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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________________

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2010


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

For the transition period from _______ to _______

Commission file number 0-18813

___________________________________________________________

THQ INC.

(Exact Name of Registrant as Specified in Its Charter)


	Delaware		13-3541686
	(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

	29903 Agoura Road
	Agoura Hills, CA		91301
	(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (818) 871-5000

___________________________________________________________

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


	Large accelerated filer o		Accelerated filer x
	Non-accelerated filer o		Smaller reporting company o
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding of the registrant's common stock as of October 29, 2010 was approximately 67,947,685.

Table of Contents

THQ INC. AND SUBSIDIARIES

INDEX


Part I - Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited):	3

	Condensed Consolidated Balance Sheets — September 30, 2010 and March 31, 2010	3

	Condensed Consolidated Statements of Operations — for the Three and Six Months Ended September 30, 2010 and 2009	4

	Condensed Consolidated Statements of Total Equity — for the Six Months Ended September 30, 2010 and 2009	5

	Condensed Consolidated Statements of Cash Flows — for the Six Months Ended September 30, 2010 and 2009	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	37

Part II - Other Information

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	(Removed and Reserved)	45

Item 5.	Other Information	45

Item 6.	Exhibits	46

Signatures		47

Table of Contents

Part I — Financial Information

Item 1. Condensed Consolidated Financial Statements

THQ INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	September 30, 2010			March 31, 2010
	(Unaudited)			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	66,391		$	188,378
Short-term investments	56,372			82,941
Cash, cash equivalents and short-term investments	122,763			271,319
Short-term investments, pledged	—			22,774
Accounts receivable, net of allowances	10,511			41,318
Inventory	21,234			13,970
Licenses	74,998			56,555
Software development	170,271			132,223
Deferred income taxes	7,297			5,590
Income taxes receivable	1,067			4,914
Prepaid expenses and other current assets	40,347			13,864
Total current assets	448,488			562,527
Property and equipment, net	31,038			28,374
Licenses, net of current portion	95,436			83,752
Software development, net of current portion	53,802			26,792
Deferred income taxes	433			433
Long-term investments	1,892			1,851
Other long-term assets, net	12,271			10,600
TOTAL ASSETS	$	643,360		$	714,329

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	59,167		$	40,305
Accrued and other current liabilities	141,677			137,332
Secured credit line	—			13,249
Total current liabilities	200,844			190,886
Other long-term liabilities	82,856			98,825
Convertible senior notes	100,000			100,000
Commitments and contingencies (see Note 11)

THQ Inc. stockholders' equity:
Preferred stock, par value $0.01, 1,000,000 shares authorized	—			—
Common stock, par value $0.01, 225,000,000 shares authorized as of September 30, 2010; 67,923,406 and 67,729,952 shares issued and outstanding as of September 30, 2010 and March 31, 2010, respectively	679			677
Additional paid-in capital	517,312			511,922
Accumulated other comprehensive income	14,875			7,867
Accumulated deficit	(273,206		)	(196,111		)
Total THQ Inc. stockholders' equity	259,660			324,355
Noncontrolling interest	—			263
Total equity	259,660			324,618
TOTAL LIABILITIES AND EQUITY	$	643,360		$	714,329

See notes to condensed consolidated financial statements.

Table of Contents

THQ INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


	For the Three Months Ended September 30,						For the Six Months Ended September 30,
	(Unaudited)						(Unaudited)
	2010			2009			2010			2009
Net sales	$	77,053		$	101,290		$	226,432		$	344,791
Cost of sales:
Product costs	35,003			38,975			95,706			118,904
Software amortization and royalties	21,162			24,191			54,515			69,227
License amortization and royalties	9,583			(9,049		)	30,473			23,490
Total cost of sales	65,748			54,117			180,694			211,621

Gross profit	11,305			47,173			45,738			133,170
Operating expenses:
Product development	17,900			19,304			34,375			41,462
Selling and marketing	24,023			19,028			57,649			57,471
General and administrative	11,878			14,055			23,722			30,633
Restructuring	(161		)	870			7			2,522
Total operating expenses	53,640			53,257			115,753			132,088

