Activision, Inc. — 2004 Annual Report Two factors that could affect future publishing and distribution net revenue performance are console hardware pricing and software pricing. As console hardware moves through its life cycle, hardware manufacturers typically enact price reductions. Reductions in the price of console hardware typically result in an increase in the installed base of hardware owned by consumers. Price cuts on Xbox and PS2 hardware were announced in March and May 2004, respectively. Historically, we have also seen that lower console hardware prices put downward pressure on software pricing. While we expect console software launch pricing for most genres to hold at $49.99 through the calendar 2004 holidays, we believe we could see additional software price declines thereafter. Distribution net revenues for the year ended March 31, 2004 increased 14% from the prior fiscal year, from $248.1 million to $281.9 million. The increase was primarily due to the positive impact of the year-over-year strengthening of the EUR and the GBP in relation to the U.S. dollar. Excluding the impact of the changing foreign currency rates, our distribution net revenue was in line with our prior fiscal year, with a slight increase of 2% year-over-year. The mix of  distribution net revenues between hardware and software sales varied year-over-year with approximately 28%  hardware in the year ended March 31, 2004 as compared to 38% hardware in the prior fiscal year. This is mainly attributed to an increase in business with large, mass-market customers that generate a higher percentage of sales from software. In both fiscal years, hardware sales were principally comprised of sales of console hardware. The mix of future distribution net revenues will be driven by a number of factors including the occurrence of further hardware price reduc- tions instituted by hardware manufacturers, the introduction of new hardware platforms and our ability to establish and maintain distribution agreements with hardware manufacturers and third-party software publishers. We are expecting our fiscal 2005 distribution results to be in line with fiscal 2004. Cost of sales—product costs represented 50% and 51% of consolidated net revenues for the years ended March 31, 2004 and 2003, respectively. In absolute dollars, cost of sales—product costs increased due to higher sales volume in fiscal 2004 as compared to fiscal 2003. There were two primary factors that affected cost of sales—product costs as a percentage of consolidated net revenues: page 25 • The product mix of our publishing business for the year ended March 31, 2004 reflects a lower proportion of net revenues from titles for hand-held devices, as compared to the year ended March 31, 2003. Titles for hand-held devices generally have the highest manufacturing per unit cost of all platforms. • Due to the lower manufacturing costs for PC titles, we were able to benefit from the strong sales of  Call of Duty for the year ended March 31, 2004. Costs and Expenses Cost of Sales—Product Costs (In thousands) % of % of March 31, Consolidated March 31, Consolidated Increase/ Percent 2004 Net Revenue 2003 Net Revenue (Decrease) Change $475,541 50% $440,977 51% $34,564 8% (In thousands) % of % of March 31, Consolidated March 31, Consolidated Increase/ Percent 2004 Net Revenue 2003 Net Revenue (Decrease) Change $281,924 30% $248,141 29% $33,783 14% Distribution Net Revenue