ELECTRONIC ARTS INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2002


[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
		SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ______ to_____

Commission File No. 0-17948

ELECTRONIC ARTS INC.

(Exact name of registrant as specified in its charter)


Delaware		94-2838567
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


209 Redwood Shores Parkway Redwood City, California		94065
(Address of principal executive offices)		(Zip Code)

(650) 628-1500
(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 for 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 [X] NO [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Outstanding at
Class of Common Stock	Par Value	October 31, 2002

Class A common stock	$0.01		141,292,321

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	Item 1. Unaudited Condensed Consolidated Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED 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
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

ELECTRONIC ARTS INC. AND SUBSIDIARIES

INDEX

Page

Part I - Financial Information

Item 1. Unaudited Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at September 30, 2002 and March 31, 2002 3

Condensed Consolidated Statements of Operations for the Three Months Ended
    September 30, 2002 and 2001 and the Six Months Ended September 30, 2002
   and 2001

4

Condensed Consolidated Statements of Cash Flows for the Six Months Ended
    September 30, 2002 and 2001
5

Notes to Condensed Consolidated Financial Statements 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21

Item 3. Quantitative and Qualitative Disclosures About Market Risk 50

Item 4. Controls and Procedures 52

Part II - Other Information

Item 1. Legal Proceedings 53

Item 4. Submission of Matters to a Vote of Security Holders 53

Item 6. Exhibits and Reports on Form 8-K 53

Signatures 54

Certifications 55

PART I — FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)

September 30, March 31,

2002 2002

ASSETS

Current assets:

Cash, cash equivalents and short-term investments
$ 920,768 $ 796,936

Marketable securities
6,525 6,869

Receivables, less allowances of $125,402 and $115,870, respectively
139,366 190,495

Inventories, net
36,827 23,780

Deferred income taxes
36,412 38,597

Other current assets
159,287 95,866

Total current assets
1,299,185 1,152,543

Property and equipment, net
307,056 308,827

Investments in affiliates
17,324 19,077

Goodwill and other intangibles, net
121,484 110,512

Long-term deferred income taxes
55,649 64,065

Other assets
46,387 44,350

$ 1,847,085 $ 1,699,374

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable
$ 120,320 $ 88,563

Accrued and other liabilities
333,558 364,419

Total current liabilities
453,878 452,982

Minority interest in consolidated joint venture
1,420 3,098

Stockholders’ equity:

Preferred stock, $0.01 par value. Authorized 10,000,000 shares
— —

Common stock

Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 140,832,259 and 138,429,269 shares, respectively
1,408 1,384

Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 4,233,463 and 6,233,413 shares, respectively
42 62

Paid-in capital
729,774 649,777

Retained earnings
664,433 606,795

Accumulated other comprehensive loss
(3,870 ) (14,724 )

Total stockholders’ equity
1,391,787 1,243,294

$ 1,847,085 $ 1,699,374

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)

Three Months Ended Six Months Ended

September 30, September 30,

2002 2001 2002 2001

Net revenues
$ 453,490 $ 240,156 $ 785,388 $ 422,106

Cost of goods sold
198,891 117,760 340,256 206,789

Gross profit
254,599 122,396 445,132 215,317

Operating expenses:

Marketing and sales
55,514 45,020 120,888 85,824

General and administrative
27,453 25,403 53,116 48,618

Research and development
98,140 97,555 189,109 188,360

Amortization of intangibles
2,246 6,475 4,491 12,950

Total operating expenses
183,353 174,453 367,604 335,752

Operating income (loss)
71,246 (52,057 ) 77,528 (120,435 )

Interest and other income, net
1,177 4,060 4,324 6,777

Income (loss) before provision for (benefit from) income taxes and minority interest
72,423 (47,997 ) 81,852 (113,658 )

Provision for (benefit from) income taxes
22,451 (14,879 ) 25,374 (35,234 )

Income (loss) before minority interest
49,972 (33,118 ) 56,478 (78,424 )

Minority interest in consolidated joint venture
262 294 1,160 346

Net income (loss)
$ 50,234 $ (32,824 ) $ 57,638 $ (78,078 )

Class A common stock:

Net income (loss):

Basic
$ 53,407 $ (27,236 ) $ 63,801 $ (66,611 )

Diluted
$ 50,234 $ (32,824 ) $ 57,638 $ (78,078 )

Net income (loss) per share:

Basic
$ 0.38 $ (0.20 ) $ 0.46 $ (0.49 )

Diluted
$ 0.34 $ (0.24 ) $ 0.39 $ (0.57 )

Number of shares used in computation:

Basic
139,843 136,652 139,317 136,158

Diluted
146,619 137,304 146,269 136,810

Class B common stock:

Net loss, net of retained interest in EA.com
$ (3,173 ) $ (5,588 ) $ (6,163 ) $ (11,467 )

Net loss per share:

Basic
$ (0.57 ) $ (0.93 ) $ (1.07 ) $ (1.90 )

Diluted
$ (0.57 ) $ (0.93 ) $ (1.07 ) $ (1.90 )

Number of shares used in computation:

Basic
5,547 6,022 5,759 6,020

Diluted
5,547 6,022 5,759 6,020

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

Six Months

Ended September 30,

2002 2001

Operating activities:

Net income (loss)
$ 57,638 $ (78,078 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Minority interest in consolidated joint venture
(1,160 ) (346 )

Distribution from investment in affiliate
3,000 —

Equity in net (income) loss of affiliates
(1,313 ) 160

Gain on sale of affiliate
— (200 )

Depreciation and amortization
49,373 55,294

Loss on write-down of affiliate
471 —

Loss on sale of fixed assets
115 315

Permanent impairment of marketable securities
2,359 —

Bad debt expense
4,639 2,327

Stock-based compensation
2,161 1,154

Tax benefit from exercise of stock options
16,866 16,789

Change in assets and liabilities:

Receivables
48,261 68,584

Inventories
(13,047 ) (5,133 )

Other assets
(85,409 ) (70,114 )

Accounts payable
31,726 6,628

Accrued and other liabilities
(35,800 ) (76,723 )

Deferred income taxes
8,689 (581 )

   Net cash provided by (used in) operating activities
88,569 (79,924 )

Investing activities:

Proceeds from sale of property and equipment
411 225

Proceeds from sale of affiliate
— 570

Capital expenditures
(23,386 ) (29,711 )

Investment in affiliates, net
(405 ) 3,018

Change in short-term investments, net
(46,212 ) (81,104 )

Acquisition, net of cash acquired
(12,868 ) —

   Net cash used in investing activities
(82,460 ) (107,002 )

Financing activities:

Proceeds from sales of Class A shares through employee stock plans and other plans
61,281 49,010

Proceeds from sales of Class B shares through employee stock plans and other plans
1 —

Purchase of treasury shares
— (6,824 )

Proceeds from minority interest investment
(751 ) —

   Net cash provided by financing activities
60,531 42,186

Translation adjustment
8,005 3,733

Increase (decrease) in cash and cash equivalents
74,645 (141,007 )

Beginning cash and cash equivalents
552,826 419,812

Ending cash and cash equivalents
627,471 278,805

Short-term investments
293,297 129,140

Ending cash, cash equivalents and short-term investments
$ 920,768 $ 407,945

ELECTRONIC ARTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(unaudited)

Six Months

Ended September 30,

2002 2001

Supplemental cash flow information:

Cash paid during the period for income taxes
$ 4,052 $ 6,756

Non-cash investing activities:

Change in unrealized appreciation (loss) on investments and marketable securities
$ 2,635 $ (3,781 )

Non-cash financing activities:

Conversion of 2,000,000 shares of Class B common stock for 206,454 shares of Class A common stock
$ 9,353 $ —

See accompanying Notes to Condensed Consolidated Financial Statements.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1. Basis of Presentation

The condensed consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring accruals) that, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for the current interim period are not necessarily indicative of results to be expected for the current year or any other period. Certain amounts have been reclassified to conform to the fiscal 2003 presentation.

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Electronic Arts Inc. (the “Company”) Annual Report on Form 10-K for the fiscal year ended March 31, 2002 as filed with the Securities and Exchange Commission on June 28, 2002.

Note 2. Fiscal Year and Fiscal Quarter

The Company’s fiscal year is reported on a 52/53-week period that ends on the Saturday nearest to March 31 in each year. The results of operations for fiscal 2003 and fiscal 2002 contain 52 weeks. The results of operations for the fiscal quarters ended September 30, 2002 and 2001 contain 13 weeks. For simplicity of presentation, all fiscal periods are treated as ending on a calendar month end.

Note 3. Common Stock

At the Company’s Annual Meeting of Stockholders, held on August 1, 2002, the stockholders elected to amend the 2000 Class A Equity Incentive Plan to increase by 5,500,000 the number of shares of the Company’s Class A common stock reserved for issuance under the Plan.

Note 4. Goodwill and Other Intangible Assets

Effective April 1, 2002, the Company adopted the full provisions of Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, which requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and acquired intangible assets meeting certain criteria to be recorded apart from goodwill. The Company evaluated its goodwill and intangibles acquired prior to June 30, 2001 using the criteria of SFAS No. 141, which resulted in $41,462,000 of other intangibles to be recorded separately from goodwill and $4,000,000 of acquired workforce intangibles being subsumed into goodwill at April 1, 2002. In addition, effective April 1, 2002, the Company adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that purchased goodwill and certain indefinite-lived intangibles no longer be amortized; rather, goodwill will be subject to at least an annual assessment for impairment by applying a fair-value-based test. SFAS No. 142 also requires, among other things, reassessment

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

of the useful lives of existing recognized intangibles and the testing for impairment of existing goodwill and other indefinite-lived intangibles. The Company evaluated the estimated useful lives of existing recognized intangibles and determined that the estimated useful lives of all such assets were appropriate.

In accordance with SFAS No. 142, the Company has ceased to amortize goodwill (see goodwill information in table below). In lieu of amortization, SFAS No. 142 requires a two-step approach to testing goodwill for impairment for each reporting unit. The first step, required to be completed by September 30, 2002, tests for impairment by applying fair value-based tests at the Company’s reporting unit level. The second step (if necessary), required to be completed by March 31, 2003, measures the amount of impairment by applying fair value-based tests to individual assets and liabilities within each reporting unit. The Company completed the first step of impairment testing during the quarter ended June 30, 2002 and found no indicators of impairment of its recorded goodwill. Accordingly, provided there are no future indicators of impairment, the second testing step is not necessary during fiscal 2003.

The following table presents comparative information showing the effects that non-amortization of goodwill would have had on the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2001 (in thousands, except per share amounts):

Three Months Ended Six Months Ended

September 30, September 30,

2002 2001 2002 2001

Reported net income (loss)
$ 50,234 $ (32,824 ) $ 57,638 $ (78,078 )

Goodwill amortization, net of tax
— 2,022 — 4,044

Adjusted net income (loss)
$ 50,234 $ (30,802 ) $ 57,638 $ (74,034 )

Reported diluted net earnings (loss) per share
$ 0.34 $ (0.24 ) $ 0.39 $ (0.57 )

Goodwill amortization, net of tax
— 0.02 — 0.03

Adjusted diluted net earnings (loss) per share
$ 0.34 $ (0.22 ) $ 0.39 $ (0.54 )

The Company operates in two business segments globally, EA Core and EA.com (see Note 8 of the Notes to Condensed Consolidated Financial Statements). During the quarter ended September 30, 2002, the Company recorded additional goodwill as a result of an acquisition of a software development company. Goodwill information for each business segment is as follows (in thousands):

Effects of As of

As of March Goodwill Foreign September 30,

31, 2002 Acquired Adjustments Currency 2002

EA Core
$ 39,335 $ 16,139 $ — $ (366 ) $ 55,108

EA.com
29,715 — — — 29,715

$ 69,050 $ 16,139 $ — $ (366 ) $ 84,823

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Other intangibles consisted of the following (in thousands):

September 30, 2002 March 31, 2002

Gross Other Gross Other

Carrying Accumulated Intangibles, Carrying Accumulated Intangibles,

Amount Amortization Other Net Amount Amortization Other Net

Developed/Core Technology
$ 28,263 $ (17,682 ) $ — $ 10,581 $ 28,263 $ (15,455 ) $ — $ 12,808

Tradename
35,169 (11,356 ) — 23,813 35,169 (9,854 ) — 25,315

Subscribers and Other Intangibles
8,694 (5,918 ) (509 ) 2,267 8,694 (5,156 ) (199 ) 3,339

Other Intangibles
$ 72,126 $ (34,956 ) $ (509 ) $ 36,661 $ 72,126 $ (30,465 ) $ (199 ) $ 41,462

As of September 30, 2002, future intangible asset amortization expense is estimated as follows (in thousands):

Fiscal Year Ended March 31,

2003
$ 4,242

2004
7,364

2005
5,946

2006
5,517

2007
2,489

Thereafter
11,103

$ 36,661

Note 5. Prepaid Royalties

Prepaid royalties consist primarily of prepayments for manufacturing royalties, co-publishing and/or distribution affiliates and license fees paid to celebrities, professional sports organizations and other organizations for use of their trade name and content. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the contractual or effective royalty rate as cost of goods sold based on actual net product sales. Management evaluates the future realization of prepaid royalties quarterly and charges to research and development expense any amounts that management deems unlikely to be realized through product sales. Royalty advances are classified as current and non-current assets based upon estimated net product sales for the following year. The current portion of prepaid royalties, included in other current assets, was $104,266,000 and $65,484,000 at September 30, 2002 and March 31, 2002, respectively. The long-term portion of prepaid royalties, included in other assets, was $4,379,000 and $1,164,000 at September 30, 2002 and March 31, 2002, respectively.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Note 6. Inventories

Inventories are stated at the lower of cost or market. Inventories, net, at September 30, 2002 and March 31, 2002 consisted of (in thousands):

September 30, 2002 March 31, 2002

Raw materials and work in process
$ 7,196 $ 1,025

Finished goods
29,631 22,755

$ 36,827 $ 23,780

Note 7. Accrued and Other Liabilities

Accrued and other liabilities at September 30, 2002 and March 31, 2002 consisted of (in thousands):

September 30, 2002 March 31, 2002

Accrued income taxes
$ 91,732 $ 94,444

Accrued expenses
82,708 87,104

Accrued royalties
78,763 77,590

Accrued compensation and benefits
60,923 87,985

Deferred revenue
16,374 13,286

Warranty reserve
3,058 4,010

$ 333,558 $ 364,419

Note 8. Segment Information

Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of An Enterprise And Related Information”, establishes standards for the reporting by public business enterprises of information about operating segments, product lines, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance.

The Company’s chief operating decision maker is considered to be the Company’s Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis accompanied by disaggregated information about revenues by geographic region and by product lines for purposes of making operating decisions and assessing financial performance.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

The Company operates in two business segments globally:

• EA Core business segment: creation, marketing and distribution of entertainment software.

• EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising.

