QuickLinks -- Click here to rapidly navigate through this document

---

---

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---

FORM 10-Q

---

(Mark one)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
For the Quarterly Period Ended June 30, 2002
O R
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission File Number 0-12699

ACTIVISION, INC.
(Exact name of registrant as specified in its charter)

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

(310) 255-2000
(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 such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No o

        The number of shares of the registrant's Common Stock outstanding as of August 2, 2002 was 66,730,202.

---

---

---

ACTIVISION, INC. AND SUBSIDIARIES

INDEX

				Page No.
PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets as of June 30, 2002 (Unaudited) and March 31, 2002		3
		Consolidated Statements of Operations for the three months ended June 30, 2002 and 2001 (Unaudited)		4
		Consolidated Statements of Cash Flows for the three months ended June 30, 2002 and 2001 (Unaudited)		5
		Consolidated Statement of Changes in Shareholders' Equity for the three months ended June 30, 2002 (Unaudited)		6
		Notes to Consolidated Financial Statements for the three months ended June 30, 2002 (Unaudited)		7
Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		24
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		25
Item 6.		Exhibits and Reports on Form 8-K		25
SIGNATURES				27

2

---

Part I. Financial Information.

Item 1. Financial Statements.

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

					June 30, 2002			March 31, 2002
					(Unaudited)
Assets
	Current assets:
		Cash and cash equivalents			$	550,330		$	279,007
		Accounts receivable, net of allowances of $54,925 and $42,019 at June 30, 2002 and March 31, 2002, respectively				64,799			76,733
		Inventories				25,439			20,736
		Software development				38,476			36,263
		Intellectual property licenses				3,505			6,326
		Deferred income taxes				18,945			22,608
		Other current assets				10,886			15,200
			Total current assets			712,380			456,873
	Software development					11,931			3,254
	Intellectual property licenses					17,490			10,899
	Property and equipment, net					18,642			17,832
	Deferred income taxes					34,024			28,795
	Other assets					6,376			3,242
	Goodwill					53,910			35,992
			Total assets		$	854,753		$	556,887
Liabilities and Shareholders' Equity
	Current liabilities:
		Current portion of long-term debt			$	1,130		$	168
		Accounts payable				45,887			64,410
		Accrued expenses				62,707			59,096
			Total current liabilities			109,724			123,674
	Long-term debt, less current portion					3,344			3,122
			Total liabilities			113,068			126,796
	Commitments and contingencies (Note 14)
	Shareholders' equity:
		Preferred stock, $.000001 par value, 3,750,000 shares authorized, no shares issued at June 30, 2002 and March 31, 2002				—			—
		Series A Junior Preferred stock, $.000001 par value, 1,250,000 shares authorized, no shares issued at June 30, 2002 and March 31, 2002				—			—
		Common stock, $.000001 par value, 125,000,000 shares authorized, 70,940,261 and 61,034,263 shares issued and 66,611,502 and 56,705,504 shares outstanding at June 30, 2002 and March 31, 2002, respectively				—			—
		Additional paid-in capital				683,038			397,528
		Retained earnings				85,088			64,384
		Accumulated other comprehensive loss				(6,118	)		(11,498	)
		Less: Treasury stock, at cost, 4,328,759 shares at June 30, 2002 and March 31, 2002				(20,323	)		(20,323	)
			Total shareholders' equity			741,685			430,091
			Total liabilities and shareholders' equity		$	854,753		$	556,887

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

3

---

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

				For the three months ended June 30,
				2002			2001
Net revenues				$	191,258		$	110,577
Costs and expenses:
	Cost of sales—product costs				83,344			64,124
	Cost of sales—software royalties and amortization				15,838			4,722
	Cost of sales—intellectual property licenses				12,643			5,274
	Product development				11,751			9,191
	Sales and marketing				21,993			18,756
	General and administrative				14,493			9,745
		Total costs and expenses			160,062			111,812
Operating income (loss)					31,196			(1,235	)
Interest income, net					1,156			1,281
Income before income tax provision					32,352			46
Income tax provision					11,648			17
Net income				$	20,704		$	29
Basic earnings per share				$	0.34		$	0.00
Weighted average common shares outstanding					60,039			45,161
Diluted earnings per share				$	0.31		$	0.00
Weighted average common shares outstanding assuming dilution					66,750			53,465

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

4

---

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

				For the three months ended June 30,
				2002			2001
Cash flows from operating activities:
	Net income			$	20,704		$	29
	Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Deferred income taxes			(1,566	)		(23,600	)
		Depreciation and amortization			2,168			1,580
		Amortization of capitalized software development costs and intellectual property licenses			18,527			6,353
		Tax benefit of stock options and warrants exercised			12,753			23,153
	Changes in operating assets and liabilities (net of effects of acquisitions):
		Accounts receivable			12,946			1,294
		Inventories			(4,703	)		(544	)
		Software development and intellectual property licenses			(33,187	)		(20,771	)
		Other assets			6,061			(36	)
		Accounts payable			(18,649	)		(17,540	)
		Accrued expenses and other liabilities			2,994			416
	Net cash provided by (used in) operating activities				18,048			(29,666	)
Cash flows from investing activities:
	Capital expenditures				(1,860	)		(2,812	)
	Proceeds from disposal of property and equipment				408			391
	Cash payment to effect business combination, net of cash acquired				(12,091	)		—
	Minority capital investment				(1,500	)		—
	Net cash used in investing activities				(15,043	)		(2,421	)
Cash flows from financing activities:
	Proceeds from issuance of common stock to employees				15,059			20,473
	Proceeds from issuance of common stock pursuant to warrants				—			1,044
	Payment on term loan				—			(8,550	)
	Other borrowings, net				1,184			(17	)
	Redemption of convertible subordinated notes				—			(62	)
	Proceeds from issuance of common stock pursuant to underwritten public offering, net of offering costs				248,102			—
Net cash provided by financing activities					264,345			12,888
Effect of exchange rate changes on cash					3,973			(365	)
Net increase (decrease) in cash and cash equivalents					271,323			(19,564	)
Cash and cash equivalents at beginning of period					279,007			125,550
Cash and cash equivalents at end of period				$	550,330		$	105,986

