and third-party developers. 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, FIFPRO Foundation and UEFA (professional soccer); NASCAR (stock car racing); National Basketball Association (professional basketball); PGA TOUR (professional golf); Tiger Woods (professional golf); National Hockey League and NHLPA (professional hockey); Warner Bros. (Harry Potter, Batman and Superman); MGM (James Bond); New Line Productions (The Lord of the Rings); Saul Zaentz Company (The Lord of the Rings); Marvel Enterprises (fighting); John Madden (professional football); National Football League Properties, Arena Football League and PLAYERS Inc. (professional football); Collegiate Licensing Company (collegiate football, basketball and baseball); ISC (stock car racing); Simcoh (Def Jam); Viacom Consumer Products (The Godfather); Valve Corporation (Half-Life and Counter-Strike); and ESPN (content in EA SPORTS^TM games). 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, the majority of which are conditional upon performance by the counterparty. These minimum guarantee payments and any related marketing commitments are included in the table below.

The following table summarizes our minimum contractual obligations and commercial commitments as of September 30, 2005, and the effect we expect them to have on our liquidity and cash flow in future periods (in millions):


	Contractual Obligations						Commercial Commitments
			Developer/						Letters
Fiscal Year			Licensor				Bank and		of
Ending March 31,	Leases		Commitments⁽¹⁾		Marketing		Other Guarantees		Credit		Total

2006 (remaining six months)	$	30	$	72	$	19	$	2	$	10	$	133
2007		31		146		34		–		–		211
2008		24		135		30		–		–		189
2009		17		145		30		–		–		192
2010		13		128		30		–		–		171
Thereafter		34		837		198		–		–		1,069

Total	$	149	$	1,463	$	341	$	2	$	10	$	1,965

⁽¹⁾ Developer/licensor commitments include $38 million of commitments to developers or licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets in our Condensed Consolidated Balance Sheets as of September 30, 2005 because the developer or licensor does not have any performance obligations to us.

The lease commitments disclosed above include contractual rental commitments of $19 million under real estate leases for unutilized office space due to our restructuring activities. These amounts, net of estimated future sub-lease income, were expensed in the periods of the related restructuring and are included in our accrued and other liabilities reported on our Condensed Consolidated Balance Sheets as of September 30, 2005. See Note 5 in the Notes to Condensed Consolidated Financial Statements.

Litigation
On July 29, 2004, a class action lawsuit,Kirschenbaum v. Electronic Arts Inc., was filed against us in Superior Court in San Mateo, California, alleging that we improperly classified “Image Production Employees” in California as exempt employees. In early October 2005, we reached a settlement to resolve these claims. Under the terms of the settlement, we will make a lump sum payment of $15.6 million to cover (a) all claims allegedly suffered by the class members, (b) plaintiffs’ attorneys’ fees, not to exceed 25% of the total settlement amount, (c) plaintiffs’ costs and expenses, (d) any incentive payments to the named plaintiffs that may be authorized by the court, and (e) all costs of administration of the settlement. On October 17, 2005, the court granted its preliminary approval of the settlement. The court has scheduled a hearing to consider its final approval of the settlement for January 27, 2006.

On February 14, 2005, a second employment-related class action lawsuit,Hasty v. Electronic Arts Inc.,was filed against us in Superior Court in San Mateo, California. The complaint alleges that we improperly classified “Engineers” in California as exempt employees and seeks injunctive relief, unspecified monetary damages, interest and attorneys’ fees. On or about March 16, 2005, we received a first amended complaint, which contains the same material allegations as the original complaint. We answered the first amended complaint on April 20, 2005.

On March 24, 2005, a class action lawsuit was filed against us and certain of our officers and directors. The complaint, which asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false and misleading statements, was filed in the United States District Court, Northern District of California, by an individual purporting to represent a class of purchasers of EA common stock. Additional class action lawsuits were filed in the same court by other individuals asserting the same claims against us. On May 9, 2005, the court consolidated the complaints, and on June 13, 2005, the court appointed lead plaintiff and lead counsel pursuant to the requirements of the Private Securities Litigation Reform Act of 1995. An amended consolidated complaint was filed on behalf of the lead plaintiff on August 12, 2005, and on September 27, 2005, we moved to dismiss the consolidated amended complaint for failure to state a claim under the federal securities laws. Separately, there are two shareholder derivative actions pending in the Superior Court, San Mateo County, and one shareholder derivative action pending in the United States District Court, Northern District of California, all of which assert claims based on substantially the same factual allegations as set forth in the federal securities class action. We have not yet responded to any of the derivative action complaints.

In addition, we are subject to other claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably foreseeable disposition of such other claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position or results of operations.

Director Indemnity Agreements
We have entered into indemnification agreements with the members of our Board of Directors at the time they join the Board to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid 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 of their service as members of our Board of Directors.

(9) COMPREHENSIVE INCOME

SFAS No. 130,“Reporting Comprehensive Income”, requires classifying items of other comprehensive income (loss) by their nature in a financial statement and displaying the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. Accumulated other comprehensive income primarily includes foreign currency translation adjustments, and the net-of-tax amounts for unrealized gains (losses) on investments and unrealized gains (losses) on derivatives designated as cash flow hedges.

The components of comprehensive income for the three and six months ended September 30, 2005 and 2004 are summarized as follows (in millions):


	Three Months Ended					Six Months Ended
	September 30,					September 30,
	2005		2004			2005			2004

Net income (loss)	$	51	$	97		$	(7	)	$	121
Other comprehensive income (loss):
Change in unrealized gains (losses) on investments, net of tax expense (benefit) of $0, $3 and $0, $(2), respectively		7		5			54			(3	)
Adjustment for gains realized in net income, net of tax expense of $0, $1 and $0, $1, respectively		–		(1	)		–			(1	)
Change in unrealized gains on derivative instruments, net of tax expense of $0, $0 and $1, $0, respectively		–		–			4			–
Foreign currency translation adjustments		3		5			(8	)		–

Total other comprehensive income (loss)	$	10	$	9		$	50		$	(4	)


Total comprehensive income	$	61	$	106		$	43		$	117

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

(10) NET INCOME (LOSS) PER SHARE

The following table summarizes the computations of basic earnings per share (“Basic EPS”) and diluted earnings per share (“Diluted EPS”). Basic EPS is computed as net income 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.


	Three Months Ended				Six Months Ended
	September 30,				September 30,
(In millions, except per share data)	2005		2004		2005			2004


Net income (loss)	$	51	$	97	$	(7	)	$	121


Shares used to compute net income (loss) per share:
Weighted-average common stock outstanding – basic		302		304		305			303
Dilutive potential common shares		12		12		–			13


Weighted-average common stock outstanding – diluted		314		316		305			316


Net income (loss) per share:
Basic	$	0.17	$	0.32	$	(0.02	)	$	0.40
Diluted	$	0.16	$	0.31	$	(0.02	)	$	0.38

As a result of our net loss for the six months ended September 30, 2005, we have excluded certain stock awards from the Diluted EPS calculation as their inclusion would have been antidilutive. Had we reported net income for this period, an additional 11 million shares of potential common stock equivalents would have been included in the number of shares used to calculate Diluted EPS for the six months ended September 30, 2005.

Excluded from the above computation of weighted-average common stock for Diluted EPS for the three and six months ended September 30, 2005 were options to purchase 6 million shares of common stock in each period, as the options’ exercise price was greater than the average market price of the common shares for each period. The weighted-average exercise price of these options was $64.44 and $64.16 per share, respectively.

Excluded from the above computation of weighted-average common stock for Diluted EPS for the three and six months ended September 30, 2004 were options to purchase 1 million shares of common stock in each period, as the options’ exercise price was greater than the average market price of the common shares for each period. The weighted-average exercise price of these options was $51.77 and $52.17 per share, respectively.

(11) 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 product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes our operating segments for making operational decisions and assessments of financial performance.

Our chief operating decision maker is considered to be our Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenue by geographic region and by product line for purposes of making operating decisions and assessing financial performance. 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 CEO.

Information about our total net revenue by product line for the three and six months ended September 30, 2005 and 2004 is presented below (in millions):


	Three Months Ended				Six Months Ended
	September 30,				September 30,
	2005		2004		2005		2004


Consoles
PlayStation 2	$	304	$	312	$	421	$	474
Xbox		136		142		180		199
Nintendo GameCube		27		38		49		65
Other Consoles		–		1		–		3

Total Consoles		467		493		650		741

PC		91		141		165		207
Mobility
PSP		45		–		77		–
Nintendo DS		8		–		20		–
Game Boy Advance		7		10		13		28
Cellular Handsets		2		–		3		–

Total Mobility		62		10		113		28

Co-publishing and Distribution		32		49		62		116
Internet Services, Licensing and Other
Subscription Services		14		13		29		25
Licensing, Advertising and Other		9		10		21		30

Total Internet Services, Licensing and Other		23		23		50		55

Total Net Revenue	$	675	$	716	$	1,040	$	1,147

Information about our operations in North America, Europe and Asia as of and for the three and six months ended September 30, 2005 and 2004 is presented below (in millions):


	North
	America		Europe		Asia		Total

Three months ended September 30, 2005
Net revenue from unaffiliated customers	$	443	$	191	$	41	$	675
Interest income, net		12		3		–		15
Depreciation and amortization		15		7		1		23
Total assets		2,435		1,246		73		3,754
Capital expenditures		17		5		1		23
Long-lived assets		334		205		10		549
Three months ended September 30, 2004
Net revenue from unaffiliated customers	$	473	$	210	$	33	$	716
Interest income, net		7		2		–		9
Depreciation and amortization		12		5		–		17
Total assets		2,765		867		71		3,703
Capital expenditures		14		5		–		19
Long-lived assets		263		138		6		407
Six months ended September 30, 2005
Net revenue from unaffiliated customers	$	627	$	335	$	78	$	1,040
Interest income, net		25		10		–		35
Depreciation and amortization		29		15		2		46
Capital expenditures		43		10		3		56
Six months ended September 30, 2004
Net revenue from unaffiliated customers	$	684	$	399	$	64	$	1,147
Interest income, net		14		3		–		17
Depreciation and amortization		21		11		1		33
Capital expenditures		35		9		1		45

Our direct sales to Wal-Mart Stores, Inc. represented approximately 14 percent of total net revenue for both the three and six months ended September 30, 2005 and approximately 15 and 14 percent of total net revenue for the three and six months ended September 30, 2004, respectively.

(12) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2004, the FASB ratified the measurement and recognition guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (“EITF”) Issue No. 03-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. In June 2005, the FASB directed its staff to issue proposed FASB Staff Position (“FSP”) EITF 03-1-a,“Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The FASB retitled this FSP as FSP FAS 115-1,“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The final FSP supersedes EITF Issue No. 03-1 and EITF Topic D-44,“Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. The final FSP replaces the guidance set forth in paragraphs 10 through 18 of EITF Issue No. 03-1 with references to existing other-than-temporary impairment guidance. In September 2005, the FASB decided to retain the paragraph in the proposed FSP on how to account for debt securities subsequent to an other-than-temporary impairment. The FASB also decided to add a footnote to clarify that the proposed FSP does not address when a holder of a debt security would place a debt security on nonaccrual status or how to subsequently report income on a nonaccrual debt security. The FASB decided that transition would be applied prospectively and the effective date would be reporting periods beginning after December 15, 2005. In November 2005, the FASB issued FSP FAS 115-1. Management is currently evaluating what impact the adoption of the measurement and recognition guidance in FSP FAS 115-1 will have on our consolidated financial statements.

In November 2004, the FASB issued SFAS No. 151,“Inventory Costs — an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 amends the guidance in Accounting Research Bulletin (“ARB”) No. 43, Chapter 4,“Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges. SFAS No. 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management believes the adoption of SFAS No. 151 will not have a material impact on our consolidated financial statements.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change. The new statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Additionally, this Statement requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and that correction of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Management does not believe the adoption of SFAS No. 154 will have a material impact on our consolidated financial statements.

(13) SUBSEQUENT EVENT

On November 9, 2005, our Board of Directors approved a plan of reorganization in connection with our intention to establish an international publishing headquarters in Geneva, Switzerland. During the next twelve months, we expect to open a new facility in Geneva, relocate certain current employees to Geneva, hire new employees in Geneva, close certain facilities in the UK, and make other related changes in our international publishing business. We intend to treat certain costs that are directly associated with our international publishing reorganization as “restructuring costs” (as defined by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”). Other costs that are not properly categorized as restructuring costs will generally be treated as normal operating expenses in our consolidated statement of operations. In accordance with SFAS No. 146, we will generally expense the restructuring costs as they are incurred and accrue costs associated with certain facility closures at the time we exit the facility.

In connection with our international publishing reorganization, we anticipate incurring between $55 million and $65 million in total restructuring costs, substantially all of which will result in cash expenditures. We anticipate incurring approximately $15 million of these charges during the remainder of fiscal 2006. We anticipate these restructuring costs will consist primarily of employee-related relocation assistance (approximately $35 million), moving expenses (approximately $15 million), and facility exit costs (approximately $10 million). While we may incur severance costs paid to terminating employees in connection with the reorganization, we do not expect these costs to be significant.

