Electronic Arts - 10-K annual report

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UNITED STATES

FORM 10-K

For the fiscal year ended March 31, 2003

OR

For the transition period from                to                

Commission File No. 0-17948

ELECTRONIC ARTS INC.

Registrant’s telephone number, including area code: (650) 628-1500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 par value

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 xNO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  YES xNO o

The aggregate market value of the Registrant’s Class A common stock, $.01 par value, held by non-affiliates of the Registrant as of September 27, 2002, the last business day of the second fiscal quarter, was $7,678,525,243.

As of June 4, 2003 there were 145,608,716 shares of Registrant’s Class A common stock, $.01 par value, outstanding, and 225,130 shares of Registrant’s Class B common stock, $.01 par value, outstanding.

Documents Incorporated by Reference

Portions of Registrant’s definitive proxy statement for its 2003 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.

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ELECTRONIC ARTS INC.

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PART I

This Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including statements regarding industry prospects and future results of operations or financial position, made in this Report are forward looking. We use words such as “anticipate”, “believe”, “expect”, “intend”, “estimate” (and the negative of any of these terms), “future” and similar expressions to help identify forward-looking statements. These forward-looking statements are subject to business and economic risk and reflect management’s current expectations, and are inherently uncertain and difficult to predict. Our actual results could differ materially. 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 include, but are not limited to, those discussed under the heading “Risk Factors” on pages 55 to 58.

Item 1:     Business

Overview

     Electronic Arts develops, markets, publishes and distributes interactive software games that are playable by consumers on the following platforms:

One of our strengths is our ability to publish interactive software games for multiple platforms, which provides cost efficiencies in developing and marketing our products. Our products designed to play on consoles and handhelds are published under license from the manufacturers of these platforms (for example, Sony for the PlayStation and PlayStation 2, Microsoft for the Xbox and Nintendo for the GameCube and Game Boy Advance) and we pay a fee to these console manufacturers for the right to publish products on their platforms. Since our inception, we have published games for over 42 different platforms.

We publish our interactive software games under three major brands:

Another strength of our business is that we have developed many of our products to become franchise titles that can be regularly iterated. For example, every year we release new versions of most of our EA SPORTS titles. Likewise, several of the EA GAMES products listed above are part of new or continuing product franchises. We also release products called “expansion packs” that provide additional content (characters, storylines, settings, missions) for games that we have previously published. For example, we have published several expansion packs for The Sims, including The Sims Unleashed Expansion Pack and The Sims Vacation Expansion Pack, each of which expands the characters, settings and gameplay of the original The Sims game. We consider titles that iterate, sequel or spawn expansion packs to be franchise titles.

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Our product development methods and organization are modeled on those used in other sectors of the entertainment industry. Employees whom we call “producers” are responsible for overseeing the development of one or more products. The interactive software games that we publish under our brands are developed by:

     We invest in the creation of state-of-the-art software tools that we use in product development. These tools allow for more cost-effective product development and the ability to more efficiently convert products from one platform to another. We have also made investments in facilities and equipment that allow us to create and edit video and audio recordings that are used in our games.

     We also distribute interactive software games that are published by other companies, which we refer to as “distribution products”. An example of a recent distribution product is Kingdom Hearts, which is published by Square Co. Ltd.

The console, PC and hand-held games that we publish are made available to consumers on a disk (usually a CD or DVD format) or a cartridge that is packaged and typically sold in retail stores and through our own online store. We refer to these as packaged goods products. In North America and Europe, our largest markets, these packaged goods products are sold primarily to retailers that may be mass market retailers (such as Wal-Mart), electronics specialty stores (such as Best Buy) or game software specialty stores (such as Electronics Boutique). In Japan, we also sell a significant volume of our products through a distributor, who in turn sells them to retailers. Our products are available in approximately 80,000 retail locations worldwide. We also maintain a smaller business in which we license to manufacturers of products in related industries (for example, makers of personal computers or computer accessories) rights to include certain of our products with the manufacturer’s product, or offer our products to consumers who have purchased the manufacturer’s product. We call these combined products “OEM bundles”.

There are three ways in which we publish games that are playable online by consumers. First, we include online features in our PC and PlayStation 2 products, for example by enabling consumers to play against one another over the Internet. We also publish games that are playable only online. One type of these online-only games is called “persistent state worlds” or massively multiplayer games. Consumers experience these games as interactive virtual worlds where thousands of other consumers can interact with one another. Examples of our persistent state world products are Ultima Online, Earth & Beyond and The Sims Online. These persistent state world games are often sold to consumers in the form of a CD or DVD that contains much of the software necessary to play the game online. The other type of online-only games that we publish are electronic card games, puzzle games and word games (marketed under the “Pogo” brand) that we make available to consumers on our website, www.ea.com, and on certain online services provided by America Online, Inc.

In fiscal 2003, we operated and reported our business in two business segments:

As of April 1, 2003, we are no longer managing these segments separately. We consider online functionality to be integral to our existing and future products.

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During fiscal 2003, our business was comprised of the following:

     Of the titles shipped in fiscal 2003, there were 22 titles that sold over one million units (aggregated across all platforms). In fiscal 2003, approximately 42 percent of our net revenue was generated by international operations, compared to approximately 37 percent in both fiscal 2002 and 2001.

     We were initially incorporated in California in 1982. In September 1991, we were reincorporated under the laws of Delaware. Our principal executive offices are located at 209 Redwood Shores Parkway, Redwood City, California 94065 and our telephone number is (650) 628-1500. We file various reports with, or furnish them to, the SEC. These reports are available free of charge on our website, www.ea.com, as soon as reasonably practicable after we electronically file the reports with, or furnish them to, the SEC.

Intellectual Property

     Like other entertainment companies, our business is based on the creation, acquisition, exploitation and protection of intellectual property. Each of our products embodies a number of separately protected intellectual properties: our products are copyrighted both as software and as audiovisual works; our product names are trademarks of ours or others; our products may contain voices and likenesses of third parties and the musical compositions and performances of third parties. Our products may also contain other content licensed from third parties, such as trademarks, fictional characters, storylines and software code.