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

5

---

ACTIVISION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three months ended June 30, 2002
(Unaudited)
(In thousands)

																				Accumulated Other Comprehensive Income (Loss)
				Common Stock											Treasury Stock
									Additional Paid-In Capital			Retained Earnings											Shareholders' Equity
				Shares		Amount									Shares		Amount
Balance, March 31, 2002				61,034		$	—		$	397,528		$	64,384		(4,329	)	$	(20,323	)	$	(11,498	)	$	430,091
Components of comprehensive income:
	Net income			—			—			—			20,704		—			—			—			20,704
	Foreign currency translation adjustment			—			—			—			—		—			—			5,380			5,380
		Total comprehensive income																						26,084
Issuance of common stock pursuant to underwritten public offering				7,500			—			247,321			—		—			—			—			247,321
Issuance of common stock pursuant to employee stock options and common stock warrants				2,157			—			15,059			—		—			—			—			15,059
Issuance of common stock warrants				—			—			2,184			—		—			—			—			2,184
Tax benefit attributable to employee stock options and common stock warrants				—			—			12,753			—		—			—			—			12,753
Issuance of common stock to effect business combinations				249			—			8,193			—		—			—			—			8,193
Balance, June 30, 2002				70,940		$	—		$	683,038		$	85,088		(4,329	)	$	(20,323	)	$	(6,118	)	$	741,685

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

6

---

ACTIVISION, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
For the three months ended June 30, 2002

1.    Basis of Presentation

        The accompanying consolidated financial statements include the accounts of Activision, Inc. and its subsidiaries ("Activision" or "we"). The information furnished is unaudited and reflects all adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the interim periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2002 as filed with the Securities and Exchange Commission.

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

2.    Stock Split

        In October 2001, the Board of Directors approved a three-for-two stock split effected in the form of a 50% stock dividend. The stock split was paid at the close of business on November 20, 2001, to shareholders of record as of November 6, 2001. The consolidated financial statements, including all share and per share data, have been restated as if the stock split had occurred as of the earliest period presented.

3.    Acquisition

        Effective May 20, 2002, we acquired all of the outstanding ownership interests of Z-Axis Ltd. ("Z-Axis"), a privately held interactive software development company, in exchange for $12.5 million in cash and 249,190 shares of our common stock valued at approximately $8.2 million. Z-Axis is a console software developer with a focus on action sports video games. This acquisition further enables us to implement our multi-platform development strategy by augmenting our internal product development capabilities for console systems and enhances our position in the action sports genre. The purchase price of the transaction, including acquisition costs, was valued at approximately $20.9 million and has been allocated to assets acquired and liabilities assumed as follows (amounts in thousands):

        Goodwill has been included in the publishing segment of our business and is non-deductible for tax purposes. A significant portion of the purchase price for this acquisition was assigned to goodwill as the primary asset we acquired in the transaction was an assembled workforce with proven technical and design talent with a history of high quality product creation. The results of operations of Z-Axis are included in our consolidated statement of operations beginning May 20, 2002. Pro forma consolidated statements of operations are not shown, as they would not differ materially from reported results.

        Approximately 93,000 additional shares of our common stock also may be issued to Z-Axis' equity holders over the course of several years, depending on the satisfaction of certain product performance requirements and other criteria. This contingent consideration will be recorded as an additional element of the purchase price for Z-Axis when those contingencies are resolved.

7

---

4.    Inventories

        Inventories are valued at the lower of cost (first-in, first-out) or market. Our inventories consist of the following (amounts in thousands):

5.    Goodwill and Other Intangible Assets

Goodwill

        The changes in the carrying amount of goodwill for the three months ended June 30, 2002 are as follows (amounts in thousands):

Acquired Intangible Assets

        As of June 30, 2002, gross acquired intangible assets were $2.2 million and were the result of the acquisition of software development and royalty agreements. Such assets had yet to be amortized as of June 30, 2002 as the related titles had not been released and/or no revenues had been earned on such titles. All gross acquired intangible assets as of June 30, 2002 are expected to be expensed during the year ended March 31, 2003.

6.    Income Taxes

        The income tax provision of $11.7 million for the three months ended June 30, 2002 reflects our effective income tax rate of approximately 36%. The income tax provision of $17,000 for the three months ended June 30, 2001 reflects our effective income tax rate of approximately 37%. For both periods, the significant item that generated the variance between our effective rate and our statutory rate of 35% was state taxes, partially offset by research and development tax credits.

7.    Software Development Costs and Intellectual Property Licenses

        Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

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

8

---

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

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

        Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of our products.

        We evaluate the future recoverability of capitalized intellectual property licenses on a quarterly basis. The recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is used. The following criteria are used to evaluate expected product performance: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to our budgeted amount.