In addition to the restructuring costs discussed above, we also expect to incur increased operating expenses associated with our international publishing reorganization, consisting primarily of costs associated with a new facility and related costs in Geneva, as well as incremental increases in compensation expenses. We expect these costs to result in incremental operating expenses of approximately $10 million during the remainder of fiscal 2006, and between $10 million and $15 million annually thereafter.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Electronic Arts Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Electronic Arts Inc. and subsidiaries (the Company) as of October 1, 2005, the related condensed consolidated statements of operations for the three-month and six-month periods ended October 1, 2005 and September 25, 2004, and the related condensed consolidated statements of cash flows for the six-month periods ended October 1, 2005 and September 25, 2004. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity U.S. generally accepted accounting principles.

We have previously audited in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Electronic Arts Inc. and subsidiaries as of March 26, 2005, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated June 3, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of March 26, 2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

KPMG LLP

Mountain View, California
November 9, 2005

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

This Quarterly Report onForm 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 onForm 10-Q are forward looking. We use words such as “anticipate”, “believe”, “expect”, “intend” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Our actual results could differ materially. 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”, as well as in our Annual Report onForm 10-K for the fiscal year ended March 31, 2005 as filed with the Securities and Exchange Commission (“SEC”) on June 7, 2005 and in other documents we have filed with the SEC.

OVERVIEW

The following overview is a top-level discussion of our operating results as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers is important in order to understand our results for the three and six months ended September 30, 2005, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Form 10-Q, including in the remainder of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors” or the condensed consolidated financial statements and related notes. Additional information can be found within the “Business” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 as filed with the SEC on June 7, 2005 and in other documents we have filed with the SEC.

About Electronic Arts

We develop, market, publish and distribute interactive software games that are playable by consumers on home video game consoles (such as the Sony PlayStation^® 2, Microsoft Xbox^® and Nintendo GameCube^TM consoles), personal computers, mobile platforms — including hand-held game players (such as the Game Boy^® Advance, Nintendo DS^TM and PlayStation^® Portable “PSP^TM”) and cellular handsets — and online, over the Internet and other proprietary online networks. Some of our games are based on content that we license from others (e.g., Madden NFL Football, Harry Potter and FIFA Soccer), and some of our games are based on our own wholly-owned intellectual property (e.g., The Sims^TM and Need for Speed^TM). Our goal is to develop titles which appeal to the mass markets, which often means translating and localizing them for sale in non-English speaking countries. In addition, we also attempt to create software game “franchises” that allow us to publish new titles on a recurring basis that are based on the same property. Examples of this are the annual iterations of our sports-based franchises (e.g., NCAA^® Football and FIFA Soccer), titles based on long-lived movie properties (e.g., James Bond^TM and Harry Potter) and wholly-owned properties that can be successfully sequeled (e.g., The Sims and Need for Speed).

Overview of Financial Results

Total net revenue for the three months ended September 30, 2005 was $675 million, down 6 percent as compared to the three months ended September 30, 2004. Net revenue for the three months ended September 30, 2005 was driven by sales ofMadden NFL 06, NCAA® Football 06,Burnout™ Revenge,FIFA 06,NBA Live 06andThe Sims™ 2 Nightlife, all of which reached platinum status (over one million copies sold) in the quarter.

Net income for the three months ended September 30, 2005 was $51 million as compared to $97 million for the three months ended September 30, 2004. Diluted income per share for the three months ended September 30, 2005 was $0.16 as compared to $0.31 for the three months ended September 30, 2004.

We used $19 million in cash from operating activities during the six months ended September 30, 2005 as compared to generating $23 million for the six months ended September 30, 2004. The increase in cash used in operating activities was primarily due to the decline in net income during the six months ended September 20, 2005 as compared to the six months ended September 30, 2004, and an increase in prepaid royalties as we continue to invest in our licensed content partially offset by a lower accounts receivable balance due to a decrease in net revenue in the six months ended September 20, 2005 as compared to the six months ended September 30, 2004.

Management’s Overview of Historical and Prospective Business Trends

Transition to Next-Generation Consoles.Our industry is cyclical and has entered into a transition stage in anticipation of the introduction of a new generation of hardware consoles over the course of the next twelve to eighteen months. During this transition, we intend to continue developing new titles for the current-generation of video game consoles while we also continue to make significant investments in the development of products that operate on the next-generation consoles. We have incurred, and expect to continue to incur, higher costs during this transition to next-generation consoles. We also expect development costs for next-generation video games to be greater on a per-title basis than development costs for current-generation video games. In addition, sales of video games for current-generation consoles may begin to decline and consumers may defer game software purchases until the next-generation consoles become available. While we expect our net revenue and gross profit to increase for the fiscal year ending March 31, 2006 as compared to prior fiscal years, such increases will not offset the increased costs we have incurred, and expect to continue to incur, during the transition. As we move through the transition, we expect our operating results to continue to be volatile and difficult to predict, which could cause our stock price to fluctuate significantly.

Expansion of Mobile Platforms. The introduction of the PSP and Nintendo DS, and to a lesser extent, increased demand for gameplay on cellular handsets, has resulted in increased sales of titles for mobile platforms. During the three months ended September 30, 2005, our net revenue from sales of our titles for mobile platforms increased to $62 million from $10 million for the three months ended September 30, 2004. Similarly, during the six months ended September 30, 2005, our net revenue from sales of our titles for mobile platforms increased to $113 million from $28 million for the six months ended September 30, 2004. As the mobile platform installed base continues to grow, we expect that sales of our titles for these platforms may become an increasingly important part of our business, particularly during the transition from current-generation to next-generation consoles.

Increasing Cost of Titles.Titles have become increasingly expensive to produce and market as the platforms on which they are played continue to advance technologically and consumers demand continual improvements in the overall gameplay experience. We expect this trend to continue throughout the transition from current-generation to next-generation platforms as (1) we become more familiar with, and gain expertise in, developing titles for next-generation platforms, (2) we require larger production teams to create our titles, (3) the technology needed to develop titles becomes more complex, (4) the number and nature of the platforms for which we develop titles increases and becomes more diverse, (5) the cost of licensing the third-party intellectual property we use in many of our titles increases and (6) we develop new methods to distribute our content via the Internet and on hand-held and wireless devices.

Software Prices.We expect the average prices of our titles for current-generation consoles to decline as (1) more value-oriented consumers purchase current-generation consoles, (2) a greater number of competitive titles are published and (3) consumers defer purchases in anticipation of next-generation consoles. As a result, we expect our gross margins to be negatively impacted.

Sales of “Hit” Titles.Sales of “hit” titles, several of which were top sellers across a number of international markets, contributed significantly to our net revenue. Our top-selling titles across all platforms worldwide during the three months ended September 30, 2005 wereMadden NFL 06, NCAA Football 06andBurnout Revenge.Hit titles are important to our financial performance because they benefit from overall economies of scale. We have developed, and it is our objective to continue to develop, many of our hit titles to become franchise titles that can be regularly iterated.

International Operations and Sales and Foreign Exchange Impact.Net revenue from international sales accounted for approximately 40 percent of our total net revenue during the first six months of both fiscal 2006 and fiscal 2005. Our international net revenue was primarily driven by sales in Europe and, to a lesser extent, sales in Asia. Foreign exchange rates favorably impacted our net revenue by $9 million, or 1 percent, for the six months ended September 30, 2005. However, we estimate that the net effect of changes in foreign currency rates had an immaterial impact on net revenue for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004. We expect foreign currency movements to negatively impact our revenue for the remaining six months of fiscal 2006. We anticipate that international net revenue will increase during the remainder of fiscal 2006 as the console installed base continues to expand outside of North America. In particular, we believe that in order to succeed in Asia, it is important to develop content locally. As such, we expect to continue to devote resources to hiring local development talent and expanding our infrastructure outside of North America, most notably, through the expansion and creation of local studio facilities in Asia. In addition, we anticipate establishing online game marketing, publishing and distribution functions in China. As part of this strategy, we may seek to partner with established local companies through acquisitions, joint ventures or other similar arrangements. Our international business has also grown through acquisitions and investments such as our acquisition of Criterion Software Group Ltd. and our tender offer for Digital Illusions C.E. (“DICE”) in fiscal 2005.

Expansion of Studio Resources and Technology.In fiscal 2005, we devoted significant resources to the overall expansion of our studio facilities in North America and Europe. We expect to continue to make significant investments in our studio facilities in North America and Europe in fiscal 2006. As we move through the life cycle of current-generation consoles, we will continue to devote significant resources to the development of current-generation titles while at the same time continuing to invest heavily in tools, technologies and titles for the next-generation of platforms and technology.

Increasing Licensing Costs.We generate a significant portion of our net revenue and operating income from games based on licensed content such as Madden NFL Football, FIFA, James Bond and Harry Potter. We have recently entered into new licenses and renewed older licenses, some of which contain higher royalty rates than similar license agreements we have entered into in the past. As a result, we expect our gross margins to continue to be negatively impacted.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 revenue and expenses during the reporting periods. 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 of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Revenue Recognition, Sales Returns, Allowances and Bad Debt Reserves

We principally derive revenue from sales of packaged interactive software games designed for play on video game consoles (such as the PlayStation 2, Xbox and Nintendo GameCube), PCs and mobile platforms including hand-held game players (such as the Nintendo Game Boy Advance, Nintendo DS and Sony PSP) and cellular handsets. We evaluate the recognition of revenue based on the criteria set forth in Statement of Position (“SOP”) 97-2,“Software Revenue Recognition”, as amended by SOP 98-9,“Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions”and Staff Accounting Bulletin (“SAB”) No. 101,“Revenue Recognition in Financial Statements”, as revised by SAB No. 104,“Revenue Recognition”. We evaluate revenue recognition using the following basic criteria and recognize revenue when all four of the following criteria are met:

	•		Evidence of an arrangement: Evidence of an agreement with the customer that reflects the terms and conditions to deliver products must be present in order to recognize revenue.

	•		Delivery: Delivery is considered to occur when the products are shipped and risk of loss has been transferred to the customer. For online games and services, revenue is recognized as the service is provided.

	•		Fixed or determinable fee: If a portion of the arrangement fee is not fixed or determinable, we recognize that amount as revenue when the amount becomes fixed or determinable.

	•		Collection is deemed probable: At the time of the transaction, we conduct a credit review of each customer involved in a significant transaction to determine the creditworthiness of the customer. Collection is deemed probable if we expect the customer to be able to pay amounts under the arrangement as those amounts become due. If we determine that collection is not probable, we recognize revenue when collection becomes probable (generally upon cash collection).

Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must make assumptions and judgments in order to: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific objective evidence of fair value (“VSOE”) exists for each undelivered element; and (4) allocate the total price among the various elements we must deliver. Changes to any of these assumptions or judgments, or changes to the elements in a software arrangement, could cause a material increase or decrease in the amount of revenue that we report in a particular period.

Product revenue, including sales to resellers and distributors (“channel partners”), is recognized when the above criteria are met. We reduce product revenue for estimated future returns, price protection, and other offerings, which may occur with our customers and channel partners. In certain countries, we have stock-balancing programs for our PC products, which allow for the exchange of PC products by resellers under certain circumstances. It is our general practice to exchange products or give credits, rather than give cash refunds.

In certain countries, from time to time, we decide to provide price protection for both our PC and video game system products. In our decision, we analyze historical returns, current sell-through of distributor and retailer inventory of our products, current trends in the video game market and the overall economy, changes in consumer demand and acceptance of our products and other related factors when evaluating the adequacy of the sales returns and price protection allowances. In addition, we monitor the volume of our sales to our channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns or higher price protection costs in subsequent periods.

In the future, 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 and/or price protection for our products may continue to increase as the PlayStation 2, Xbox and Nintendo GameCube consoles move through their lifecycles and an increasing number and aggregate amount of competitive products heighten pricing and competitive pressures. While management believes it can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates changed, our returns and price protection reserves would change, which would impact the total net revenue we report. For example, if actual returns and/or price protection were significantly greater than the reserves we have established, our actual results would decrease our reported total net revenue. Conversely, if actual returns and/or price protection were significantly less than our reserves, this would increase our reported total net revenue.

Significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. We determine our allowance for doubtful accounts by evaluating customer creditworthiness in the context of current economic trends and historical experience. Depending upon the overall economic climate and the financial condition of our customers, the amount and timing of our bad debt expense and cash collection could change significantly.

Royalties and Licenses

Our royalty expenses consist of payments to (1) content licensors, (2) independent software developers and (3) co-publishing and/or distribution affiliates. License royalties consist of payments made to celebrities, professional sports organizations, movie studios and other organizations for our use of their trademark, copyright, personal publicity rights, content and/or other intellectual property. Royalty payments to independent software developers are payments for the development of intellectual property related to our games. Co-publishing and distribution royalties are payments made to third parties for delivery of product.

Royalty-based payments made to content licensors and distribution affiliates generally are capitalized as prepaid royalties and expensed to cost of goods sold at the greater of the contractual or effective royalty rate based on expected net product sales. Prepayments made to thinly capitalized independent software developers and co-publishing affiliates are generally in connection with the development of a particular product and, therefore, we are generally subject to development risk prior to the general release of the product. Accordingly, payments that are due prior to completion of a product are generally expensed as research and development as the services are incurred. Payments due after completion of the product (primarily royalty-based in nature) are generally expensed as cost of goods sold at the higher of the contractual or effective royalty rate based on expected net product sales.