     We acquire intellectual property rights to include in our products through license agreements such as those with the sports leagues and player associations, with movie studios and performing talent, with music labels and musicians. These licenses are typically limited to use of the licensed rights in specific products for specific time periods. In addition, our products for play on videogame platforms such as the Sony PlayStation 2 console include intellectual properties owned by the platform company and licensed non-exclusively to us for use. While we may have renewal rights for some licenses, our business is significantly dependent on our ability to continue to obtain the intellectual property rights from third parties needed for many of our products.

     Our products are susceptible to unauthorized copying. Our primary protection against unauthorized use, duplication and distribution of our products is copyright and trademark. We typically own the copyright to the software code as well as the brand or title name trademark under which our products are marketed. We register our copyrights in the United States, and register our significant trademarks in multiple countries including the United States. In addition, console manufacturers such as Sony typically incorporate security devices in their consoles in an effort to prevent unlicensed use of products.

Joint Ventures and Investments

          Joint Ventures

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Our joint venture agreements with Square expired as of March 31, 2003. As provided in the EA Square KK joint venture agreement, we have purchased Square’s 30 percent interest in EA Square KK for $2.5 million representing the return of their capital contribution and renamed the entity Electronic Arts KK. Electronic Arts KK is now a wholly owned subsidiary of Electronic Arts. See Note 13 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. As a further result of the termination of the joint venture agreements, our distribution of Square products in North America will terminate on June 30, 2003. We generated $84.5 million, $80.8 million and $106.6 million in net revenue from sales of Square products in North America during fiscal 2003, 2002 and 2001, respectively.

          Investments

Market

     Historically, there have been multiple consoles available in the market and vigorous competition between console manufacturers. While Sony has for the past several years been the clear market leader (with its PlayStation and PlayStation 2 consoles), Microsoft and Nintendo are large and viable competitors, and PCs continue to be strong interactive game platform. We develop and publish products for multiple platforms, and this diversification continues to be a cornerstone of our strategy.

     The following table details select information on a sample of the console platforms for which we have published titles:

          PlayStation 2

          GameCube

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          Xbox

     Our early investment in products designed for play on 32-bit PCs and consoles (such as the PlayStation), has been strategically important in positioning us for the current generation of 128-bit machines. We believe that such investment continues to be important. During fiscal years 2003, 2002 and 2001, the video and computer games industry has experienced a platform transition from 32-bit CD-based and 64-bit cartridge-based consoles to the current generation of 128-bit, DVD-based game consoles and related software. The transition to the current generation systems was initiated by the launch of Sony’s PlayStation 2 in fiscal 2001, and continued with the launches of the Nintendo GameCube and Microsoft’s Xbox in fiscal 2002. As the market continues to shift to the current generation systems, our sales of 32-bit and 64-bit products have been declining and we expect a continued significant decline in fiscal 2004.

          Online Games

Competition

     The interactive entertainment software business is highly competitive. It is characterized by the continuous introduction of new titles and the development of new technologies. Our competitors vary in size from very small companies with limited resources to very large, diversified corporations with greater financial and marketing resources than ours. Our business is driven by hit titles, which require ever-increasing budgets for development and marketing. Therefore, the availability of significant financial resources has become a major competitive factor in our industry, primarily as a result of the costs associated with the development and marketing of game software. Competition in our industry is also based on product quality and features, timing of product releases, brand-name recognition, access to distribution channels, effectiveness of marketing, and price.

     We compete with Sony, Microsoft and Nintendo, which each publish software for their respective console platforms. We also compete with numerous companies which are, like us, licensed by the console manufacturers to develop and publish software games that operate on their consoles. These competitors include Acclaim Entertainment, Activision, Capcom, Eidos, Infogrames, Konami, Lucas Arts, Midway, Namco, Sega, Take-Two Interactive, THQ, 3DO, Ubi Soft and Vivendi Universal Games, among others. In addition, we believe that large software companies and media companies are increasing their focus in the interactive entertainment software market. Our titles also compete with other forms of entertainment, such as motion pictures, television and music for the leisure time and discretionary spending of consumers.

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     In addition, the market for our products is characterized by significant price competition, and we face increasing pricing pressures from our competitors. These pressures have, from time to time, required us to reduce our prices on certain products. The experience of our industry is that software game prices decline once a generation of consoles have been in the market for a significant period of time, because of the increasing number of software titles competing for acceptance by consumers. Accordingly, we expect lower overall pricing of games for the PlayStation 2, Xbox and Nintendo GameCube during fiscal 2004, in comparison to fiscal 2003. However, we believe that highly-anticipated “hit” titles, based on popular sports and entertainment properties, will maintain premium pricing in the market in fiscal 2004, as they have done in fiscal 2003.

     During calendar 2002, we were a market leader in sales of interactive entertainment software products for the Sony PlayStation 2, the Nintendo GameCube, the Microsoft Xbox and personal computers (in the aggregate), in the U.S. and European markets. In the U.S., together with our affiliates, we published three of the top-10-selling titles for play on videogame consoles, and five of the top-10 PC titles (according to NPDFunworld and NPD Techworld). Our nearest competitors had two of the top-10 videogame and PC titles for the same period (according to NPDFunworld and NPD Techworld). While similar comprehensive data are not available for Europe, we believe that our titles had similar chart strength for the PlayStation 2 and PC in that territory in calendar year 2002.

Relationships with Significant Hardware Platform Companies

          Sony

     We also announced in May 2003 that we would make many of our sports games available for the PlayStation 2 online service. Through that service, customers who have any online adaptor for their PlayStation 2 consoles will be able to play our PlayStation 2 sports products online.

     In fiscal 2003, approximately four percent of our net revenue was derived from sales of EA Studio software for the PlayStation, compared to 11 percent in fiscal 2002. During fiscal 2003, we released six PlayStation games, compared to five in fiscal 2002. As expected, PlayStation product sales decreased for fiscal 2003 compared to the prior year primarily attributable to the market 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 2004. Under the terms of a licensing agreement entered into with Sony Computer Entertainment of America in July 1994, as amended, we are authorized to develop and distribute CD-based software products compatible with the PlayStation. Pursuant to this agreement, we engage Sony to supply PlayStation CDs for our products.