Please see the discussion regarding segment reporting in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

Information about the Company’s business segments is presented below for the three and six months ended September 30, 2002 and 2001 (in thousands):

Three Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 434,694 $ 18,796 $ 453,490

Cost of goods sold
195,740 3,151 198,891

Gross profit
238,954 15,645 254,599

Operating expenses:

Marketing and sales(a)
46,287 9,227 55,514

General and administrative
25,431 2,022 27,453

Research and development(b)
71,764 26,376 98,140

Amortization of intangibles
927 1,319 2,246

Total operating expenses
144,409 38,944 183,353

Operating income (loss)
94,545 (23,299 ) 71,246

Interest and other income (expense), net
1,205 (28 ) 1,177

Income (loss) before provision for income taxes and minority interest
95,750 (23,327 ) 72,423

Provision for income taxes
22,451 — 22,451

Income (loss) before minority interest
73,299 (23,327 ) 49,972

Minority interest in consolidated joint venture
262 — 262

Net income (loss) before retained interest in EA.com
$ 73,561 $ (23,327 ) $ 50,234

Interest income
$ 4,468 $ 7 $ 4,475

Depreciation and amortization
12,701 12,366 25,067

Identifiable assets
1,701,838 145,247 1,847,085

Capital expenditures
14,702 275 14,977

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Three Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 224,926 $ 15,230 $ 240,156

Cost of goods sold
114,788 2,972 117,760

Gross profit
110,138 12,258 122,396

Operating expenses:

Marketing and sales(a)
34,979 10,041 45,020

General and administrative
23,152 2,251 25,403

Research and development(b)
63,725 33,830 97,555

Amortization of intangibles(c)
3,205 3,270 6,475

Total operating expenses
125,061 49,392 174,453

Operating loss
(14,923 ) (37,134 ) (52,057 )

Interest and other income (expense), net
4,179 (119 ) 4,060

Loss before benefit from income taxes and minority interest
(10,744 ) (37,253 ) (47,997 )

Benefit from income taxes
(14,879 ) — (14,879 )

Income (loss) before minority interest
4,135 (37,253 ) (33,118 )

Minority interest in consolidated joint venture
294 — 294

Net income (loss) before retained interest in EA.com
$ 4,429 $ (37,253 ) $ (32,824 )

Interest income
$ 4,300 $ 16 $ 4,316

Depreciation and amortization
13,366 14,573 27,939

Identifiable assets
1,097,527 196,625 1,294,152

Capital expenditures
11,116 3,565 14,681

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Six Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 746,813 $ 38,575 $ 785,388

Cost of goods sold
334,235 6,021 340,256

Gross profit
412,578 32,554 445,132

Operating expenses:

Marketing and sales(a)
103,729 17,159 120,888

General and administrative
48,946 4,170 53,116

Research and development(b)
137,365 51,744 189,109

Amortization of intangibles
1,853 2,638 4,491

Total operating expenses
291,893 75,711 367,604

Operating income (loss)
120,685 (43,157 ) 77,528

Interest and other income (expense), net
4,426 (102 ) 4,324

Income (loss) before provision for income taxes and minority interest
125,111 (43,259 ) 81,852

Provision for income taxes
25,374 — 25,374

Income (loss) before minority interest
99,737 (43,259 ) 56,478

Minority interest in consolidated joint venture
1,160 — 1,160

Net income (loss) before retained interest in EA.com
$ 100,897 $ (43,259 ) $ 57,638

Interest income
$ 9,099 $ 73 $ 9,172

Depreciation and amortization
24,609 24,764 49,373

Capital expenditures
22,809 577 23,386

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Six Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 390,477 $ 31,629 $ 422,106

Cost of goods sold
200,207 6,582 206,789

Gross profit
190,270 25,047 215,317

Operating expenses:

Marketing and sales(a)
65,810 20,014 85,824

General and administrative
43,419 5,199 48,618

Research and development(b)
119,108 69,252 188,360

Amortization of intangibles(c)
6,410 6,540 12,950

Total operating expenses
234,747 101,005 335,752

Operating loss
(44,477 ) (75,958 ) (120,435 )

Interest and other income (expense), net
7,268 (491 ) 6,777

Loss before benefit from income taxes and minority interest
(37,209 ) (76,449 ) (113,658 )

Benefit from income taxes
(35,234 ) — (35,234 )

Loss before minority interest
(1,975 ) (76,449 ) (78,424 )

Minority interest in consolidated joint venture
346 — 346

Net loss before retained interest in EA.com
$ (1,629 ) $ (76,449 ) $ (78,078 )

Interest income
$ 9,468 $ 35 $ 9,503

Depreciation and amortization
24,829 30,465 55,294

Capital expenditures
18,949 10,762 29,711

(a) EA.com Marketing and Sales includes $4,466,000 of Carriage Fee for the three months ended September 30, 2002 and 2001 and $8,932,000 of Carriage Fee for the six months ended September 30, 2002 and 2001.

(b) EA.com Research and Development includes $11,998,000 of Network Development and Support and $2,137,000 of Customer Relationship Management (CRM) for the three months ended September 30, 2002; and includes $15,170,000 of Network Development and Support and $2,996,000 of CRM for the three months ended September 30, 2001. EA.com Research and Development includes $24,111,000 of Network Development and Support and $4,344,000 of CRM for the six months ended September 30, 2002; and includes $32,045,000 of Network Development and Support and $5,910,000 of CRM for the six months ended September 30, 2001.

(c) Results for fiscal 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. Amortization of intangibles for the three months ended September 30, 2001 includes goodwill amortization of $1,486,000 for EA Core and $1,445,000 for EA.com. Amortization of intangibles for the six months ended September 30, 2001 includes goodwill amortization of $2,971,000 for EA Core and $2,890,000 for EA.com.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Information about the Company’s operations in North America and foreign areas for the three and six months ended September 30, 2002 and 2001 is presented below (in thousands):

Asia

Pacific

North (excluding

America Europe Japan) Japan Eliminations Total

Three months ended September 30, 2002

Net revenues from unaffiliated customers
$ 313,559 $ 116,654 $ 13,803 $ 9,474 $ — $ 453,490

Intercompany revenues
(3,097 ) 10,885 967 57 (8,812 ) —

Total net revenues
310,462 127,539 14,770 9,531 (8,812 ) 453,490

Operating income (loss)
38,111 34,002 346 (912 ) (301 ) 71,246

Interest income
4,012 421 41 1 — 4,475

Depreciation and amortization
20,793 3,893 229 152 — 25,067

Identifiable assets
1,402,119 408,419 24,156 12,391 — 1,847,085

Capital expenditures
11,507 3,281 102 87 — 14,977

Long-lived assets
357,675 177,429 4,847 4,884 — 544,835

Six months ended September 30, 2002

Net revenues from unaffiliated customers
$ 487,138 $ 243,184 $ 28,992 $ 26,074 $ — $ 785,388

Intercompany revenues
(2,916 ) 20,835 1,910 57 (19,886 ) —

Total net revenues
484,222 264,019 30,902 26,131 (19,886 ) 785,388

Operating income (loss)
27,568 53,154 709 (4,080 ) 177 77,528

Interest income
8,284 793 94 1 — 9,172

Depreciation and amortization
41,299 7,318 462 294 — 49,373

Capital expenditures
17,833 5,127 262 164 — 23,386

Three months ended September 30, 2001

Net revenues from unaffiliated customers
$ 169,555 $ 53,202 $ 8,007 $ 9,392 $ — $ 240,156

Intercompany revenues
816 4,894 2,734 — (8,444 ) —

Total net revenues
170,371 58,096 10,741 9,392 (8,444 ) 240,156

Operating loss
(29,987 ) (20,482 ) (300 ) (1,162 ) (126 ) (52,057 )

Interest income
3,649 602 65 — — 4,316

Depreciation and amortization
23,923 3,652 200 164 — 27,939

Identifiable assets
994,577 267,690 18,072 13,813 — 1,294,152

Capital expenditures
9,087 5,211 121 262 — 14,681

Long-lived assets
353,289 164,261 4,083 4,608 — 526,241

Six months ended September 30, 2001

Net revenues from unaffiliated customers
$ 272,617 $ 113,014 $ 18,058 $ 18,417 $ — $ 422,106

Intercompany revenues
2,331 9,446 4,107 — (15,884 ) —

Total net revenues
274,948 122,460 22,165 18,417 (15,884 ) 422,106

Operating loss
(95,705 ) (24,122 ) (296 ) (1,002 ) 690 (120,435 )

Interest income
8,232 1,138 133 — — 9,503

Depreciation and amortization
48,204 6,412 366 312 — 55,294

Capital expenditures
22,610 6,264 273 564 — 29,711

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Information about the Company’s net revenues by product line for the three and six months ended September 30, 2002 and 2001 is presented below (in thousands):

Three Months Ended Six Months Ended

September 30, September 30,

% of % of % of % of

2002 total 2001 total 2002 total 2001 total

PlayStation 2
$ 158,712 35 % $ 91,763 38 % $ 293,310 37 % $ 142,282 34 %

PC
82,686 18 % 53,888 22 % 158,752 20 % 123,962 29 %

Xbox
37,527 8 % — — 57,630 7 % — —

Nintendo GameCube
27,838 6 % — — 42,794 6 % — —

PlayStation
24,206 6 % 25,147 10 % 37,429 5 % 39,189 9 %

Advertising
8,645 2 % 7,100 3 % 19,118 3 % 14,761 4 %

Online Subscriptions
7,635 2 % 7,188 3 % 15,776 2 % 15,144 4 %

License, OEM and Other
5,079 1 % 4,734 2 % 8,442 1 % 9,024 2 %

Game Boy Advance
3,679 1 % — — 5,817 1 % — —

Game Boy Color
1,129 — 4,279 2 % 2,521 — 4,279 1 %

Nintendo 64
(6 ) — 6,225 3 % 511 — 8,627 2 %

Affiliated label
96,360 21 % 39,832 17 % 143,288 18 % 64,838 15 %

$ 453,490 100 % $ 240,156 100 % $ 785,388 100 % $ 422,106 100 %

Note 9. Comprehensive Income (Loss)

The components of comprehensive income (loss), net of tax, for the three and six months ended September 30, 2002 and 2001 were as follows (in thousands):

Three Months Ended Six Months Ended

September 30, September 30,

2002 2001 2002 2001

Net income (loss)
$ 50,234 $ (32,824 ) $ 57,638 $ (78,078 )

Other comprehensive income (loss):

Change in unrealized appreciation (loss) on investments, net of tax expense of $843, $662, $1,471 and $78
1,249 (2,560 ) 1,164 (3,859 )

Adjustment for loss realized in net income, net of a tax benefit of $441
1,918 — 1,918 —

Foreign currency translation adjustments
(1,538 ) 2,546 7,772 4,014

Total other comprehensive income (loss)
1,629 (14 ) 10,854 155

Total comprehensive income (loss)
$ 51,863 $ (32,838 ) $ 68,492 $ (77,923 )

The currency translation adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

Note 10. Net Earnings (Loss) Per Share

The following summarizes the computations of Basic Earnings Per Share (“EPS”) and Diluted EPS. Basic EPS is computed as net earnings divided by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method.

Net income (loss) per share is computed individually for Class A common stock and Class B common stock. Please see the discussion regarding segment reporting in the MD&A.

(in thousands, except per share amounts):

Three months ended September 30, 2002

Class A common Class A common Class B

stock-Basic stock-Diluted common stock

Net income (loss) before retained interest in EA.com
$ 73,561 $ 50,234 $ (23,327 )

Net loss related to retained interest in EA.com
(20,154 ) — 20,154

Net income (loss)
$ 53,407 $ 50,234 $ (3,173 )

Shares used to compute net income (loss) per share:

Weighted-average common shares
139,843 139,843 5,547

Dilutive stock equivalents
— 6,776 —

Dilutive potential common shares
139,843 146,619 5,547

Net income (loss) per share:

Basic
$ 0.38 N/A $ (0.57 )

Diluted
N/A $ 0.34 $ (0.57 )

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

(in thousands, except per share amounts):

Six months ended September 30, 2002

Class A common Class A common Class B

stock-Basic stock-Diluted common stock

Net income (loss) before retained interest in EA.com
$ 100,897 $ 57,638 $ (43,259 )

Net loss related to retained interest in EA.com
(37,096 ) — 37,096

Net income (loss)
$ 63,801 $ 57,638 $ (6,163 )

Shares used to compute net income (loss) per share:

Weighted-average common shares
139,317 139,317 5,759

Dilutive stock equivalents
— 6,952 —

Dilutive potential common shares
139,317 146,269 5,759

Net income (loss) per share:

Basic
$ 0.46 N/A $ (1.07 )

Diluted
N/A $ 0.39 $ (1.07 )

(in thousands, except per share amounts):

Three months ended September 30, 2001

Class A common Class A common Class B

stock-Basic stock-Diluted common stock

Net income (loss) before retained interest in EA.com
$ 4,429 $ (32,824 ) $ (37,253 )

Net loss related to retained interest in EA.com
(31,665 ) — 31,665

Net loss
$ (27,236 ) $ (32,824 ) $ (5,588 )

Shares used to compute net loss per share:

Weighted-average common shares
136,652 136,652 6,022

Dilutive stock equivalents
— 652 —

Dilutive potential common shares
136,652 137,304 6,022

Net loss per share:

Basic
$ (0.20 ) N/A $ (0.93 )

Diluted
N/A $ (0.24 ) $ (0.93 )

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

(in thousands, except per share amounts):

Six months ended September 30, 2001

Class A common Class A common Class B

stock-Basic stock-Diluted common stock

Net loss before retained interest in EA.com
$ (1,629 ) $ (78,078 ) $ (76,449 )

Net loss related to retained interest in EA.com
(64,982 ) — 64,982

Net loss
$ (66,611 ) $ (78,078 ) $ (11,467 )

Shares used to compute net loss per share:

Weighted-average common shares
136,158 136,158 6,020

Dilutive stock equivalents
— 652 —

Dilutive potential common shares
136,158 136,810 6,020

Net loss per share:

Basic
$ (0.49 ) N/A $ (1.90 )

Diluted
N/A $ (0.57 ) $ (1.90 )

The Diluted EPS calculation for Class A common stock, presented above, includes the potential dilution from the conversion of Class B common stock to Class A common stock in the event that an initial public offering for Class B common stock does not occur. Net income (loss) used for the calculation of Diluted EPS for Class A common stock was $50,234,000 and ($32,824,000) for the three months ended September 30, 2002 and 2001, respectively. Net income (loss) used for the calculation of Diluted EPS for Class A common stock was $57,638,000 and ($78,078,000) for the six months ended September 30, 2002 and 2001, respectively. This net income (loss) includes the remaining interest in EA.com (100% of EA.com losses), which is directly attributable to outstanding Class B shares owned by third parties, which would be included in the Class A common stock EPS calculation in the event that an initial public offering for Class B common stock does not occur.

Excluded from the above computation of weighted-average shares for Diluted EPS for Class A common stock were options to purchase 349,000 and 231,000 shares of common stock for the three and six months ended September 30, 2002, respectively, as the options’ exercise price was greater than the average market price of the common shares. For the three and six months ended September 30, 2002, the weighted-average exercise price of these respective options was $63.74 and $63.43 per share, respectively.

Due to the net loss attributable for the three and six months ended September 30, 2001 on a diluted basis to Class A Stockholders, stock options have been excluded from the Diluted EPS calculation as their inclusion would have been antidilutive. Had net income been reported for these periods, an additional 5,443,000 and 5,784,000 shares would have been added to the calculation of diluted common shares for Class A common stock for the three and six

ELECTRONIC ARTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(continued)

months ended September 30, 2001, respectively. Due to the net loss attributable for the three and six months ended September 30, 2002 on a diluted basis to Class B Stockholders, stock options have been excluded from the Diluted EPS calculation as their inclusion would have been antidilutive. Had net income been reported for the three and six months ended September 30, 2002, an additional 226,000 and 422,000 shares would have been added to diluted potential common shares for Class B common stock, respectively. Similarly, an additional 889,000 and 911,000 shares would have been added to diluted potential common shares for Class B common stock for the three and six months ended September 30, 2001, respectively.

Note 11. Restructuring and Asset Impairment Charges

In October 2001, the Company announced a restructuring plan for EA.com. The restructuring initiatives involved strategic decisions to discontinue certain product offerings and focus only on key online priorities that align with its fiscal 2003 operational objectives. The workforce reduction resulted in the termination of approximately 270 positions.

The following table summarizes the activity in the accrued restructuring account for the six months ended September 30, 2002 (in thousands):

Non-

Current

Workforce Facilities Assets Total

Balance as of March 31, 2002
$ 674 $ 2,214 $ — $ 2,888

Charges utilized in cash for the three months ended June 30, 2002
(494 ) (243 ) — (737 )

Charges utilized in non-cash for the three months ended June 30, 2002
— (36 ) — (36 )

Balance as of June 30, 2002
180 1,935 — 2,115

Charges utilized in cash for the three months ended September 30, 2002
(82 ) (100 ) — (182 )

Balance as of September 30, 2002
$ 98 $ 1,835 $ — $ 1,933

The restructuring accrual is included in accrued expenses in Note 7 of the Notes to Condensed Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis Of Financial Condition and Results Of Operations

This Quarterly Report on Form 10-Q and, in particular, the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements about circumstances that have not yet occurred. All statements, trend analysis and other information contained below relating to markets, our products and trends in revenue, as well as other statements including words such as “anticipate”, “believe” or “expect” and statements in the future tense, are forward-looking statements. These forward-looking statements are subject to business and economic risks and actual events or our actual future results could differ materially due to such risks. We will not necessarily update information if any forward-looking statement later turns out to be inaccurate. Risks and uncertainties that may affect our future results and performance include, but are not limited to, those discussed under the heading “Risk Factors” at pages 41 to 49, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002 as filed with the Securities and Exchange Commission (SEC) on June 28, 2002 and other documents filed with the SEC.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements. Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenues and expenses during the reporting period. The policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations but also because application and interpretation of these policies requires both judgment and estimates of matters that are inherently uncertain and unknown. As a result, actual results may differ materially from our estimates.