Minimum guaranteed royalty obligations are initially recorded as an asset and as a liability at the contractual amount when no significant performance remains with the licensor. When significant performance remains with the licensor, we record royalty payments as an asset when actually paid rather than upon execution of the contract. Minimum royalty payment obligations are classified as current liabilities to the extent such royalty payments are contractually due within the next twelve months. As of September 30, 2005 and March 31, 2005, approximately $38 million and $51 million, respectively, of minimum guaranteed royalty obligations had been recognized.

Each quarter, we also evaluate the future realization of our royalty-based assets as well as any unrecognized minimum commitments not yet paid to determine amounts we deem unlikely to be realized through product sales. Any 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 estimated revenue to evaluate the future realization of prepaid royalties. If actual sales or revised revenue estimates fall below the initial revenue estimate, then the actual charge taken may be greater in any given quarter than anticipated. We had no impairments during the three and six months ended September 30, 2005. Impairments for both the three and six months ended September 30, 2004 were $2 million.

Valuation of Long-Lived Assets

We evaluate both purchased intangible assets and other long-lived assets in order to determine if events or changes in circumstances indicate a potential impairment in value exists. This evaluation requires us to estimate, among other things, the remaining useful lives of the assets and future cash flows of the business. These evaluations and estimates require the use of judgment. Our actual results could differ materially from our current estimates.

Under current accounting standards, we make judgments about the recoverability of purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate a potential impairment in the remaining value of the assets recorded on our condensed consolidated balance sheets. In order to determine if 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. Our future net cash flows are primarily dependent on the sale of products for play on proprietary video game consoles, hand-held game players and PCs (collectively referred to as “platforms”). The success of our products is affected by our ability to accurately predict which platforms and which products we develop will be successful. Also, our revenue and earnings are dependent on our ability to meet our product release schedules. Due to product sales shortfalls, 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. There were no impairment charges recorded in the three months ended September 30, 2005 and 2004.

Income Taxes

In the ordinary course of our business, there are many transactions and calculations where the tax law and ultimate tax determination is uncertain. As part of the process of preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate prior to the completion and filing of tax returns for such periods. This process requires estimating both our geographic mix of income and our current tax exposures in each jurisdiction where we operate. These estimates involve complex issues, require extended periods of time to resolve, and require us to make judgments, such as anticipating the positions that we will take on tax returns prior to our actually preparing the returns and the outcomes of disputes with tax authorities. We are also required to make determinations of the need to record deferred tax liabilities and the recoverability of deferred tax assets. A 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.

In addition, changes in our business, including acquisitions, changes in our international structure, changes in the geographic location of business functions, changes in the geographic mix of income, as well as changes in our agreements with tax authorities, valuation allowances, applicable accounting rules, applicable tax laws and regulations, rulings and interpretations thereof, developments in tax audit and other matters, and variations in the estimated and actual level of annual pre-tax income can affect the overall effective income tax rate and result in a variance between the projected effective tax rate for any quarter and the final effective tax rate for the fiscal year. For example, during the three months ended September 30, 2005, we resolved various tax-related matters with foreign tax authorities which decreased our tax expense and engaged in certain intercompany transactions which increased our income tax expense. Collectively, these items resulted in a net decrease in tax expense for the quarter of approximately $9 million.

With respect to our projected effective income tax rate each quarter prior to the end of a fiscal year, we are required to make a projection of several items, including our projected mix of full-year income in each jurisdiction in which we operate and the related income tax expense in each jurisdiction. The projected annual effective income tax rate is also adjusted for taxes related to certain anticipated changes in how we do business. Significant non-recurring charges are taken in the quarter incurred. The actual results could vary from those projected, and as such, the overall effective income tax rate for a fiscal year could be different from that previously projected for the full year.

RESULTS OF OPERATIONS


Fiscal Years Ended	Number of Weeks	Fiscal Period End Date
March 31, 2006	53 weeks	April 1, 2006
March 31, 2005	52 weeks	March 26, 2005

The results of operations for the three and six months ended September 30, 2005 and 2004 contain the following number of weeks:


Fiscal Period	Number of Weeks	Fiscal Period End Date
Three months ended September 30, 2005	13 weeks	October 1, 2005
Six months ended September 30, 2005	27 weeks	October 1, 2005

Three months ended September 30, 2004	13 weeks	September 25, 2004
Six months ended September 30, 2004	26 weeks	September 25, 2004

Accordingly, for the three months ended June 30, 2005, there was one additional week included in our results of operations as compared to the three months ended June 30, 2004.

For simplicity of presentation, all fiscal periods are treated as ending on a calendar month end.

Net Revenue

We principally derive net revenue from sales of packaged interactive software games designed for play on video game consoles (such as the PlayStation 2, Xbox and Nintendo GameCube), PCs and mobile platforms which include hand-held game players (such as the Nintendo Game Boy Advance, Nintendo DS and Sony PSP) and cellular handsets. Additionally, in Europe and Asia, we generate a significant portion of net revenue by marketing and selling third-party interactive software games through our established distribution network. We also derive net revenue from selling subscriptions to some of our online games, programming third-party web sites with our game content, allowing other companies to manufacture and sell our products in conjunction with other products, and selling advertisements on our online web pages.

From a geographical perspective, our total net revenue for the three and six months ended September 30, 2005 and 2004 was as follows (in millions):


	Three Months Ended September 30,								Increase /			%
	2005				2004				(Decrease)			Change
North America	$	443	66	%	$	473	66	%	$	(30	)		(6	%)


Europe		191	28	%		210	29	%		(19	)		(9	%)
Asia		41	6	%		33	5	%		8			24	%

International		232	34	%		243	34	%		(11	)		(5	%)

Total Net Revenue	$	675	100	%	$	716	100	%	$	(41	)		(6	%)


	Six Months Ended September 30,								Increase /			%
	2005				2004				(Decrease)			Change
North America	$	627	60	%	$	684	60	%	$	(57	)		(8	%)


Europe		335	32	%		399	35	%		(64	)		(16	%)
Asia		78	8	%		64	5	%		14			22	%

International		413	40	%		463	40	%		(50	)		(11	%)

Total Net Revenue	$	1,040	100	%	$	1,147	100	%	$	(107	)		(9	%)

North America

For the three months ended September 30, 2005, net revenue in North America was $443 million, driven primarily by sales ofMadden NFL 06,NCAA Football 06,NBA Live 06,Tiger Woods PGA Tour® 06 andBurnout Revenge, all of which were released during the quarter. Overall, net revenue decreased $30 million, or 6 percent, as compared to the three months ended September 30, 2004. The decrease in current-year net revenue was primarily due to (1) lower sales from our Def Jam franchise as there was no corresponding title released during the three months ended September 30, 2005, and (2) lower sales from our Sims franchise as we launchedThe Sims™ 2in the three months ended September 30, 2004 as compared to the release of an expansion pack,The Sims 2 Nightlife,in the three months ended September 30, 2005. The overall decrease in net revenue was mitigated by (1) the release ofNBA Live 06during the second quarter of fiscal 2006 as compared to the release ofNBA Live 2005in the third quarter of fiscal 2005, and (2) the release ofMarvel Nemesis™: Rise of the Imperfects™ during the second quarter of fiscal 2006.

For the six months ended September 30, 2005, net revenue in North America was $627 million, driven primarily by sales ofMadden NFL 06,NCAA Football 06,NBA Live 06,Tiger Woods PGA Tour 06,Medal of Honor European Assault™andBurnout Revenge. Overall, net revenue was down $57 million, or 8 percent, as compared to the six months ended September 30, 2004. This decrease was primarily due to (1) lower sales from our Fight Night, Harry Potter and Def Jam franchises as there were no corresponding titles released during the six months ended September 30, 2005, and (2) lower sales from our Sims franchise. The overall decrease in net revenue was mitigated by current-year sales from (1) the releaseNBA Live 06,(2) the release ofMedal of Honor European Assaultduring the first quarter of fiscal 2006 on multiple platforms as there was no corresponding title released from our Medal of Honor franchise during the six months ended September 30, 2004, as well as (3) the current-year release ofBatman Begins^TM.

Europe

For the three months ended September 30, 2005, net revenue in Europe was $191 million, driven primarily by sales ofFIFA 06,Burnout RevengeandThe Sims 2 Nightlifeexpansion pack which were released during the quarter. Overall, net revenue declined $19 million, or 9 percent, as compared to the three months ended September 30, 2004. We estimate that foreign exchange rates (primarily the Euro and the British pound sterling) decreased reported European net revenue by approximately $2 million, or 1 percent, for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004. The decrease in net revenue was primarily due to (1) lower sales from our Sims and Harry Potter franchises, and (2) higher prior-year sales ofCatwoman^TM. The overall decline in net revenue was mitigated by the release ofFIFA 06 in Europe during the second quarter of fiscal 2006 as compared to the release ofFIFA Soccer 2005, which was not released until the third quarter of fiscal 2005.

For the six months ended September 30, 2005, net revenue in Europe was $335 million, driven primarily by sales of (1)FIFA 06andBurnout Revenge, both of which were released during the second quarter of fiscal 2006, (2)Medal of Honor European AssaultandBattlefield 2^TM, which were released in the first quarter of fiscal 2006, and (3)FIFA Street, which was released in the fourth quarter of fiscal 2005. Overall, net revenue declined $64 million, or 16 percent, as compared to the six months ended September 30, 2004. We estimate that foreign exchange rates (primarily the Euro and the British pound sterling) increased reported European net revenue by approximately $6 million, or 2 percent, for the six months ended September 30, 2005 as compared to the six months ended September 30, 2004. Excluding the effect of foreign exchange rates, we estimate that European net revenue decreased by approximately $70 million, or 18 percent, for the six months ended September 30, 2005. The overall decrease in net revenue was primarily due to (1) lower sales from our Harry Potter and Sims franchises, and (2) higher prior year sales ofUEFA Euro 2004, which was released in the three months ended June 30, 2004 in conjunction with the UEFA Euro 2004 football tournament held in Europe. The overall decrease in net revenue was mitigated by current-year sales from our FIFA and Medal of Honor franchises.

Asia

For the three months ended September 30, 2005, net revenue in Asia increased by $8 million, or 24 percent, as compared to the three months ended September 30, 2004. We estimate that foreign exchange rates increased reported Asia net revenue by approximately $1 million, or 3 percent, for the three months ended September 30, 2005 as compared to the three months ended September 30, 2004. The increase in net revenue was driven primarily by higher sales of our Medal of Honor, Cricket and Battlefield franchises. This increase was partially offset by lower sales from our Sims franchise.

For the six months ended September 30, 2005, net revenue in Asia increased by $14 million, or 22 percent, as compared to the six months ended September 30, 2004. We estimate that foreign exchange rates increased reported Asia net revenue by approximately $3 million, or 5 percent, for the six months ended September 30, 2005 as compared to the six months ended September 30, 2004. The increase in net revenue was driven primarily by higher sales of our Medal of Honor, Battlefield, Cricket and FIFA franchises. This increase was partially offset by lower sales from our Harry Potter franchise.

Our total net revenue by product line for the three and six months ended September 30, 2005 and 2004 was as follows (in millions):


	Three Months Ended September 30,								Increase/			%
	2005				2004				(Decrease)			Change
Consoles
PlayStation 2	$	304	45	%	$	312	44	%	$	(8	)		(3	%)
Xbox		136	20	%		142	20	%		(6	)		(4	%)
Nintendo GameCube		27	4	%		38	5	%		(11	)		(29	%)
Other Consoles		–	0	%		1	0	%		(1	)		(100	%)

Total Consoles		467	69	%		493	69	%		(26	)		(5	%)
PC		91	14	%		141	20	%		(50	)		(35	%)
Mobility
PSP		45	7	%		–	0	%		45			N/A
Nintendo DS		8	1	%		–	0	%		8			N/A
Game Boy Advance		7	1	%		10	1	%		(3	)		(30	%)
Cellular Handsets		2	0	%		–	0	%		2			N/A

Total Mobility		62	9	%		10	1	%		52			520	%
Co-publishing and Distribution		32	5	%		49	7	%		(17	)		(35	%)

Internet Services, Licensing and Other
Subscription Services		14	2	%		13	2	%		1			8	%
Licensing, Advertising and Other		9	1	%		10	1	%		(1	)		(10	%)

Total Internet Services, Licensing and Other		23	3	%		23	3	%		–			0	%

Total Net Revenue	$	675	100	%	$	716	100	%	$	(41	)		(6	%)


	Six Months Ended September 30,								Increase/			%
	2005				2004				(Decrease)			Change
Consoles
PlayStation 2	$	421	40	%	$	474	41	%	$	(53	)		(11	%)
Xbox		180	17	%		199	17	%		(19	)		(10	%)
Nintendo GameCube		49	5	%		65	6	%		(16	)		(25	%)
Other Consoles		–	0	%		3	0	%		(3	)		(100	%)

Total Consoles		650	62	%		741	64	%		(91	)		(12	%)
PC		165	16	%		207	18	%		(42	)		(20	%)
Mobility
PSP		77	8	%		–	0	%		77			N/A
Nintendo DS		20	2	%		–	0	%		20			N/A
Game Boy Advance		13	1	%		28	3	%		(15	)		(54	%)
Cellular Handsets		3	0	%		–	0	%		3			N/A

Total Mobility		113	11	%		28	3	%		85			304	%
Co-publishing and Distribution		62	6	%		116	10	%		(54	)		(47	%)
Internet Services, Licensing and Other
Subscription Services		29	3	%		25	2	%		4			16	%
Licensing, Advertising and Other		21	2	%		30	3	%		(9	)		(30	%)

Total Internet Services, Licensing and Other		50	5	%		55	5	%		(5	)		(9	%)

Total Net Revenue	$	1,040	100	%	$	1,147	100	%	$	(107	)		(9	%)

PlayStation 2

For the three months ended September 30, 2005, net revenue from sales of titles for the PlayStation 2 was $304 million, driven primarily by sales ofMadden NFL 06, NCAA Football 06, Burnout Revenge, FIFA 06andNBA Live 06.We released nine titles for the PlayStation 2 during each of the three months ended September 30, 2005 and September 30, 2004. Overall, PlayStation 2 net revenue decreased $8 million, or 3 percent, as compared to the three months ended September 30, 2004. The decrease in current-year sales was primarily due to lower sales from (1) our Def Jam, Need for Speed and Burnout franchises, (2) the release ofMadden NFL 2005 Special Collector’s Editionat a higher price point in the three months ended September 30, 2004, and (3) higher prior-year sales ofCatwoman. The overall decrease in net revenue was mitigated by current-year sales of products from our FIFA and NBA Live franchises.