          Nintendo

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     Under the terms of a licensing agreement entered into with Nintendo of America (effective as of November 1, 2001), we are authorized to develop and distribute proprietary optical format disk products compatible with the Nintendo GameCube. Pursuant to this agreement, we engage Nintendo to supply Nintendo GameCube proprietary optical format disk products for our products.

          Microsoft

     Under the terms of a licensing agreement entered into with Microsoft as of December 8, 2000, as amended, we are authorized to develop and distribute DVD-based software products compatible with the Xbox.

     In May 2003, we announced that we have no plans to support the online service for Xbox. It is unclear whether the absence of online functionality in our Xbox products will be important enough to consumers to affect sales of our Xbox products.

Relationship with AOL

     Our carriage agreement with AOL establishes the basis for our creation and distribution of game sites on the world wide web that are available to AOL subscribers via the Games Channel on AOL’s flagship ISP service and to other consumers who use other AOL portals (AOL.com, CompuServe, Netscape/ Netcenter and ICQ). Users can also access our online games website directly from the world wide web at www.ea.com. We are AOL’s exclusive provider of a broad aggregation of online games and programs and we manage all of the Games Channel content within AOL’s flagship ISP service and other AOL portals in the United States. Within any of these AOL properties, users will be able to find a games channel or area which will provide the user access to our online games. See Note 5 of the Notes to Consolidated Financial Statements, included in Item 8 hereof, for a discussion of the significant terms of our relationship with AOL.

Products and Product Development

     In fiscal 2003, we generated approximately 68 percent of our revenue from EA Studio-produced products released during the year. As of March 31, 2003, we were actively marketing approximately 70 titles, comprising over 135 stock keeping units, or SKUs, that were produced by EA Studios. During fiscal 2003, we introduced 31 EA Studios titles, representing 86 SKUs, compared to 32 EA Studios titles, comprising 64 SKUs, in fiscal 2002. In fiscal 2003, we had 22 titles that sold over one million units (aggregated across all platforms). In fiscal 2002, we had 16 titles and in fiscal 2001, we had 14 titles that

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     The products produced by EA Studios are designed and created by our employee designers and artists and by non-employee software developers (“independent artists”). We typically advance development funds to the independent artists during development of our games, which payments are considered advances against subsequent royalties based on the sales of the products. These terms are typically set forth in written agreements entered into with the independent artists.

     For fiscal 2003, we had one title, Harry Potter and the Chamber of Secrets, published on seven different platforms, which represented approximately 10 percent of our total fiscal 2003 net revenue. For fiscal 2002, Harry Potter and the Sorcerer’s Stone™, published on four different platforms, represented approximately 12 percent of our total fiscal 2002 net revenue. For fiscal 2001, no title represented more than 10 percent of our total fiscal 2001 net revenue.

     We publish products in a number of categories such as sports, action, strategy, simulations, role playing and adventure, each of which is becoming increasingly competitive. Our sports-related products, marketed under the EA SPORTS™ brand name, accounted for a significant percentage of net revenue in fiscal years 2003, 2002 and 2001. There can be no assurance that we will be able to maintain our market share in the sports category.

     The front-line retail selling prices in North America of our products, excluding older titles marketed as “Classics”, typically range from $30.00 to $50.00. “Classics” titles have retail selling prices that range from $10.00 to $30.00. The retail selling prices of our titles outside of North America vary widely based on local market conditions.

     We currently develop or publish products for six different hardware platforms. In fiscal 2003, our product releases were for PlayStation 2, PC, Xbox, PlayStation, Nintendo GameCube, Game Boy Advance, Game Boy Color and online Internet play. Our planned product introductions for fiscal 2004 are for the PlayStation 2, PC, Nintendo GameCube, Xbox, PlayStation and Game Boy Advance.

     Our goal is to be the market leader of games played on the current generation of 128-bit video game consoles. We are investing in the development of tools and technologies designed to facilitate development of our products for these platforms. We had research and development expenditures of $401.0 million in fiscal 2003, $380.6 million in fiscal 2002 and $376.2 million in fiscal 2001.

          EA.com Web Site

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     Paid Content. In addition to free online games, we offer premium pay-to-play persistent state world games. In order to access these premium games, the player must purchase a CD-ROM through retail stores or through our online store. After an initial free trial period, the player must pay a subscription fee in order to continue playing. These persistent state world games are designed to appeal to avid gamers: teens and adults looking to participate in multi-player online games made up of fantastic worlds, characters, adventures or activities – big or small, real or imagined – as well as new forms of cutting-edge online entertainment targeted to mass market gamers. Current persistent state world game offerings include Ultima Online, The Sims Online and Earth & Beyond.

     We launched both Earth & Beyond andThe Sims Online in fiscal 2003. The Sims Onlinewas expected to be our flagship online subscription offering. Through March 31, 2003, however, the number of units sold and number of subscribers for The Sims Onlineand Earth & Beyond have been below our expectations. See Note 19 of the Notes to Consolidated Financial Statements for a discussion of the restructuring and asset impairment charges, included in Item 8 hereof.

     Each of the categories above focuses on targeting and serving its specific consumer group by:

Marketing and Distribution

          Electronic Arts Distribution

     Co-Publishing and Distribution Products. Co-publishing products are games that are conceived and developed by independent developers and for which we provide production assistance and marketing and distribution services. We publish some of these products under an EA brand. Distribution products are titles that are published by another publisher and delivered to us as completed products, for which we provide distribution services. As of March 31, 2003, we distributed approximately 34 co-publishing and distribution titles in North America.

     Our largest relationship relating to distribution products is with Square. In May 1998, Electronic Arts and Square formed a joint venture in North America, creating Square EA, as discussed in Note 13 of the Notes to Consolidated Financial Statements, included in Item 8 hereof. In conjunction with the formation of this joint venture, we have since that time had the exclusive right in North America to distribute products published by this joint venture. Our joint venture agreements with Square expired as of March 31, 2003, and our distribution of Square products in North America will cease on June 30, 2003. In fiscal 2003, Square EA publishedKingdom Hearts for the PlayStation 2, which was a top-ten selling SKU, selling over one million units.