Operating income (loss)	(42,335		)	(6,084		)	(70,015		)	1,082
Interest and other income (expense), net	(3,991		)	290			(5,581		)	349
Income (loss) before income taxes	(46,326		)	(5,794		)	(75,596		)	1,431
Income taxes	659			154			1,499			1,154
Net income (loss) prior to allocation of noncontrolling interest	(46,985		)	(5,948		)	(77,095		)	277
Loss attributable to noncontrolling interest	—			378			—			562
Net income (loss) attributable to THQ Inc.	$	(46,985	)	$	(5,570	)	$	(77,095	)	$	839

Earnings (loss) per share attributable to THQ Inc. - basic	$	(0.69	)	$	(0.08	)	$	(1.14	)	$	0.01
Earnings (loss) per share attributable to THQ Inc. - diluted	$	(0.69	)	$	(0.08	)	$	(1.14	)	$	0.01

Shares used in per share calculation - basic	67,813			67,462			67,779			67,466
Shares used in per share calculation - diluted	67,813			67,462			67,779			67,745

See notes to condensed consolidated financial statements.

Table of Contents

THQ INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF TOTAL EQUITY

(In thousands, except share data)

Six Months Ended September 30, 2010

(Unaudited)


	Common stock				Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Non-Controlling Interest			Total Equity
	Shares		Amount		Additional Paid-In Capital			Accumulated Other Comprehensive Income			Accumulated Deficit			Non-Controlling Interest			Total Equity
Balance at March 31, 2010	67,729,952		$	677	$	511,922		$	7,867		$	(196,111	)	$	263		$	324,618
Exercise of options	17,555		—		83			—			—			—			83
Issuance of common stock	20,250		—		—			—			—			—			—
Issuance of ESPP shares	144,692		2		435			—			—			—			437
Issuance of restricted stock, net	(1,350	)	—		(7		)	—			—			—			(7		)
Conversion of stock unit awards	12,307		—		(39		)	—			—			—			(39		)
Stock-based compensation	—		—		4,918			—			—			—			4,918
Sale of noncontrolling interest	—		—		—			—			—			(263		)	(263		)
Comprehensive loss:
Net loss	—		—		—			—			(77,095		)	—			(77,095		)
Other comprehensive income (loss):
Foreign currency translation gain	—		—		—			4,534			—			—			4,534
Unrealized gain on investments, net of tax	—		—		—			2,721			—			—			2,721
Reclassification of gain on investments included in net loss, net of tax	—		—		—			(247		)	—			—			(247		)
Comprehensive loss	—		—		—			7,008			(77,095		)	—			(70,087		)
Balance at September 30, 2010	67,923,406		$	679	$	517,312		$	14,875		$	(273,206	)	$	—		$	259,660

Six Months Ended September 30, 2009

(Unaudited)


	Common stock				Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-Controlling Interest			Total Equity
	Shares		Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Non-Controlling Interest			Total Equity
Balance at March 31, 2009	67,471,659		$	675	$	495,851	$	(2,392	)	$	(187,094	)	$	3,198		$	310,238
Exercise of options	41,378		—		215		—			—			—			215
Conversion of stock unit awards	23,545		—		—		—			—			—			—
Cancellation of restricted stock	(24,841	)	—		—		—			—			—			—
Stock-based compensation	—		—		5,083		—			—			—			5,083
Taxes related to stock options	—		—		4,147		—			—			—			4,147
Comprehensive income:
Net income (loss)	—		—		—		—			839			(562		)	277
Other comprehensive income (loss):
Foreign currency translation gain	—		—		—		13,011			—			—			13,011
Unrealized gain on investments, net tax	—		—		—		2,218			—			—			2,218
Reclassification of gain on investments included in net income, net of tax	—		—		—		(641		)	—			—			(641		)
Comprehensive income (loss)	—		—		—		14,588			839			(562		)	14,865
Balance at September 30, 2009	67,511,741		$	675	$	505,296	$	12,196		$	(186,255	)	$	2,636		$	334,548