Sales allowances and bad debt reserves
We derive revenues from sales of our packaged goods product, subscriptions of online service, sales of packaged goods through our online store and website advertising. Product revenue is recognized net of an allowance for returns. We also have stock-balancing programs for our personal computer products which allow under certain circumstances for the exchange of personal computer products by resellers. We may decide to provide price protection under certain circumstances for both our personal computer and video game system products after we analyze: inventory remaining in the channel, the rate of inventory sell through in the channel, and our remaining inventory on hand. We maintain a policy of exchanging products or giving credits, but do not give cash refunds.

We estimate potential future product returns, price protection and stock-balancing programs related to current period product revenue. We analyze historical returns, current sell through of distributor and retailer inventory of our products, current trends in the video game market and the overall economy, changes in customer demand and acceptance of our products and other related factors when evaluating the adequacy of the sales returns and price protection allowances. In addition, management monitors and manages the volume of our sales to retailers and distributors and their inventories as substantial overstocking in the distribution channel can result in high

returns or the requirement for substantial price protection in subsequent periods. In the past, actual returns have not generally exceeded our reserves. However, actual returns in any future period are inherently uncertain as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. For example, the risk of product returns for our products on mature platforms may increase as new hardware platforms, such as Xbox, Nintendo GameCube and PlayStation 2, become more popular. While management believes it can make reliable estimates for these matters, if we changed our assumptions and estimates, our returns reserves would change, which would impact the net revenue we report. For example, if actual returns were significantly greater than the reserves we have established, the actual results would decrease our reported revenue. Conversely, if actual returns were significantly less than our reserves, this would increase our reported revenue.

Similarly, significant judgment is required to estimate our allowance for doubtful accounts in any accounting period. Our allowance for doubtful accounts is determined by evaluating customer credit-worthiness in the context of current economic trends. Depending upon the overall economic climate and the financial condition of our customers, the amount and timing of our bad debt expense could change significantly.

We also have no way of accurately forecasting bankruptcy or an inability of any of our customers to meet their financial obligations to us. Therefore, our estimates could differ materially from actual results.

Our gross accounts receivable balance was $264,768,000 and our allowance for product returns, pricing allowances and doubtful accounts was $125,402,000 as of September 30, 2002. As of March 31, 2002, our gross accounts receivable balance was $306,365,000 and our allowance for product returns, pricing allowances and doubtful accounts was $115,870,000.

Prepaid royalties
Prepaid royalties consist primarily of prepayments for manufacturing royalties, co-publishing and/or distribution affiliates and license fees paid to celebrities, professional sports organizations and other organizations for use of their trade name and content. Also included in prepaid royalties are prepayments made to independent software developers under development arrangements that have alternative future uses. Prepaid royalties are expensed at the contractual or effective royalty rate as cost of goods sold based on actual net product sales. We evaluate the future realization of prepaid royalties quarterly and charge to research and development expense any amounts that we deem unlikely to be realized through product sales. We rely on forecasted revenue to evaluate the future realization of prepaid royalties. If actual revenues, or revised forecasted sales, fall below the initial forecasted sales, the charge to research and development expense may be larger than anticipated in any given quarter. Once the charge has been taken to research and development expense, that amount will not be expensed in future quarters when the product has shipped. The current portion of prepaid royalties, included in other current assets, was $104,266,000 at September 30, 2002 and $65,484,000 at March 31, 2002. The long-term portion of prepaid royalties, included in other assets, was $4,379,000 at September 30, 2002 and $1,164,000 at March 31, 2002.

Valuation of long-lived assets, including goodwill and other intangible assets
We evaluate both purchased intangible assets and long-lived assets in order to determine if events or changes in circumstances indicate an other than temporary impairment in value. This evaluation requires us to estimate, among other things, the remaining useful lives along with

future estimates of cash flows of the business. All require the use of judgment and estimates. Our actual results could differ materially from our current estimates. Please see Risk Factors.

Under current accounting standards, we make judgments about the remaining useful lives of purchased intangible assets and other long-lived assets whenever events or changes in circumstances indicate an other than temporary impairment in the remaining value of the assets recorded on our balance sheet. In order to judge the remaining useful life of an asset, management makes various assumptions about the value of the asset in the future. This may include assumptions about future prospects for the business that the asset relates to and typically involves computations of the estimated future cash flows to be generated by these businesses. Please refer to the Operations by Segment discussion of the Management’s Discussion and Analysis of Financial Condition and Results of Operations for discussions of EA Core and EA.com. For our EA Core division, our future net cash flows are primarily dependent on the sale of products for play on proprietary video game platforms. The success of our products is affected by the ability to accurately predict which platforms and which products we develop will be successful. Also, our revenues and earnings are dependent on our ability to meet our product release schedules. For our EA.com division, the future net cash flows are dependent on the success of online games. Offering games solely for online play is a substantial departure from our traditional business of selling packaged software games. The EA.com business is still in the growing stages, therefore evaluating its business and prospects is more difficult than would be the case for a more mature business. We continue to encounter the risks and difficulties faced with launching a new business, including the launch of new online games, including but not limited to, Earth and Beyond and The Sims Online. Due to these and other factors described in our Risk Factors, we may not realize the future net cash flows necessary to recover our long-lived assets, which may result in an impairment charge recorded in the future.

On April 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets”. As a result of adopting this standard, we will continue to amortize finite-lived intangibles, but will no longer amortize certain other intangible assets, most notably goodwill and acquired workforce. In lieu of amortization, SFAS No. 142 requires a two-step approach to testing goodwill for impairment for each reporting unit. The first step, required to be completed by September 30, 2002, tests for impairment by applying fair value-based tests at the Company’s reporting unit level. The second step (if necessary), required to be completed by March 31, 2003, measures the amount of impairment by applying fair value-based tests to individual assets and liabilities within each reporting unit. We completed the first step of impairment testing during the first quarter of fiscal 2003 and found no indicators of impairment of our recorded goodwill. Accordingly, provided there are no future indicators of impairment, the second testing step is not necessary during fiscal 2003. Following adoption of SFAS No. 142, we continue to evaluate whether any event has occurred which might indicate that the carrying value of an intangible asset is not recoverable.

Income taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our current tax exposures in each jurisdiction including the impact, if any, of additional taxes resulting from tax examinations as well as making judgments regarding the recoverability of deferred tax assets. To the extent recovery of deferred tax assets is not likely based on our estimation of future taxable income in each jurisdiction, a valuation allowance is

established. Tax exposures can involve complex issues and may require an extended period to resolve. To determine the quarterly tax rate, we are required to estimate full-year income and the related income tax expense in each jurisdiction. The estimated effective tax rate is adjusted for the tax related to significant unusual items. Changes in the geographic mix or estimated level of annual pre-tax income can affect the overall effective tax rate.

RESULTS OF OPERATIONS

Revenues

We derive revenues primarily from shipments of entertainment software, which includes EA Studio products for dedicated entertainment systems (that we call video game systems or consoles such as PlayStation®, PlayStation® 2, Xbox™ and Nintendo GameCube™, and handheld systems such as Game Boy® Advance), EA Studio personal computer products (or PC), Co-Publishing products that are co-published and distributed by us, and Affiliated Label (or AL) products that are published by third parties and distributed by us. We also derive revenues from licensing of EA Studio products and AL products through hardware companies (or OEM), selling subscriptions on our online gaming service, selling advertisements on our online web pages and selling our packaged goods through our online store.

Information about our net revenues for North America and foreign areas for the three and six months ended September 30, 2002 and 2001 is summarized below (in thousands):

September 30, September 30,

2002 2001 Increase % change

Net Revenues for the Three Months Ended:

North America
$ 313,559 $ 169,555 $ 144,004 84.9 %

Europe
116,654 53,202 63,452 119.3 %

Asia Pacific
13,803 8,007 5,796 72.4 %

Japan
9,474 9,392 82 0.9 %

International
139,931 70,601 69,330 98.2 %

Consolidated Net Revenues
$ 453,490 $ 240,156 $ 213,334 88.8 %

September 30, September 30,

2002 2001 Increase % change

Net Revenues for the Six Months Ended:

North America
$ 487,138 $ 272,617 $ 214,521 78.7 %

Europe
243,184 113,014 130,170 115.2 %

Asia Pacific
28,992 18,058 10,934 60.5 %

Japan
26,074 18,417 7,657 41.6 %

International
298,250 149,489 148,761 99.5 %

Consolidated Net Revenues
$ 785,388 $ 422,106 $ 363,282 86.1 %

North America Net Revenues
The increase in North America net revenues for the three and six months ended September 30, 2002 compared to the same periods last year was primarily attributable to the following:

•       PlayStation 2 net revenues increased by 50% for the quarter and 73% for the six months ended September 30, 2002. Net revenues for the three months ended September 30, 2002 increased primarily due to higher sales on key franchise titles, including Madden NFL™ 2003 and NCAA® Football 2003, as compared to prior year releases of these sports franchise titles. Net revenues for the six months ended September 30, 2002 increased primarily due to strong sales of key title Medal of Honor Frontline™, higher sales of sports franchise titles, as well as a higher installed base of the PlayStation 2 hardware due in part to Sony’s price cut of the hardware in North America in May 2002.

•       We generated $34,979,000 in Xbox net revenues for the quarter and $45,186,000 for the six months ended September 30, 2002. There were no net revenues for the Xbox platform in the same periods of the prior year since the platform launched in North America in the third quarter of fiscal 2002. Key titles on this platform included Madden NFL 2003, NCAA Football 2003 and Nascar Thunder 2003 which were released during the current quarter.

•       AL product net revenues increased by 238% for the quarter and 253% for the six months ended September 30, 2002 primarily due to strong sales of hit titles Kingdom Hearts, a distribution deal with Square EA, and Battlefield 1942™, a co-publishing deal with Digital Illusions.

•       We generated $21,290,000 in Nintendo GameCube net revenues for the quarter and $28,021,000 for the six months ended September 30, 2002. There were no net revenues for the Nintendo GameCube platform in the same periods of the prior year since the platform launched in North America in the third quarter of fiscal 2002. Key titles on this platform included Madden NFL 2003, NCAA Football 2003, James Bond 007 in...Agent Under Fire™ and Nascar Thunder 2003.

•       PC product net revenues increased by 47% for the quarter and by 15% for the six months ended September 30, 2002 due primarily to higher sales of The Sims™ products. Current fiscal year included The Sims Vacation Expansion Pack, The Sims Unleashed Expansion Pack, The Sims Deluxe and The Sims Hot Date. Prior year releases, including The Sims, The Sims: Livin’ Large and The Sims House Party, continued to generate strong sales in the current year.

•       These increases were partially offset by the expected decrease in Nintendo 64 (“N64”) net revenues for the three and six months ended September 30, 2002 due to the platform transition to next-generation consoles.

International Net Revenues
The increase in international net revenues for the three months ended September 30, 2002 compared to the three months ended September 30, 2001 was attributable to the following:

•       Europe’s net revenues increased 119% compared to the prior year primarily due to strong sales of key title Medal of Honor Frontline on the PlayStation 2. In addition, current year AL product net revenues were higher primarily due to sales from Battlefield 1942. PC product sales were higher in the current year primarily due to stronger sales for The Sims franchise titles.

•       Asia Pacific’s net revenues increased 72% compared to the prior year primarily due to higher AL and PlayStation 2 product sales.

•       Japan’s net revenues remained relatively flat compared to the prior year.

The increase in international net revenues for the six months ended September 30, 2002 compared to the six months ended September 30, 2001 was attributable to the following:

•       Europe’s net revenues increased by 115% compared to the prior year primarily due to higher PlayStation 2 sales due to strong current year sales of key titles Medal of Honor Frontline and 2002 FIFA World Cup and a higher installed base of the PlayStation 2 hardware due in part to Sony’s hardware price cut in Europe in August 2002. In addition, current year AL product revenues were higher due to sales from Resident Evil and Battlefield 1942. PC product sales were higher in the current year primarily due to stronger sales for The Sims franchise titles.

•       Asia Pacific’s net revenues increased by 61% compared to the prior year primarily due to higher AL and PlayStation 2 product sales.

•       Japan’s net revenues increased by 42% compared to the prior year primarily due to strong current year PlayStation 2 sales of 2002 FIFA World Cup and Project FIFA World Cup.

Information about our worldwide net revenues by product line for the three and six months ended September 30, 2002 and 2001 is presented below (in thousands):

September 30, September 30, Increase/

2002 2001 (Decrease) % change

Net Revenues for the Three Months Ended:

EA Studio:

PlayStation 2
$ 158,712 $ 91,763 $ 66,949 73.0 %

PC
82,686 53,888 28,798 53.4 %

Xbox
37,527 — 37,527 N/A

Nintendo GameCube
27,838 — 27,838 N/A

PlayStation
24,206 25,147 (941 ) (3.7 %)

Advertising
8,645 7,100 1,545 21.8 %

Online Subscriptions
7,635 7,188 447 6.2 %

License, OEM and Other
5,079 4,734 345 7.3 %

Game Boy Advance
3,679 — 3,679 N/A

Game Boy Color
1,129 4,279 (3,150 ) (73.6 %)

N64
(6 ) 6,225 (6,231 ) (100 %)

357,130 200,324 156,806 78.3 %

Affiliated Label:
96,360 39,832 56,528 141.9 %

Consolidated Net Revenues
$ 453,490 $ 240,156 $ 213,334 88.8 %

September 30, September 30, Increase/

2002 2001 (Decrease) % change

Net Revenues for the Six Months Ended:

EA Studio:

PlayStation 2
$ 293,310 $ 142,282 $ 151,028 106.1 %

PC
158,752 123,962 34,790 28.1 %

Xbox
57,630 — 57,630 N/A

Nintendo GameCube
42,794 — 42,794 N/A

PlayStation
37,429 39,189 (1,760 ) (4.5 %)

Advertising
19,118 14,761 4,357 29.5 %

Online Subscriptions
15,776 15,144 632 4.2 %

License, OEM and Other
8,442 9,024 (582 ) (6.4 %)

Game Boy Advance
5,817 — 5,817 N/A

Game Boy Color
2,521 4,279 (1,758 ) (41.1 %)

N64
511 8,627 (8,116 ) (94.1 %)

642,100 357,268 284,832 79.7 %

Affiliated Label:
143,288 64,838 78,450 121.0 %

Consolidated Net Revenues
$ 785,388 $ 422,106 $ 363,282 86.1 %

PlayStation 2 Product Net Revenues
Net revenues increased for the three and six months ended September 30, 2002 primarily due to strong current year sales of the hit title Medal of Honor Frontline. The increase in the three and six months ended September 30, 2002 was also due to the higher installed base of the PlayStation 2 hardware due in part to Sony’s price cut of the hardware in North America in May 2002 and in Europe in August 2002. Major releases for the quarter were Madden NFL 2003 and NCAA Football 2003, which generated higher sales in the current quarter and the six months ended September 30, 2002 as compared to prior year releases of these sports franchise titles. We expect revenues from PlayStation 2 products to continue to grow in fiscal 2003, but as revenues for these products increase, we do not expect to maintain these growth rates.

Xbox Product Net Revenues
We released five Xbox titles during the six months ended September 30, 2002. Key releases for the quarter included Madden NFL 2003, NCAA Football 2003 and Nascar Thunder 2003. Other significant titles on the platform include 2002 FIFA World Cup and James Bond 007 in...Agent Under Fire.

Nintendo GameCube Product Net Revenues
We released six titles for the six months ended September 30, 2002 for the Nintendo GameCube. Key releases for the quarter included Madden NFL 2003, NCAA Football 2003, Nascar Thunder 2003 and Freekstyle. Other significant titles on the platform include James Bond 007 in...Agent Under Fire and 2002 FIFA World Cup.

Personal Computer Product Net Revenues
The increase in net revenues of PC products for the three and six months ended September 30, 2002 compared to the same periods last year was due primarily to higher sales of The Sims franchise titles. Current year net revenues included The Sims Vacation Expansion Pack, The Sims Unleashed Expansion Pack, The Sims Deluxe and The Sims Hot Date. Prior year releases, including The Sims, The Sims: Livin’ Large and The Sims House Party continued to generate strong sales in the current year. The Sims and its expansion packs have now sold over 18 million units. Due to the strong sales of The Sims products in fiscal 2002, we expect revenues from PC products to only be up slightly in fiscal 2003.