For the six months ended September 30, 2005, net revenue from sales of titles for the PlayStation 2 was $421 million, driven primarily by sales ofMadden NFL 06, Medal of Honor European Assault, NCAA Football 06, Burnout RevengeandFIFA 06. We released 12 titles for the PlayStation 2 during each of the six months ended September 30, 2005 and September 30, 2004. Overall, PlayStation 2 net revenue decreased $53 million, or 11 percent, as compared to the six months ended September 30, 2004. The decrease was primarily due to (1) lower sales from our Harry Potter, Fight Night, Def Jam and Need for Speed franchises, and (2) strong prior-year sales ofUEFA Euro 2004. The overall decrease in net revenue was mitigated by current-year sales of products from our Medal of Honor, FIFA and NBA Live franchises.

Xbox

For the three months ended September 30, 2005, net revenue from sales of titles for the Xbox was $136 million, driven primarily by sales ofMadden NFL 06, NCAA Football 06, Burnout Revenge, NBA Live 06andTiger Woods PGA TOUR 06.We released nine titles for the Xbox during the three months ended September 30, 2005, as compared to eight titles in the three months ended September 30, 2004. Overall, Xbox net revenue decreased $6 million, or 4 percent, as compared to the three months ended September 30, 2004. The decrease was primarily due to lower sales from our Def Jam franchise. The overall decrease in net revenue was mitigated by current-year sales products from our NBA Live franchise.

For the six months ended September 30, 2005, net revenue from sales of titles for the Xbox was $180 million, driven primarily by sales ofMadden NFL 06, NCAA Football 06, Burnout Revenge, Medal of Honor European AssaultandNBA Live 06.We released 12 titles for the Xbox during the six months ended September 30, 2005, as compared to 11 titles in the six months ended September 30, 2004. Overall, Xbox net revenue decreased $19 million, or 10 percent, as compared to the six months ended September 30, 2004. The decrease was primarily due to lower sales from our Fight Night, Def Jam and Harry Potter franchises. The overall decrease in net revenue was mitigated by current-year sales of products from our Medal of Honor and NBA Live franchises.

Nintendo GameCube

For the three months ended September 30, 2005, net revenue from sales of titles for the Nintendo GameCube was $27 million, driven primarily by sales ofMadden NFL 06,FIFA 06, Marvel Nemesis: Rise of the Imperfects, NBA Live 06andTiger Woods PGA TOUR 06. We released six titles for the Nintendo GameCube during the three months ended September 30, 2005, as compared to seven titles in the three months ended September 30, 2004. Overall, Nintendo GameCube net revenue decreased $11 million, or 29 percent, as compared to three months ended September 30, 2004. The decrease was primarily due to lower sales from our NCAA Football and Def Jam franchises during the three months ended September 30, 2005.

For the six months ended September 30, 2005, net revenue from sales of titles for the Nintendo GameCube was $49 million, driven primarily by sales ofMadden NFL 06, Medal of Honor European Assault, Batman Begins, FIFA 06andMarvel Nemesis: Rise of the Imperfects. We released eight titles for the Nintendo GameCube during each of the six months ended September 30, 2005 and September 30, 2004. Overall, Nintendo GameCube net revenue decreased $16 million, or 25 percent, as compared to six months ended September 30, 2004. The decrease was primarily due to lower sales from our Harry Potter and NCAA Football franchises. The overall decrease in net revenue was mitigated by current-year sales of products from (1) our Medal of Honor franchise, as well as (2) the current-year release ofBatman Begins.

For the three months ended September 30, 2005, net revenue from sales of titles for the PC was $91 million, driven primarily by sales ofThe Sims 2 NightlifeandBattlefield 2.We released six titles for the PC during each of the three months ended September 30, 2005 and September 30, 2004. Overall, PC net revenue decreased $50 million, or 35 percent, as compared to three months ended September 30, 2004. The decrease was primarily due to lower sales in the three months ended September 30, 2005 from our Sims franchise. The overall decrease in net revenue was mitigated by current-year sales of products from our Battlefield franchise. We consolidated DICE’s financial results into our financial statements as of January 27, 2005, and, therefore, have characterizedBattlefield 2as PC-based revenue. Prior to consolidating DICE’s financial results, we classified revenue from the Battlefield franchise as co-publishing and distribution revenue.

For the six months ended September 30, 2005, net revenue from sales of titles for the PC was $165 million, driven primarily by sales ofBattlefield 2andThe Sims 2 Nightlife. We released eight titles for the PC during the six months ended September 30, 2005, as compared to nine titles in the six months ended September 30, 2004. Overall, PC net revenue decreased $42 million, or 20 percent, as compared to the six months ended September 30, 2004. The decrease was primarily due to lower sales from our Sims and Harry Potter franchises. The overall decrease in net revenue was mitigated by current-year sales of products from our Battlefield franchise.

Mobility

Net revenue from mobile products increased from $10 million in the three months ended September 30, 2004 to $62 million in the three months ended September 30, 2005. Mobile products include games for all mobile devices such as hand-helds and cellular handsets. The increase in mobility net revenue for the three months ended September 30, 2005 was primarily due to the sales of titles for the PSP and Nintendo DS that were launched in certain regions during the six months ended March 31, 2005.

Net revenue from mobile products increased from $28 million in the six months ended September 30, 2004 to $113 million in the six months ended September 30, 2005. The increase in mobility net revenue was primarily due to sales of titles for the PSP and Nintendo DS. The increase was partially offset by a decrease in net revenue from sales of our Harry Potter franchise for the Game Boy Advance, which had no corresponding title released in the six months ended September 30, 2005.

Co-Publishing and Distribution

Net revenue from co-publishing and distribution products decreased from $49 million in the three months ended September 30, 2004 to $32 million in the three months ended September 30, 2005. The decrease was primarily due to (1) the change in our classification of sales of products from our Battlefield franchise, which we no longer classify as co-publishing and distribution revenue, and (2) higher prior-year sales of co-publishing and distribution titles.

Net revenue from co-publishing and distribution products decreased from $116 million in the six months ended September 30, 2004 to $62 million in the six months ended September 30, 2005. The decrease was primarily due to (1) the change in our classification of sales of products from our Battlefield franchise, which we no longer classify as co-publishing and distribution revenue, and (2) higher prior-year sales of co-publishing and distribution titles.

Subscription Services

Net revenue from subscription services increased from $13 million in the three months ended September 30, 2004 to $14 million in the three months ended September 30, 2005. The increase in net revenue was primarily due to an increase in the number of paying subscribers to Club Pogo, partially offset by a decrease in net revenue fromUltima Online^TM andThe Sims Online^TM.

Net revenue from subscription services increased from $25 million in the six months ended September 30, 2004 to $29 million in the six months ended September 30, 2005. The increase in net revenue was primarily due to an increase in the number of paying subscribers to Club Pogo, partially offset by a decrease in net revenue fromUltima OnlineandThe Sims Online.

Cost of Goods Sold

Cost of goods sold for our disk-based and cartridge-based products consists of (1) product costs, (2) certain royalty expenses for celebrities, professional sports and other organizations and independent software developers, (3) manufacturing royalties, net of volume discounts, (4) expenses for defective products, (5) write-offs of post-launch prepaid royalty costs, (6) amortization of certain intangible assets, and (7) operations expenses. Cost of goods sold for our online product subscription business consists primarily of data center and bandwidth costs associated with hosting our web sites, credit card fees and royalties for use of third-party intellectual properties. Cost of goods sold for our web site advertising business primarily consists of ad-serving costs.

Cost of goods sold for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,		% of Net			September 30,		% of Net
	2005		Revenue			2004		Revenue			% Change


Three months ended	$	284		42.1	%	$	284		39.7	%		0.0	%


Six months ended	$	434		41.7	%	$	460		40.1	%		(5.7	%)

In the three and six months ended September 30, 2005, cost of goods sold as a percentage of total net revenue increased by 2.4 and 1.6 percentage points, respectively. These increases were primarily the result of higher license royalties as a percentage of total net revenue during the three and six months ended September 30, 2005 due to our new license agreements with the NFL, Players Inc. and Collegiate Licensing Company. The increase in license royalties was partially offset by lower third-party development royalties as a percentage of total net revenue primarily due to the internal development ofBurnout Revengein the current year as compared to the external development ofBurnout^TM3:Takedown^TM in the prior year.

Our product costs remained relatively flat as a percentage of total net revenue during the three and six months ended September 30, 2005 as compared to the three and six months ended September 30, 2004; however, we experienced lower inventory management costs as the prior year included charges associated with the recall of the PlayStation 2Tiger Woods PGA TOUR 2005game in Europe. The decrease in inventory management costs was offset by (1) a decrease in PC net revenue as we launchedThe Sims 2in the three months ended September 30, 2004 as compared to the release of an expansion pack,The Sims 2 Nightlife, in the three months ended September 30, 2005, and (2) an increase in revenue from the PSP and Nintendo DS, both of which have higher costs of goods sold than PC products as a percentage of total net revenue.

We expect cost of goods sold as a percentage of total net revenue to remain approximately flat during fiscal 2006 as compared to fiscal 2005. We expect margin pressure as a result of a potential decrease in average selling prices as current-generation platforms mature and our industry transitions to next-generation technology and higher license royalty rates. Although there can be no assurance, and our actual results could differ materially, we expect this pressure to be essentially offset by lower manufacturing royalty rates, lower third-party development royalties and, to some extent, favorable product mix.

Marketing and Sales

Marketing and sales expenses consist of personnel-related costs and advertising, marketing and promotional expenses, net of advertising expense reimbursements from third parties.

Marketing and sales expenses for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,		% of Net			September 30,		% of Net
	2005		Revenue			2004		Revenue			$ Change		% Change


Three months ended	$	107		16	%	$	107		15	%	$	–		0	%


Six months ended	$	182		18	%	$	171		15	%	$	11		6	%

For the six months ended September 30, 2005, marketing and sales expenses increased by $11 million, or 6 percent, as compared to the six months ended September 30, 2004 primarily due to an increase in personnel-related costs from an increase in headcount and facility-related expenses in support of our marketing and sales functions worldwide.

We expect marketing and sales expenses for the twelve months ending March 31, 2006 to be relatively consistent with the prior year as a percentage of net revenue.

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.

General and administrative expenses for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,		% of Net			September 30,		% of Net
	2005		Revenue			2004		Revenue			$ Change		% Change


Three months ended	$	52		8	%	$	42		6	%	$	10		24	%


Six months ended	$	103		10	%	$	77		7	%	$	26		34	%

For the three months ended September 30, 2005, general and administrative expenses increased by $10 million, or 24 percent, as compared to the three months ended September 30, 2004 primarily due to an increase in headcount, a slight increase in litigation costs and slightly higher bad debt expense.

For the six months ended September 30, 2005, general and administrative expenses increased by $26 million, or 34 percent, as compared to the six months ended September 30, 2004 primarily due to (1) an increase of $11 million in personnel-related costs due to an increase in headcount to help support the growth of our administrative functions worldwide and (2) an increase of $10 million in professional and contracted services to support our business.

We expect general and administrative expenses for the twelve months ending March 31, 2006 to be consistent with the prior year as a percentage of net revenue.

Research and Development

Research and development expenses consist of expenses incurred by our production studios for personnel-related costs, consulting, equipment depreciation and any impairment of prepaid royalties for pre-launch products. Research and development expenses for our online business include expenses incurred by our studios consisting of direct development and related overhead costs in connection with the development and production of our online games. Research and development expenses also include expenses associated with the development of web site content, network infrastructure direct expenses, software licenses and maintenance, and network and management overhead.