     The interactive software game business has become increasingly “hits” driven, requiring significantly greater expenditures for marketing and advertising of our products, particularly for television advertising. There can be no assurance that we will continue to produce “hit” titles, or that advertising for any product will increase sales sufficiently to recoup those advertising expenses.

     We generated approximately 95 percent of our North American net revenue from direct sales to retailers through a field sales organization of professionals and a group of telephone sales representatives. The remaining 5 percent of our North American sales were made through a limited number of specialized

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     Outside of North America, we derive revenues primarily from direct sales to retailers. Our largest distributor relationship is with Sony in Japan. Sales of our PlayStation and PlayStation 2 products through Sony make up approximately 60 percent of our net revenue in Japan. Under the terms of our distribution agreement with Sony, we are not required to accept returns or grant price protection. In a few of our smaller markets we also sell our products through distributors with whom we have written agreements or informal arrangements, depending on the business customs of the territories.

     In North America, we have stock-balancing programs for our PC products, which allow for the exchange of PC products by resellers under certain circumstances. In all of our major geographical markets (other than Japan), we may decide to provide price protection under certain circumstances for both our PC and console products after we analyze: inventory remaining in the channel, the rate of inventory sell-through in the channel, and our remaining inventory on hand. It is our policy to exchange products or give credits, rather than give cash refunds. Moreover, the risk of product returns for our products on mature platforms (such as the PlayStation) may increase as newer hardware platforms, such as the Xbox, Nintendo GameCube and PlayStation 2, become more popular. We monitor and manage 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. We believe that we provide adequate reserves for returns and price protection which are based on estimated future returns of products, taking into account historical returns, current sell-through of distributor and retailer inventory of our products, current trends in the interactive game market and the overall economy, changes in customer demand and acceptance of our products and other related factors. We believe our current reserves will be sufficient to meet return and price protection requirements for current in-channel inventory. However, we cannot be certain that actual returns or price protection will not exceed our reserves.

     The distribution channels through which our games are sold have been characterized by change, including consolidations and financial difficulties of certain distributors and retailers. The bankruptcy or other business difficulties of a distributor or retailer could render our accounts receivable from such entity uncollectible, which could have an adverse effect on our operating results and financial condition. In January 2002, one of our retail customers, Kmart, declared bankruptcy. We believe we have adequately reserved for our exposure to Kmart. In addition, an increasing number of companies are competing for access to our distribution channels. Our arrangements with our distributors and retailers may be terminated by either party at any time without cause. Distributors and retailers often carry products that compete with ours. Retailers of our products typically have a limited amount of shelf space and promotional resources that they are willing to devote to the software games category, and there is intense competition for these resources. There can be no assurance that distributors and retailers will continue to purchase our products or provide our products with adequate levels of shelf space and promotional support.

     Within our website, we offer visitors the opportunity to purchase our packaged goods software products directly from us. We use our existing distribution network to fulfill consumers’ online orders. We also have a fulfillment group that sells product directly to consumers through a toll-free number and through our websites listed in advertising by us and our co-publishing and distribution affiliates. This group is also responsible for targeted direct-mail marketing and sells product backups and accessories to registered customers.

Inventory and Working Capital

     Our management focuses considerable attention to managing our inventories and other working-capital-related items. We manage inventories by communicating with our customers prior to the release of our products, and then using our industry experience to forecast demand on a product-by-product and territory-by-territory basis. We then place manufacturing orders for our products that match this forecasted

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     As shown in our Consolidated Balance Sheets included in this Report, we had approximately $950.0 million in cash and cash equivalents and $637.6 million in short-term investments as of March 31, 2003. We believe that this amount is sufficient to meet our working capital needs for the coming year.

Segment Reporting

In fiscal 2003, we operated and reviewed our business in two business segments:

As of April 1, 2003, we are no longer managing these segments separately. We consider online functionality to be integral to our existing and future products. Please see the discussion regarding segment reporting in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 18 of the Notes to Consolidated Financial Statements, included in Items 7 and 8 hereof.

International Operations

     We have wholly-owned subsidiaries throughout the world, including offices in the United Kingdom, France, Spain, Germany, Australia, Canada, South Africa, Singapore, Sweden, Japan, Malaysia, Brazil and Holland. Our joint venture in Japan has recently been converted to a wholly owned subsidiary as a result of our buy-out of our joint venture partner (see the discussion under “Joint Ventures and Investments” included above). The amounts of net revenue, operating profit and identifiable assets attributable to each of our geographic regions for each of the last three fiscal years are set forth in Note 18 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.

     International net revenue increased by 66 percent to $1,046.5 million, or 42 percent of consolidated fiscal 2003 net revenue, compared to $631.4 million, or 37 percent of consolidated fiscal 2002 net revenue due to the following:

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     Although we expect international revenue to grow in fiscal 2004, we do not believe it will continue to grow at the same rate as in the prior year.

Manufacturing and Suppliers

     The suppliers we use for manufacture of our games can be characterized in three types:

In many instances, we are able to acquire materials on a volume-discount basis. We have multiple potential sources of supply for most materials, except with respect to our PlayStation, PlayStation 2, Xbox and Nintendo GameCube products, as discussed in “Relationships with Significant Hardware Platform Companies” above. We also have alternate sources for the manufacture and assembly of most of our products. To date, we have not experienced any material difficulties or delays in production of our software and related documentation and packaging. However, a shortage of components or other factors beyond our control could impair our ability to manufacture, or have manufactured, our products.

Backlog

     We typically ship orders immediately upon receipt. To the extent that any backlog may or may not exist at the end of a reporting period, it would be both coincidental and an unreliable indicator of future results of any period.

Seasonality

     Our business is highly seasonal. We typically experience our highest revenue and profits in the calendar year-end holiday season and a seasonal low in revenue and profits in the quarter ending in June.