PlayStation Product Net Revenues
The expected decrease in PlayStation net revenues for the three and six months ended September 30, 2002 compared to the same periods last year was attributable to the transition to next generation console systems. Although our PlayStation products are playable on the PlayStation 2 console, we expect sales of current PlayStation products to continue to decline in fiscal 2003.

Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America in July 1994 (the “Sony Agreement”), as amended, we are authorized to develop and distribute CD-based software products compatible with the PlayStation. Furthermore, under the terms of an additional licensing agreement entered into with Sony Computer Entertainment of America as of April 2000 (the “PlayStation 2 Agreement”), as amended, we are authorized to develop and distribute DVD-based software products compatible with the PlayStation 2. Pursuant to these agreements, we engage Sony to supply its PlayStation and PlayStation 2 CDs and DVDs for distribution by us. Accordingly, we have limited ability to control our supply of PlayStation and PlayStation 2 CD and DVD products or the timing of their delivery.

Advertising Revenues
Net revenues increased for the three and six months ended September 30, 2002 compared to the same periods last year primarily due to higher advertising revenues generated from AOL and co-branded AOL properties. The increase was partially offset by lower advertising revenues generated from EA.com and Pogo websites. Advertising revenues decreased 17% for the current quarter versus the prior quarter ended June 30, 2002. Due to the current softening of the advertising market, we may experience declines in advertising revenues in future quarters.

Online Subscription Net Revenues
Net revenues increased slightly for the three and six months ended September 30, 2002 compared to the same periods last year primarily attributable to the launch of Motor City Online in October 2001 and Earth & Beyond in September 2002, partially offset by lower subscription revenues from Ultima Online and Platinum and Sports subscription offerings which we discontinued in November 2001. The decrease in Ultima Online was due to strong sales of Ultima Online Third Dawn in the prior year and a slight decrease in the number of paying customers. We recently launched Earth and Beyond and are targeting the launch of The Sims Online in December 2002. Securing and maintaining subscriptions to such products will be critical to the success of EA.com both in the current fiscal year and for the long term.

License, OEM and Other Revenues
The increase in license, OEM and other net revenues for the three months ended September 30, 2002 was primarily attributable to higher revenues for online packaged goods products. For the six months ended September 30, 2002, license, OEM and other net revenues decreased primarily due to larger license and OEM deals in Europe in the prior year, including a multi-territory license deal in the United Kingdom.

Game Boy Color Product Net Revenues
The decrease in Game Boy Color net revenues during the three and six months ended September 30, 2002 compared to the same periods last year was primarily due to the release of two hit titles last year, The World is Not Enough and Madden NFL 2002, versus no new titles released in the current periods.

Game Boy Advance Product Net Revenues
We released two Game Boy Advance titles during the six months ended September 30, 2002, Madden NFL 2003 and Desert Strike Advance. Net revenues were generated primarily in North America and Europe from titles such as Harry Potter and the Sorceror’s Stone and Madden NFL 2003.

Nintendo 64 Product Net Revenues
The expected decrease in N64 net revenues for the three and six months ended September 30, 2002, compared to the prior fiscal year, was primarily due to the platform transition to next-generation consoles. We do not intend to release any new N64 products in fiscal 2003.

Affiliated Label Product Net Revenues
AL net revenues increased for the three and six months ended September 30, 2002 compared to the same periods last year primarily due to strong sales of hit titles Kingdom Hearts, a distribution deal with Square EA, and Battlefield 1942, a co-publishing deal with Digital Illusions. The increase was also due to products released under new AL distribution deals with LEGO Interactive and Crave Entertainment, Inc. during the current year.

Operations by Segment

We operate in two business segments globally:

EA.com represents Electronic Arts’ online and e-Commerce businesses. EA.com’s business includes subscription revenues collected for Internet game play on our websites, website advertising, sales of packaged goods for Internet-only based games and sales of Electronic Arts games sold through the EA.com web store. The Consolidated Statements of Operations includes all revenues and costs directly attributable to EA.com, including charges for shared facilities, functions and services used by EA.com and provided by EA Core. Certain costs and expenses have been allocated based on management’s estimates of the cost of services provided to EA.com by EA Core.

Our view of business segments may change due to changes in the underlying business facts and circumstances.

Information about our operations by segment for the three and six months ended September 30, 2002 and 2001 is presented below (in thousands):

Three Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 434,694 $ 18,796 $ 453,490

Cost of goods sold
195,740 3,151 198,891

Gross profit
238,954 15,645 254,599

Operating expenses:

Marketing and sales(a)
46,287 9,227 55,514

General and administrative
25,431 2,022 27,453

Research and development(b)
71,764 26,376 98,140

Amortization of intangibles
927 1,319 2,246

Total operating expenses
144,409 38,944 183,353

Operating income (loss)
94,545 (23,299 ) 71,246

Interest and other income (expense), net
1,205 (28 ) 1,177

Income (loss) before provision for income taxes and minority interest
95,750 (23,327 ) 72,423

Provision for income taxes
22,451 — 22,451

Income (loss) before minority interest
73,299 (23,327 ) 49,972

Minority interest in consolidated joint venture
262 — 262

Net income (loss) before retained interest in EA.com
$ 73,561 $ (23,327 ) $ 50,234

Allocation of retained interest (in thousands):

Three Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net income (loss) before retained interest in EA.com
$ 73,561 $ (23,327 ) $ 50,234

Net loss related to retained interest in EA.com
(20,154 ) 20,154 —

Net income (loss)
$ 53,407 $ (3,173 ) $ 50,234

Three Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 224,926 $ 15,230 $ 240,156

Cost of goods sold
114,788 2,972 117,760

Gross profit
110,138 12,258 122,396

Operating expenses:

Marketing and sales(a)
34,979 10,041 45,020

General and administrative
23,152 2,251 25,403

Research and development(b)
63,725 33,830 97,555

Amortization of intangibles(c)
3,205 3,270 6,475

Total operating expenses
125,061 49,392 174,453

Operating loss
(14,923 ) (37,134 ) (52,057 )

Interest and other income (expense), net
4,179 (119 ) 4,060

Loss before benefit from income taxes and minority interest
(10,744 ) (37,253 ) (47,997 )

Benefit from income taxes
(14,879 ) — (14,879 )

Income (loss) before minority interest
4,135 (37,253 ) (33,118 )

Minority interest in consolidated joint venture
294 — 294

Net income (loss) before retained interest in EA.com
$ 4,429 $ (37,253 ) $ (32,824 )

Allocation of retained interest (in thousands):

Three Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net income (loss) before retained interest in EA.com
$ 4,429 $ (37,253 ) $ (32,824 )

Net loss related to retained interest in EA.com
(31,665 ) 31,665 —

Net loss
$ (27,236 ) $ (5,588 ) $ (32,824 )

Six Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 746,813 $ 38,575 $ 785,388

Cost of goods sold
334,235 6,021 340,256

Gross profit
412,578 32,554 445,132

Operating expenses:

Marketing and sales(a)
103,729 17,159 120,888

General and administrative
48,946 4,170 53,116

Research and development(b)
137,365 51,744 189,109

Amortization of intangibles
1,853 2,638 4,491

Total operating expenses
291,893 75,711 367,604

Operating income (loss)
120,685 (43,157 ) 77,528

Interest and other income (expense), net
4,426 (102 ) 4,324

Income (loss) before provision for income taxes and minority interest
125,111 (43,259 ) 81,852

Provision for income taxes
25,374 — 25,374

Income (loss) before minority interest
99,737 (43,259 ) 56,478

Minority interest in consolidated joint venture
1,160 — 1,160

Net income (loss) before retained interest in EA.com
$ 100,897 $ (43,259 ) $ 57,638

Allocation of retained interest (in thousands):

Six Months Ended September 30, 2002

EA Core

(excl. EA.com) EA.com Electronic Arts

Net income (loss) before retained interest in EA.com
$ 100,897 $ (43,259 ) $ 57,638

Net loss related to retained interest in EA.com
(37,096 ) 37,096 —

Net income (loss)
$ 63,801 $ (6,163 ) $ 57,638

Six Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net revenues
$ 390,477 $ 31,629 $ 422,106

Cost of goods sold
200,207 6,582 206,789

Gross profit
190,270 25,047 215,317

Operating expenses:

Marketing and sales(a)
65,810 20,014 85,824

General and administrative
43,419 5,199 48,618

Research and development(b)
119,108 69,252 188,360

Amortization of intangibles(c)
6,410 6,540 12,950

Total operating expenses
234,747 101,005 335,752

Operating loss
(44,477 ) (75,958 ) (120,435 )

Interest and other income (expense), net
7,268 (491 ) 6,777

Loss before benefit from income taxes and minority interest
(37,209 ) (76,449 ) (113,658 )

Benefit from income taxes
(35,234 ) — (35,234 )

Loss before minority interest
(1,975 ) (76,449 ) (78,424 )

Minority interest in consolidated joint venture
346 — 346

Net loss before retained interest in EA.com
$ (1,629 ) $ (76,449 ) $ (78,078 )

Allocation of retained interest (in thousands):

Six Months Ended September 30, 2001

EA Core

(excl. EA.com) EA.com Electronic Arts

Net loss before retained interest in EA.com
$ (1,629 ) $ (76,449 ) $ (78,078 )

Net loss related to retained interest in EA.com
(64,982 ) 64,982 —

Net loss
$ (66,611 ) $ (11,467 ) $ (78,078 )

Costs and Expenses, Interest and Other Income, Net, Income Taxes and Net Income (Loss) for both EA Core and EA.com Segments

Cost of Goods Sold. Cost of goods sold for our packaged goods business consists of actual product costs, royalties expense for celebrities, professional sports and other organizations and independent software developers, manufacturing royalties, expense for defective products and operations expense. Cost of goods sold for our subscription business consists primarily of data center and bandwidth costs associated with hosting our websites, credit card fees and royalties for use of EA and third party properties. Cost of goods sold for our advertising business consists primarily of ad serving costs.

Marketing and Sales. Marketing and sales expenses consist of personnel-related costs, advertising and marketing and promotional expenses. In addition, marketing and sales includes the amortization of the AOL carriage fee (“Carriage Fee”), which began with the launch of EA.com in October 2000. The Carriage Fee is being amortized straight-line over the five-year term of the AOL agreement entered into in November 1999.

General and Administrative. General and administrative expenses consist of personnel and related expenses of executive and administrative staff, fees for professional services such as legal and accounting and allowances for bad debts.

Research and Development. Research and development expenses consist of personnel-related costs, consulting, equipment depreciation, customer relationship management expenses associated with Electronic Arts’ product and online games and write-offs of prepaid royalties. EA.com has research and development expenses incurred by Electronic Arts’ studios consisting of direct development costs and related overhead costs in connection with the development and production of EA.com online games. Research and development also includes network development and support costs directly incurred by EA.com. Network development and support costs consist of expenses associated with development of web content, depreciation on server equipment to support online games, network infrastructure direct expenses, software licenses and maintenance, and network and management overhead.

Cost of Goods Sold

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 198,891 43.9 % $ 117,760 49.0 % 68.9 %

Six Months Ended
$ 340,256 43.3 % $ 206,789 49.0 % 64.5 %

Cost of goods sold as a percentage of revenues decreased for the three and six months ended September 30, 2002 as compared to the same periods last year primarily due to:

•       New revenues with relatively low cost of goods sold as a percentage of revenue for the Nintendo GameCube and Xbox products.

•       An increase in AL margins as compared to the prior year due to co-publishing deals such as Battlefield 1942 and Buffy the Vampire Slayer.

•       An increase in PlayStation 2 margins as compared to the prior year due to lower royalties on Medal of Honor Frontline and volume discounts received from console manufacturers. Medal of Honor Frontline is a wholly owned intellectual property, developed internally, on which we pay no royalties (other than console royalties).

• An increase in PC margins due to higher sales of products that are wholly owned intellectual properties such as The Sims family of titles compared to Madden NFL 2002, Black and White and NHL 2002 in the prior year.

• Partially offset by a higher mix of low margin AL products compared to the prior year.

Marketing and Sales

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 55,514 12.2 % $ 45,020 18.7 % 23.3 %

Six Months Ended
$ 120,888 15.4 % $ 85,824 20.3 % 40.9 %

Marketing and sales expenses for the three months ended September 30, 2002 increased in absolute dollars by 23%, and increased 41% for the six months ended September 30, 2002 primarily attributed to an increase in titles released compared to the prior year. A significant portion of our marketing and sales expense in the current year related to advertising spending to support key releases in multiple territories including Madden NFL 2003, NCAA Football 2003, Medal of Honor Frontline and 2002 FIFA World Cup.

General and Administrative

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 27,453 6.1 % $ 25,403 10.6 % 8.1 %

Six Months Ended
$ 53,116 6.8 % $ 48,618 11.5 % 9.3 %

General and administrative expenses for the three months ended September 30, 2002 increased in absolute dollars by 8%, and increased 9% for the six months ended September 30, 2002 primarily due to:

• Increase in payroll and occupancy costs to support the increased growth in North America and Europe.

• An increase in the bad debt provision due to additional write-offs taken on the Kmart account.

Research and Development

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 98,140 21.6 % $ 97,555 40.6 % 0.6 %

Six Months Ended
$ 189,109 24.1 % $ 188,360 44.6 % 0.4 %

Research and development expenses increased slightly for the three and six months ended September 30, 2002 compared to the same periods in the prior year due to additional headcount-related expenses attributable to increased in-house development capacity, net of co-development arrangements.

This was offset by lower EA.com spending due to headcount reductions in the prior fiscal year and lower spending on Majestic and Motor City Online.

Amortization of Intangibles

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 2,246 0.5 % $ 6,475 2.7 % (65.3 %)

Six Months Ended
$ 4,491 0.6 % $ 12,950 3.1 % (65.3 %)

For the three and six months ended September 30, 2002, amortization of intangibles relates to amortization of definite-lived identifiable intangible assets from acquisitions of Pogo, Westwood, Dreamworks and Kesmai. For the three and six months ended September 30, 2001, amortization of intangibles relates primarily to amortization of purchased goodwill and intangibles from acquisitions of Westwood, Pogo, Kesmai, Dreamworks, ABC Software and other acquisitions. The decrease in amortization for the three and six months ended September 30, 2002 was due to certain identifiable intangible assets related to Westwood and Dreamworks being fully amortized in fiscal 2002, as well as the result of adopting SFAS No. 142. SFAS No. 142 requires, among other things, the discontinuance of goodwill amortization. As of April 1, 2002, we have ceased to amortize approximately $69,050,000 of goodwill. For the three months ended September 30, 2001, amortization of goodwill totaled $2,931,000. For the six months ended September 30, 2001, amortization of goodwill totaled $5,861,000. In addition, during the three months ended December 31, 2001, we recorded intangible impairment charges of $1,641,000 relating to EA.com’s restructuring.

Interest and Other Income, Net

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 1,177 0.3 % $ 4,060 1.7 % (71.0 %)

Six Months Ended
$ 4,324 0.6 % $ 6,777 1.6 % (36.2 %)

Interest and other income, net, for the three and six months ended September 30, 2002 decreased from the same periods in the prior year primarily due to a permanent impairment of marketable securities in the current quarter as well as an increase in the cost of utilizing foreign exchange hedge contracts in the current quarter.

Income Taxes

September 30, Effective September 30, Effective

(in thousands) 2002 tax rate 2001 tax rate % change

Three Months Ended
$ 22,451 31 % $ (14,879 ) 31 % 250.9 %

Six Months Ended
$ 25,374 31 % $ (35,234 ) 31 % 172.0 %

Our effective tax rate was 31% for the three and six months ended September 30, 2002 and 2001.

Net Income (Loss)

September 30, % of net September 30, % of net

(in thousands) 2002 revenues 2001 revenues % change

Three Months Ended
$ 50,234 11.1 % $ (32,824 ) (13.7 %) 253.0 %

Six Months Ended
$ 57,638 7.3 % $ (78,078 ) (18.5 %) 173.8 %

In absolute dollars, reported net income (loss) increased for the three and six months ended September 30, 2002 primarily related to higher revenues and gross profits, offset by the increase in expenses compared to the same periods last year. The increase in expenses was primarily due to the increases in marketing and advertising costs to support a higher number of key releases in multiple territories.