        Commencing upon the related product's release, capitalized intellectual property license costs are amortized to cost of sales—intellectual property licenses based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed trademark or copyright will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

        As of June 30, 2002, capitalized software development costs included $18.3 million of internally developed software costs and $32.1 million of payments made to independent software developers. As of March 31, 2002, capitalized software development costs included $16.0 million of internally developed software costs and $23.5 million of payments made to independent software developers. Capitalized intellectual property licenses were $21.0 million and $17.2 million as of June 30, 2002 and March 31, 2002, respectively. Amortization of capitalized software development costs and intellectual property licenses, combined, was $18.5 million and $6.4 million for the three months ended June 30, 2002 and 2001, respectively.

8.    Accumulated Other Comprehensive Income (Loss)

        For the three months ended June 30, 2002, the accumulated other comprehensive loss balance primarily consisted of foreign currency translation adjustments.

9.    Revenue Recognition

        We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers. We may permit product returns from or grant price protection to our customers on unsold merchandise under certain conditions. Price protection policies, when granted and applicable, allow customers a credit against amounts they owe us with respect to merchandise unsold by them. With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of such copies. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, in order to recognize

9

---

revenue for both product sales and licensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable.

        Revenue from product sales is reflected after deducting the estimated allowance for returns and price protection. Management must make estimates of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection based upon historical experience, customer inventory levels, current economic trends and changes in the demand and acceptance of our products by the end consumer.

10.  Interest Income, Net

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

11.  Supplemental Cash Flow Information

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

12.  Operations by Reportable Segments and Geographic Area

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

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

        Distribution refers to our European operations located in the United Kingdom, the Netherlands and Germany that provide logistical and sales services to third party publishers of interactive

10

---

entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware.

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

        The accounting policies of these segments are the same as those described in the Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended March 31, 2002. Revenue derived from sales between segments is eliminated in consolidation.

        Information on the reportable segments for the three months ended June 30, 2002 and 2001 is as follows (amounts in thousands):

       

        Geographic information for the three months ended June 30, 2002 and 2001 is based on the location of the selling entity. Revenues from external customers by geographic region were as follows (amounts in thousands):

11

---

        Revenues by platform were as follows (amounts in thousands):

        As of and for the three months ended June 30, 2002, we had one customer that accounted for 17% of our consolidated net revenues and 27% of our consolidated accounts receivable, net. As of and for the three months ended June 30, 2001, that same customer accounted for 15% of our consolidated net revenues and 22% of our consolidated accounts receivable, net. This customer was a customer of both our publishing and distribution businesses.

13.  Computation of Earnings Per Share

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

        Options to purchase 15,353 shares of common stock at exercise prices ranging from $28.34 to $33.24 and options to purchase 7,920 shares of common stock at exercise prices ranging from $19.66 to $25.27 were outstanding for the three months ended June 30, 2002 and 2001, respectively, but were not included in the calculation of diluted earnings per share because their effect would be antidilutive.

14.  Commitments

Bank Lines of Credit

        In June 1999, we obtained a $100.0 million revolving credit facility and a $25.0 million term loan with a syndicate of banks (the "U.S. Facility"). The revolving portion of the U.S. Facility provided us with the ability to borrow up to $100.0 million, including issuing letters of credit up to $80 million, on a

12

---

revolving basis against eligible accounts receivable and inventory. The term loan had a three-year term with principal amortization on a straight-line quarterly basis beginning December 31, 1999, a borrowing rate based on the banks' base rate (which is generally equivalent to the published prime rate) plus 2% or LIBOR plus 3% and was to expire June 2002. The revolving portion of the U.S Facility had a borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus 2.75%. In May 2001, we accelerated our repayment of the outstanding balance under the term loan portion of the U.S. Facility. In connection with the accelerated repayment, we amended the U.S. Facility (the "Amended and Restated U.S. Facility"). The Amended and Restated U.S. Facility eliminated the term loan, reduced the revolver to $78.0 million and reduced the interest rate to the banks' base rate plus 1.25% or LIBOR plus 2.25%. We pay a commitment fee of ¹/4% on the unused portion of the revolver. The Amended and Restated U.S. Facility is collateralized by substantially all of our assets and was scheduled to expire in June 2002. However, in June 2002, we obtained an extension of the expiration date to August 21, 2002. Due to our improved financial position, including significant cash balances and minimal debt, we will not seek additional bank financing upon the expiration of the Amended and Restated U.S. Facility.

        The Amended and Restated U.S. Facility contains various covenants that limit our ability to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. We are also required to maintain specified financial ratios related to net worth and fixed charges. As of June 30, 2002, we were in compliance with these covenants. As of June 30, 2002, there were no borrowings outstanding and $1.8 million of letters of credit outstanding against the revolving portion of the Amended and Restated U.S. Facility.

        We have a revolving credit facility through our CD Contact subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands Facility permitted revolving credit loans and letters of credit up to Euro ("EUR") 4.5 million ($4.5 million) as of June 30, 2002, based upon eligible accounts receivable and inventory balances. The Netherlands Facility is due on demand, bears interest at a Eurocurrency rate plus 1.5%, is collateralized by a British Pounds ("GBP") 1.5 million ($2.3 million) guarantee made by our Centresoft subsidiary through its bank facility and expires August 2003. As of June 30, 2002, there was $962,000 of borrowings and no letters of credit outstanding under the Netherlands Facility.

