Activision, Inc. — 2004 Annual Report • A $21 million game cancellation charge recorded in the fiscal 2004 third quarter. We executed a realignment  of our product portfolio driven by the evolution of the video game market, which is increasingly dominated by  high quality products that are based on recognizable franchises and supported with big marketing programs. We completed a comprehensive review of our product portfolio in which we evaluated each product based on a  number of criteria, including: the strength of the franchise, the projected product quality, the potential responsive- ness of the product to aggressive marketing support and the financial risk in the event of product failure. As a result of this review, we believe that we have an extensive slate of high potential properties in development. However, we found that certain projects had a lower likelihood of achieving acceptable levels of operating  performance and that continued pursuit of these projects would create a substantial opportunity cost as it related to our slate of high potential projects. Accordingly, in the three months ended December 31, 2003, we cancelled the development of ten products that we believed were unlikely to produce an acceptable level of return on our investment. In connection with the cancellation of these products, we recorded a pre-tax charge of approximately $21 million. • Our increased emphasis on product quality and the lengthening of product development schedules. To maintain the competitiveness of our products and to take advantage of increasingly sophisticated technology associated with new hardware platforms, we have increased the amount of time spent play-testing new products, conducted more extensive product quality evaluations and lengthened product development schedules to allow time to make the improvements indicated by our testing and evaluations. We are focused on improved game quality, and in many cases, this has resulted in an increase in product development costs. • The increase in absolute dollars is also due to an increase in studio employee incentive compensation as a result of the strong performances of key fiscal 2004 title releases. Sales and marketing expenses of $128.2 million and $100.6 million represented 14% and 12% of consolidated net revenues for the years ended March 31, 2004 and 2003, respectively. The increase in sales and marketing expense dollars and as a percentage of net revenues for the year ended March 31, 2004 from the prior fiscal year was  primarily generated by our publishing business as a result of significant marketing programs, including television and  in-theatre ad campaigns and in-store promotions, run in support of our three key fiscal 2004 third quarter title releases, Tony Hawk’s Underground , and our two new original properties,  True Crime: Streets of L.A. and  Call of Duty . We expect to continue to provide significant marketing support for our future “big proposition” titles. Accordingly, we expect fiscal 2005 sales and marketing costs to exceed fiscal 2004 spending levels. Sales and Marketing General and Administrative (In thousands) % of % of March 31, Consolidated March 31, Consolidated Increase/ Percent 2004 Net Revenue 2003 Net Revenue (Decrease) Change $128,221 14% $100,646 12% $27,575 27% page 27 (In thousands) % of % of March 31, Consolidated March 31, Consolidated Increase/ Percent 2004 Net Revenue 2003 Net Revenue (Decrease) Change $44,612 5% $46,479 5% $(1,867) (4%)