See notes to condensed consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


	For the Six Months Ended September 30,
	(Unaudited)
	2010			2009
OPERATING ACTIVITIES:
Net income (loss) prior to allocation of noncontrolling interest	$	(77,095	)	$	277
Adjustments to reconcile net income (loss) prior to allocation of noncontrolling interest to net cash used in operating activities:
Depreciation and amortization	5,616			7,099
Amortization of licenses and software development⁽¹⁾	66,648			93,421
Loss on disposal of property and equipment	10			489
Restructuring charges	7			2,522
Change in deferred revenue and related expenses⁽³⁾	4,053			(5,230		)
Amortization of debt issuance costs	393			136
Amortization of interest	763			105
Gain on investments	(332		)	(734		)
Stock-based compensation⁽²⁾	4,357			5,388
Changes in operating assets and liabilities:
Accounts receivable, net of allowances	30,204			56,931
Inventory	(6,992		)	(14,056		)
Licenses	(23,940		)	(3,270		)
Software development⁽³⁾	(116,763		)	(91,527		)
Prepaid expenses and other current assets⁽³⁾	(24,129		)	(19,652		)
Accounts payable	18,202			2,336
Accrued and other liabilities⁽³⁾	(39,446		)	(63,712		)
Income taxes	2,193			(6,122		)
Net cash used in operating activities	(156,251		)	(35,599		)

INVESTING ACTIVITIES:
Proceeds from sales and maturities of available-for-sale investments	93,248			8,776
Proceeds from sales and maturities of trading investments	22,775			2,925
Purchases of available-for-sale investments	(64,781		)	(39,989		)
Other long-term assets	(474		)	(124		)
Acquisitions, net of cash acquired	—			(840		)
Purchases of property and equipment	(8,265		)	(3,268		)
Net cash provided by (used in) investing activities	42,503			(32,520		)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock to employees	520			215
Payment of debt issuance costs	—			(3,646		)
Proceeds from issuance of convertible senior notes	—			100,000
Borrowings on secured credit line	—			2,500
Payment of secured credit line	(13,249		)	(8,441		)
Net cash provided by (used in) financing activities	(12,729		)	90,628
Effect of exchange rate changes on cash	4,490			10,633
Net increase (decrease) in cash and cash equivalents	(121,987		)	33,142
Cash and cash equivalents - beginning of period	188,378			131,858
Cash and cash equivalents - end of period	$	66,391		$	165,000

________________________________


⁽¹⁾	Excludes amortization of capitalized stock-based compensation expense


⁽²⁾	Includes the net effects of capitalization and amortization of stock-based compensation expense.


⁽³⁾	Six months ended September 30, 2009 has been reclassified to conform to current period presentation with respect to change in deferred revenue and related expenses.

See notes to condensed consolidated financial statements.

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THQ INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present the results of operations, financial position and cash flows of THQ Inc. and its subsidiaries (collectively "THQ", we, us, our or the "Company"). In the opinion of management, the accompanying condensed consolidated balance sheets and related interim condensed consolidated statements of operations, condensed consolidated statements of total equity, and condensed consolidated statements of cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to accounts receivable allowances, licenses, software development, revenue recognition, stock-based compensation expense and income taxes. Interim results are not necessarily indicative of results for a full year. The balance sheet at March 31, 2010 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010.

Cost of Sales — License Amortization and Royalties. Prior to April 1, 2010, we presented "Venture partner expense" related to the license agreement that the THQ / JAKKS Pacific LLC ("LLC") joint venture, comprised of THQ and JAKKS Pacific, Inc. ("Jakks"), had with WWE as a separate line item in the "Cost of sales" section of our statements of operations. On December 31, 2009, the LLC was dissolved, the WWE license held by the LLC was terminated, and a new eight-year license was entered into directly between THQ and WWE. The final expenses related to the joint venture were recorded as of December 31, 2009. In this Quarterly Report on Form 10-Q, we include the historical venture partner expense for the three and six months ended September 30, 2009, within "Cost of sales — License amortization and royalties" in our statements of operations for comparability.

“Venture partner expense” in the three and six months ended September 30, 2009 was a benefit of $23.7 million and $22.4 million, respectively. The benefit reflects the settlement agreement we entered into with Jakks on August 17, 2009 that established the preferred payment rate owed to Jakks at a rate that was 40% lower than the previous contract rate. We had been accruing this expense at the contract payment rate that expired June 30, 2006, which, prior to the settlement, was the best basis available upon which to estimate this expense. As a result of establishing the preferred payment rate for the period that had been under dispute, we revised our previous estimate, which resulted in a one-time benefit in “Venture partner expense” of $24.2 million during the three months ended September 30, 2009. Excluding this one-time benefit, “Venture partner expense” in the three and six months ended September 30, 2009 would have been $0.5 million and $1.8 million, respectively, which reflected the 40% lower payment rate. Further, excluding this one-time benefit from this Quarterly Report on Form 10-Q, “Cost of sales - License amortization and royalties” in the three and six months ended September 30, 2009 would have been $15.2 million and $47.7 million, respectively.