        We also have revolving credit facilities with our CentreSoft subsidiary located in the United Kingdom (the "UK Facility") and our NBG subsidiary located in Germany (the "German Facility"). As of June 30, 2002, the UK Facility provided Centresoft with the ability to borrow up to GBP 7.0 million ($10.7 million), including issuing letters of credit, on a revolving basis. Furthermore, as of June 30, 2002, under the UK Facility, Centresoft has provided a GBP 1.5 million ($2.3 million) guarantee which serves as collateral for the Netherlands Facility. The UK Facility bears interest at LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and expires in October 2002. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of June 30, 2002, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility at June 30, 2002. The German Facility provided for revolving loans up to EUR 2.0 million ($2.0 million) as of June 30, 2002, bears interest at a Eurocurrency rate plus 2.5%, is collateralized by a cash deposit of approximately GBP 732,000 ($1.1 million) made by our CentreSoft subsidiary and has no expiration date. No borrowings were outstanding against the German Facility as of June 30, 2002.

Private Placement of Convertible Subordinated Notes

        In December 1997, we completed the private placement of $60.0 million principal amount of 6³/4% convertible subordinated notes due 2005 (the "Notes"). The Notes were convertible, in whole or in part, at the option of the holder at any time after December 22, 1997 (the date of original issuance) and prior to the close of business on the business day immediately preceding the maturity date, unless previously redeemed or repurchased, into our common stock at a conversion price of $12.583 per share, subject to adjustment in certain circumstances. During the three months ended June 30, 2001, we called

13

---

for the redemption of the Notes. In connection with that call, holders converted to common stock approximately $58.7 million aggregate principal amount of their Notes, net of conversion costs. The remaining Notes were redeemed for cash.

Software Developer and Intellectual Property License Contracts

        In the normal course of business, we enter into contractual arrangements with third parties for the development of products, as well as for the rights to intellectual property ("IP"). Under these agreements, we commit to provide specified payments to a developer or IP holder, based upon contractual arrangements. Assuming all contractual provisions are met, the total future minimum contract commitment for contracts in place as of June 30, 2002 is approximately $74.9 million and is scheduled to be paid as follows (amounts in thousands):

Legal Proceedings

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

15.  Related Parties

        As of June 30, 2002, we had a $419,000 loan, including accrued interest, due from an executive which bore interest at 6.75%. The loan has subsequently been repaid.

        In August 2001, we elected to our Board of Directors an individual who is a partner in a law firm that has provided legal services to Activision for more than ten years. We paid approximately $325,000 during the three months ended June 30, 2002 for legal services rendered by the law firm.

16.  Recently Issued Accounting Standards

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the Company's commitment to an exit plan. The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

14

---

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

OVERVIEW

        We are a leading international publisher of interactive entertainment software products. We have built a company with a diverse portfolio of products that spans a wide range of categories and target markets and that is used on a variety of game hardware platforms and operating systems. We have created, licensed and acquired a group of highly recognizable brands which we market to a growing variety of consumer demographics.

        Our products cover the action/adventure, action sports, racing, role-playing, simulation, first-person shooters and strategy game categories. Historically, we have offered our products in versions that operate on the Sony PlayStation ("PS1"), Sony PlayStation 2 ("PS2"), Nintendo 64 ("N64"), Nintendo GameCube ("GameCube") and Microsoft Xbox ("Xbox") console systems, Nintendo Game Boy Advance ("GBA") and Game Boy Color ("GBC") handheld devices, as well as on personal computers ("PC").

        Our publishing business involves the development, marketing and sale of products, either directly, by license or through our affiliate label program with third party publishers. In the United States, our products are sold primarily on a direct basis to mass-market retailers, consumer electronics stores, discount warehouses and office super-stores. We conduct our international publishing activities through offices in the United Kingdom, Germany, France, Australia, Sweden, Canada and Japan. Our products are sold internationally on a direct to retail basis, through third party distribution and licensing arrangements and through our wholly-owned European distribution subsidiaries. In addition to publishing, we maintain distribution operations located in the United Kingdom, the Netherlands and Germany that provide logistical and sales services to third party publishers of interactive entertainment software, our own publishing operations and manufacturers of interactive entertainment hardware.

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

        In July 2002, we extended our partnership with professional skate-boarder, Tony Hawk, through an exclusive multi-year licensing agreement that expires in 2015. The continuation of our long-term relationship with Tony Hawk is part of our strategy to continue to be a leader in the action sports category. Activision O₂, our action sports umbrella brand, has featured such franchises as Tony Hawk's Pro Skater, Mat Hoffman's Pro BMX and Shaun Palmer's Pro Snowboarder.    We will continue to promote our action sports franchises throughout fiscal 2003 with the expected release of several titles for existing franchises, including Tony Hawk's Pro Skater 4 and Mat Hoffman's Pro BMX 2, as well as several new action sports titles, including Kelly Slater's Pro Surfer and Shaun Murray's Pro Wakeboarder. We also plan to continue to focus on our super hero brands. Spider-Man: The Movie was a key release for the first quarter of fiscal 2003. Additional super hero titles expected to be released in fiscal 2003 include Blade II and X-Men Next Dimension. Additionally, we will continue to focus on our other key brands. We will also continue to evaluate emerging brands that we believe have potential for growth. A significant number of our fiscal 2003 releases will be cross-platform releases as we believe this provides us with many benefits with regards to sales and consumer awareness, as well as savings in our cost structures. We believe fiscal 2003 will be a strong growth year for our industry as the installed hardware bases for PS2, GameCube, Xbox and GBA continue to increase and as technological advances are made, enabling the interactive entertainment industry to continue to reach a broader audience.