LIQUIDITY AND CAPITAL RESOURCES

EA Core and EA.com

As of September 30, 2002, our working capital was $845,307,000 compared to $699,561,000 at March 31, 2002. Cash, cash equivalents and short-term investments increased by approximately $123,832,000 during the six months ended September 30, 2002. We generated $88,569,000 of cash from operations, $61,282,000 of cash through the sale of equity securities under our stock plans, offset by $23,386,000 of cash used in capital expenditures during the six months ended September 30, 2002.

Reserves for bad debts and sales returns increased from $115,870,000 at March 31, 2002 to $125,402,000 at September 30, 2002. Reserves have been charged for returns of product and price protection credits issued for products sold in prior periods. Management believes these reserves are adequate based on historical experience and its current estimate of potential returns and allowances.

Our principal source of liquidity is $920,768,000 in cash, cash equivalents and short-term investments and $6,525,000 in marketable securities. Management believes the existing cash, cash equivalents, short-term investments, marketable securities and cash generated from operations will be sufficient to meet cash and investment requirements for at least the next 12 months. However, our ability to maintain sufficient liquidity could be affected by various risks and uncertainties, including but not limited to, those related to customer demand and acceptance of titles on new platforms and new title versions on existing platforms, our ability to collect our accounts receivable as they become due, successfully achieving our product release schedules and attaining our forecasted sales objectives, the impact of competition, the economic conditions in the domestic and international markets, seasonality in operating results, risks of product returns and the other risks listed in the “Risk Factors” section.

EA.com

Included in the amounts above is the following for the EA.com business:

•            With the exception of the proceeds from the sale of stock and warrant to AOL in fiscal 2000 in the amount of $20,000,000, to date, EA.com has been funded solely by Electronic Arts. This funding has been accounted for as capital contributions from Electronic Arts. Excess cash generated from operations is transferred to Electronic Arts, and has been accounted for as a return of capital. We anticipate these funding procedures will continue in the near-term. However, Electronic Arts may, at its discretion, provide funds to EA.com under a debt arrangement, instead of treating such funding as a capital contribution.

•            During the six months ended September 30, 2002, EA.com used $19,952,000 of cash in operations, $577,000 in capital expenditures for computer equipment, network infrastructure, internal use software and related third party software, offset by $18,736,000 in capital contributions from Electronic Arts. As a result of the net operating loss generated, we realized a tax benefit of approximately $13,410,000.

•            During the six months ended September 30, 2001, EA.com used $54,370,000 of cash in operations, $10,762,000 in capital expenditures for computer equipment, network infrastructure, internal use software and related third party software, offset by $65,781,000 in

capital contributions from Electronic Arts. As a result of the net operating loss generated, we realized a tax benefit of approximately $23,699,000.

Under the AOL agreement entered into in November 1999, EA.com is required to pay $81,000,000 to AOL over the life of the five-year agreement. Of this amount, $36,000,000 was paid upon signing the agreement with the remainder due in four equal annual installments beginning with the first anniversary of the initial payment. EA.com paid AOL $11,250,000 in both fiscal 2001 and 2002. No payments were made to AOL in the six months ended September 30, 2002.

Future liquidity needs of EA.com will be met by Electronic Arts as Electronic Arts intends to continue to fund the cash requirements of EA.com for the foreseeable future.

Other Commitments

Advertising Commitments

We made a commitment to spend $15,000,000 in offline media advertisements promoting our online games, including those on the AOL service, prior to March 31, 2005. As of September 30, 2002, we have spent approximately $3,755,000 against this commitment.

In addition, under an agreement amended on August 30, 2002, we made a commitment to spend $17,000,000 in advertising with News America Corporation and its affiliates through the period ended December 31, 2006. As of September 30, 2002, we have fulfilled approximately $1,388,000 of this commitment.

Lease Commitments

We lease certain of our current facilities and certain equipment under non-cancelable capital and operating lease agreements. We are required to pay property taxes, insurance and normal maintenance costs for certain of our facilities and will be required to pay any increases over the base year of these expenses on the remainder of our facilities.

In February of 1995, we entered into a build-to-suit lease with a financial institution on our headquarters’ facility in Redwood City, California, which was extended in July 2001 and runs through July 2006. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13, “Accounting for Leases”, as amended. Existing campus facilities developed in phase one comprise a total of 350,000 square feet and provide space for sales, marketing, administration and research and development functions. We have an option to purchase the property (land and facilities) for $145,000,000 or, at the end of the lease, to arrange for (1) an additional extension of the lease or (2) sale of the property to a third party with us retaining an obligation to the owner for the difference between the sale price and the guaranteed residual value of up to $128,900,000 if the sales price is less than this amount, subject to certain provisions of the lease.

In December 2000, we entered into a second build-to-suit lease with a financial institution for a five year term from December 2000 to expand our headquarters’ facilities and develop adjacent property adding approximately 310,000 square feet to our campus. Construction was completed in June 2002. We accounted for this arrangement as an operating lease in accordance with SFAS No. 13, as amended. The facilities will provide space for marketing, sales and research and development. We have an option to purchase the property for $127,000,000 or, at the end of the lease, to arrange for (1) an extension of the lease or (2) sale of the property to a third party with

us retaining an obligation to the owner for the difference between the sale price and the guaranteed residual value of up to $118,800,000 if the sales price is less than this amount, subject to certain provisions of the lease.

Lease rates are based upon the Commercial Paper Rate. The two lease agreements described above require us to maintain certain financial covenants, all of which we were in compliance with as of September 30, 2002.

Letters of Credit

In connection with our purchases of Nintendo GameCube optical disks for distribution in North America, Nintendo requires us to provide irrevocable letters of credit prior to Nintendo’s acceptance of purchase orders from us for purchases of these optical disks. For purchases of Nintendo GameCube optical disks for distribution in Japan and Europe, Nintendo requires us to make cash deposits.

Development, Celebrity, League and Content Licenses: Payments and Commitments

The products published by EA Studios are designed and created by our in-house designers and artists and by independent software developers (“independent artists”). We typically pay the independent artists royalties based on the sales of the specific products, as defined in the related independent artist agreements. Advance payments on these royalties are paid to independent artists upon meeting deliverables as detailed in the contractual agreement. In addition, certain celebrity, league and content license contracts contain minimum guarantee payments and marketing commitments that are not dependent on any deliverables. Celebrities and organizations with whom we have contracts include: FIFA, NASCAR, John Madden, National Basketball Association, PGA TOUR, Tiger Woods, National Hockey League, Warner Bros. (Harry Potter), MGM/Danjaq (James Bond), The Saul Zaentz Company d/b/a Tolkien Enterprises (The Lord of The Rings) and National Football League. These minimum guarantee payments and marketing commitments are included in the table below.

Summary of minimum contractual obligations and commercial commitments as of September 30, 2002 (in thousands):

Commercial

Contractual Obligations Commitments

Bank and

Fiscal Year Minimum Other Letters of

Ended March 31, Leases Advertising Guarantees AOL Marketing Guarantees Credit Total

2003
$ 8,742 $ 5,857 $ 26,266 $ 11,250 $ 20,734 $ 1,050 $ 26,384 $ 100,283

2004
14,206 7,000 27,628 11,250 16,289 171 — 76,544

2005
10,549 8,000 21,332 — 11,208 171 — 51,260

2006
10,005 3,000 18,515 — 4,572 171 — 36,263

2007
8,796 3,000 3,829 — 3,571 170 — 19,366

Thereafter
11,609 — 2,260 — 3,571 170 — 17,610

$ 63,907 $ 26,857 $ 99,830 $ 22,500 $ 59,945 $ 1,903 $ 26,384 $ 301,326

Transactions with Related Parties

Square EA
In May 1998, we entered into a joint venture with Square Co., Ltd. (“Square”), a leading developer and publisher of entertainment software in Japan. In North America, the companies

formed Square Electronic Arts, LLC (“Square EA”), which has exclusive publishing rights in North America for future interactive entertainment titles created by Square. Additionally, we have the exclusive right to distribute in North America products published by this joint venture. Either party may terminate the existence of Square EA and the distribution agreement effective March 31, 2003. We own a 30% minority interest in this joint venture while Square owns 70%. This joint venture is accounted for under the equity method.

We generated $27,320,000 and $33,606,000 in net revenues from sales of Square EA products during the three and six months ended September 30, 2002. We generated $7,691,000 and $15,102,000 in net revenues from sales of Square EA products during the three and six months ended September 30, 2001.

Indebtedness of Management
As of September 30, 2002, we had loans outstanding to executive officers in the amount of $4,988,900. All loans were in effect prior to the enactment of the Sarbanes-Oxley Act of 2002.

News America Corporation Exchange
On February 7, 2000, we acquired Kesmai from News America Corporation (“News Corp”) in exchange for $22,500,000 in cash and approximately 206,000 shares of our existing common stock valued at $8,650,000. Under the original agreements, we agreed to spend $12,500,000 through the period ended June 1, 2002 in advertising with News Corp or any of its affiliates. In addition, under these agreements if certain conditions were met, including that a qualified public offering of Class B common stock did not occur within twenty-four months of News Corp’s purchase of such shares and all of the Class B outstanding shares had been converted to Class A common stock, then (1) News Corp would have the right to (i) exchange Class B common stock for approximately 206,000 shares of Class A common stock, and (ii) receive cash from Electronic Arts in the amount of $9,650,000, and (2) we would agree to spend an additional $11,675,000 in advertising with News Corp and its affiliates.

On August 30, 2002, we entered into a new agreement with News Corp under which (i) News Corp exchanged its 2,000,000 shares of Class B common stock for 206,454 shares of Class A common stock and (ii) the Company paid News Corp $1,000,000 in cash and committed to spend an additional $17,000,000 in advertising with News Corp and its affiliates through the period ended December 31, 2006. All other obligations of the Company to News Corp under the original agreements were terminated.

Impact of Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We do not expect the adoption of SFAS No.143 to have a material impact on our consolidated financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt”, as amended by SFAS

No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements”. We do not expect the adoption of SFAS No. 145 to have a material impact on our consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”. We do not expect the adoption of SFAS No. 146 to have a material impact on our consolidated financial statements.

RISK FACTORS

Electronic Arts’ business is subject to many risks and uncertainties which may affect our future financial performance. Some of those important risks and uncertainties which may cause our operating results to vary or which may materially and adversely affect our operating results are as follows:

Risk Factors Relating to Our Core Business

New Video Game Platforms Create Additional Technical and Business Model Uncertainties

A majority of our revenues are derived from the sale of products for play on proprietary video game platforms such as the Sony PlayStation 2. The success of our products is significantly affected by acceptance of the new video game hardware systems and the life span of older hardware platforms and our ability to accurately predict which platforms will be most successful.

Sometimes we will spend development and marketing resources on products designed for new video game systems that have not yet achieved large installed bases or will continue product development for older hardware platforms that may have shorter life cycles than we expected. Conversely, if we do not develop for a platform that achieves significant market acceptance, or discontinue development for a platform that has a longer life cycle than expected, our revenue growth may be adversely affected.

For example, the Sega Dreamcast console launched in Japan in early 1999 and in the United States in September of 1999. We did not develop products for this platform. Had this platform achieved wide market acceptance, our revenue growth would have been adversely affected. Similarly, we are developing products for the Xbox and Nintendo GameCube. If these platforms do not achieve wide commercial acceptance, our revenue growth will be adversely impacted.

Product Development Schedules Are Frequently Unreliable and Make Predicting Quarterly Results Difficult

Product development schedules, particularly for new hardware platforms and high-end multimedia personal computers, or PCs, are difficult to predict because they involve creative processes, use of new development tools for new platforms and the learning process, research and experimentation associated with development for new technologies. For example, EMPEROR: Battle for Dune for the PC, which was expected to ship in fiscal 2001 was not released until the first quarter of fiscal 2002 due to development delays. Also, James Bond 007 in...Agent Under Fire for the PS2, which was expected to ship in fiscal 2001, released in October of fiscal 2002 due to development delays. Additionally, development risks for CD-ROM, DVD and proprietary optical format disk products can cause particular difficulties in predicting quarterly results because brief manufacturing lead times allow finalizing products and projected release dates late in a quarter. Failure to meet anticipated production schedules may adversely impact our revenues and profitability and cause our actual results to be materially different than any financial guidance given by the Company.

Our Business Is Both Seasonal and Cyclical

Our business is highly seasonal with a significant percentage of our revenues occurring in the December quarter. In fiscal 2002, these seasonal trends were magnified by general industry factors, including the platform transition, the fall 2001 launches of the Xbox and Nintendo GameCube in North America and the economic slowdown in the United States and other territories. Our business is also cyclical; video game platforms have historically had a life cycle of four to six years, and decline as more advanced platforms are being introduced. As one group of platforms is reaching the end of its cycle and new platforms are emerging, buying patterns may change. Purchases of products for older platforms may

slow at a faster rate than sales of new platforms. There can be no guarantee that the current platform cycle will mirror past cycles in length or in terms of consumer behavior.

Our Business is Intensely Competitive and Increasingly “Hit” Driven

Competition in our industry is intense in all areas. We are regularly facing strong competition by our competitors on a product by product and brand by brand basis, particularly in the sports product line. If our competitors develop more successful products, or if we do not continue to develop consistently high quality products, our revenues will be adversely affected.

Impact of e-Commerce and Online Games on Our Business Is Not Known

While we do not currently derive significant revenues from online sales of our packaged products, online distribution may become a more significant channel for distribution of our products in the future. How online distribution ultimately affects the more traditional retail distribution, at which we have historically had success, and over what time period, is uncertain. We also expect the number and popularity of online games to increase and become a significant factor in the interactive games business generally. We do not know how that increase generally, or the emerging business of EA.com specifically, will affect the sales of packaged goods.

Our Business, Our Products, and Our Distribution Are Subject to Increasing Regulation of Content, Consumer Privacy and Online Delivery in Key Territories

Legislation is increasingly introduced which may affect the content of our products and their distribution. For example, privacy rules in the United States and Europe impose various restrictions on our web sites. Those rules vary by territory while of course the Internet recognizes no geographical boundaries. Other countries such as Germany have adopted laws regulating content transmitted over the Internet that are stricter than current United States laws. In the United States, in response to recent events, the federal and several state governments are considering content restrictions on products such as those made by us as well as restrictions on distribution of such products. Any one or more of these factors could harm our business.

Risk Factors Relating to Our Online Business

Because of EA.com’s Limited Operating History, It Will Be Difficult To Evaluate its Business and Prospects

EA.com is still in an early stage business. Evaluating its business and prospects will be more difficult than would be the case for a more mature business. We will continue to encounter the risks and difficulties faced in launching a new business, and we may not achieve our goals or may be compelled to change the manner in which we seek to develop the business. These uncertainties as to the future operations of EA.com will increase the difficulty we face in completing and pursuing the essential plans for the development of the business and will also make it more difficult for our stockholders and securities analysts to predict the operating results of this business.

EA.com Has a History of Losses and Expects To Continue To Incur Losses and May Never Achieve Profitability

EA.com has incurred substantial losses to date, including the current fiscal year. We expect EA.com to continue to incur losses at least through the current fiscal year as it builds its business. EA.com will be required to maintain the significant support, service and product enhancement demands of online users, and we cannot be certain that EA.com will produce sufficient revenues from its operations to support these costs. Even if profitability is achieved, EA.com may not be able to sustain it over a period of time.

Our Agreements with America Online May Not Prove Successful to the Development of EA.com’s Business

We have a series of agreements with America Online (“AOL”) for the offering of our games for online play. These agreements require that we make substantial guaranteed payments to AOL and that we commit our resources to the pursuit of the online game opportunity. We cannot be assured that the substantial costs associated with the AOL agreements will be justified by the revenues generated from that relationship. In addition, restrictions included in the AOL agreements limiting other channels we may develop for offering online games may limit our ability to diversify our online distribution strategies. The success for us of the AOL agreements will also be a result of AOL’s performance under the agreements, a factor over which we will have very little control.

We Have Limited Experience with Online Games and May Not Be Able To Operate This Business Effectively

Offering games solely for online play is a substantial departure from our traditional business of selling packaged software games. We have employed various revenue models, including subscription fees, “pay to play fees” and advertising. We have limited experience with developing optimal pricing strategies for online games. For example, our product Majestic and our Platinum offering, which contained certain browser-based entertainment games, were launched with a monthly subscription pricing model and obtained only limited commercial success. Accordingly, we did not realize our projected cash flows and discontinued these offerings.