Employees

     As of March 31, 2003, we employed approximately 4,000 people, of whom over 1,700 were outside the United States. We believe that our ability to attract and retain qualified employees is an important factor in our growth and development and that our future success will depend, in large measure, on our ability to continue to attract and retain qualified employees. To date, we have been successful in recruiting and retaining sufficient numbers of qualified personnel to conduct our business successfully. We believe that our relationships with our employees are good. None of our employees are represented by a union, guild or other collective bargaining organization.

Tracking Stock

     On March 22, 2000, the stockholders of Electronic Arts authorized the issuance of a new series of common stock, designated as Class B Common Stock (“Tracking Stock”). The Tracking Stock was intended to reflect the performance of our online and e-Commerce business segment. When we adopted the Tracking Stock, our intention was to provide liquidity for our online business through access to the

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Executive Officers

     The following table sets forth information regarding our executive officers, who are appointed by and serve at the discretion of the Board of Directors:

     Mr. Probst has been a director of Electronic Arts since January 1991 and currently serves as Chairman and Chief Executive Officer. He was elected as Chairman in July 1994. Mr. Probst has previously served as President of Electronic Arts; as Senior Vice President of EA Distribution, Electronic Arts’ distribution division, from January 1987 to January 1991; and from September 1984, when he joined

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     Mr. Mattrickhas served as President of worldwide EA Studios since September 1997. Prior to this, he served as Executive Vice President, North American Studios, since October 1996. From July 1991 to October 1996, he served as Senior Vice President, North American Studios, Vice President of Electronic Arts and Executive Vice President/ General Manager for EA Canada. Mr. Mattrick was founder and former chairman of Distinctive Software Inc. from 1982 until it was acquired by us in 1991.

     Mr. Riccitiellohas served as President and Chief Operating Officer since October 1997. Prior to joining Electronic Arts, Mr. Riccitiello served as President and Chief Executive Officer of the worldwide bakery division at Sara Lee Corporation. Before joining Sara Lee, he served as President and CEO of Wilson Sporting Goods Co. and has also held executive management positions at Haagen-Dazs, PepsiCo, Inc. and The Clorox Company. Mr. Riccitiello holds a B.S. degree from the University of California, Berkeley.

     Mr. Gordon has served as Executive Vice President and Chief Creative Officer since March 1998. Prior to this, he served as Executive Vice President, Marketing since October 1995. From August 1993 to October 1995, he served as Executive Vice President of EA Studios and as Senior Vice President of Entertainment Production since February 1992. He also served as Senior Vice President of Marketing, as General Manager of EA Studios, as Vice President of Marketing, as Director of Advertising and as Vice President of our former entertainment division while employed by us. Mr. Gordon holds a B.A. degree from Yale University and an M.B.A. degree from Stanford University.

     Mr. Jensonjoined Electronic Arts in June 2002 as Executive Vice President and Chief Financial and Administrative Officer. Before joining Electronic Arts, he was the Senior Vice President and Chief Financial Officer for Amazon.com from 1999 to 2002. From 1998 to 1999, he was the Chief Financial Officer and Executive Vice President for Delta Air Lines. Prior to that, he worked in several positions as part of the General Electric Company. Most notably, he served as Chief Financial Officer and Senior Vice President for the National Broadcasting Company, a subsidiary of General Electric. Mr. Jenson earned his Masters of Accountancy-Business Taxation, and B.S. in Accounting from Brigham Young University.

     Ms. Kennedy has been employed by Electronic Arts since February 1990. She served as Corporate Counsel until March 1991 and is currently Executive Vice President, General Counsel and Secretary. From October 1996 to August 2002, she was Senior Vice President, General Counsel and Secretary. Prior to October 1996, she served as Vice President, General Counsel and Secretary. Ms. Kennedy was elected Secretary in September 1994. Ms. Kennedy is a member of the State Bars of California and New York and received her B.A. degree from William Smith College and her Juris Doctor from the State University of New York.

     Mr. Lee has served as Executive Vice President and Chief Operating Officer, Worldwide Studios since August 2002. From 1998 to August 2002, he was Senior Vice President and Chief Operating Officer, Worldwide Studios. Prior to this, he served as General Manager of EA Canada, Chief Operating Officer of EA Canada, Chief Financial Officer of EA Sports and Vice President, Finance and Administration of EA Canada. Mr. Lee was a principal of Distinctive Software Inc. until it was acquired by EA in 1991. Mr. Lee holds a Bachelor of Commerce degree from the University of British Columbia and is a Chartered Financial Analyst.

     Mr. McMillanwas named Executive Vice President of EA’s worldwide studios in June 2002. From September 1999, he served as Senior Vice President, Worldwide Studios. From 1991 to 1999, he held various senior positions within EA’s Studios. Mr. McMillan was an employee of Distinctive Software Inc. until it was acquired by EA in 1991.

     Mr. Rueff has served as Executive Vice President of Human Resources since August 2002. From October 1998 to August 2002, he served as Senior Vice President of Human Resources. Prior to joining Electronic Arts, Mr. Rueff held various positions with the PepsiCo companies for over 10 years, including: Vice President, International Human Resources; Vice President, Staffing and Resourcing at Pepsi-Cola

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     Ms. Smith has served as Executive Vice President and General Manager, North American Publishing since March 1998. Prior to this, she served as Executive Vice President, North American Sales since October 1996. She previously held the position of Senior Vice President of North American Sales and Distribution from July 1993 to October 1996 and as Vice President of Sales from 1988 to 1993. Ms. Smith has also served as Western Regional Sales Manager and National Sales Manager since she joined Electronic Arts in 1984. Ms. Smith holds a B.S. degree in management and organizational behavior from the University of San Francisco.

     Mr. Carbone has served as Senior Vice President, Finance since December 2000. Prior to this, he served as Vice President, Finance since February 1991. He was elected Assistant Secretary of the Company in March 1991. Mr. Carbone holds a B.S. degree in accounting from King’s College and is a Certified Public Accountant.

     Dr. Florin has served as Senior Vice President and Managing Director, European Publishing since April 2003. Prior to this, he served as Vice President, Managing Director for European countries since 2001. From the time he joined Electronic Arts in 1996 to 2001, he was the Managing Director for German speaking countries. Prior to joining Electronic Arts, Dr. Florin held various positions at BMG, the global music division of Bertelsmann AG, and worked as a consultant with McKinsey. Dr. Florin holds Masters and Ph.D. degrees in Economics from the University of Augsburg, Germany.