Research and development expenses for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,		% of Net			September 30,		% of Net
	2005		Revenue			2004		Revenue			$ Change		% Change


Three months ended	$	182		27	%	$	157		22	%	$	25		16	%


Six months ended	$	365		35	%	$	288		25	%	$	77		27	%

For the three and six months ended September 30, 2005, research and development expenses increased by $25 million, or 16 percent, and $77 million, or 27 percent, respectively, as compared to the three and six months ended September 30, 2004, primarily due to:

•

An increase of $28 million and $78 million in the three and six months ended September 30, 2005, respectively, in personnel-related costs. This increase primarily relates to an increase in employee headcount in our Canadian and European studios as a result of increased internal development and the development for next-generation tools, technologies and titles, as well as our recent consolidations of DICE and Criterion. This increase was partially offset by a decrease in the allocation of our annual bonus expense during the six months ended September 30, 2005 primarily due to lower net income during the first six months of fiscal 2006.

•

An increase of $7 million and $19 million in the three and six months ended September 30, 2005, respectively, in facilities-related expenses to help support the growth of our research and development functions worldwide.

The increases in research and development expenses were partially offset by an overall decrease of approximately $10 million and $19 million in the three and six months ended September 30, 2005, respectively, in external development expenses as a result of developing more of our titles internally.

We expect research and development spending to continue to increase in total dollars and as a percentage of net revenue for fiscal 2006 as compared to fiscal 2005, as we continue to invest in next-generation tools, technologies and titles.

Interest and Other Income, Net

Interest and other income, net, for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,		% of Net			September 30,		% of Net
	2005		Revenue			2004		Revenue			$ Change		% Change


Three months ended	$	13		2	%	$	12		2	%	$	1		8	%


Six months ended	$	30		3	%	$	21		2	%	$	9		43	%

For the three and six months ended September 30, 2005, interest and other income, net, increased as compared to the three and six months ended September 30, 2004 primarily due to an increase of $5 million and $17 million in the three and six months ended September 30, 2005, respectively, in interest income as a result of higher yields on our cash, cash equivalent and short-term investment balances in fiscal 2006. This increase was partially offset by a decrease of $5 million in both the three and six months ended September 30, 2005 from gains on investments recorded in the three and six months ended September 30, 2004.

Income Taxes

Income taxes for the three and six months ended September 30, 2005 and 2004 were as follows (in millions):


	September 30,			Effective			September 30,		Effective
	2005			Tax Rate			2004		Tax Rate			% Change


Three months ended	$	9			15	%	$	40		29	%		(78	%)


Six months ended	$	(13	)		(80	%)	$	50		29	%		(126	%)

Our effective income tax rate reflects our significant operations outside the U.S., which are generally taxed at rates lower than the U.S. statutory rate of 35 percent. Our effective income tax rates were a provision of 15 percent and a benefit of 80 percent for the three and six months ended September 30, 2005, respectively. These rates reflected the impact of certain adjustments recorded in the three months ended September 30, 2005 as a result of the resolution of various tax-related matters with foreign tax authorities, offset by additional income taxes resulting from certain intercompany transactions during the three months ended September 30, 2005. Excluding adjustments, but taking into account an adjustment to reflect our current projection of the geographic mix of taxable income and applicable tax expense, our projected annual tax rate for the full year of fiscal 2006 is 28 percent.

The American Jobs Creation Act of 2004 (the “Jobs Act”), enacted on October 22, 2004, provides for a temporary 85 percent dividends received deduction on certain foreign earnings repatriated in fiscal 2005 or fiscal 2006. The deduction would result in an approximate 5.25 percent federal tax on a portion of the foreign earnings repatriated. State, local and foreign taxes could apply as well. To qualify for this federal tax deduction, the earnings must be reinvested in the United States pursuant to a domestic reinvestment plan established by our Chief Executive Officer and approved by the Board of Directors. Certain other criteria in the Jobs Act must be satisfied as well. The maximum amount of our foreign earnings that we may repatriate subject to the Jobs Act deduction is $500 million.

We historically have considered undistributed earnings of our foreign subsidiaries to be indefinitely reinvested and, accordingly, no U.S. taxes have been provided thereon. As a result of the Jobs Act, we are in the process of evaluating whether we will change our intentions regarding a portion of our foreign earnings and take advantage of the repatriation provisions of the Jobs Act, and if so, the amount that we would repatriate. We may not take advantage of the new law at all. In addition to not having made a decision to repatriate any foreign earnings, we are not yet in a position to accurately determine the impact of a qualifying repatriation, should we choose to make one, on our income tax expense for fiscal 2006. If we decide to repatriate a portion of our foreign earnings, we would be required to recognize income tax expense related to the federal, state, local and foreign taxes that we would incur on the repatriated earnings when the decision is made. We estimate that the reasonably possible amount of the income tax expense could be up to $35 million. We expect to be in a position to finalize our analysis no later than February 2006.

In July 2005, the Financial Accounting Standards Board (“FASB”) issued an exposure draft of a proposed interpretation of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” which addresses the accounting for uncertain tax positions. The proposed interpretation provides that the best estimate of the impact of a tax position would be recognized in an entity’s financial statements only if it is probable that the position will be sustained on audit based solely on its technical merits. This proposed interpretation also would provide guidance on disclosure, accrual of interest and penalties, accounting in interim periods and transition. The effective date of this proposed interpretation has not been determined. We cannot predict what actions the FASB will take or how any such actions might ultimately affect our financial position or results of operations.

Impact of Recently Issued Accounting Standards

In March 2004, the FASB ratified the measurement and recognition guidance and certain disclosure requirements for impaired securities as described in Emerging Issues Task Force (“EITF”) Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. In June 2005, the FASB directed its staff to issue proposed FASB Staff Position (“FSP”) EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The FASB retitled this FSP as FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”. The final FSP supersedes EITF Issue No. 03-1 and EITF Topic D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value”. The final FSP replaces the guidance set forth in paragraphs 10 through 18 of EITF Issue No. 03-1 with references to existing other-than-temporary impairment guidance. In September 2005, the FASB decided to retain the paragraph in the proposed FSP on how to account for debt securities subsequent to an other-than-temporary impairment. The FASB also decided to add a footnote to clarify that the proposed FSP does not address when a holder of a debt security would place a debt security on nonaccrual status or how to subsequently report income on a nonaccrual debt security. The FASB decided that transition would be applied prospectively and the effective date would be reporting periods beginning after December 15, 2005. In November 2005, the FASB issued FSP FAS 115-1. Management is currently evaluating what impact the adoption of the measurement and recognition guidance in FSP FAS 115-1 will have on our consolidated financial statements.

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”),“Share-Based Payment”. SFAS No. 123R requires that the cost resulting from all share-based payment transactions be recognized in financial statements using a fair-value-based method. The statement replaces SFAS No. 123, supersedes Accounting Principles Board (“APB”) No. 25, and amends SFAS No. 95,“Statement of Cash Flows”. While the fair value method under SFAS No. 123R is similar to the fair value method under SFAS No. 123 with regards to measurement and recognition of stock-based compensation, management is currently evaluating the impact of several of the key differences between the two standards on our consolidated financial statements. For example, SFAS No. 123 permits us to recognize forfeitures as they occur while SFAS No. 123R will require us to estimate future forfeitures and adjust our estimate on a quarterly basis. SFAS No. 123R also will require a classification change in the statement of cash flows, whereby a portion of the tax benefit from stock options will move from operating cash flow activities to financing cash flow activities (total cash flows will remain unchanged).

In March 2005, the SEC released SAB No. 107,“Share-based Payment”, which provides the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations for public companies. In April 2005, the SEC adopted a rule that amends the compliance dates of SFAS No. 123R. Under the revised compliance dates, we will be required to adopt the provisions of SFAS No. 123R no later than our first quarter of fiscal 2007. While management continues to evaluate the impact of SFAS No. 123R on our consolidated financial statements, we currently believe that the expensing of stock-based compensation will have an impact on our Condensed Consolidated Statements of Operations similar to our pro forma disclosure under SFAS No. 123, as amended.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle. Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change. The new Statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. Additionally, this Statement requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and that correction of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Management does not believe the adoption of SFAS No. 154 will have a material impact on our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES


	As of September 30,						Increase /
(In millions)	2005			2004			(Decrease)

Cash, cash equivalents and short-term investments	$	2,230		$	2,490		$	(260	)
Marketable equity securities		182			—			182

Total	$	2,412		$	2,490		$	(78	)


Percentage of total assets		64	%		67	%


	Six Months Ended
	September 30,						Increase /
(In millions)	2005			2004			(Decrease)

Cash provided by (used in) operating activities	$	(19	)	$	23		$	(42	)
Cash used in investing activities		(16	)		(873	)		857
Cash provided by (used in) financing activities		(649	)		86			(735	)
Effect of foreign exchange on cash and cash equivalents		(11	)		—			(11	)

Net decrease in cash and cash equivalents	$	(695	)	$	(764	)	$	69

Changes in Cash Flow
During the six months ended September 30, 2005, we used $19 million of cash from operating activities as compared to generating $23 million of cash for the six months ended September 30, 2004. The increase in cash used in operating activities was primarily due to the decline in net income during the six months ended September 30, 2005 as compared to the six months ended September 30, 2004, and an increase in prepaid royalties as we continue to invest in our product development and content partially offset by a lower accounts receivable balance due to a decrease in revenue in the six months ended September 20, 2005 as compared to the six months ended September 30, 2004. We expect to generate significant operating cash flow during the remainder of fiscal 2006. For the six months ended September 30, 2005, our primary use of cash in non-operating activities consisted of $709 million for the repurchase and retirement of our common stock, completing our common stock repurchase program, and $56 million in capital expenditures primarily related to the expansion of our Vancouver studio and upgrades to our worldwide ERP systems. These non-operating expenditures were partially offset by $60 million in proceeds from sales of common stock through our stock plans. We anticipate making continued capital investments in our Vancouver studio during fiscal 2006.

Short-term investments and marketable equity securities
As of September 30, 2005, our portfolio of cash, cash equivalents and short-term investments was comprised of 26 percent cash and cash equivalents and 74 percent short-term investments. As of March 31, 2005, 43 percent of our portfolio consisted of cash and cash equivalents and 57 percent of our portfolio consisted of short-term investments. In absolute dollars, our cash and equivalents decreased from $1,270 million as of March 31, 2005 to $575 million as of September 30, 2005. This decrease was primarily due to $709 million of cash used for our common stock repurchase program during the six months ended September 30, 2005. Due to our mix of fixed and variable rate securities, our short-term investment portfolio is susceptible to changes in short-term interest rates. As of September 30, 2005, our short-term investments had gross unrealized losses of approximately $15 million, or 1 percent of the total in short-term investments. From time to time, we may liquidate some or all of our short-term investments to fund operational needs or other activities, such as capital expenditures, business acquisitions or stock repurchase programs. Depending on which short-term investments we liquidate to fund these activities, we could recognize a portion of the gross unrealized losses.

Marketable equity securities increased to $182 million as of September 30, 2005, from $140 million as of March 31, 2005, primarily due to an increase in the unrealized gain on our investment in Ubisoft Entertainment.

Receivables, net
Our gross accounts receivable balances were $465 million and $458 million as of September 30, 2005 and March 31, 2005, respectively. The increase in our accounts receivable balance was expected due to higher sales volume in the second quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. We expect our accounts receivable balance to increase during the three months ending December 31, 2005 based on our seasonal product release schedule. Reserves for sales returns, pricing allowances and doubtful accounts decreased from $162 million as of March 31, 2005 to $137 million as of September 30, 2005. Reserves for sales returns, pricing allowances and doubtful accounts decreased in absolute dollars but increased as a percentage of trailing six and nine month net revenue as of September 30, 2005 as compared to March 31, 2005 primarily as a result of the seasonality in our business. Reserves for sales returns, pricing allowances and doubtful accounts increased in both absolute dollars and as a percentage of trailing six and nine month net revenue as compared to the quarter ended September 30, 2004. We believe these reserves are adequate based on historical experience and our current estimate of potential returns and allowances.

Inventories
Inventories increased to $74 million as of September 30, 2005, from $62 million as of March 31, 2005, primarily due to the buildup of inventory in connection with the release ofFIFA 06in North America at the beginning of the third quarter of fiscal 2006. Other thanFIFA 06, no single title represented more than $4 million of inventory as of September 30, 2005.

Other current assets
Other current assets increased to $208 million as of September 30, 2005, from $164 million as of March 31, 2005, primarily due to an increase in prepaid royalties as we continue to invest in our product development and content.

Accounts payable
Accounts payable increased to $171 million as of September 30, 2005, from $134 million as of March 31, 2005, primarily due to the higher sales volume as well as higher expenditures to support the growth of our business worldwide in the second quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005.

Accrued and other liabilities
Our accrued and other liabilities decreased to $558 million as of September 30, 2005 from $694 million as of March 31, 2005. The decrease was primarily due to a $77 million reduction in income tax payable we recorded in the three months ended September 30, 2005 following a recent U.S. Tax Court ruling regarding the proper allocation of the tax deduction for stock options between U.S. and foreign entities. Although the case remains subject to appeal, it has precedent value for our situation. Accordingly, we released a reserve of $77 million during the quarter ended September 30, 2005, whereby, we recorded a reduction to our income tax liability and an increase to additional paid in capital. This had no impact on our income statement or on our net operating cash flow in the quarter. We anticipate our accrued and other liabilities balance will increase during the three months ending December 31, 2005 primarily due to an increase in our operations during this period.