Critical Accounting Policies

        We have identified the policies below as critical to our business operations and the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and

15

---

Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 1 to the Notes to the Consolidated Financial Statements in Item 8 of our Annual Report on Form 10-K for the year ended March 31, 2002 as filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Revenue Recognition.    We recognize revenue from the sale of our products upon the transfer of title and risk of loss to our customers. Revenue from product sales is recognized after deducting the estimated allowance for returns and price protection. We may permit product returns from or grant price protection to our customers on unsold merchandise under certain conditions. Price protection policies, when granted and applicable, allow customers a credit against amounts they owe us with respect to merchandise unsold by them. With respect to license agreements that provide customers the right to make multiple copies in exchange for guaranteed amounts, revenue is recognized upon delivery of such copies. Per copy royalties on sales that exceed the guarantee are recognized as earned. In addition, in order to recognize revenue for both product sales and licensing transactions, persuasive evidence of an arrangement must exist and collection of the related receivable must be probable. Revenue recognition also determines the timing of certain expenses, including cost of sales—intellectual property licenses and cost of sales—software royalties and amortization.

        Allowances for Returns, Price Protection, Doubtful Accounts and Inventory Obsolescence.    We may permit product returns from or grant price protection to our customers under certain conditions.    The conditions our customers must meet to be granted the right to return products or price protection are, among other things, compliance with applicable payment terms, delivery to us of weekly inventory and sell-through reports, and consistent participation in the launches of our premium title releases. We may also consider other factors, including the facilitation of slow moving inventory and other market factors. Management must make estimates of potential future product returns and price protection related to current period product revenue. We estimate the amount of future returns and price protection based upon historical experience, customer inventory levels, current economic trends and changes in the demand and acceptance of our products by the end consumer. Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price protection in any accounting period. Material differences may result in the amount and timing of our revenue for any period if management made different judgments or utilized different estimates.

        Similarly, management must make estimates of the uncollectibility of our accounts receivable. In estimating allowance for doubtful accounts, we analyze historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in our customers' payment terms and their economic condition, as well as whether we can obtain sufficient credit insurance. Any significant changes in any of these criteria would impact management's estimates in establishing our allowance for doubtful accounts.

        We value inventory at the lower of cost or market. We regularly review inventory quantities on hand and in the retail channel and record a provision for excess or obsolete inventory based on the future expected demand for our products. Significant changes in demand for our products would impact management's estimates in establishing our inventory provision.

        Software Development Costs.    Software development costs include payments made to independent software developers under development agreements, as well as direct costs incurred for internally developed products.

        We account for software development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or

16

---

Otherwise Marketed." Software development costs are capitalized once technological feasibility of a product is established and such costs are determined to be recoverable. For products where proven game engine technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product basis. Prior to a product's release, we expense, as part of product development costs, capitalized costs when we believe such amounts are not recoverable. Amounts related to software development which are not capitalized are charged immediately to product development expense.

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

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

        Significant management judgment and estimates are utilized in the assessment of when technological feasibility is established, as well as in the ongoing assessment of the recoverability of capitalized costs.

        Intellectual Property Licenses.    Intellectual property license costs represent license fees paid to intellectual property rights holders for use of their trademarks or copyrights in the development of our products.

        We evaluate the future recoverability of capitalized amounts on a quarterly basis. The recoverability of capitalized intellectual property license costs is evaluated based on the expected performance of the specific products in which the licensed trademark or copyright is used. The following criteria are used to evaluate expected product performance: historical performance of comparable products; the commercial acceptance of prior products released on a given game engine; orders for the product prior to its release; estimated performance of a sequel product based on the performance of the product on which the sequel is based; and actual development costs of a product as compared to our budgeted amount.

        Commencing upon the related product's release, capitalized intellectual property license costs are amortized to cost of sales—intellectual property licenses based on the ratio of current revenues for the specific product to total projected revenues for all products in which the licensed trademark or copyright will be utilized. As intellectual property license contracts may extend for multiple years, the amortization of capitalized intellectual property license costs relating to such contracts may extend beyond one year. For products that have been released, we evaluate the future recoverability of capitalized amounts on a quarterly basis. The primary evaluation criterion is actual title performance.

        Significant management judgment and estimates are utilized in the assessment of the recoverability of capitalized costs.

17

---

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

18

---

Results of Operations—Three Months Ended June 30, 2002 and 2001

Net Revenues

        Net revenues for the three months ended June 30, 2002 increased 73% over the prior year period, from $110.6 million to $191.3 million. Increases were reported in both our publishing and distribution segments.

        Publishing net revenues for the three months ended June 30, 2002 increased 85% from $82.8 million to $153.1 million. The increase in publishing net revenues was primarily attributable to the simultaneous cross-platform, multi-national release during the three months ended June 30, 2002 of Spider-Man: The Movie. In the three months ended June 30, 2002, 65% of our worldwide publishing net revenues were derived from the Spider-Man brand. Publishing console net revenues increased 253% from $32.4 million to $114.2 million due to the release of Spider-Man: The Movie as noted above. Publishing PC net revenues for the three months ended June 30, 2002 also increased when compared to the prior year period, increasing 108% from $13.6 million to $28.3 million. The increase in publishing PC net revenues reflects the PC release during the three months ended June 30, 2002 of Soldier of Fortune II: Double Helix, as well as Spider-Man: The Movie, both of which performed very well in both the domestic and international marketplaces. Publishing handheld net revenues decreased 71% from $36.9 million to $10.7 million. This decrease reflects the fact that the Nintendo Game Boy Advance hardware was launched in June 2001. Our GBA sales for the three months ended June 30, 2001 benefited from the related hardware launch, which drove GBA sales. As described above, a significant portion of our publishing net revenues is derived from products based on a relatively small number of popular brands each year. We expect that a limited number of popular brands will continue to produce a disproportionately large amount of our net revenues.