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Item 2: Properties

We own or lease the following facilities. We believe that these facilities are adequate for our current needs. We believe that suitable additional or substitute space will be available as needed to accommodate our future needs.

Redwood City, California Headquarters Campus

     In February 1995, we entered into a build-to-suit lease with Keybank National Association on our headquarters facility in Redwood City, California, which was extended in July 2001 and expires in 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 $145.0 million, 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 $128.9 million if the sales price is less than this amount. The lease also provides that a sale of the property to a third party is subject to remarketing conditions including marketing assistance, requisite repairs and maintenance, appropriate notice and seller’s indemnities and warranties.

     In December 2000, we entered into a second build-to-suit lease with Keybank National Association for a five-year term beginning December 2000 to expand our Redwood Shores, California 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 provide space for marketing, sales and research and development. We have an option to purchase the property for $127.0 million 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 $118.8 million if the sales price is less than this amount. The lease also provides that a sale of the property to a third party is subject to remarketing conditions including marketing assistance, requisite repairs and maintenance, appropriate notice and seller’s indemnities and warranties.

     Lease rates are based upon the Commercial Paper Rate. The two lease agreements described above require us to maintain certain financial covenants related to consolidated net worth, fixed charge coverage ratio, total consolidated debt to total consolidated capital and quick ratio, all of which we were in compliance with as of March 31, 2003.

Louisville, Kentucky Distribution Center

North American Development Studios

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England Facilities

Pacific Rim Facilities

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Item 3: Legal Proceedings

     We are subject to pending claims and litigation. Management, after review and consultation with legal counsel, considers that any liability from the disposition of such lawsuits would not have a material adverse effect on our consolidated financial condition or results of operations.

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

     There were no matters submitted to a vote of security holders during the quarter ended March 31, 2003.

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PART II

Item 5: Market for Registrant’s Common Equity and Related Stockholder Matters

Our Class A Common Stock is traded on the Nasdaq National Market under the symbol “ERTS”. The following table sets forth the quarterly high and low price per share of our Class A Common Stock from April 1, 2001 through March 31, 2003. Such prices represent prices between dealers and does not include retail mark-ups, mark-downs or commissions and may not represent actual transactions.

There were approximately 1,787 holders of record of our Common Stock as of June 4, 2003. In addition, we believe that a significant number of beneficial owners of our Class A Common Stock hold their shares in street name.

Dividend Policy

We have not paid any cash dividends and do not anticipate paying cash dividends in the foreseeable future.

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Item 6: Selected Financial Data

ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA
Years Ended March 31, (In thousands, except per share data)

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ELECTRONIC ARTS AND SUBSIDIARIES
SELECTED FIVE-YEAR CONSOLIDATED FINANCIAL DATA (Continued)
Years Ended March 31, (In thousands)

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Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. 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 revenue 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 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 and price protections may materially exceed our estimates 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 may increase as the Xbox, Nintendo GameCube and PlayStation 2 consoles pass the midpoint of their lifecycle and an increasing number and aggregate amount of competitive products heighten pricing and competitive pressures. 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. We determine our allowance for doubtful accounts by evaluating customer creditworthiness 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 cannot predict customer bankruptcies 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 $246.7 million and our allowance for product returns, pricing allowances and doubtful accounts was $164.6 million as of March 31, 2003. As of March 31, 2002, our gross accounts receivable balance was $306.4 million and our allowance for product returns, pricing

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Prepaid royalties

Valuation of long-lived assets, including goodwill and other intangible assets

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 determine if an other-than-temporary impairment has occurred, management makes various assumptions about the future value of the asset, by evaluating future business prospects and estimated cash flows. 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 our ability to accurately predict which platforms and which products we develop will be successful. Also, our revenue and earnings are dependent on our ability to meet our product release schedules. Due to product sales shortfalls, 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. We recorded asset impairment charges of $66.3 million during fiscal 2003 and $12.8 million during fiscal 2002. See Note 19 of the Notes to Consolidated Financial Statements, included in Item 8 hereof, for a discussion of the asset impairment charges recorded.

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 no longer amortize certain other intangible assets, most notably goodwill. In

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Income taxes

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RESULTS OF OPERATIONS

Comparison of Fiscal 2003 to 2002:

Revenue

We principally derive revenue from sales of packaged interactive software games designed for play on videogame consoles (such as the PlayStation 2, Xbox and Nintendo GameCube), PCs and hand-held game machines (such as the Nintendo Game Boy Advance). We also derive additional revenue from selling subscriptions to some of our online games, selling advertisements on our online web pages, selling our packaged goods through our online store and by allowing other companies to manufacture and sell our products in conjunction with other products.

Geographically, our net revenue for the fiscal years ended March 31, 2003 and 2002 break down as follows (in thousands):

Net Revenue

Net Revenue for fiscal 2003 increased by 44 percent as compared to fiscal 2002. The increase in net revenue was driven by the following:

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We expect lower overall industry pricing in fiscal 2004.

North America

For fiscal 2003, net revenue from sales in North America increased by 31 percent to $1.4 billion versus $1.1 billion in fiscal 2002. Growth in North American net revenue was driven by:

Our agreement to distribute Square products in North America will terminate on June 30, 2003 (see Joint Ventures and Investments, included in Item 1 hereof). We recorded $84.5 million in net revenue in fiscal 2003 and $80.8 million in net revenue in fiscal 2002 from sales of Square products in North America.

International

Europe

For fiscal 2003, net revenue from sales in Europe increased by 69 percent to $878.9 million versus $519.5 million in fiscal 2002. Net revenue growth in Europe was driven by:

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Asia Pacific

For fiscal 2003, net revenue from sales in the Asia Pacific region, excluding Japan, increased by 64 percent to $87.6 million versus $53.4 million in fiscal 2002. Growth in net revenue in Asia Pacific was driven by:

Japan

For fiscal 2003, net revenue from sales in Japan increased by 37 percent to $80.1 million versus $58.6 million in fiscal 2002. Growth in net revenue in Japan was driven by:

Revenue by Product Line

Information about our worldwide net revenue by product line for fiscal 2003 and 2002 is presented below (in thousands):

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Net revenue from PlayStation 2 titles increased in fiscal 2003 by 89 percent to $910.7 million versus $482.9 million in the prior fiscal year. The increase was primarily due to the following:

We expect revenue from PlayStation 2 products to continue to grow in fiscal 2004, but not at the same rate as in fiscal 2003.