Financial Condition
We believe that existing cash, cash equivalents, short-term investments, marketable equity securities and cash generated from operations will be sufficient to meet our operating requirements for at least the next twelve months, including working capital requirements, capital expenditures and potential future acquisitions or strategic investments. We may choose at any time to raise additional capital to strengthen our financial position, facilitate expansion, pursue strategic acquisitions and investments or to take advantage of business opportunities as they arise. There can be no guarantee that such additional capital will be available to us on favorable terms, if at all, or that it will not result in substantial dilution to our existing stockholders.

Our two lease agreements with Keybank National Association, described in the “Off-Balance Sheet Commitments” section below, are scheduled to expire in June 2006 and July 2006. We currently are evaluating whether to extend the leases, purchase the properties under lease, or identify a third-party buyer for the properties when the leases expire. Should we choose to renew the leases, our lease payments may change from the amounts under the current lease agreements. Should we choose to purchase the properties, we could incur a cash outflow of approximately $200 million. We have not yet determined the course of action that we will take.

A portion of our cash, cash equivalents and short-term investments that was generated from operations domiciled in foreign tax jurisdictions (approximately $834 million as of September 30, 2005) is designated as indefinitely reinvested in the respective tax jurisdiction. While we have no plans to repatriate these funds to the United States in the short term, if we were required to do so in order to fund our operations in the United States, we would accrue and pay additional taxes in connection with their repatriation. We are in the process of evaluating whether we will repatriate foreign earnings under the repatriation provisions of the American Jobs Creation Act of 2004.


	Number of Shares
	Repurchased and		Approximate
	Retired		Amount
Three months ended September 30, 2005		6.3	$	372
Six months ended September 30, 2005		12.6	$	709
From the inception of the program through September 30, 2005		13.4	$	750

We have a “shelf” registration statement on Form S-3 on file with the Securities and Exchange Commission. This shelf registration statement, which includes a base prospectus, allows us at any time to offer any combination of securities described in the prospectus in one or more offerings up to a total amount of $2.0 billion. Unless otherwise specified in a prospectus supplement accompanying the base prospectus, we will use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes, including for working capital, financing capital expenditures, research and development, marketing and distribution efforts and, if opportunities arise, for acquisitions or strategic alliances. Pending such uses, we may invest the net proceeds in interest-bearing securities. In addition, we may conduct concurrent or other financings at any time.

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 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 described in the “Risk Factors” section below.

Contractual Obligations and Commercial Commitments

Development, Celebrity, League and Content Licenses: Payments and Commitments
The products produced by our studios are designed and created by our employee designers, artists, software programmers and by non-employee software developers (“independent artists” or “third-party developers”). We typically advance development funds to the independent artists and third-party developers during development of our games, usually in installment payments made upon the completion of specified development milestones.


	Contractual Obligations						Commercial Commitments
			Developer/						Letters
Fiscal Year			Licensor				Bank and		of
Ending March 31,	Leases⁽¹⁾		Commitments⁽²⁾		Marketing		Other Guarantees		Credit		Total
2006 (remaining six months)	$	30	$	72	$	19	$	2	$	10	$	133
2007		31		146		34		—		—		211
2008		24		135		30		—		—		189
2009		17		145		30		—		—		192
2010		13		128		30		—		—		171
Thereafter		34		837		198		—		—		1,069

Total	$	149	$	1,463	$	341	$	2	$	10	$	1,965


⁽¹⁾		See discussion on operating leases in the “Off-Balance Sheet Commitments” section below for additional information.

⁽²⁾		Developer/licensor commitments include $38 million of commitments to developers or licensors that have been recorded in current and long-term liabilities and a corresponding amount in current and long-term assets in our Condensed Consolidated Balance Sheets as of September 30, 2005 because the developer or licensor does not have any performance obligations to us.

OFF-BALANCE SHEET COMMITMENTS

Lease Commitments

We lease certain of our current facilities and certain equipment under non-cancelable 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 third party for our headquarters facility in Redwood City, California, which was refinanced with Keybank National Association in July 2001 and expires in July 2006. We 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. We have an option to purchase the property (land and facilities) for a maximum of $145 million or, at the end of the lease, to arrange for (i) an extension of the lease or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $129 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 Keybank National Association for a five and one-half year term 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 provide space for sales, marketing, administration and research and development functions. We have an option to purchase the property for a maximum of $130 million or, at the end of the lease, to arrange for (i)��an extension of the lease or (ii) sale of the property to a third party while we retain an obligation to the owner for approximately 90 percent of the difference between the sale price and the guaranteed residual value of up to $119 million if the sales price is less than this amount, subject to certain provisions of the lease.

We believe the estimated fair values of both properties under these operating leases are in excess of their respective guaranteed residual values as of September 30, 2005.


				Actual as of
Financial Covenants	Requirement			September 30, 2005

Consolidated Net Worth (in millions)	equal to or greater than	$	2,099	$	2,984
Fixed Charge Coverage Ratio	equal to or greater than		3.00		13.42
Total Consolidated Debt to Capital	equal to or less than		60%		7.6%
Quick Ratio - Q1 & Q2	equal to or greater than		1.00		10.36
Q3 & Q4	equal to or greater than		1.75		N/A

As our two lease agreements with Keybank National Association are scheduled to expire in June 2006 and July 2006, we currently are evaluating whether to extend the leases, purchase the properties under lease, or identify a third-party buyer for the properties when the leases expire. We have not yet determined the course of action that we will take. See the “Liquidity and Capital Resources” section above for additional information.

Litigation

On July 29, 2004, a class action lawsuit,Kirschenbaum v. Electronic Arts Inc., was filed against us in Superior Court in San Mateo, California, alleging that we improperly classified “Image Production Employees” in California as exempt employees. In early October 2005, we reached a settlement to resolve these claims. Under the terms of the settlement, we will make a lump sum payment of $15.6 million to cover (a) all claims allegedly suffered by the class members, (b) plaintiffs’ attorneys’ fees, not to exceed 25% of the total settlement amount, (c) plaintiffs’ costs and expenses, (d) any incentive payments to the named plaintiffs that may be authorized by the court, and (e) all costs of administration of the settlement. On October 17, 2005, the court granted its preliminary approval of the settlement. The court has scheduled a hearing to consider its final approval of the settlement for January 27, 2006.

Director Indemnity Agreements

We have entered into indemnification agreements with the members of our Board of Directors at the time they join the Board to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid 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 of their service as members of our Board of Directors.

RISK FACTORS

Our business is subject to many risks and uncertainties, which may affect our future financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial performance.

Our business is highly dependent on the success and timely release of new video game platforms, on the continued availability of existing video game platforms, as well as our ability to develop commercially successful products for these platforms.

We derive most of our revenue from the sale of products for play on video game platforms manufactured by third parties, such as Sony’s PlayStation 2 and Microsoft’s Xbox. The success of our business is driven in large part by the availability of an adequate supply of current-generation video game platforms, the timely release, adequate supply, and success of new video game hardware systems, our ability to accurately predict which platforms will be most successful in the marketplace, and our ability to develop commercially successful products for these platforms. 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 which we are developing products may be delayed, may not succeed or may have a shorter life cycle than anticipated. If the platforms for which we are developing products are not released when anticipated, are not available in adequate amounts to meet consumer demand, or do not attain wide market acceptance, our revenue will suffer, we may be unable to fully recover the resources we have committed, and our financial performance will be harmed.

Our industry is cyclical and has entered a transition period heading into the next cycle. During the transition, we expect our costs to increase, we may experience a decline in sales as consumers anticipate and adopt next-generation products and our operating results may suffer and become more difficult to predict.

Video game platforms have historically had a life cycle of four to six years, which causes the video game software market to be cyclical as well. Sony’s PlayStation 2 was introduced in 2000 and Microsoft’s Xbox and the Nintendo GameCube were introduced in 2001. Over the course of the next twelve to eighteen months, we expect Microsoft, Sony and Nintendo to introduce new video game platforms into the market (so-called “next-generation platforms”). As a result, we believe that the interactive entertainment industry has entered into a transition stage leading into the next cycle. During this transition, we intend to continue developing new titles for the current generation of video game platforms while we also make significant investments preparing to introduce products upon the launch of the next-generation platforms. We have incurred and expect to continue to incur increased costs during the transition to next-generation platforms, which are not likely to be offset in the near future. We also expect development costs for next-generation video games to be greater on a per-title basis than development costs for current-generation video games. Further, we expect that, as the current-generation of platforms reaches the end of its cycle and next-generation platforms are introduced into the market, sales of video games for current-generation consoles may begin to decline as consumers defer game software purchases until the next-generation platforms become available. This decline may not be offset by increased sales of products for the new platforms. For example, following the launch of Sony’s PlayStation 2 platform, we experienced a significant decline in revenue from sales of products for Sony’s older PlayStation game console, which was not immediately offset by revenue generated from sales of products for the PlayStation 2. If the increased costs we have incurred and expect to continue to incur are not offset during the transition, our operating results will suffer and our financial position will be harmed. In addition, during the transition, we expect our operating results to be more volatile and difficult to predict, which could cause our stock price to fluctuate significantly.

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 or we are unable to obtain such licenses, our profitability will be materially impacted.

Over the course of the next twelve to eighteen months, we expect our platform licensors to introduce new video game platforms into the market in various parts of the world. For example, Microsoft has announced plans to release the Xbox 360 (the next-generation successor to the Xbox) during the 2005 holiday season and Sony has announced plans to release the PlayStation 3 (the next-generation successor to the PlayStation 2) in 2006. 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, certain 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. It is also possible that platform licensors may choose not to renew our licenses. Because publishing products for video game consoles is the largest portion of our business, any increase in fee structures or failure to secure a license relationship would significantly harm our ability to generate revenues and/or profits.

If we do not consistently meet our product development schedules, our operating results will be adversely affected.

Our business is highly seasonal, with the highest levels of consumer demand, and a significant percentage of our revenue, occurring in the December quarter. In addition, we seek to release many of our products in conjunction with specific events, such as the release of a related movie or the beginning of a sports season or major sporting event. If we miss these key selling periods for any reason, including product delays or delayed introduction of a new platform for which we have developed products, our sales will suffer disproportionately. Our ability to meet product development schedules is affected by a number of factors, including the creative processes involved, the coordination of large and sometimes geographically dispersed development teams required by the increasing complexity of our products, and the need to refine and tune our products prior to their release. We have in the past experienced development delays for several of our products. Failure to meet anticipated production or “go live” schedules may cause a shortfall in our revenue and profitability and cause our operating results to be materially different from expectations.

Our business is subject to risks generally associated with the entertainment industry, any of which could significantly harm our operating results.

Our business is subject to risks that are generally associated with the entertainment industry, many of which are beyond our control. These risks could negatively impact our operating results and include: the popularity, price and timing of our games and the platforms on which they are played; economic conditions that adversely affect discretionary consumer spending; changes in consumer demographics; the availability and popularity of other forms of entertainment; and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.

If the average price of current-generation titles continues to decline, our operating results will suffer.

As a result of a more value-oriented consumer base, a greater number of current-generation titles being published, and significant pricing pressure from our competitors, we have experienced a decrease in the average price of our titles for current-generation platforms. Although we believe that a few of the most popular current-generation titles will continue to be launched at premium price points, as the interactive entertainment industry transitions to next-generation platforms, we expect there to be fewer current-generation titles able to command premium price points, and we expect that even these titles will be subject to price reductions at an earlier point in their sales cycle than we have seen in prior years. We expect the average price of current-generation titles to continue to decline, which will have a negative effect on our margins and operating results.

Technology changes rapidly in our business and if we fail to anticipate or successfully implement new technologies, the quality, timeliness and competitiveness of our products and services will suffer.

Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must implement and take advantage of in order to make our products and services competitive in the market. 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 and services may be technologically inferior to our competitors’, less appealing to consumers, or both. If we cannot achieve our technology goals within the original development schedule of our products and services, then we may delay their release until these technology goals can be achieved, which may delay or reduce revenue and increase our development expenses. Alternatively, we may increase the resources employed in research and development in an attempt to accelerate our development of new technologies, either to preserve our product or service launch schedule or to keep up with our competition, which would increase our development expenses.

Our business is intensely competitive and “hit” driven. If we do not continue to deliver “hit” products or if consumers prefer our competitors’ products over our own, our operating results could suffer.

Competition in our industry is intense and we expect new competitors to continue to emerge. While many new products are regularly introduced, only a relatively small number of “hit” titles accounts for a significant portion of total net revenue in our industry. Hit products published by our competitors may take a larger share of consumer spending than we anticipate, which could cause our product sales to fall below our expectations. If our competitors develop more successful products, offer competitive products at lower price points, or if we do not continue to develop consistently high-quality and well-received products, our revenue, margins, and profitability will decline.

If we are unable to maintain or acquire licenses to intellectual property, we will publish fewer hit titles and our revenue, profitability and cash flows 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, our EA SPORTS products include rights licensed from major sports leagues and players’ associations. Similarly, many of our other hit franchises, such as James Bond, Harry Potter and Lord 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 or obtain additional licenses with significant commercial value, our revenues and profitability will decline significantly. Competition for these licenses may also drive up the advances, guarantees and royalties that we must pay to the licensor, which could significantly increase our costs.