Online Games Have Risks That Are Not Associated with Our Traditional Business

Online games, particularly multiplayer games, pose risks to player enjoyment that do not generally apply to packaged goods games. Players frequently are not acquainted with other players, which may adversely affect the playing experience. Social issues raised by a player’s conduct may impact the experience for other players. It is difficult to monitor player behavior that impairs the game experience. In addition, there are substantial technical challenges to be met both in the introduction of our games online and in maintaining an effective game playing environment over time. Also, hacking and spamming have become a serious problem for online sites, and significant hacking and spamming could seriously interfere with online game play. The success of Earth and Beyond and The Sims Online are critical to the success of EA.com in the short-term. The products provide unique customer experiences and we cannot be assured of broad acceptance. If these risks are not successfully controlled and technical challenges resolved, potential customers for our games may be unwilling to play in sufficient volume to allow us to attain or sustain profitability.

Development of EA.com’s Business Will Require Significant Capital, and We Cannot Be Assured That It Will Be Available

EA.com will not be successful if it does not continue to receive substantial financing. Electronic Arts has agreed to provide a limited amount of funding to EA.com, but this financing alone may not be sufficient. Any additional funding that is obtained from Electronic Arts may either be treated as a debt arrangement or alternatively may increase Electronic Arts’ retained interest in EA.com and correspondingly decrease the interest of the holders of outstanding shares of Class B common stock. The attraction of additional equity or debt financing for EA.com from third parties may not be possible or may only be possible on terms that result in significant dilution to Class A and Class B common stockholders or incremental interest payments and debt-related restrictions. To date, nearly all funding (except warrants and cash from revenues) has been provided by Electronic Arts. We cannot provide assurance that Electronic Arts will be able to recover its investment in EA.com.

If Use of the Internet Does Not Continue To Develop and Reliably Support the Demands Placed on It by Electronic Commerce, EA.com’s Business Will Be Harmed

EA.com’s success depends upon growth in the use of the Internet as a medium for playing games. The use of the Internet for sophisticated games like ours is relatively new. Our business would be seriously harmed if:

       •    use of the Internet does not continue to increase or increases more slowly than expected,

       •    the infrastructure for the Internet does not effectively support online game play,

       •    concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of conducting commercial transactions, or

       •    government regulations regarding Internet content, privacy or other conditions impede the effectiveness of the Internet to users.

Capacity Restraints May Restrict the Use of the Internet as a Forum for Game Play, Resulting in Decreased Demand for Our Products

The Internet infrastructure may not be able to support the demands placed on it by increased usage or the limited capacity of networks to transmit large amounts of data. Other risks associated with commercial use of the Internet could slow its growth, including:

       •    outages and other delays resulting from the inadequate reliability of the network infrastructure,

       •    slow development of enabling technologies and complementary products, and

       •    limited availability and adoption by consumers of cost-effective, high speed access.

Delays in the development or adoption of new equipment standards or protocols required to handle increased levels of Internet activity, or increased governmental regulation, would cause the Internet to fail to gain, or lose, viability as a means of game playing. If these or any other factors cause use of the Internet for commerce to slow or decline, the Internet may not prove viable as a commercial marketplace. This, in turn, would result in decreased demand for EA.com’s products and services.

To Become and Remain Competitive, EA.com Must Continually Develop New Content. This Is Inherently Risky and Expensive.

EA.com’s success depends on our ability to develop new products and services for the EA.com site. Our agreement with AOL requires us to develop new games for the EA.com site. We cannot assure you that products will be developed on time, in a cost effective manner, or that they will be commercially successful. Currently, the release of The Sims Online for which we expect to generate subscription revenue, has been delayed due to longer than anticipated development schedules. Similarly, the online product Majestic achieved only limited commercial success due in part to the length of time it took to download the online software component. Accordingly, we discontinued Majestic on May 1, 2002.

We May Not Be Able To Respond to Rapid Technological Change

The market for Internet products and services is characterized by rapid technological change and evolving industry standards. We will be required to continually improve performance, features, reliability and capacity of our network infrastructure. We cannot assure you that we will be successful in responding rapidly or in a cost effective manner to such developments.

Increasing Governmental Regulation of the Internet Could Limit the Market for Our Products

As Internet commerce continues to evolve, we expect that federal, state and foreign governments will adopt laws and regulations covering issues such as user privacy, taxation of goods and services provided over the Internet, pricing, content and quality of products and services. It is possible that legislation could expose companies involved in electronic commerce to liability, taxation or other increased costs, any of which could limit the growth of electronic commerce generally. Legislation could dampen the growth in Internet usage and decrease its acceptance as a communications and commercial medium. If enacted, these laws and regulations could limit the market for EA.com’s products.

Our Revenues Have Been Heavily Dependent on a Single Product and Would Be Adversely Affected if That Product’s Popularity Were To Decline

In the near term, EA.com’s subscription revenues to date have consisted primarily of revenues from sales of our online product Ultima Online, and we would be adversely affected if revenues from that product were to decline for any reason and not be replaced. We expect the online game market to become increasingly competitive, and it is possible that competing products could cause revenues from Ultima Online to decline. In addition, popularity of Ultima Online could decline over time simply because of consumer preference for new game experiences.

We Continue to Invest in Research and Development and Network Technology and Operations for EA.com, and We Cannot Be Assured That We Will Achieve Revenues That Support This Level of Spending

We have invested heavily, and expect to continue to invest, in research and development and network technology and operations for our website and online games. While we have reduced the overall level of spending for EA.com, we will continue to invest in the technologies, tools and network infrastructure that are necessary for us to launch and support our key products, The Sims Online and Earth & Beyond. Accordingly, there are no assurances that the revenues from these products will exceed the associated costs in order for EA.com to achieve profitability. If we cannot increase revenues to profitable levels, the value of EA.com will be impaired. In order to develop the game offerings that we envision for our online operations it will continue to be necessary to engage in significant developmental efforts both to adapt existing Electronic Arts games to the online format and to create new online games. Our agreements with AOL require us to maintain a substantial commitment to online game development and we cannot be assured that we will realize acceptable returns from this investment.

We Derive a Significant Portion Of Our Revenue From Advertisements and Advertising Services, Which Revenues Tend to be Cyclical and Dependent on the Economic Prospects Of Advertisers and Direct Marketers and the Economy in General. A Continued Decrease in Expenditures By Advertisers and Direct Marketers Or a Continued Downturn in the Economy Could Cause Our Revenues to Decline Significantly in any Given Period.

We derive, and expect to continue to derive for the foreseeable future, a portion of our revenue from products and services we provide to advertisers, direct marketers and agencies, advertising sold through our agreement with AOL and from advertisements we deliver to Web sites. Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions as well as budgeting and buying patterns. The overall market for advertising, including Internet advertising, has been characterized in recent quarters by increasing softness of demand, lower prices for advertisements, the reduction or cancellation of advertising contracts, an increased risk of uncollectible receivables from customers and the reduction of marketing and advertising budgets, especially for online advertising and by Internet-related companies. As a result of these reductions, advertising spending across traditional media, as well as the Internet, has decreased. We have seen a sequential decline in our advertising revenues in the current quarter compared to the previous quarter. Further declines may occur.

The advertising revenue outlook for EA.com may be adversely affected by an environment where the supply of advertising inventory exceeds advertisers’ demand. Under these circumstances, Web publishers tend to remove ad space from their Web sites in an effort to correct the supply-demand imbalance; other publishers may cut back on their Web presence or go out of business. Faced with smaller budgets, advertisers and ad agencies purchase less advertising inventory and tend not to experiment with newer advertising media, like the Internet. Consequently, the number of ad impressions delivered by EA.com may decline or fail to grow, which would adversely affect our revenues.

We cannot assure you that further reductions in advertising spending will not occur. We also cannot assure you that if economic conditions improve, marketing budgets and advertising spending will increase from current levels. A continued decline in the economic prospects of advertisers or the economy in general could alter current or prospective advertisers’ spending priorities or increase the time it takes to close a sale with a customer. As a result, our revenues from advertisements and advertising services may decline significantly in any given period.

Online Product Development Schedules Are Unreliable and Make Predicting Quarterly Results Difficult

Online product development schedules, particularly for Internet based games are difficult to predict because they involve creative processes, use of new development tools, Internet latency issues, a learning process to better understand Internet based game mechanics, and research and experimentation associated with development for new online technologies. Additionally, development risks for Internet based products can cause particular difficulties in predicting quarterly results because of the challenges associated with game testing, live Beta testing, integration into network servers and integration on to the Games web site and may impact the release (“go live”) dates of products during a particular quarter. Our online product currently under development, The Sims Online (“TSO”), has experienced development delays and will be released later than planned. While we are targeting the launch of TSO in December 2002, it may be delayed further. Our revenues and operating costs are dependent on our ability to meet our product “go live” schedules, including for TSO, and our failure to meet those schedules could result in revenues falling short of analysts’ expectations, resulting in increased operating losses for EA.com. If TSO does not launch in December 2002, or if it is not successful, our fourth quarter of fiscal year 2003 may not meet analysts’ expectations.

We Are Heavily Dependent on a Few Internet Infrastructure Service Providers to Host and Manage Our Servers at Co-Location Facilities and Our Operating Results May Be Adversely Affected if We Must Change Service Providers

We are dependent on a few third party internet infrastructure service providers to host and manage the majority of our servers that support our online games. The performance of these service providers are outside of our control. Many of the service providers in the internet infrastructure space require substantial financial resources to build, maintain and manage co-location facilities. Many of these service providers have experienced significant financial difficulties during the recent economic downturn. To the extent that industry, economic, financial or competitive factors influence the level of performance that we expect from service providers we currently use for co-location space (bandwidth and rack), we may need to re-locate our servers to another co-location facility which would increase our expenses and may result in delays or reduced shipments of our online products, thereby adversely impacting our operating results.

General Risk Factors

We May Not Be Able To Attract and Retain the Personnel Necessary for our Businesses

The market for technical, creative, marketing and other personnel essential to the development of our products and management of our businesses is extremely competitive. In the last fiscal year, notwithstanding the downturn of the economy generally, competitive recruiting efforts aimed at Electronic Arts’ employees and executives continued. Electronic Arts’ leading position within the interactive entertainment industry makes us a prime target for recruiting of executives and key creative talent. In addition, the cost of real estate in the San Francisco Bay area — the location of our headquarters and one of our largest studios — remains relatively high, and has made recruiting from other areas and relocating employees to our headquarters more difficult. If we cannot successfully recruit and retain the employees we need, our ability to develop and manage our businesses will be impaired.

Our Platform Licensors Are Our Chief Competitors and Frequently Control the Manufacturing of and/or Access To Our Video Game Products

Our agreements with hardware licensors, which are also our chief competitors, typically give significant control to the licensor over the approval and manufacturing of our products. This fact could, in certain circumstances, leave us unable to get our products approved, manufactured and shipped to customers. In most events, control of the approval and manufacturing process by the platform licensors increases both our manufacturing lead times and costs as compared to those we can achieve independently. For example, in prior years, we experienced delays in obtaining approvals for and manufacturing of PlayStation products which caused delays in shipping those products. The potential for additional delay or refusal to approve or manufacture our products continues with our platform licensors. Such occurrences would harm our business and adversely affect our financial performance. Additionally, we have not negotiated a final publishing agreement with Nintendo for the Nintendo GameCube platform and although we are currently operating under an understanding with Nintendo, we cannot be assured that the final terms of the formal agreement will be favorable.

In addition, as online capabilities for videogame platforms emerge, our platform licensors will control our ability to provide online game capabilities for our console platform products. Currently, both Microsoft and Sony provide, or have announced plans to provide, online capabilities for Xbox and PlayStation 2 products respectively. In each case, compatibility code and the consent of the licensor are required for us to include online capabilities in our products. In addition, the business model for Microsoft’s and Sony’s online businesses for their videogame products may compete with our EA.com business. As these capabilities become more significant, the failure or refusal of our licensors to approve our products, or the successful deployment by these licensors of services competitive to EA.com, may harm our business.

Proliferation and Assertion of Patents Poses Serious Risks to our Business

Many patents have been issued that may apply to widely used game technologies. Additionally, many recently issued patents are now being asserted against Internet implementations of existing games. Several such patents have been asserted against us. Such claims can harm our business. For example, in June of 2002 we were sued for alleged infringement of a patent which the plaintiff claims generally describes the distribution of a software program on CD-ROMs to users containing a link capability (e.g., hyperlinks) to additional information stored on a remote server. We will incur substantial expenses in evaluating and defending against such claims, regardless of the merits of the claims. In the event that there is a determination that we have infringed a third party patent, we could incur significant monetary liability and be prevented from using the rights in the future.

Foreign Sales and Currency Fluctuations

For the six months ended September 30, 2002, international net revenues comprised 38% of total consolidated net revenues. For the fiscal year ended March 31, 2002, international net revenues comprised 37% of total consolidated net revenues. We expect foreign sales to continue to account for a significant and growing portion of our revenues. Such sales are subject to unexpected regulatory requirements, tariffs and other barriers. Additionally, foreign sales are primarily made in local currencies which may fluctuate. While we hedge against foreign currency fluctuations, we cannot control translation issues.

Increased Difficulties in Forecasting Results

During platform transition periods, where the success of our products is significantly impacted by the changing market for our products, forecasting our revenues and earnings is more difficult than in more stable or rising product markets. The demand for our products may decline during a transition faster than we anticipate, negatively impacting both revenues and earnings. At launch, Sony shipped only half of the number of PlayStation 2 units to retail in North America than it had originally planned, and it shipped significantly fewer units than planned at launch in Europe as well. Shortages were announced as being caused by shortages of components for manufacturing. Due to these shortages, our results of operations for fiscal 2001 were adversely affected. Consequently, if Microsoft or Nintendo do not ship the number of units planned for the Xbox and Nintendo GameCube, our sales of these products may be adversely affected in fiscal 2003.

The Current Legislative and Regulatory Environment Affecting Accounting Principles Generally Accepted in the United States of America is Uncertain and Volatile, and Significant Changes in Current Principles Could Affect Our Financial Statements Going Forward

Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally. Similarly, Congress has considered a variety of bills that could affect certain accounting principles. In addition, the FASB and other regulatory accounting agencies have recently introduced several new or proposed accounting standards, such as accounting for stock options, some of which represent a significant change from current industry practices. While we believe that our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, we cannot predict the impact of the adoption of any such proposals on our financial statements going forward.

Fluctuations in Stock Price

Industry and Financial Analysts provide investors with estimates of our future production and financial performance. We also give guidance as to our expectations for future performance. We may not meet those expectations. This may create an immediate and significant adverse effect on the trading price of our common stock. As a result of the factors discussed in this report and other factors that may arise in the future, the market price of our common stock historically has been, and we expect will continue to be, subject to significant fluctuations. These fluctuations may be due to factors specific to us, to changes in analysts’ earnings estimates, or to factors affecting the computer, software, Internet, entertainment, media or electronics businesses. In addition, fluctuations may be due to uncertainties in the securities markets in general. For example, during the fiscal year ended March 31, 2002, the price per share of our Class A common stock ranged from $42.40 to $66.01 and $53.38 to $67.73 during the six months ended September 30, 2002.

World Events

The terrorist attacks of September 11, 2001 in the United States, the subsequent US military action, and the continuing concerns over potential additional terrorist attacks against US interests and citizens

pose serious uncertainties in our business. Consumer spending, consumer preferences in entertainment, and the securities markets and the economy generally may be affected on an ongoing and unpredictable basis by these events, all of which may make prediction of our results more difficult.

Because of these and other factors affecting our operating results and financial condition, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK
We are exposed to various market risks, including the changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from changes in market rates and prices. Foreign exchange contracts used to hedge foreign currency exposures and short-term investments are subject to market risk. We do not consider our cash and cash equivalents to be subject to interest rate risk due to their short maturities. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Foreign Currency Exchange Rate Risk

We utilize foreign exchange contracts to hedge foreign currency exposures of underlying assets and liabilities, primarily certain intercompany receivables that are denominated in foreign currencies, thereby, limiting our risk. Our foreign exchange contracts are accounted for as derivatives whereby the gains and losses on these contracts are reflected in the Consolidated Statement of Operations. Gains and losses on open contracts at the end of each accounting period resulting from changes in the forward rate are recognized in earnings and are designed to offset gains and losses on the underlying foreign currency denominated assets and liabilities. At September 30, 2002, we had foreign exchange contracts, all with maturities of less than one month to purchase and sell approximately $124,553,000 in foreign currencies, primarily British Pounds, European Currency Units (“Euros”), Japanese Yen and other currencies.