Net revenue from sales of titles for the PC increased in fiscal 2003 by nine percent to $499.6 million versus $456.3 million in the prior fiscal year. The increase was primarily due to strong sales of The Simsfranchise titles, and the release of SimCity 4, for a combined increase of $71.0 million, partially offset by lower net revenue on prior year releases Black and Whiteand Dune Emperor totaling $32.2 million.We expect revenue from PC products to be relatively flat in fiscal 2004.

Net revenue from sales of Xbox products increased in fiscal 2003 by 180 percent to $219.4 million versus $78.4 million in the prior fiscal period. The increase was primarily due to the following:

We expect net revenue from Xbox products to continue to grow in fiscal 2004, but for the rate of growth to decrease.

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Net revenue from sales of Nintendo GameCube titles increased in fiscal 2003 by 241 percent to $176.7 million versus $51.7 million in the prior fiscal year. The increase was primarily due to the following:

We expect net revenue from Nintendo GameCube products to continue to grow in fiscal 2004, but for the rate of growth to decrease.

As we expected, the decrease in revenue from sales of PlayStation titles in fiscal 2003 compared to fiscal 2002 was attributable to the market transition to newer 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 2004.

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We expected The Sims Online to be our flagship online subscription offering. Through March 31, 2003, however, the number of units sold and number of subscribers for The Sims Online and Earth & Beyondhave been below our expectations. As a result, we canceled most of our plans to develop similar online products and have consolidated the operations of our online games business into our core business. See Note 19 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.

Net revenue from co-publishing products and distribution products increased 40 percent to $375.8 million in fiscal 2003 compared to $269.0 million in the prior fiscal year primarily due to strong sales of hit titles including Kingdom Hearts, 1503 A.D. The New World and higher Battlefield 1942franchise net revenue, for an aggregate increase of $105.0 million in fiscal 2003.

Operations by Segment

In fiscal 2003 and 2002, we operated and reported our business in two business segments:

The EA.com business segment represented our online and e-Commerce businesses. The EA.com business segment included subscription revenue collected for Internet game play on our websites, website advertising, sales of packaged goods for Internet-only games and sales of our packaged goods games sold through the our web store. The Consolidated Statements of Operations includes all revenue and costs directly and indirectly attributable to the EA.com business segment, including charges for shared facilities, functions and services. Certain costs and expenses are subjective and allocations were based on management’s estimates. See Note 18 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.

In March 2003, we consolidated the operations of the EA.com business segment into our core business. We now consider online functionality to be integral to our existing and future products. Accordingly,

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Our view and reporting of business segments may change due to changes in the underlying business facts and circumstances and the evolution of our reporting to our Chief Operating Decision Maker.

Information about our operations by segment for fiscal 2003 and 2002 is presented below (in thousands):

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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 disk-based and cartridge-based products consists of actual product costs, royalties expense for celebrities, professional sports and other organizations and independent software developers, manufacturing royalties, net of volume discounts, expense for defective products, write-off of post-launch prepaid royalty costs, and operations expense. Cost of goods sold for our online product 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 website advertising business consists primarily of ad serving costs.

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Marketing and Sales.Marketing and sales expenses consist of personnel-related costs, advertising and marketing and promotional expenses, net of coop advertising expense reimbursements. In addition, marketing and sales includes the amortization of the fees payable under our agreement with AOL for the distribution, or “carriage”, of our online games on their network, which began with the launch of our online games service in October 2000. See Note 5 of the Notes to Consolidated Financial Statements, included in Item 8 hereof.

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 our products and write-offs of pre-launch prepaid royalties. Research and development expenses for the EA.com business segment include expenses incurred by EA Studios consisting of direct development costs and related overhead costs in connection with the development and production of our online games. Research and development expenses also include network development and support costs directly incurred by the EA.com business segment. Network development and support costs consist of expenses associated with development of website 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 as a percentage of revenue decreased by 4 percentage points to 43.2 percent in fiscal 2003 from 47.2 percent in fiscal 2002 primarily due to:

Marketing and sales expenses increased by 37.9 percent in fiscal 2003 compared to fiscal 2002 primarily due to:

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As a percentage of net revenue, marketing and sales expenses declined from 14.0 percent of net revenue in fiscal 2002 to 13.4 percent of revenue in fiscal 2003. Marketing and sales includes vendor reimbursements for advertising expenses of $28.2 million in fiscal 2003 and $8.9 million in fiscal 2002 to support key titles.

General and administrative expenses increased by 22.2 percent in fiscal 2003 compared to fiscal 2002 primarily due to an increase in payroll costs of $26.9 million to support the increased growth of these functions worldwide.

As a percentage of net revenue, general and administrative expenses declined from 6.2 percent of net revenue in fiscal 2002 to 5.3 percent of net revenue.

Research and development expenses increased by 5.4 percent in fiscal 2003 compared to fiscal 2002 primarily due to:

As a percentage of revenue, research and development expenses declined from 22.0 percent of net revenue in fiscal 2002 to 16.1 percent of net revenue in fiscal 2003. Research and development includes vendor reimbursements for development expenses of $15.0 million in fiscal 2003 and $17.0 million in fiscal 2002 to support key titles.

We expect research and development spending to increase in fiscal 2004 due to an increase in development spending for next generation console products including the PlayStation 2, Xbox and Nintendo GameCube, as well as extending our investment in the PC platform.

Amortization of intangibles results primarily from our acquisitions of Westwood, Kesmai, DreamWorks Interactive, ABC Software, Pogo and other acquisitions. Amortization of intangibles was $3.5 million for the EA Core business segment and $4.0 million for the EA.com business segment for fiscal 2003. Amortization of intangibles was $12.9 million for the EA Core business segment and $12.5 million for the EA.com business segment for fiscal 2002.