Noncontrolling Interest. Prior to April 30, 2010, we consolidated the results of THQ*ICE LLC (a joint venture with ICE Entertainment, Inc.) in the consolidated financial statements as we believed we were the primary beneficiary and would have received the majority of expected returns or absorbed the majority of expected losses of THQ*ICE LLC. We sold our interest in THQ*ICE LLC on April 30, 2010 and recognized an insignificant gain.

Revenue Recognition. In instances where we have both vendor specific objective evidence ("VSOE") for the fair value of an undelivered online service component of our games and a continuing involvement in providing the online service, we bifurcate the fair value of the online service component from the revenue recognized on the sale of the boxed product. The fair value of the online service component, and the related specifically identifiable costs of providing the online service, such as server hosting and license royalties, if any, are deferred and recognized ratably over the estimated online service period of six months, beginning the month after shipment of the software product. This timeframe is consistent with our revenue recognition for sales of boxed product where the online service is considered a deliverable, we have a significant continuing involvement in providing the online service, and we do not have VSOE for the fair value of the online service component.

Fiscal Quarter. We report our fiscal year on a 52/53-week period with our fiscal year ending on the Saturday nearest March 31. For simplicity, all fiscal periods in our condensed consolidated financial statements and accompanying notes are presented as ending on a calendar month end. The results of operations for the three and six months ended September 30, 2010 and 2009

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contain the following number of weeks:


Fiscal Period	Number of Weeks	Fiscal Period End Date
Three months ended September 30, 2010	13 weeks	October 2, 2010
Three months ended September 30, 2009	13 weeks	September 26, 2009
Six months ended September 30, 2010	26 weeks	October 2, 2010
Six months ended September 30, 2009	26 weeks	September 26, 2009

2. Cash and Cash Equivalents

The following table summarizes the components of our cash and cash equivalents (in thousands):


	September 30, 2010		March 31, 2010
Cash and time deposits	$	38,447	$	116,170
Money market funds	21,917		21,049
Negotiable certificates of deposit⁽¹⁾	5,338		28,545
Corporate securities	689		8,439
Municipal securities⁽²⁾	—		14,175
Cash and cash equivalents	$	66,391	$	188,378

________________________________________________


⁽¹⁾	Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.


⁽²⁾	Municipal securities consist of bonds issued or deemed to be guaranteed by non-U.S. governments.

At September 30, 2010 and March 31, 2010, we had $6.0 million and $51.2 million, respectively, of trading securities classified as cash equivalents. These investments are made up of negotiable certificates of deposit, corporate securities, and municipal securities, which, when purchased by us, had remaining maturities of three months or less. Gains and losses recognized on these investments in the three and six months ended September 30, 2010, were immaterial. During the six months ended September 30, 2009 we did not hold any trading securities classified as cash equivalents.

3. Investment Securities

The following table summarizes our investment securities and their related inception-to-date gross unrealized gains and (losses), as of September 30, 2010 (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
Municipal securities⁽¹⁾	$	3,412	$	248	$	(1	)	$	3,659
Corporate securities	47,254		2,087		(75		)	49,266
Negotiable certificates of deposit⁽²⁾	3,221		226		—			3,447
Total short-term investments	53,887		2,561		(76		)	56,372
Long-term investments:
Municipal securities⁽³⁾	2,000		—		(108		)	1,892
Total long-term investments	2,000		—		(108		)	1,892
Total available-for-sale investment securities	$	55,887	$	2,561	$	(184	)	$	58,264

________________________________________________


⁽¹⁾	Municipal securities classified as short-term includes bonds issued or deemed to be guaranteed by non-U.S. governments.


⁽²⁾	Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.


⁽³⁾	Municipal securities classified as long-term, consist of municipal Auction Rate Securities ("ARS") substantially all of which are backed by monoline bond insurance companies.