Fair value represents the difference in value of the contracts at the spot rate and the forward rate. The counterparties to these contracts are substantial and creditworthy multinational commercial banks. The risks of counterparty nonperformance associated with these contracts are not considered to be material. Notwithstanding our efforts to manage foreign exchange risks, there can be no assurances that our hedging activities will adequately protect us against the risks associated with foreign currency fluctuations.

The following table below provides information about our foreign currency forward exchange contracts at September 30, 2002. The information is provided in U.S. dollar equivalents and presents the notional amount (forward amount), the weighted average contractual foreign currency exchange rates and fair value.

Weighted-Average Fair Value

Contract Amount Contract Rate Gain/(Loss)

(In thousands) (In thousands)

Foreign currency to be sold under contract:

British Pound
$ 85,135 1.5340 $ (1,173 )

Euro
9,727 0.9728 (34 )

Japanese Yen
5,469 122.5000 (22 )

Swedish Krona
3,440 9.3017 29

South African Rand
2,691 10.7765 (31 )

Australian Dollar
2,184 0.5460 7

Swiss Franc
1,341 0.6707 9

Norwegian Krone
1,335 7.4886 8

Danish Krone
922 7.5867 3

Total
$ 112,244 $ (1,204 )

Foreign currency to be purchased under contract:

British Pound
$ 12,309 1.5574 $ 22

Total
$ 12,309 $ 22

Grand total
$ 124,553 $ (1,182 )

While the contract amounts provide one measurement of the volume of these transactions, they do not represent the amount of our exposure to credit risk. The amounts (arising from the possible inabilities of counterparties to meet the terms of their contracts) are generally limited to the amounts, if any, by which the counterparties’ obligations exceed our obligations as these contracts can be settled on a net basis at our option. We control credit risk through credit approvals, limits and monitoring procedures.

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 primarily consisting of debt instruments of 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. At September 30, 2002, our cash equivalents and short-term investments included debt securities of $721,802,000. Notwithstanding our efforts to manage interest rate risks, there can be no assurances that we will be adequately protected against the risks associated with interest rate fluctuations.

The table below presents the amounts and related weighted average interest rates of our investment portfolio at September 30, 2002:

Average

Interest

Rate Cost Fair Value

(Dollars in thousands)

Cash equivalents

Variable rate
1.87 % $ 428,505 $ 428,505

Short-term investments

Fixed rate
3.62 % $ 282,134 $ 284,897

Variable rate
6.35 % $ 8,400 $ 8,400

Maturity dates for short-term investments range from 15 months to 35 months with call dates ranging from 0 months to 11 months.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Company’s chief executive officer and chief financial officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of a date (the “Evaluation Date”) within 90 days before the filing date of this quarterly report, have concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities.

(b) Changes in internal controls. There were no significant changes in the Company’s internal controls or, to our knowledge in other factors, that could significantly affect the Company’s disclosure controls and procedures subsequent to the Evaluation Date. However, in the last several months, in response to the certification requirements of the Sarbanes-Oxley Act and new Securities and Exchange Commission Regulations, the Company has enhanced its internal controls and disclosure systems, through various measures including: detailing its internal accounting policies; establishing a formal disclosure committee for preparation of all periodic reports; and requiring certifications from various trial balance controllers and other financial personnel responsible for the Company’s financial statements.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Company is subject to pending claims and litigation. Management, after review and consultation with counsel, considers that any liability from the disposition of such lawsuits in the aggregate would not have a material adverse effect upon the consolidated financial position or results of operations of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 6. Exhibits and Reports on Form 8-K


(a)		Exhibits: None.

(b)		Reports on Form 8-K:

		On August 14, 2002, the Company filed a current report on Form 8-K, attaching under Item 9 certifications made by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 to accompany the Company’s Form 10-Q for the quarterly period ended June 30, 2002.

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.

ELECTRONIC ARTS INC.
(Registrant)


		/s/ WARREN C. JENSON

DATED:		WARREN C. JENSON
November 8, 2002		Executive Vice President, Chief Financial and Administrative Officer

CERTIFICATIONS

I, Lawrence F. Probst III, certify that:

        1.    I have reviewed this quarterly report on Form 10-Q of Electronic Arts Inc.;

        2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

        3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

        4.    The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a)		Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)		Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


a)		All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Dated: November 8, 2002 By: /s/ LAWRENCE F. PROBST III

Lawrence F. Probst III
Chairman and Chief Executive Officer

I, Warren C. Jenson, certify that:


a)		Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)		Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


a)		All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Dated: November 8, 2002	By:	/s/ WARREN C. JENSON

		Warren C. Jenson Executive Vice President, Chief Financial and Administrative Officer


			Page

Part I - Financial Information
Item 1.	Unaudited Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets at September 30, 2002 and March 31, 2002	3
		Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2002 and 2001 and the Six Months Ended September 30, 2002 and 2001	4
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2002 and 2001	5
		Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		50
Item 4.	Controls and Procedures		52
Part II - Other Information
Item 1.	Legal Proceedings		53
Item 4.	Submission of Matters to a Vote of Security Holders		53
Item 6.	Exhibits and Reports on Form 8-K		53
Signatures			54
Certifications			55


			September 30,			March 31,
			2002			2002

ASSETS
Current assets:
	Cash, cash equivalents and short-term investments		$	920,768		$	796,936
	Marketable securities			6,525			6,869
	Receivables, less allowances of $125,402 and $115,870, respectively			139,366			190,495
	Inventories, net			36,827			23,780
	Deferred income taxes			36,412			38,597
	Other current assets			159,287			95,866

		Total current assets		1,299,185			1,152,543
Property and equipment, net				307,056			308,827
Investments in affiliates				17,324			19,077
Goodwill and other intangibles, net				121,484			110,512
Long-term deferred income taxes				55,649			64,065
Other assets				46,387			44,350

			$	1,847,085		$	1,699,374

LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	120,320		$	88,563
	Accrued and other liabilities			333,558			364,419

		Total current liabilities		453,878			452,982
Minority interest in consolidated joint venture				1,420			3,098
Stockholders’ equity:
	Preferred stock, $0.01 par value. Authorized 10,000,000 shares			—			—
	Common stock
		Class A common stock, $0.01 par value. Authorized 400,000,000 shares; issued and outstanding 140,832,259 and 138,429,269 shares, respectively		1,408			1,384
		Class B common stock, $0.01 par value. Authorized 100,000,000 shares; issued and outstanding 4,233,463 and 6,233,413 shares, respectively		42			62
	Paid-in capital			729,774			649,777
	Retained earnings			664,433			606,795
	Accumulated other comprehensive loss			(3,870	)		(14,724	)

		Total stockholders’ equity		1,391,787			1,243,294

			$	1,847,085		$	1,699,374


					Three Months Ended						Six Months Ended
					September 30,						September 30,

					2002			2001			2002			2001

Net revenues					$	453,490		$	240,156		$	785,388		$	422,106
Cost of goods sold						198,891			117,760			340,256			206,789

			Gross profit			254,599			122,396			445,132			215,317

Operating expenses:
	Marketing and sales					55,514			45,020			120,888			85,824
	General and administrative					27,453			25,403			53,116			48,618
	Research and development					98,140			97,555			189,109			188,360
	Amortization of intangibles					2,246			6,475			4,491			12,950

				Total operating expenses		183,353			174,453			367,604			335,752

			Operating income (loss)			71,246			(52,057	)		77,528			(120,435	)
Interest and other income, net						1,177			4,060			4,324			6,777

			Income (loss) before provision for (benefit from) income taxes and minority interest			72,423			(47,997	)		81,852			(113,658	)
Provision for (benefit from) income taxes						22,451			(14,879	)		25,374			(35,234	)

			Income (loss) before minority interest			49,972			(33,118	)		56,478			(78,424	)
Minority interest in consolidated joint venture						262			294			1,160			346

		Net income (loss)			$	50,234		$	(32,824	)	$	57,638		$	(78,078	)

Class A common stock:
Net income (loss):
	Basic				$	53,407		$	(27,236	)	$	63,801		$	(66,611	)

	Diluted				$	50,234		$	(32,824	)	$	57,638		$	(78,078	)

Net income (loss) per share:
	Basic				$	0.38		$	(0.20	)	$	0.46		$	(0.49	)
	Diluted				$	0.34		$	(0.24	)	$	0.39		$	(0.57	)
Number of shares used in computation:
	Basic					139,843			136,652			139,317			136,158
	Diluted					146,619			137,304			146,269			136,810

Class B common stock:
Net loss, net of retained interest in EA.com					$	(3,173	)	$	(5,588	)	$	(6,163	)	$	(11,467	)

Net loss per share:
	Basic				$	(0.57	)	$	(0.93	)	$	(1.07	)	$	(1.90	)
	Diluted				$	(0.57	)	$	(0.93	)	$	(1.07	)	$	(1.90	)
Number of shares used in computation:
	Basic					5,547			6,022			5,759			6,020
	Diluted					5,547			6,022			5,759			6,020


					Six Months
					Ended September 30,

					2002			2001

Operating activities:
	Net income (loss)				$	57,638		$	(78,078	)
		Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
			Minority interest in consolidated joint venture			(1,160	)		(346	)
			Distribution from investment in affiliate			3,000			—
			Equity in net (income) loss of affiliates			(1,313	)		160
			Gain on sale of affiliate			—			(200	)
			Depreciation and amortization			49,373			55,294
			Loss on write-down of affiliate			471			—
			Loss on sale of fixed assets			115			315
			Permanent impairment of marketable securities			2,359			—
			Bad debt expense			4,639			2,327
			Stock-based compensation			2,161			1,154
			Tax benefit from exercise of stock options			16,866			16,789
			Change in assets and liabilities:
				Receivables		48,261			68,584
				Inventories		(13,047	)		(5,133	)
				Other assets		(85,409	)		(70,114	)
				Accounts payable		31,726			6,628
				Accrued and other liabilities		(35,800	)		(76,723	)
				Deferred income taxes		8,689			(581	)

				Net cash provided by (used in) operating activities		88,569			(79,924	)

Investing activities:
	Proceeds from sale of property and equipment					411			225
	Proceeds from sale of affiliate					—			570
	Capital expenditures					(23,386	)		(29,711	)
	Investment in affiliates, net					(405	)		3,018
	Change in short-term investments, net					(46,212	)		(81,104	)
	Acquisition, net of cash acquired					(12,868	)		—

				Net cash used in investing activities		(82,460	)		(107,002	)

Financing activities:
	Proceeds from sales of Class A shares through employee stock plans and other plans					61,281			49,010
	Proceeds from sales of Class B shares through employee stock plans and other plans					1			—
	Purchase of treasury shares					—			(6,824	)
	Proceeds from minority interest investment					(751	)		—

				Net cash provided by financing activities		60,531			42,186

Translation adjustment						8,005			3,733

Increase (decrease) in cash and cash equivalents						74,645			(141,007	)
Beginning cash and cash equivalents						552,826			419,812

Ending cash and cash equivalents						627,471			278,805
Short-term investments						293,297			129,140

Ending cash, cash equivalents and short-term investments					$	920,768		$	407,945


							Effects of			As of
	As of March		Goodwill				Foreign			September 30,
	31, 2002		Acquired		Adjustments		Currency			2002

EA Core	$	39,335	$	16,139	$	—	$	(366	)	$	55,108
EA.com		29,715		—		—		—			29,715

	$	69,050	$	16,139	$	—	$	(366	)	$	84,823


	September 30, 2002										March 31, 2002

	Gross								Other		Gross								Other
	Carrying		Accumulated						Intangibles,		Carrying		Accumulated						Intangibles,
	Amount		Amortization			Other			Net		Amount		Amortization			Other			Net

Developed/Core Technology	$	28,263	$	(17,682	)	$	—		$	10,581	$	28,263	$	(15,455	)	$	—		$	12,808
Tradename		35,169		(11,356	)		—			23,813		35,169		(9,854	)		—			25,315
Subscribers and Other Intangibles		8,694		(5,918	)		(509	)		2,267		8,694		(5,156	)		(199	)		3,339

Other Intangibles	$	72,126	$	(34,956	)	$	(509	)	$	36,661	$	72,126	$	(30,465	)	$	(199	)	$	41,462


Fiscal Year Ended March 31,

2003	$	4,242
2004		7,364
2005		5,946
2006		5,517
2007		2,489
Thereafter		11,103

	$	36,661


	September 30, 2002		March 31, 2002

Raw materials and work in process	$	7,196	$	1,025
Finished goods		29,631		22,755

	$	36,827	$	23,780


	September 30, 2002		March 31, 2002

Accrued income taxes	$	91,732	$	94,444
Accrued expenses		82,708		87,104
Accrued royalties		78,763		77,590
Accrued compensation and benefits		60,923		87,985
Deferred revenue		16,374		13,286
Warranty reserve		3,058		4,010

	$	333,558	$	364,419

	•		EA Core business segment: creation, marketing and distribution of entertainment software.

	•		EA.com business segment: creation, marketing and distribution of entertainment software which can be played or sold online, ongoing management of subscriptions of online games and website advertising.


		Three Months Ended September 30, 2002

		EA Core
		(excl. EA.com)		EA.com			Electronic Arts

Net revenues		$	434,694	$	18,796		$	453,490
Cost of goods sold			195,740		3,151			198,891

Gross profit			238,954		15,645			254,599
Operating expenses:
	Marketing and sales(a)		46,287		9,227			55,514
	General and administrative		25,431		2,022			27,453
	Research and development(b)		71,764		26,376			98,140
	Amortization of intangibles		927		1,319			2,246

Total operating expenses			144,409		38,944			183,353

Operating income (loss)			94,545		(23,299	)		71,246
Interest and other income (expense), net			1,205		(28	)		1,177

Income (loss) before provision for income taxes and minority interest			95,750		(23,327	)		72,423
Provision for income taxes			22,451		—			22,451

Income (loss) before minority interest			73,299		(23,327	)		49,972
Minority interest in consolidated joint venture			262		—			262

Net income (loss) before retained interest in EA.com		$	73,561	$	(23,327	)	$	50,234

Interest income		$	4,468	$	7		$	4,475
Depreciation and amortization			12,701		12,366			25,067
Identifiable assets			1,701,838		145,247			1,847,085
Capital expenditures			14,702		275			14,977


		Three Months Ended September 30, 2001

		EA Core
		(excl. EA.com)			EA.com			Electronic Arts

Net revenues		$	224,926		$	15,230		$	240,156
Cost of goods sold			114,788			2,972			117,760

Gross profit			110,138			12,258			122,396
Operating expenses:
	Marketing and sales(a)		34,979			10,041			45,020
	General and administrative		23,152			2,251			25,403
	Research and development(b)		63,725			33,830			97,555
	Amortization of intangibles(c)		3,205			3,270			6,475

Total operating expenses			125,061			49,392			174,453

Operating loss			(14,923	)		(37,134	)		(52,057	)
Interest and other income (expense), net			4,179			(119	)		4,060

Loss before benefit from income taxes and minority interest			(10,744	)		(37,253	)		(47,997	)
Benefit from income taxes			(14,879	)		—			(14,879	)

Income (loss) before minority interest			4,135			(37,253	)		(33,118	)
Minority interest in consolidated joint venture			294			—			294

Net income (loss) before retained interest in EA.com		$	4,429		$	(37,253	)	$	(32,824	)

Interest income		$	4,300		$	16		$	4,316
Depreciation and amortization			13,366			14,573			27,939
Identifiable assets			1,097,527			196,625			1,294,152
Capital expenditures			11,116			3,565			14,681


		Six Months Ended September 30, 2002

		EA Core
		(excl. EA.com)		EA.com			Electronic Arts

Net revenues		$	746,813	$	38,575		$	785,388
Cost of goods sold			334,235		6,021			340,256

Gross profit			412,578		32,554			445,132
Operating expenses:
	Marketing and sales(a)		103,729		17,159			120,888
	General and administrative		48,946		4,170			53,116
	Research and development(b)		137,365		51,744			189,109
	Amortization of intangibles		1,853		2,638			4,491

Total operating expenses			291,893		75,711			367,604

Operating income (loss)			120,685		(43,157	)		77,528
Interest and other income (expense), net			4,426		(102	)		4,324

Income (loss) before provision for income taxes and minority interest			125,111		(43,259	)		81,852
Provision for income taxes			25,374		—			25,374

Income (loss) before minority interest			99,737		(43,259	)		56,478
Minority interest in consolidated joint venture			1,160		—			1,160

Net income (loss) before retained interest in EA.com		$	100,897	$	(43,259	)	$	57,638

Interest income		$	9,099	$	73		$	9,172
Depreciation and amortization			24,609		24,764			49,373
Capital expenditures			22,809		577			23,386


		Six Months Ended September 30, 2001

		EA Core
		(excl. EA.com)			EA.com			Electronic Arts

Net revenues		$	390,477		$	31,629		$	422,106
Cost of goods sold			200,207			6,582			206,789

Gross profit			190,270			25,047			215,317
Operating expenses:
	Marketing and sales(a)		65,810			20,014			85,824
	General and administrative		43,419			5,199			48,618
	Research and development(b)		119,108			69,252			188,360
	Amortization of intangibles(c)		6,410			6,540			12,950

Total operating expenses			234,747			101,005			335,752

Operating loss			(44,477	)		(75,958	)		(120,435	)
Interest and other income (expense), net			7,268			(491	)		6,777

Loss before benefit from income taxes and minority interest			(37,209	)		(76,449	)		(113,658	)
Benefit from income taxes			(35,234	)		—			(35,234	)

Loss before minority interest			(1,975	)		(76,449	)		(78,424	)
Minority interest in consolidated joint venture			346			—			346

Net loss before retained interest in EA.com		$	(1,629	)	$	(76,449	)	$	(78,078	)

Interest income		$	9,468		$	35		$	9,503
Depreciation and amortization			24,829			30,465			55,294
Capital expenditures			18,949			10,762			29,711

(a)		EA.com Marketing and Sales includes $4,466,000 of Carriage Fee for the three months ended September 30, 2002 and 2001 and $8,932,000 of Carriage Fee for the six months ended September 30, 2002 and 2001.