The decrease in amortization in fiscal 2003 of $17.9 million, was driven by:

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In addition, we recorded intangible impairment charges relating to our restructuring of the EA.com business segment of $12.4 million in fiscal 2003 and $1.6 million in fiscal 2002 (see our discussion under “Restructuring and Asset Impairment Charges” below).

EA Core Business Segment

The exit plans resulted in a workforce reduction of approximately 33 personnel in development and administrative departments. The estimated costs for consolidation of facilities included contractual rental commitments under the real estate lease for vacated office space, offset by estimated future sub-lease income. In addition, the exit plans resulted in the write-off of certain non-current fixed assets, primarily leasehold improvements.

Additionally, during fiscal 2003, we consolidated our Los Angeles, Irvine and Las Vegas studios into one major game development studio in Los Angeles. These measures were taken in order to maximize efficiencies and streamline the creative development process and operations of our studios. In connection with these consolidation activities, we recorded a total pre-tax restructuring charge of $3.1 million and asset impairment charges of $2.0 million. This charge includes $1.6 million for the shutdown of facilities related to non-cancelable lease payments for permanently vacated properties and associated costs, $2.0 million for the write-off of abandoned equipment and leasehold improvements at facilities that were permanently vacated and $1.5 million for employee severance expenses related to involuntary terminations.

EA.com Business Segment

Fiscal 2003 Restructuring

The restructuring plan resulted in the termination of approximately 50 employees, mostly in research and development. The estimated costs for consolidation of facilities and other administrative charges included contractual rental commitments under real estate leases for unutilized office space offset by estimated future sub-lease income and costs to close the facilities.

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We performed an evaluation of asset impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, to adjust the depreciable assets and remaining finite-lived identifiable intangibles utilized in the EA.com business segment to their estimated fair value. This test was performed in the fourth quarter of fiscal 2003 and the measurement date was January 1, 2003. In February 2003, our only outside holder of Class B common stock, AOL, exercised its right to exchange its Class B shares for shares of Class A common stock. In late December 2002, we launched The Sims Online, an online game based on our very popular The Simsline of PC games, which have sold over 20 million units worldwide. The Sims Online was expected to be our flagship online subscription offering. Through March 31, 2003, the number of units sold and number of subscribers forThe Sims Online, along with other EA.com business segment revenue, were significantly below our expectations. As a result of these triggering events in the fourth quarter of fiscal 2003, we canceled most of our plans to develop similar online products and substantially reduced our expected future undiscounted cash flows related to these long-lived assets. We recorded impairment charges on long-lived assets of $62.9 million, including $24.9 million relating to impaired customized internal-use software systems for our online games and website infrastructure, $25.6 million for other long-lived assets and $12.4 million of finite-lived intangibles impairment charges relating to our Kesmai and Pogo online game studios. There are no assurances that the impairment factors evaluated by management will not change in subsequent periods and accordingly, we may record additional impairment charges in future periods.

In conjunction with our annual policy to reassess the remaining useful lives of goodwill and certain indefinite-lived intangibles and to test the recoverability of these long-lived assets in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets”, as of January 1, 2003, we also performed fair-value-based tests to evaluate impairment of assets included in the EA.com reporting unit. Under this test, the fair-value-based tests did not indicate an impairment of our recorded goodwill and certain indefinite-lived intangibles at the EA.com reporting unit level. However, future impairment tests could result in a charge to earnings and a corresponding write down of goodwill and certain indefinite-lived intangibles.

The following table reflects our unaudited pro forma consolidated basic earnings (loss) per share for the years ended 2003, 2002 and 2001 as if the consolidation of the operations of our EA.com business segment into our core business had occurred at the beginning of each of the periods presented (in thousands, except per share data):

Fiscal 2002 Restructuring

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The restructuring plan resulted in the termination of approximately 270 employees, or one-third of the EA.com business segment workforce, which affected all departments across the organization. The estimated costs for consolidation of facilities are comprised of contractual rental commitments under real estate leases for vacated office space offset by estimated future sub-lease income. Included in these costs are estimated costs to close offices or consolidate facilities in various locations and costs to write off a portion of the assets from these facilities.

In addition, our restructuring efforts required an evaluation of asset impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of”, to adjust these depreciable assets and certain intangibles to their estimated fair value. We evaluated the impact of consolidating or abandoning certain online technologies and processes and reviewed the effect of changes to our subscription online product offerings in relation to the asset base of the EA.com business segment. As a result, it was determined that certain long-lived assets would be abandoned or were related to products or services that had been discontinued and would therefore be written-down to their estimated net disposal value. Impairment charges on long-lived assets amounted to $12.8 million, including $11.2 million relating to abandoned technologies consisting of customized internal-use software systems for our online infrastructure, $1.0 million of intangibles impairment charges related to our Kesmai online development studio resulting from discontinuing associated products and services and $0.6 million of goodwill charges relating to our San Diego online game studio closure. We may change these impairment factors in subsequent periods and accordingly, we could record additional impairment charges in future periods.

Interest and other income, net, in fiscal 2003 decreased from fiscal 2002 primarily due to:

Our effective tax rate was 31.0 percent for fiscal 2003 and fiscal 2002.

Reported net income increased in fiscal 2003 compared to fiscal 2002 primarily related to:

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Although the dollar amount of expenses rose in fiscal 2003 versus fiscal 2002, net income as a percentage of sales increased to 12.8 percent versus 5.9 percent as expenses grew at a slower rate than did our revenues.

Comparison of Fiscal 2002 to 2001:

Revenue

Geographically, our net revenue for the fiscal years ended March 31, 2002 and 2001 break down as follows: (in thousands):

North America Net Revenue

The increase in North America net revenue for fiscal 2002 compared to fiscal 2001 was primarily attributable to:

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International Net Revenue

The increase in international net revenue for fiscal 2002 compared to fiscal 2001 was attributable to the following:

Information about our worldwide net revenue by product line for fiscal 2002 and 2001 is presented below (in thousands):