Activision, Inc. — 2004 Annual Report Management’s Discussion and Analysis of Financial Condition  and Results of Operations Inflation Our management currently believes that inflation has not had a material impact on continuing operations. Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in interest rates, foreign currency exchange rates and market prices. Our market risk sensitive instru- ments are classified as “other than trading.” 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 interest rates, foreign currency exchange rates and market prices and the timing of transactions. Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We manage our interest rate risk by maintaining an investment portfolio consisting primarily of debt instruments with high credit quality and relatively short average maturities. We also manage our interest rate risk by maintaining sufficient cash and cash equivalent balances such that we are typically able to hold our investments to maturity. As of March 31, 2004, our cash equivalents and short-term investments included debt securities of $426.2 million. The following table presents the amounts and related weighted average interest rates of our investment portfolio as of March 31, 2004 (amounts in thousands): Average Amortized Fair Interest Rate Cost Value Cash equivalents: Fixed rate 1.12% $305,132 $305,132 Variable rate 0.95 60,006 60,006 Short-term investments: Fixed rate 1.81% $121,000 $121,097 Our short-term investments generally mature between three months and two years. 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 appro- priate to reduce risk. We do not hold or purchase any foreign currency contracts for trading purposes. As of March 31, 2004, we had no outstanding hedging contracts. Foreign Currency Exchange Rate Risk Market Price Risk With regard to the structured stock repurchase transactions described in Note 16 in the Notes to the Consolidated Financial Statements, at those times when we have structured stock repurchase transactions outstanding, it is possible that at settlement we could take delivery of shares at an effective repurchase price higher than the then market price. As of March 31, 2004, we had no structured stock repurchase transactions outstanding. page 40