        Distribution net revenues for the three months ended June 30, 2002 increased 37% from the prior year period, from $27.7 million to $38.1 million, primarily driven by an increase in our distribution console net revenues. Distribution console net revenues for the three months ended June 30, 2002 increased 68% over the prior year period, from $17.9 million to $30.1 million. Distribution console net revenues for the three months ended June 30, 2002 benefited from the international hardware launches of Xbox and GameCube in March 2002 and May 2002, respectively. Additionally, we benefited from the price reduction on PS2 hardware that was effective September 2001, as this resulted in both an increase in sales of PS2 hardware, as well as an increase in sales of PS2 software due to the corresponding larger installed hardware base.

        Domestic net revenues grew 62% from $66.3 million to $107.1 million. International net revenues increased by 90% from $44.3 million to $84.2 million. The increase in domestic net revenues is reflective of the improvements in our publishing segment as described above, and the increase in international net revenues is reflective of the improvements in our publishing and distribution segments as described above.

Costs and Expenses

        Cost of sales—product costs represented 44% and 58% of consolidated net revenues for the three months ended June 30, 2002 and 2001, respectively. The decrease in cost of sales—product costs as a percentage of consolidated net revenues for the three months ended June 30, 2002 was due to a change in the product mix of our publishing business. The product mix of our publishing business for the three months ended June 30, 2001 reflects a heavier concentration of net revenues from handheld devices due to the release of the Nintendo Game Boy Advance hardware in June 2001 as described above. Handheld devices generally have the highest manufacturing per unit cost of all platforms. Additionally, our console manufacturing costs for the three months ended June 30, 2002 benefited from the economies of scale due to the high volume of Spider-Man: The Movie units manufactured. The decrease in cost of sales—product costs as a percentage of consolidated net revenues for the three months ended June 30, 2002 was also due to the decrease in distribution net revenues as a percentage of total

19

---

consolidated net revenues as distribution net revenues have a higher per unit cost as compared to publishing net revenues.

        Cost of sales—intellectual property licenses increased as a percentage of publishing net revenues to 8% for the three months ended June 30, 2002, from 6% for the three months ended June 30, 2001. The increase is reflective of the fact that in the three months ended June 30, 2002, our top performing titles were products with high intellectual property royalty rates.

        Cost of sales—software royalties and amortization increased as a percentage of publishing net revenues to 10% for the three months ended June 30, 2002, from 6% for the three months ended June 30, 2001. The increase is reflective of higher amortization for internally developed products during the three months ended June 30, 2002 as compared to the prior year period due to the release of Spider-Man: The Movie and Soldier of Fortune II: Double Helix during the three months ended June 30, 2002, both of which were internally developed. This increase is also reflective of the change in product mix of net revenues from our publishing business as previously described. The product mix of net revenues from our publishing business for the three months ended June 30, 2001 reflects a heavier concentration of net revenues from handheld devices due to the release of the Nintendo Game Boy Advance hardware in June 2001. Handheld devices generally have a lower cost to develop as compared to other platforms.

        Product development expense for the three months ended June 30, 2002 increased 28% from the prior year period, from $9.2 million to $11.8 million. This increase is reflective of the change in product mix of titles in development during the respective periods. The cost to develop the current generation of console systems, including PS2, Xbox and GameCube, is higher than the cost to develop for the prior generation of console systems, including PS1, N64 and Sega Dreamcast. Approximately 74% of titles in development during the three months ended June 30, 2002 were for the current generation of console systems, compared to only approximately 45% of titles in development during the prior year period.

        Sales and marketing expenses of $22.0 million and $18.8 million represented 11% and 17% of consolidated net revenues for the three months ended June 30, 2002 and 2001, respectively. The increase in sales and marketing expense dollars was the result of a significant marketing program in support of the simultaneous cross-platform, multi-national release of Spider-Man: The Movie. The success of the title contributed to the decrease of sales and marketing expenses as a percentage of consolidated net revenues for the three months ended June 30, 2002 as compared to the prior year period. The decrease in sales and marketing expenses as a percentage of consolidated net revenues demonstrates our ability to leverage and maximize marketing spending over our branded products and sequel titles.

        General and administrative expense for the three months ended June 30, 2002, increased 49% over the prior year period, from $9.7 million to $14.5 million. As a percentage of consolidated net revenues, general and administrative expenses remained relatively constant at approximately 8% to 9%. The increase in the dollar amount of general and administrative expenses was due to the incurrence of an approximate $2.0 million charge for the relocation of our UK distribution facility due to the increased growth of our UK distribution and UK publishing businesses, as well as an increase in worldwide administrative support needs and headcount related expenses.

Operating Income (Loss)

        Operating income (loss) for the three months ended June 30, 2002, was $31.2 million, compared to an operating loss of $(1.2) million in the prior year period. The increase in operating income for the three months ended June 30, 2002 over the prior year period was primarily due to an increase in the success of our publishing business due to the success of Spider-Man: The Movie, cross-platform releases and a continued focus on building operating efficiencies and controlling costs. The increase in publishing operating income was offset by an operating loss in our distribution business. The operating loss in our distribution business is reflective of the incurrence of an approximate $2.0 million charge for

20

---

the relocation of our UK distribution facility due to the increased growth of our UK distribution and UK publishing businesses.