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 existing games. Several such claims have been asserted against us. Such claims can harm our business. We 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, which could negatively impact our operating results.

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.

From time to time we may become involved in other litigation which could adversely affect us.

We are currently, and from time to time in the future may become, subject to other claims and litigation, which could be expensive, lengthy, and disruptive to normal business operations. In addition, the outcome of any claims or litigation may be difficult to predict and could have a material adverse effect on our business, operating results, or financial condition. For further information regarding certain claims and litigation in which we are currently involved, see “Part II — Item 1. Legal Proceedings” below.

Our business, our products and our distribution are subject to increasing regulation of content, consumer privacy, distribution and online delivery in the key territories in which we conduct business. If we do not successfully respond to these regulations, our business may suffer.

Legislation is continually being introduced that may affect both the content of our products and their distribution. For example, privacy laws in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory 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 continually considering content restrictions on products such as ours, as well as restrictions on distribution of such products. For example, recent legislation has been adopted in several states, and could be proposed at the federal level, that prohibits the sale of certain games (e.g., violent games or those with “M” or “AO” ratings) to minors. Any one or more of these factors could harm our business by limiting the products we are able to offer to our customers, by limiting the size of the potential market for our products, and by requiring additional differentiation between products for different territories to address varying regulations. This additional product differentiation could be costly.

If one or more of our titles were found to contain hidden, objectionable content, our business could suffer.

Throughout the history of our industry, many video games have been designed to include certain hidden content and gameplay features that are accessible through the use of in-game cheat codes or other technological means that are intended to enhance the gameplay experience. However, in several cases, the hidden content or feature was included in the game by an employee who was not authorized to do so or by an outside developer without the knowledge of the publisher. From time to time, some hidden content and features have contained profanity, graphic violence and sexually explicit or other objectionable material. In a few cases, the Entertainment Software Ratings Board (“ESRB”) has reacted to discoveries of hidden content and features by reviewing the rating that was originally assigned to the product, requiring the publisher to change the game packaging and/or fining the publisher. Retailers have on occasion reacted to the discovery of such hidden content by pulling these games from their shelves, refusing to sell them, and demanding that their publishers accept them as product returns. Likewise, consumers have reacted to the revelation of hidden content by refusing to purchase such games, demanding refunds for games they’ve already purchased, and refraining from buying other games published by the company whose game contained the objectionable material.

We have implemented preventative measures designed to reduce the possibility of hidden, objectionable content from appearing in the video games we publish. Nonetheless, these preventative measures are subject to human error, circumvention, overriding, and reasonable resource constraints. If a video game we published were found to contain hidden, objectionable content, the ESRB could demand that we recall a game and change its packaging to reflect a revised rating, retailers could refuse to sell it and demand we accept the return of any unsold copies or returns from customers, and consumers could refuse to buy it or demand that we refund their money. This could have a material negative impact on our operating results and financial condition. In addition, our reputation could be harmed, which could impact sales of other video games we sell. If any of these consequences were to occur, our business and financial performance could be significantly harmed.

If we do not continue to attract and retain key personnel, we will be unable to effectively conduct our business. In addition, compensation-related changes in accounting requirements, as well as evolving legal and operational factors, could have a significant impact on our expenses and operating results.

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. Our leading position within the interactive entertainment industry makes us a prime target for recruiting of executives and key creative talent. If we cannot successfully recruit and retain the employees we need, or replace key employees following their departure, our ability to develop and manage our businesses will be impaired.

We annually review and evaluate with the Compensation Committee of our Board of Directors the compensation and benefits that we offer our employees to ensure that we are able to attract and retain our talent. Within our regular review, we have considered recent changes in the accounting treatment of stock options, the competitive market for technical, creative, marketing and other personnel, and the evolving nature of job functions within our studios, marketing organizations and other areas of the business. Any changes we make to our compensation programs could result in increased expenses and have a significant impact on our operating results.

Our platform licensors are our chief competitors and frequently control the manufacturing of and/or access to our video game products. If they do not approve our products, we will be unable to ship to our customers.

Our agreements with hardware licensors (such as Sony for the PlayStation 2, Microsoft for the Xbox and Nintendo for the Nintendo GameCube) typically give significant control to the licensor over the approval and manufacturing of our products, which could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. These hardware licensors are also our chief competitors. 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. While we believe that our relationships with our hardware licensors are currently good, the potential for these licensors to delay or refuse to approve or manufacture our products exists. Such occurrences would harm our business and our financial performance.

We also require compatibility code and the consent of Microsoft and Sony in order to include online capabilities in our products for their respective platforms. As online capabilities for video game platforms become more significant, Microsoft and Sony could restrict our ability to provide online capabilities for our console platform products. If Microsoft or Sony refused to approve our products with online capabilities or significantly impacted the financial terms on which these services are offered to our customers, our business could be harmed.

Our international net revenue is subject to currency fluctuations.

For the six months ended September 30, 2005, international net revenue comprised 40 percent of our total net revenue. For the fiscal year ended March 31, 2005, international net revenue comprised 47 percent of our total net revenue. We expect foreign sales to continue to account for a significant portion of our total net 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 against the U.S. dollar. While we utilize foreign exchange forward contracts to mitigate some foreign currency risk associated with foreign currency denominated assets and liabilities (primarily certain intercompany receivables and payables) and from time to time, foreign currency option contracts to hedge foreign currency forecasted transactions (primarily related to a portion of the revenue generated by our operational subsidiaries), our results of operations, including our reported net revenue and net income, and financial condition would be adversely affected by unfavorable foreign currency fluctuations, particularly the Euro and Pound Sterling.

Changes in our tax rates or exposure to additional tax liabilities could adversely affect our operating results and financial condition.

We are subject to income taxes in the United States and in various foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and, in the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain.

We are also required to estimate what our taxes will be in the future. Although we believe our tax estimates are reasonable, the estimate process is inherently uncertain, and our estimates are not binding on tax authorities. Our effective tax rate could be adversely affected by changes in our business, including the mix of earnings in countries with differing statutory tax rates, changes in the elections we make, changes in applicable tax laws as well as other factors. Further, our tax determinations are regularly subject to audit by tax authorities and developments in those audits could adversely affect our income tax provision. Should our ultimate tax liability exceed our estimates, our income tax provision and net income could be materially affected.

We are also required to pay taxes other than income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the United States and various foreign jurisdictions. We are regularly under examination by tax authorities with respect to these non-income taxes. There can be no assurance that the outcomes from these examinations, changes in our business or changes in applicable tax rules will not have an adverse effect on our operating results and financial condition.

Changes in our worldwide operating structure could have adverse tax consequences.

As we expand our international operations and implement changes to our operating structure or undertake intercompany transactions in response to changing tax laws, expiring rulings, and our current and anticipated business and operational requirements, our tax expense could increase. For example, in the second quarter of fiscal 2006, we incurred additional income taxes resulting from certain intercompany transactions.

In addition, while our current intention is to invest indefinitely our undistributed foreign earnings offshore, we are in the process of evaluating whether we will change our intentions regarding a portion of our foreign earnings and take advantage of the repatriation provision of the Jobs Act, and if so, the amount that we would intend to repatriate. We may decide not to take advantage of the new law at all. In addition to not having made a decision to repatriate any foreign earnings, we are not yet in a position to determine the impact of a qualifying repatriation, should we choose to make one, on our income tax expense for fiscal 2006.

Our reported financial results could be adversely affected by changes in financial accounting standards or by the application of existing or future accounting standards to our business as it evolves.

As a result of the enactment of the Sarbanes-Oxley Act and the review of accounting policies by the SEC and national and international accounting standards bodies, the frequency of accounting policy changes may accelerate. For example, the FASB has issued a new standard that will require us to adopt a different method of determining and accounting for the compensation expense of our employee stock options. This and other possible changes to accounting standards, could adversely affect our reported results of operations although not necessarily our cash flows. Further, accounting policies affecting software revenue recognition have been the subject of frequent interpretations, which could significantly affect the way we account for revenue related to our products. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.

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 the quarter ended September 30, 2005, over 65 percent of our U.S. sales were made to six key customers, two of which have recently merged. In Europe, our top ten customers accounted for approximately 33 percent of our sales in that territory during the six months ended September 30, 2005. Worldwide, we had direct sales to one customer, Wal-Mart Stores, Inc., which represented approximately 14 percent of total net revenue in the six months ended September 30, 2005. We also had direct sales to two recently merged customers, Electronics Boutique and GameStop, which, on a combined basis, represented more than 10 percent of our total net revenue in the six months ended September 30, 2005. 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 a 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 to pay for our products. Additionally, our receivables from these large customers increase significantly in the December quarter as they stock up for the holiday selling season. Also, having such a large portion of our total net revenue concentrated in a few customers reduces our negotiating leverage with these customers.

Acquisitions, investments and other strategic transactions could result in operating difficulties, dilution to our investors and other negative consequences.

We have evaluated, and expect to continue to evaluate, a wide array of potential strategic transactions, including (1) acquisitions of companies, businesses, intellectual properties, and other assets, and (2) investments in new interactive entertainment businesses (for example, online and mobile games). Any of these strategic transactions could be material to our financial condition and results of operations. Although we regularly search for opportunities to engage in strategic transactions, we may not be successful in identifying suitable opportunities. We may not be able to consummate potential acquisitions or investments or an acquisition or investment may not enhance our business or may decrease rather than increase our earnings. In addition, the process of integrating an acquired company or business, or successfully exploiting acquired intellectual property or other assets, could divert a significant amount of our management’s time and focus and may create unforeseen operating difficulties and expenditures. Additional risks we face include:

	•		The need to implement or remediate controls, procedures and policies appropriate for a public company in an acquired company that, prior to the acquisition, lacked these controls, procedures and policies,

	•		Cultural challenges associated with integrating employees from an acquired company or business into our organization,

	•		Retaining key employees from the businesses we acquire,

	•		The need to integrate an acquired company’s accounting, management information, human resource and other administrative systems to permit effective management, and

•

To the extent that we engage in strategic transactions outside of the United States, we face additional risks, including risks related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries.

Future acquisitions and investments could involve the issuance of our equity securities, potentially diluting our existing stockholders, the incurrence of debt, contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm our financial condition. Our stockholders may not have the opportunity to review, vote on or evaluate future acquisitions or investments.

Our products are subject to the threat of piracy by a variety of organizations and individuals. If we are not successful in combating and preventing piracy, our sales and profitability could be harmed significantly.

In many countries around the world, more pirated copies of our products are sold than legitimate copies. Though we believe piracy has not had a material impact on our operating results to date, highly organized pirate operations have been expanding globally. In addition, the proliferation of technology designed to circumvent the protection measures we use in our products, the availability of broadband access to the Internet, the ability to download pirated copies of our games from various Internet sites, and the widespread proliferation of Internet cafes using pirated copies of our products, all have contributed to ongoing and expanding piracy. Though we take steps to make the unauthorized copying and distribution of our products more difficult, as do the manufacturers of consoles on which our games are played, neither our efforts nor those of the console manufacturers may be successful in controlling the piracy of our products. This could have a negative effect on our growth and profitability in the future.

Our stock price has been volatile and may continue to fluctuate significantly.

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 (including those discussed in the risk factors above as well as others not currently known to us or that we currently do not believe are material), to changes in securities analysts’ earnings estimates, to our results falling below the expectations of analysts and investors, to factors affecting the computer, software, Internet, entertainment, media or electronics industries, or to national or international economic conditions.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

We are exposed to various market risks, including changes in foreign currency exchange rates, interest rates, and market prices. Market risk is the potential loss arising from changes in market rates and market prices. Foreign currency option and foreign exchange forward contracts are used to either hedge anticipated exposures or mitigate some existing exposures subject to market risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes. Interest rate risk is the potential loss arising from changes in interest rates and credit ratings. We do not consider our cash and cash equivalents to be exposed to significant interest rate risk because our portfolio consists of highly liquid investments with original maturities of three months or less.

Foreign Currency Exchange Rate Risk
From time to time, we hedge some of our foreign currency risk related to anticipated foreign-currency-denominated sales transactions by purchasing option contracts that generally have maturities of 15 months or less. These transactions are designated and qualify as cash flow hedges. The derivative assets associated with our hedging activities are recorded at fair value in other current assets in the Condensed Consolidated Balance Sheets. The effective portion of gains or losses resulting from changes in fair value is initially reported as a component of accumulated other comprehensive income, net of any tax effects, in stockholders’ equity and subsequently reclassified into net revenue in the period when the forecasted transaction actually occurs. The ineffective portion of gains or losses resulting from changes in fair value is reported in interest and other income, net in the Condensed Consolidated Statements of Operations. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements. The fair value of our foreign currency option contracts purchased and included in other current assets was $8 million as of September 30, 2005.

We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign-currency-denominated assets and liabilities, primarily intercompany receivables and payables. The forward contracts generally have a contractual term of less than one month and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant at each month-end. Our foreign exchange forward contracts are not designated as hedging instruments under SFAS No. 133 and are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in the Condensed Consolidated Balance Sheets, and gains and losses from changes in fair value are reported in interest and other income, net, in the Condensed Consolidated Statements of Operations. The gains and losses on these forward contracts generally offset the gains and losses on the underlying foreign-currency-denominated assets and liabilities.