The following table summarizes our investment securities and their related inception-to-date gross unrealized gains and (losses), as of March 31, 2010 (in thousands):

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	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
Municipal securities⁽¹⁾	$	17,222	$	26	$	(7	)	$	17,241
Corporate securities	64,220		187		(53		)	64,354
Negotiable certificates of deposit⁽²⁾	1,347		—		(1		)	1,346
Total short-term investments	82,789		213		(61		)	82,941
Long-term investments:
Municipal securities⁽³⁾	2,000		—		(149		)	1,851
Total long-term investments	2,000		—		(149		)	1,851
Total available-for-sale investment securities	$	84,789	$	213	$	(210	)	84,792
Put option								1,738
Trading securities⁽⁴⁾								21,036
Total short-term investments, pledged								22,774
Total investment securities								$	107,566

________________________________________________


⁽¹⁾	Municipal securities classified as short-term includes bonds issued or deemed to be guaranteed by non-U.S. governments, U.S. agency securities, U.S. Treasury securities, and local governments.


⁽²⁾	Negotiable certificates of deposit consist of certificates issued by institutions outside the U.S.


⁽³⁾	Municipal securities classified as long-term, consist of municipal ARS substantially all of which are backed by monoline bond insurance companies.


⁽⁴⁾	Trading securities classified as short-term, pledged, consist of student loan ARS substantially all of which are guaranteed by the U.S. government under the Federal Family Educational Loan Program and backed by monoline bond insurance companies.

Available-for-sale investments

Our entire portfolio of available-for-sale investments had a fair value of $58.3 million at September 30, 2010, and inception-to-date net unrealized gains of $2.4 million (inclusive of gains and losses resulting from changes in foreign currency rates) that are recorded in accumulated other comprehensive income. Included in our portfolio of available-for-sale investments at September 30, 2010, are securities with inception-to-date gross unrealized losses of $0.2 million; these losses are temporary, as we believe the decline in fair value is primarily attributable to the limited liquidity of these investments. During the six months ended September 30, 2010 and September 30, 2009, no securities had an other-than-temporary impairment.

At September 30, 2010 and March 31, 2010 our portfolio of available-for-sale investments included two investments that have been in a continuous unrealized loss position for more than 12 months; both investments are long-term municipal ARS. The inception-to-date unrealized losses and fair value of these investments at both September 30, 2010 and March 31, 2010 was $0.1 million and $1.9 million, respectively. These losses are temporary as we believe the decline in fair value is primarily attributable to the limited liquidity of these investments.

In the six months ended September 30, 2010 and 2009 we had pre-tax net unrealized gains of $2.7 million and $0.8 million on available-for-sale securities that is included in accumulated other comprehensive income. In addition, in the six months ended September 30, 2010 and 2009, we had pre-tax unrealized holding gains of $0.4 million and $1.8 million, respectively, on our investment in Yuke's Co., Ltd. ("Yuke's") that is classified as available-for-sale and is included in other long-term assets, net (see "Note 6 — Other Long-Term Assets").

Realized gains and losses on sales of available-for-sale securities are recognized in net income (loss) on the specific identification basis and are included in interest and other income (expense), net in the condensed consolidated statements of operations. Pre-tax realized gains and losses in the three and six months ended September 30, 2010 are shown in the table below (in thousands):


	Three Months Ended September 30,				Six Months Ended September 30,
	2010		2009		2010		2009
Pre-tax realized gains	$	686	$	100	$	711	$	600
Pre-tax realized losses	$	41	$	—	$	380	$	—

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The following table summarizes the amortized cost and fair value of our available-for-sale investment securities, classified by stated maturity, at September 30, 2010 (in thousands):


	Amortized Cost		Fair Value
Short-term investments:
Due in one year or less	$	38,420	$	39,982
Due after one year through five years	15,467		16,390
Total short-term investments	53,887		56,372
Long-term investments:
Due in one year or less	500		490
Due after ten years	1,500		1,402
Total long-term investments	2,000		1,892
Total available-for-sale investment securities	$	55,887	$	58,264

Auction Rate Securities

At September 30, 2010, we had $1.9 million of ARS classified as long-term available-for-sale investments. These ARS are variable rate bonds tied to short-term interest rates with long-term maturities. ARS have interest rate resets through a modified Dutch auction at predetermined short-term intervals, typically every 7, 28, or 35 days. Interest on ARS is generally paid at the end of each auction process or semi-annually and is based upon the interest rate determined during the prior auction.

At March 31, 2010, we had $1.9 million of ARS classified as long-term available-for-sale investments, and $21.0 million of ARS classified as short-term trading investments, pledged. In addition, as further discussed below, we held a $1.7 million put option related to the short-term trading ARS that was also classified as short-term investments, pledged.