Interest Income, Net

        Interest income, net remained flat at $1.2 million for the three months ended June 30, 2002, compared to $1.3 million for the three months ended June 30, 2001, as higher average cash balances during the three months ended June 30, 2002 were offset by lower interest rates.

Provision for Income Taxes

        The income tax provision of $11.7 million for the three months ended June 30, 2002 reflects our effective income tax rate of approximately 36%. The significant item that generated the variance between our effective rate and our statutory rate of 35% was state taxes, partially offset by research and development tax credits. The realization of deferred tax assets primarily is dependent on the generation of future taxable income. We believe that it is more likely than not that we will generate taxable income sufficient to realize the benefit of net deferred tax assets recognized.

Liquidity and Capital Resources

        Our cash and cash equivalents were $550.3 million at June 30, 2002 compared to $279.0 million at March 31, 2002. This $271.3 million increase in cash and cash equivalents for the three months ended June 30, 2002, resulted from $18.0 million and $264.3 million provided by operating and financing activities, respectively, offset by $15.0 million utilized in investing activities. The principal components comprising cash flows from operating activities included favorable operating results, tax benefits from stock option and warrant exercises and reductions in accounts receivable, partially offset by our continued investment in software development and intellectual property licenses and reductions in accounts payable, driven by a seasonal change in working capital needs. Approximately $33.2 million was expended in the three months ended June 30, 2002 in connection with the acquisition of publishing or distribution rights to products being developed by third parties, the execution of new license agreements granting us long-term rights to intellectual property of third parties, as well as the capitalization of product development costs relating to internally developed products. The cash used in investing activities primarily was the result of business combinations and equipment purchases. On May 20, 2002, we acquired all of the outstanding ownership interests of Z-Axis Ltd. ("Z-Axis"), a privately held interactive software development company, in exchange for $12.5 million in cash and 249,190 shares of our common stock valued at approximately $8.2 million. The cash provided by financing activities primarily was the result of proceeds from the issuance of common stock pursuant to employee stock option plans and an underwritten public offering completed June 7, 2002. On June 7, 2002, we issued 7,500,000 shares of common stock for proceeds of approximately $247.3 million, net of offering costs. The proceeds from this offering will be used for general corporate purposes, including, among other things, additions to working capital and financing of capital expenditures, joint ventures and/or strategic acquisitions.

        In connection with our purchases of Nintendo 64, Nintendo GameCube and Game Boy hardware and software cartridges for distribution in North America and Europe, Nintendo requires us to provide either irrevocable or standby letters of credit prior to accepting purchase orders. Furthermore, Nintendo maintains a policy of not accepting returns of Nintendo 64, Nintendo GameCube or Game Boy hardware and software cartridges. Because of these and other factors, the carrying of an inventory of Nintendo 64, Nintendo GameCube and Game Boy hardware and software cartridges entails significant capital and risk. As of June 30, 2002, we had approximately $3.2 million of Nintendo 64 and Nintendo GameCube and $5.8 million of Game Boy hardware and software cartridge inventory on hand, which represented approximately 13% and 23%, respectively, of all inventory.

        In June 1999, we obtained a $100.0 million revolving credit facility and a $25.0 million term loan with a syndicate of banks (the "U.S. Facility"). The revolving portion of the U.S. Facility provided us

21

---

with the ability to borrow up to $100.0 million, including issuing letters of credit up to $80 million, on a revolving basis against eligible accounts receivable and inventory. The term loan had a three-year term with principal amortization on a straight-line quarterly basis beginning December 31, 1999, a borrowing rate based on the banks' base rate (which is generally equivalent to the published prime rate) plus 2% or LIBOR plus 3% and was to expire June 2002. The revolving portion of the U.S Facility had a borrowing rate based on the banks' base rate plus 1.75% or LIBOR plus 2.75%. In May 2001, we accelerated our repayment of the outstanding balance under the term loan portion of the U.S. Facility. In connection with the accelerated repayment, we amended the U.S. Facility (the "Amended and Restated U.S. Facility"). The Amended and Restated U.S. Facility eliminated the term loan, reduced the revolver to $78.0 million and reduced the interest rate to the banks' base rate plus 1.25% or LIBOR plus 2.25%. We pay a commitment fee of ¹/4% on the unused portion of the revolver. The Amended and Restated U.S. Facility is collateralized by substantially all of our assets and was scheduled to expire in June 2002. However, in June 2002, we obtained an extension of the expiration date to August 21, 2002. Due to our improved financial position, including significant cash balances and minimal debt, we will not seek additional bank financing upon the expiration of the Amended and Restated U.S. Facility.

        The Amended and Restated U.S. Facility contains various covenants that limit our ability to incur additional indebtedness, pay dividends or make other distributions, create certain liens, sell assets, or enter into certain mergers or acquisitions. We are also required to maintain specified financial ratios related to net worth and fixed charges. As of June 30, 2002, we were in compliance with these covenants. As of June 30, 2002, there were no borrowings outstanding and $1.8 million of letters of credit outstanding against the revolving portion of the Amended and Restated U.S. Facility.