As of September 30, 2005, we had foreign exchange contracts to purchase and sell approximately $370 million in foreign currencies. Of this amount, $359 million represents contracts to sell foreign currencies in exchange for U.S. dollars, $10 million to sell foreign currencies in exchange for British Pounds, and $1 million to purchase foreign currency in exchange for U.S. dollars. The fair value of our forward contracts was immaterial as of September 30, 2005.

The counterparties to these forward and option contracts are creditworthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be material.

Notwithstanding our efforts to mitigate some foreign currency exchange rate risks, there can be no assurances that our mitigating activities will adequately protect us against the risks associated with foreign currency fluctuations. For example, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 15 percent would result in a potential loss in fair value of our option contracts of $8 million in either scenario, as of September 30, 2005. In addition, a hypothetical adverse foreign currency exchange rate movement of 10 percent or 15 percent would result in potential losses on our forward contracts of $37 million and $55 million, respectively, as of September 30, 2005. This sensitivity analysis assumes a parallel adverse shift in foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.

Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to our short-term investment portfolio. We manage our interest rate risk by maintaining an investment portfolio generally consisting of debt instruments of high credit quality and relatively short average maturities. Additionally, the contractual terms of the securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the securities. We also do not use derivative financial instruments in our short-term investment portfolio.

As of September 30, 2005 and March 31, 2005, our short-term investments were classified as available-for-sale and, consequently, recorded at fair market value with unrealized gains or losses resulting from changes in fair value reported as a separate component of accumulated other comprehensive income, net of any tax effects, in stockholders’ equity. Our portfolio of short-term investments consisted of the following investment categories, summarized by fair value as of September 30, 2005 and March 31, 2005 (in millions):


	As of		As of
	September 30,		March 31,
	2005		2005
U.S. government agencies	$	1,129	$	1,168
U.S. government bonds		333		298
Corporate bonds		182		180
Asset-backed securities		11		42

Total short-term investments	$	1,655	$	1,688

Notwithstanding our efforts to manage interest rate risks, there can be no assurances that we will be adequately protected against risks associated with interest rate fluctuations. At any time, a sharp rise in interest rates could have a significant adverse impact on the fair value of our investment portfolio. The following table presents the hypothetical changes in fair value in our short-term investment portfolio as of September 30, 2005, arising from selected potential changes in interest rates. The modeling technique measures the change in fair value from immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS. Actual results may differ materially.


	Valuation of Securities Given						Fair Value		Valuation of Securities Given
	an Interest Rate Decrease of X						as of		an Interest Rate Increase of X
(In millions)	Basis Points						September 30,		Basis Points
	(150 BPS)		(100 BPS)		(50 BPS)		2005		50 BPS		100 BPS		150 BPS

U.S. government agencies	$	1,137	$	1,134	$	1,132	$	1,129	$	1,126	$	1,123	$	1,121
U.S. government bonds		341		338		336		333		330		327		324
Corporate bonds		186		184		183		182		180		179		178
Asset-backed securities		11		11		11		11		11		11		11

Total short-term investments	$	1,675	$	1,667	$	1,662	$	1,655	$	1,647	$	1,640	$	1,634

Market Price Risk
The values of our equity investments in publicly traded companies are subject to market price volatility. As of September 30, 2005, our marketable equity securities were classified as available-for-sale and, consequently, were recorded in the Condensed Consolidated Balance Sheet at fair market value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income, net of any tax effects, in stockholders’ equity. The fair value of our marketable equity securities was $182 million and $140 million as of September 30, 2005 and March 31, 2005, respectively.

At any time, a sharp decrease in market prices in our investments in marketable equity securities could have a significant adverse impact on the fair value of our investments. The following table presents the hypothetical changes in the fair value of our marketable equity securities as of September 30, 2005, arising from selected potential changes in market prices. The modeling technique measures the change in fair value from immediate hypothetical parallel shifts in market price plus or minus 25 percent, 50 percent and 75 percent.


	Valuation of Securities Given an						Fair Value		Valuation of Securities Given an
	X Percentage Decrease in Each						as of		X Percentage Increase in Each
(In millions)	Stock's Market Price						September 30,		Stock's Market Price
	(75%)		(50%)		(25%)		2005		25%		50%		75%

Marketable Equity Securities	$	46	$	91	$	137	$	182	$	228	$	274	$	319

Item 4. Controls and Procedures

Definition and limitations of disclosure controls.Our 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 report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s 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 and Administrative Officer, as appropriate to allow timely decisions regarding required disclosure. Our management evaluates these controls and procedures on an ongoing basis.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our system of controls may not achieve its desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.

Evaluation of disclosure controls and procedures.Our Chief Executive Officer and Chief Financial and Administrative Officer, after evaluating the effectiveness of our disclosure controls and procedures, believe that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing the requisite reasonable assurance that material information required to be disclosed in the reports that we file or submit under the Exchange 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 and Administrative Officer, as appropriate to allow timely decisions regarding the required disclosure.

Changes in internal controls.During our last fiscal quarter, no changes occurred in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION


Item 1.		Legal Proceedings

		On July 29, 2004, a class action lawsuit,Kirschenbaum v. Electronic Arts Inc., was filed against us in Superior Court in San Mateo, California, alleging that we improperly classified “Image Production Employees” in California as exempt employees. In early October 2005, we reached a settlement to resolve these claims. Under the terms of the settlement, we will make a lump sum payment of $15.6 million to cover (a) all claims allegedly suffered by the class members, (b) plaintiffs’ attorneys’ fees, not to exceed 25% of the total settlement amount, (c) plaintiffs’ costs and expenses, (d) any incentive payments to the named plaintiffs that may be authorized by the court, and (e) all costs of administration of the settlement. On October 17, 2005, the court granted its preliminary approval of the settlement. The court has scheduled a hearing to consider its final approval of the settlement for January 27, 2006.

		On February 14, 2005, a second employment-related class action lawsuit,Hasty v. Electronic Arts Inc.,was filed against us in Superior Court in San Mateo, California. The complaint alleges that we improperly classified “Engineers” in California as exempt employees and seeks injunctive relief, unspecified monetary damages, interest and attorneys’ fees. On or about March 16, 2005, we received a first amended complaint, which contains the same material allegations as the original complaint. We answered the first amended complaint on April 20, 2005.

		On March 24, 2005, a class action lawsuit was filed against us and certain of our officers and directors. The complaint, which asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 based on allegedly false and misleading statements, was filed in the United States District Court, Northern District of California, by an individual purporting to represent a class of purchasers of EA common stock. Additional class action lawsuits were filed in the same court by other individuals asserting the same claims against us. On May 9, 2005, the court consolidated the complaints, and on June 13, 2005, the court appointed lead plaintiff and lead counsel pursuant to the requirements of the Private Securities Litigation Reform Act of 1995. An amended consolidated complaint was filed on behalf of the lead plaintiff on August 12, 2005, and on September 27, 2005, we moved to dismiss the consolidated amended complaint for failure to state a claim under the federal securities laws. Separately, there are two shareholder derivative actions pending in the Superior Court, San Mateo County, and one shareholder derivative action pending in the United States District Court, Northern District of California, all of which assert claims based on substantially the same factual allegations as set forth in the federal securities class action. We have not yet responded to any of the derivative action complaints.

		In addition, we are subject to other claims and litigation arising in the ordinary course of business. Our management considers that any liability from any reasonably foreseeable disposition of such other claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position or results of operations.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds

		On October 18, 2004, our Board of Directors authorized a program to repurchase up to an aggregate of $750 million of our common stock. Pursuant to the authorization, we were able to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions over the course of a twelve-month period. Our common stock repurchase program was completed in September 2005. The following table summarizes the number of shares repurchased for the three months ended September 30, 2005:


					Total Number of		Maximum Dollar Value
					Shares Purchased		of Shares that May Yet
	Total Number				as Part of Publicly		Be Purchased Under the
	of Shares		Average Price		Announced		Program
Period	Purchased		Paid per Share		Program		(in millions)
July 1 - 31, 2005		2,277,768	$	59.04		2,277,768	$	238

August 1 - 31, 2005		2,343,600	$	59.25		2,343,600	$	99

September 1 - 30, 2005		1,705,389	$	58.14		1,705,389	$	0


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

		At our Annual Meeting of Stockholders, held on July 28, 2005, our stockholders elected the following individuals to the Board of Directors for one-year terms:


	For	Withheld
M. Richard Asher	256,709,482	12,997,662
Leonard S. Coleman	262,851,087	6,856,057
Gary M. Kusin	267,616,645	2,090,499
Gregory B. Maffei	266,905,659	2,801,485
Timothy Mott	163,903,486	105,803,658
Vivek Paul	267,648,602	2,058,542
Robert W. Pittman	259,259,155	10,447,989
Lawrence F. Probst III	264,874,125	4,833,019
Linda J. Srere	258,463,287	11,243,857


		In addition, the following matters were voted on and approved by the stockholders:

		To amend our 2000 Equity Incentive Plan to (a) increase the number of shares authorized by 10 million, (b) authorize the issuance of awards of stock appreciation rights, (c) increase by 1 million shares the limit on the total number of shares underlying awards of restricted stock and restricted stock units that may be granted under the Equity Plan — from 3 million to 4 million shares, (d) modify the payment alternatives under the Equity Plan, (e) add flexibility to grant performance-based stock options and stock appreciation rights and modify the permissible performance factors currently contained in the Equity Plan, and (f) revise the share-counting methodology used in the Equity Plan.


For	Against		Abstain		Broker Non-vote

182,744,255		61,131,403		1,730,413		24,101,073


		To amend the 2000 Employee Stock Purchase Plan to increase by 1,500,000 the number of shares of common stock reserved for issuance thereunder.


For	Against		Abstain		Broker Non-vote

217,586,501		26,362,630		1,656,940		24,101,073


		To ratify the appointment of KPMG LLP as our independent registered public accounting firm for fiscal 2006.


For	Against		Abstain		Broker Non-vote

264,769,119		3,326,302		1,611,723		—


Item 5.		Other Information

		The following discussion of the reorganization of our international publishing organization 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 about our expectations regarding future restructuring charges, operating expenses and other costs are forward looking. We use words such as “anticipate”, “believe”, “expect”, “intend” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Actual results could differ materially from the expectations set forth in these forward-looking statements. 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 above in this report under the heading “Risk Factors”, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 and in other documents we have filed with the Securities and Exchange Commission.

		On November 9, 2005, our Board of Directors approved a plan of reorganization in connection with our intention to establish an international publishing headquarters in Geneva, Switzerland. During the next twelve months, we expect to open a new facility in Geneva, relocate certain current employees to Geneva, hire new employees in Geneva, close certain facilities in the UK, and make other related changes in our international publishing business. We intend to treat certain costs that are directly associated with our international publishing reorganization as “restructuring costs” (as defined by Statement of Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”). Other costs that are not properly categorized as restructuring costs will generally be treated as normal operating expenses in our consolidated statement of operations. In accordance with SFAS No. 146, we will generally expense the restructuring costs as they are incurred and accrue costs associated with certain facility closures at the time we exit the facility.

		In connection with our international publishing reorganization, we anticipate incurring between $55 million and $65 million in total restructuring costs, substantially all of which will result in cash expenditures. We anticipate incurring approximately $15 million of these charges during the remainder of fiscal 2006. We anticipate these restructuring costs will consist primarily of employee-related relocation assistance (approximately $35 million), moving expenses (approximately $15 million), and facility exit costs (approximately $10 million). While we may incur severance costs paid to terminating employees in connection with the reorganization, we do not expect these costs to be significant.

		In addition to the restructuring costs discussed above, we also expect to incur increased operating expenses associated with our international publishing reorganization, consisting primarily of costs associated with a new facility and related costs in Geneva, as well as incremental increases in compensation expenses. We expect these costs to result in incremental operating expenses of approximately $10 million during the remainder of fiscal 2006, and between $10 million and $15 million annually thereafter.


Item 6.	Exhibits
	The following exhibits (other than exhibits 32.1 and 32.2, which are furnished with this report) are filed as part of this report:

	Exhibit
	Number	Title

	10.1	Electronic Arts Discretionary Bonus Program Plan Document

	15.1	Awareness Letter of KPMG LLP, Independent Registered Public Accounting Firm.

	31.1	Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	Additional exhibits furnished with 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.

SIGNATURE

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 C. Jenson

DATED:		WARREN C. JENSON
November 10, 2005		Executive Vice President,
		Chief Financial and Administrative Officer

ELECTRONIC ARTS INC.
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2005

EXHIBIT INDEX


EXHIBIT
NUMBER		EXHIBIT TITLE

10.1		Electronic Arts Discretionary Bonus Program Plan Document

15.1		Awareness Letter of KPMG LLP, Independent Registered Public Accounting Firm.

31.1		Certification of Chairman and Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Executive Vice President, Chief Financial and Administrative Officer pursuant to Rule 13a-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Additional exhibits furnished with 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.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

Electronic Arts (EA) 10-Q2006 Q2 Quarterly report

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