Activision

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

Activision´s products cover the action, adventure, action sports, racing, role-playing, simulation and strategy game categories. The company offers its products in versions that operate on the PlayStation® 2 computer entertainment system and PlayStation" game console from Sony Computer Entertainment, Xbox™ video game system from Microsoft, Nintendo GameCube™ and the Game Boy® Advance, as well as on personal computers. Driven partly by the enhanced capabilities of the next-generation of platforms, the company believes that in the next few years there will be significant growth in the market for interactive entertainment software and it plans to leverage its skills and resources to extend its leading position in the industry.

Activision´s publishing business involves the development, marketing and sale of products, either directly, by license or through its affiliate label program with third-party publishers. In addition to publishing, it maintains distribution operations in Europe that provide logistical and sales services to third-party publishers of interactive entertainment software, its own publishing operations and manufacturers of interactive entertainment hardware.

The company´s objective is to be a worldwide leader in the development, publishing and distribution of quality interactive entertainment software products that deliver a highly satisfying consumer entertainment experience. Its strategy includes the following elements:

Create and Maintain Diversity in Product Mix, Platforms and Markets. Activision believes that maintaining a diversified mix of products can reduce its operating risks and enhance profitability. Therefore, the company develops and publishes products spanning a wide range of product categories, including action, adventure, action sports, racing, role-playing, simulation and strategy, and products designed for target audiences ranging from game enthusiasts and children to mass-market consumers and "value priced" buyers. Presently, it concentrates on developing, publishing and distributing products that operate on the PlayStation 2 computer entertainment system, Xbox video game system from Microsoft, Nintendo GameCube, Nintendo Game Boy hand-held devices and the personal computer. The company typically releases its console products for use on multiple platforms in order to reduce the risks associated with any single platform, leverage its costs over a larger installed base and increase unit sales.

Create, Acquire and Maintain Strong Brands. Activision focuses its development and publishing activities principally on products that are, or have the potential to become, franchise properties with sustainable consumer appeal and brand recognition. These products can thereby serve as the basis for sequels, prequels and related new products that can be released over an extended period of time. The company believes that the publishing and distribution of products based in large part on franchise properties enhances the predictability of its revenues and the probability of high unit volume sales and operating profits. It has entered into a series of strategic relationships with the owners of intellectual properties pursuant to which it has acquired the rights to publish products based on franchises such as Star Trek, various Disney films such as Toy Story 2 and Marvel Comics´ properties such as Spider-Man, X-Men, Blade, Iron Man and Fantastic Four. The company has also capitalized on the success of its Tony Hawk´s Pro Skater products to sign long-term agreements, many of which are exclusive, with numerous other action sports athletes including superstars Mat Hoffman in BMX pro biking, Kelly Slater in pro surfing, Shaun Palmer in snowboarding, Shaun Murray in wakeboarding and Travis Pastrana in motorcross biking and established the "Activision O2" brand as the dominant brand in the action sports category.

Enforce Disciplined Product Selection and Development Processes. The success of Activision´s publishing business depends, in significant part, on its ability to develop games that will generate high unit volume sales and that can be completed up to its high-quality standards. The company´s publishing units have implemented a formal control process for the selection, development, production and quality assurance of its products, which is referred to as the "Greenlight Process." This process is applied to products under development with external, as well as internal resources. The "Greenlight Process" includes in-depth reviews of each project at five intervals during the development process by a team that includes several of the company´s highest ranking operating managers and coordination between our sales and marketing personnel and development staff at each step in the process.

Activision develops its products using a strategic combination of its internal development resources and external development resources acting under contract with us, some of whom are independent and in some of which we have a capital investment. It typically selects its external developers based on their track record and expertise in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the original game. The company believes that this selection process allows it to strengthen and leverage the particular expertise of its internal and external development resources.

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

In order to further Activision´s emphasis on improved profitability, it has implemented a number of operational initiatives. The company has increased its product development capabilities by allocating a portion of the development of its games to experienced independent development companies working under contract with the company, thereby taking advantage of specialized third-party developers without incurring the fixed overhead obligations associated with increased internally employed staff. The company´s sales and marketing operations work with its studio resources to increase the visibility of new product launches and to coordinate timing and promotion of product releases. Its finance and administration and sales and marketing personnel work together to improve inventory management and receivables collections. The company has broadly instituted objective-based reward programs that provide incentives to management and staff throughout the organization to produce results that meet its financial objectives.

Grow Through Continued Strategic Acquisitions and Alliances. The interactive entertainment industry is consolidating, and Activision believes that success in this industry will be driven in part by the ability to take advantage of scale. Specifically, smaller companies are more capital constrained, enjoy less predictability of revenues and cash flow, lack product diversity and must spread fixed costs over a smaller revenue base. Several industry leaders are emerging that combine the entrepreneurial and creative spirit of the industry with professional management, the ability to access the capital markets and the ability to maintain favorable relationships with strategic developers, property owners and retailers. Having completed 13 acquisitions since 1997, Activision believes that it has successfully diversified its operations, channels of distribution, development talent pool and library of titles, and has emerged as one of the industry´s leaders. The company intends to continue to expand its resources through acquisitions, strategic relationships and key license transactions. It expects to focus its acquisition strategy on increasing its development capacity through the acquisition of or investment in select experienced development firms, and expanding its intellectual property library through licenses and strategic relationships with intellectual property owners.

Activision´s headquarters is located at 3100 Ocean Park Boulevard, Santa Monica, California 90405. The company also maintains offices in the United Kingdom, France, Germany, Japan, Australia, Belgium, The Netherlands, New York, New York, Madison, Wisconsin, St. Paul, Minnesota and Woodland Hills, California. The company´s World Wide Web site is located at website: activision.com.

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