        We have a revolving credit facility through our CD Contact subsidiary in the Netherlands (the "Netherlands Facility"). The Netherlands Facility permitted revolving credit loans and letters of credit up to Euro ("EUR") 4.5 million ($4.5 million) as of June 30, 2002, based upon eligible accounts receivable and inventory balances. The Netherlands Facility is due on demand, bears interest at a Eurocurrency rate plus 1.5%, is collateralized by a British Pounds ("GBP") 1.5 million ($2.3 million) guarantee made by our Centresoft subsidiary through its bank facility and expires August 2003. As of June 30, 2002, there was $962,000 of borrowings and no letters of credit outstanding under the Netherlands Facility.

        We also have revolving credit facilities with our CentreSoft subsidiary located in the United Kingdom (the "UK Facility") and our NBG subsidiary located in Germany (the "German Facility"). As of June 30, 2002, the UK Facility provided Centresoft with the ability to borrow up to GBP 7.0 million ($10.7 million), including issuing letters of credit, on a revolving basis. Furthermore, as of June 30, 2002, under the UK Facility, Centresoft has provided a GBP 1.5 million ($2.3 million) guarantee which serves as collateral for the Netherlands Facility. The UK Facility bears interest at LIBOR plus 2%, is collateralized by substantially all of the assets of the subsidiary and expires in October 2002. The UK Facility also contains various covenants that require the subsidiary to maintain specified financial ratios related to, among others, fixed charges. As of June 30, 2002, we were in compliance with these covenants. No borrowings were outstanding against the UK Facility at June 30, 2002. The German Facility provided for revolving loans up to EUR 2.0 million ($2.0 million) as of June 30, 2002, bears interest at a Eurocurrency rate plus 2.5%, is collateralized by a cash deposit of approximately GBP 732,000 ($1.1 million) made by our CentreSoft subsidiary and has no expiration date. No borrowings were outstanding against the German Facility as of June 30, 2002.

        In the normal course of business, we enter into contractual arrangements with third parties for the development of products, as well as for the rights to intellectual property ("IP"). Under these agreements, we commit to provide specified payments to a developer or IP holder, based upon contractual arrangements. Assuming all contractual provisions are met, the total future minimum

22

---

contract commitment for contracts in place as of June 30, 2002 is approximately $74.9 million and is scheduled to be paid as follows (amounts in thousands):

        We believe that we have sufficient working capital ($602.7 million at June 30, 2002), as well as proceeds available from the UK Facility, the Netherlands Facility and the German Facility, to finance our operational requirements for at least the next twelve months, including acquisitions of inventory and equipment, the funding of the development, production, marketing and sale of new products and the acquisition of intellectual property rights for future products from third parties. We have historically financed our acquisitions through the issuance of shares of common stock or a combination of common stock and cash. We will continue to evaluate potential acquisition candidates as to the benefit they bring to us and as to our ability to make such acquisitions.

Recently Issued Accounting Standards

        In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be initially measured at fair value and recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of the company's commitment to an exit plan. The provisions of SFAS No. 146 are required to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Factors Affecting Future Performance

        In connection with the Private Securities Litigation Reform Act of 1995 (the "Litigation Reform Act"), we have disclosed certain cautionary information to be used in connection with written materials (including this Quarterly Report on Form 10-Q) and oral statements made by or on behalf of our employees and representatives that may contain "forward-looking statements" within the meaning of the Litigation Reform Act. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. The listener or reader is cautioned that all forward-looking statements are necessarily speculative and there are numerous risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. For a discussion that highlights some of the more important risks identified by management, but which should not be assumed to be the only factors that could affect future performance, see our Annual Report on Form 10-K for the fiscal year ended March 31, 2002 which is incorporated herein by reference. The reader or listener is cautioned that we do not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management over time means that actual events are bearing out as estimated in such forward-looking statements.

23

---

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Risk

        We have had a number of variable rate and fixed rate debt obligations, denominated both in U.S. dollars and various foreign currencies as detailed in Note 14 of the Notes to Consolidated Financial Statements appearing elsewhere in this Quarterly Report. We manage interest rate risk by monitoring our ratio of fixed and variable rate debt obligations in view of changing market conditions. Additionally, in the future, we may consider the use of interest rate swap agreements to further manage potential interest rate risk.

        As of June 30, 2002 the carrying value of our variable rate debt was approximately $1.0 million, which was comprised of the Netherlands Facility. A hypothetical 1% increase in the applicable interest rate of our variable rate debt, which is not less than 10% of the end of period market rate, would increase annual interest expense by approximately $10,000. A hypothetical 1% increase in the applicable interest rates of our fixed rate debt would not materially impact our financial statements.

Foreign Currency Exchange Rate Risk

        We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly GBP and EUR. The volatility of GBP and EUR (and all other applicable currencies) will be monitored frequently throughout the coming year. When appropriate, we enter into hedging transactions in order to mitigate our risk from foreign currency fluctuations. We will continue to use hedging programs in the future and may use currency forward contracts, currency options and/or other derivative financial instruments commonly utilized to reduce financial market risks if it is determined that such hedging activities are appropriate to reduce risk. We do not hold or purchase any foreign currency contracts for trading purposes. As of June 30, 2002, assuming a change in currency rates of 10% of period end rates, the potential gain or loss on outstanding hedging contracts would be approximately $136,300. However any such gain or loss would in turn be offset by the potential gain or loss on the hedged receivable and/or payable.

24

---

Part II.—OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)

Reports on Form 8-K

25

---

26

---

SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 14, 2002

ACTIVISION, INC.

/s/  WILLIAM J. CHARDAVOYNE       William J. Chardavoyne Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

27

---

QuickLinks

Part I. Financial Information.
Item 1. Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk

Part II.—OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K