Activision, Inc. — 2004 Annual Report A significant portion of our revenues and profits are derived from a relatively small number of popular titles and brands each year as revenues and profits are significantly affected by our ability to release highly successful or “hit” titles. For example, for the year ended March 31, 2003, 30% of our consolidated net revenues and 43% of worldwide  publishing net revenues were derived from net revenues from our  Spider-Man: The Movie and  Tony Hawk’s Pro Skater  4 titles. Though many of these titles have substantial production or acquisition costs and marketing budgets, once a title recoups these costs, incremental net revenues directly and positively impacts operating profits resulting in a dispropor- tionate amount of operating income being derived from these select titles. We expect that a limited number of titles and brands will continue to produce a disproportionately large amount of our net revenues and profits. Distribution net revenues for the year ended March 31, 2003 increased 5% from the prior fiscal year, from $236.9 million to $248.1 million. The increase was due to the positive impact of the year-over-year strengthening of the  EUR and the GBP in relation to the U.S. dollar. Distribution console net revenues for the year ended March 31, 2003 also benefited from the international hardware launches of Xbox and GameCube in March 2002 and May 2002, respectively. It additionally 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. This increase was partially offset by declines in distribution hand-held and PC net revenues for the reasons detailed in the discussion of publishing net revenues. The mix of distribution net  revenues between hardware and software sales remained relatively constant year-over-year at approximately 38% hardware and 62% software. Domestic net revenues increased 7% from $404.9 million for the year ended March 31, 2002 to $432.3 million  for the year ended March 31, 2003 for the reasons detailed above in the discussion of our publishing business  net revenues. International net revenues increased by 13% from $381.5 million for the year ended March 31, 2002 to $431.9 million for the year ended March 31, 2003 for the reasons detailed above in the discussion of our  publishing business, as well as the result of the year-over-year strengthening of the EUR and the GBP in relation to the U.S. dollar. Cost of sales—product costs represented 51% and 56% of consolidated net revenues for the years ended March 31, 2003 and 2002, respectively. There were two primary factors that affected cost of sales—product costs as a  percentage of consolidated net revenues. First, the product mix of our publishing business for the year ended March 31, 2003 reflects a lower proportion of net revenues from titles for hand-held devices, as compared to the year ended March 31, 2002. Titles for hand-held devices generally have the highest manufacturing per unit cost of all platforms. Second, our manufacturing costs for console titles for the year ended March 31, 2003 benefited from the economies of scale due to the high volume of  Spider-Man: The Movie units manufactured. Cost of Sales—Software Royalties and Amortization Costs and Expenses Cost of Sales—Product Costs (In thousands) % of % of March 31, Consolidated March 31, Consolidated Increase/ Percent 2003 Net Revenue 2002 Net Revenue (Decrease) Change $440,977 51% $435,725 56% $5,252 1% (In thousands) % of % of March 31, Publishing March 31, Publishing Increase/ Percent 2003 Net Revenue 2002 Net Revenue (Decrease) Change $79,194 13% $58,892 11% $20,302 34% page 31