(b)		EA.com Research and Development includes $11,998,000 of Network Development and Support and $2,137,000 of Customer Relationship Management (CRM) for the three months ended September 30, 2002; and includes $15,170,000 of Network Development and Support and $2,996,000 of CRM for the three months ended September 30, 2001. EA.com Research and Development includes $24,111,000 of Network Development and Support and $4,344,000 of CRM for the six months ended September 30, 2002; and includes $32,045,000 of Network Development and Support and $5,910,000 of CRM for the six months ended September 30, 2001.

(c)		Results for fiscal 2003 do not include amortization of goodwill as a result of adopting SFAS No. 142. Amortization of intangibles for the three months ended September 30, 2001 includes goodwill amortization of $1,486,000 for EA Core and $1,445,000 for EA.com. Amortization of intangibles for the six months ended September 30, 2001 includes goodwill amortization of $2,971,000 for EA Core and $2,890,000 for EA.com.


								Asia
								Pacific
		North						(excluding
		America			Europe			Japan)			Japan			Eliminations			Total

Three months ended September 30, 2002
Net revenues from unaffiliated customers		$	313,559		$	116,654		$	13,803		$	9,474		$	—		$	453,490
Intercompany revenues			(3,097	)		10,885			967			57			(8,812	)		—

	Total net revenues		310,462			127,539			14,770			9,531			(8,812	)		453,490

Operating income (loss)			38,111			34,002			346			(912	)		(301	)		71,246
Interest income			4,012			421			41			1			—			4,475
Depreciation and amortization			20,793			3,893			229			152			—			25,067
Identifiable assets			1,402,119			408,419			24,156			12,391			—			1,847,085
Capital expenditures			11,507			3,281			102			87			—			14,977
Long-lived assets			357,675			177,429			4,847			4,884			—			544,835

Six months ended September 30, 2002
Net revenues from unaffiliated customers		$	487,138		$	243,184		$	28,992		$	26,074		$	—		$	785,388
Intercompany revenues			(2,916	)		20,835			1,910			57			(19,886	)		—

	Total net revenues		484,222			264,019			30,902			26,131			(19,886	)		785,388

Operating income (loss)			27,568			53,154			709			(4,080	)		177			77,528
Interest income			8,284			793			94			1			—			9,172
Depreciation and amortization			41,299			7,318			462			294			—			49,373
Capital expenditures			17,833			5,127			262			164			—			23,386

Three months ended September 30, 2001
Net revenues from unaffiliated customers		$	169,555		$	53,202		$	8,007		$	9,392		$	—		$	240,156
Intercompany revenues			816			4,894			2,734			—			(8,444	)		—

	Total net revenues		170,371			58,096			10,741			9,392			(8,444	)		240,156

Operating loss			(29,987	)		(20,482	)		(300	)		(1,162	)		(126	)		(52,057	)
Interest income			3,649			602			65			—			—			4,316
Depreciation and amortization			23,923			3,652			200			164			—			27,939
Identifiable assets			994,577			267,690			18,072			13,813			—			1,294,152
Capital expenditures			9,087			5,211			121			262			—			14,681
Long-lived assets			353,289			164,261			4,083			4,608			—			526,241

Six months ended September 30, 2001
Net revenues from unaffiliated customers		$	272,617		$	113,014		$	18,058		$	18,417		$	—		$	422,106
Intercompany revenues			2,331			9,446			4,107			—			(15,884	)		—

	Total net revenues		274,948			122,460			22,165			18,417			(15,884	)		422,106

Operating loss			(95,705	)		(24,122	)		(296	)		(1,002	)		690			(120,435	)
Interest income			8,232			1,138			133			—			—			9,503
Depreciation and amortization			48,204			6,412			366			312			—			55,294
Capital expenditures			22,610			6,264			273			564			—			29,711


	Three months ended September 30, 2002

	Class A common			Class A common		Class B
	stock-Basic			stock-Diluted		common stock

Net income (loss) before retained interest in EA.com	$	73,561		$	50,234	$	(23,327	)
Net loss related to retained interest in EA.com		(20,154	)		—		20,154

Net income (loss)	$	53,407		$	50,234	$	(3,173	)

Shares used to compute net income (loss) per share:
Weighted-average common shares		139,843			139,843		5,547
Dilutive stock equivalents		—			6,776		—

Dilutive potential common shares		139,843			146,619		5,547

Net income (loss) per share:
Basic	$	0.38			N/A	$	(0.57	)
Diluted		N/A		$	0.34	$	(0.57	)


							Non-
							Current
	Workforce			Facilities			Assets		Total

Balance as of March 31, 2002	$	674		$	2,214		$	—	$	2,888
Charges utilized in cash for the three months ended June 30, 2002		(494	)		(243	)		—		(737	)
Charges utilized in non-cash for the three months ended June 30, 2002		—			(36	)		—		(36	)

Balance as of June 30, 2002		180			1,935			—		2,115
Charges utilized in cash for the three months ended September 30, 2002		(82	)		(100	)		—		(182	)

Balance as of September 30, 2002	$	98		$	1,835		$	—	$	1,933

•		PlayStation 2 net revenues increased by 50% for the quarter and 73% for the six months ended September 30, 2002. Net revenues for the three months ended September 30, 2002 increased primarily due to higher sales on key franchise titles, including Madden NFL™ 2003 and NCAA® Football 2003, as compared to prior year releases of these sports franchise titles. Net revenues for the six months ended September 30, 2002 increased primarily due to strong sales of key title Medal of Honor Frontline™, higher sales of sports franchise titles, as well as a higher installed base of the PlayStation 2 hardware due in part to Sony’s price cut of the hardware in North America in May 2002.

•		We generated $34,979,000 in Xbox net revenues for the quarter and $45,186,000 for the six months ended September 30, 2002. There were no net revenues for the Xbox platform in the same periods of the prior year since the platform launched in North America in the third quarter of fiscal 2002. Key titles on this platform included Madden NFL 2003, NCAA Football 2003 and Nascar Thunder 2003 which were released during the current quarter.

•		AL product net revenues increased by 238% for the quarter and 253% for the six months ended September 30, 2002 primarily due to strong sales of hit titles Kingdom Hearts, a distribution deal with Square EA, and Battlefield 1942™, a co-publishing deal with Digital Illusions.

•		We generated $21,290,000 in Nintendo GameCube net revenues for the quarter and $28,021,000 for the six months ended September 30, 2002. There were no net revenues for the Nintendo GameCube platform in the same periods of the prior year since the platform launched in North America in the third quarter of fiscal 2002. Key titles on this platform included Madden NFL 2003, NCAA Football 2003, James Bond 007 in...Agent Under Fire™ and Nascar Thunder 2003.

•		PC product net revenues increased by 47% for the quarter and by 15% for the six months ended September 30, 2002 due primarily to higher sales of The Sims™ products. Current fiscal year included The Sims Vacation Expansion Pack, The Sims Unleashed Expansion Pack, The Sims Deluxe and The Sims Hot Date. Prior year releases, including The Sims, The Sims: Livin’ Large and The Sims House Party, continued to generate strong sales in the current year.

•		These increases were partially offset by the expected decrease in Nintendo 64 (“N64”) net revenues for the three and six months ended September 30, 2002 due to the platform transition to next-generation consoles.

•		Europe’s net revenues increased 119% compared to the prior year primarily due to strong sales of key title Medal of Honor Frontline on the PlayStation 2. In addition, current year AL product net revenues were higher primarily due to sales from Battlefield 1942. PC product sales were higher in the current year primarily due to stronger sales for The Sims franchise titles.

•		Asia Pacific’s net revenues increased 72% compared to the prior year primarily due to higher AL and PlayStation 2 product sales.

•		Japan’s net revenues remained relatively flat compared to the prior year.

•		Europe’s net revenues increased by 115% compared to the prior year primarily due to higher PlayStation 2 sales due to strong current year sales of key titles Medal of Honor Frontline and 2002 FIFA World Cup and a higher installed base of the PlayStation 2 hardware due in part to Sony’s hardware price cut in Europe in August 2002. In addition, current year AL product revenues were higher due to sales from Resident Evil and Battlefield 1942. PC product sales were higher in the current year primarily due to stronger sales for The Sims franchise titles.

•		Asia Pacific’s net revenues increased by 61% compared to the prior year primarily due to higher AL and PlayStation 2 product sales.

•		Japan’s net revenues increased by 42% compared to the prior year primarily due to strong current year PlayStation 2 sales of 2002 FIFA World Cup and Project FIFA World Cup.


	September 30,			September 30,		Increase/
	2002			2001		(Decrease)			% change

Net Revenues for the Three Months Ended:
EA Studio:
PlayStation 2	$	158,712		$	91,763	$	66,949			73.0	%
PC		82,686			53,888		28,798			53.4	%
Xbox		37,527			—		37,527			N/A
Nintendo GameCube		27,838			—		27,838			N/A
PlayStation		24,206			25,147		(941	)		(3.7	%)
Advertising		8,645			7,100		1,545			21.8	%
Online Subscriptions		7,635			7,188		447			6.2	%
License, OEM and Other		5,079			4,734		345			7.3	%
Game Boy Advance		3,679			—		3,679			N/A
Game Boy Color		1,129			4,279		(3,150	)		(73.6	%)
N64		(6	)		6,225		(6,231	)		(100	%)

		357,130			200,324		156,806			78.3	%
Affiliated Label:		96,360			39,832		56,528			141.9	%

Consolidated Net Revenues	$	453,490		$	240,156	$	213,334			88.8	%



	September 30,			September 30,		Increase/
	2002			2001		(Decrease)			% change

Net Revenues for the Six Months Ended:
EA Studio:
PlayStation 2	$	293,310		$	142,282	$	151,028			106.1	%
PC		158,752			123,962		34,790			28.1	%
Xbox		57,630			—		57,630			N/A
Nintendo GameCube		42,794			—		42,794			N/A
PlayStation		37,429			39,189		(1,760	)		(4.5	%)
Advertising		19,118			14,761		4,357			29.5	%
Online Subscriptions		15,776			15,144		632			4.2	%
License, OEM and Other		8,442			9,024		(582	)		(6.4	%)
Game Boy Advance		5,817			—		5,817			N/A
Game Boy Color		2,521			4,279		(1,758	)		(41.1	%)
N64		511			8,627		(8,116	)		(94.1	%)

		642,100			357,268		284,832			79.7	%
Affiliated Label:		143,288			64,838		78,450			121.0	%

Consolidated Net Revenues	$	785,388		$	422,106	$	363,282			86.1	%


	September 30,		% of net			September 30,		% of net
(in thousands)	2002		revenues			2001		revenues			% change

Three Months Ended	$	198,891		43.9	%	$	117,760		49.0	%		68.9	%

Six Months Ended	$	340,256		43.3	%	$	206,789		49.0	%		64.5	%

•		New revenues with relatively low cost of goods sold as a percentage of revenue for the Nintendo GameCube and Xbox products.

•		An increase in AL margins as compared to the prior year due to co-publishing deals such as Battlefield 1942 and Buffy the Vampire Slayer.

•		An increase in PlayStation 2 margins as compared to the prior year due to lower royalties on Medal of Honor Frontline and volume discounts received from console manufacturers. Medal of Honor Frontline is a wholly owned intellectual property, developed internally, on which we pay no royalties (other than console royalties).

•		An increase in PC margins due to higher sales of products that are wholly owned intellectual properties such as The Sims family of titles compared to Madden NFL 2002, Black and White and NHL 2002 in the prior year.

•		Partially offset by a higher mix of low margin AL products compared to the prior year.

•		Increase in payroll and occupancy costs to support the increased growth in North America and Europe.

•		An increase in the bad debt provision due to additional write-offs taken on the Kmart account.


	September 30,		Effective			September 30,			Effective
(in thousands)	2002		tax rate			2001			tax rate			% change

Three Months Ended	$	22,451		31	%	$	(14,879	)		31	%		250.9	%

Six Months Ended	$	25,374		31	%	$	(35,234	)		31	%		172.0	%

•		With the exception of the proceeds from the sale of stock and warrant to AOL in fiscal 2000 in the amount of $20,000,000, to date, EA.com has been funded solely by Electronic Arts. This funding has been accounted for as capital contributions from Electronic Arts. Excess cash generated from operations is transferred to Electronic Arts, and has been accounted for as a return of capital. We anticipate these funding procedures will continue in the near-term. However, Electronic Arts may, at its discretion, provide funds to EA.com under a debt arrangement, instead of treating such funding as a capital contribution.

•		During the six months ended September 30, 2002, EA.com used $19,952,000 of cash in operations, $577,000 in capital expenditures for computer equipment, network infrastructure, internal use software and related third party software, offset by $18,736,000 in capital contributions from Electronic Arts. As a result of the net operating loss generated, we realized a tax benefit of approximately $13,410,000.

•		During the six months ended September 30, 2001, EA.com used $54,370,000 of cash in operations, $10,762,000 in capital expenditures for computer equipment, network infrastructure, internal use software and related third party software, offset by $65,781,000 in


											Commercial
	Contractual Obligations										Commitments

											Bank and
Fiscal Year					Minimum						Other		Letters of
Ended March 31,	Leases		Advertising		Guarantees		AOL		Marketing		Guarantees		Credit		Total

2003	$	8,742	$	5,857	$	26,266	$	11,250	$	20,734	$	1,050	$	26,384	$	100,283
2004		14,206		7,000		27,628		11,250		16,289		171		—		76,544
2005		10,549		8,000		21,332		—		11,208		171		—		51,260
2006		10,005		3,000		18,515		—		4,572		171		—		36,263
2007		8,796		3,000		3,829		—		3,571		170		—		19,366
Thereafter		11,609		—		2,260		—		3,571		170		—		17,610

	$	63,907	$	26,857	$	99,830	$	22,500	$	59,945	$	1,903	$	26,384	$	301,326

	•		use of the Internet does not continue to increase or increases more slowly than expected,

	•		the infrastructure for the Internet does not effectively support online game play,

	•		concerns over the secure transmission of confidential information over public networks inhibit the growth of the Internet as a means of conducting commercial transactions, or

	•		government regulations regarding Internet content, privacy or other conditions impede the effectiveness of the Internet to users.