In October 2008, we entered into a settlement agreement with UBS Financial Services Inc. ("UBS"), the broker of certain of our ARS (the "UBS Agreement"). The UBS Agreement provided us with Auction Rate Securities Rights ("Rights") to sell such ARS to UBS at the par value of the underlying securities at any time during the period from June 30, 2010 through July 2, 2012 and in return, we agreed to release UBS from certain potential claims related to the ARS in certain specified circumstances. These Rights were a freestanding instrument accounted for separately from the ARS, and were registered, nontransferable securities accounted for as a put option. At March 31, 2010, the put option had a fair value of $1.7 million and was recorded in short-term investments, pledged in our consolidated balance sheet along with the underlying ARS which had a fair value of $21.0 million.

On June 30, 2010, we exercised our Rights and sold all of the remaining ARS underlying the UBS Agreement to UBS at par value in accordance with the terms of the UBS Agreement. Accordingly, in the three months ended June 30, 2010, we recognized a loss of $1.7 million due to the exercise of the put option, which is recorded in interest and other income (expense), net in the condensed consolidated statement of operations. This loss was offset by a gain of $1.7 million on the settlement of the underlying ARS.

Additionally, pursuant to the UBS Agreement, we entered into a Credit Agreement with UBS Bank USA, which allowed us to borrow up to 75% of the market value of the ARS (as determined by UBS) at any time, on a no net interest basis, to the extent that such ARS continued to be illiquid or until June 30, 2010 (see "Note 8 — Secured Credit Line"). In the three months ended June 30, 2010, we repaid the entire amount outstanding under the credit line, which was $13.2 million. The credit line established pursuant to the Credit Agreement was secured by certain of our ARS held with UBS. At June 30, 2010 we had no borrowings outstanding under the Credit Agreement and thus the credit line was terminated, pursuant to its terms, on July 2, 2010.

4. Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. We used the following methods and assumptions to estimate the fair value of our investment securities:

• Level 1 — Quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to

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access at the measurement date. We do not adjust the quoted prices for these investments.

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 — Discounted cash flow analysis using unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, as discussed further below.

Our policy is to recognize transfers between these levels of the fair value hierarchy as of the beginning of the reporting period.

The following table summarizes our financial assets measured at fair value on a recurring basis as of September 30, 2010 (in thousands):


	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	21,917	$	—	$	—	$	21,917
Negotiable certificates of deposit	—		5,338		—		5,338
Corporate Securities	—		689		—		689
Short-term investments:
Municipal securities	—		3,659		—		3,659
Corporate securities	—		49,266		—		49,266
Negotiable certificates of deposit	—		3,447		—		3,447
Long-term investments:
Municipal securities	—		—		1,892		1,892
Other long-term assets, net:
Investment in Yuke's	5,955		—		—		5,955
Total	$	27,872	$	62,399	$	1,892	$	92,163

Level 3 assets at September 30, 2010 consist of AAA/Aaa rated ARS, which are backed by monoline bond insurance companies. We historically invested in these securities as part of our cash management program. However, the lack of liquidity in these credit markets has prevented us and other investors from selling these securities. As such, these investments which were not subject to the UBS Agreement, are classified as long-term at September 30, 2010 to reflect the lack of liquidity. We believe we have the ability to, and intend to, hold these ARS classified as available-for-sale until the auction process recovers or the securities mature. These securities are investment grade, and we have no reason to believe that any of the underlying issuers of these ARS are presently at risk or that the underlying credit quality of the assets backing these ARS has been impacted by the reduced liquidity of these investments. We have continued to receive interest payments on these ARS according to their terms.

We have estimated the fair value of these ARS using a discounted cash flow analysis that considered the following key inputs: i) credit quality, ii) estimates on the probability of the issue being called or sold prior to final maturity, iii) current market rates, and iv) estimates of the next time the security is expected to have a successful auction. The contractual terms of these securities do not permit the issuer to call, prepay or otherwise settle the securities at prices less than the stated par value of the security.

The following table summarizes our financial assets measured at fair value on a recurring basis as of March 31, 2010 (in thousands):

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	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	21,049	$	—	$	—	$	21,049
Negotiable certificates of deposit	—		28,545		—		28,545
Corporate securities	—		8,439		—		8,439
Municipal securities	—		14,175		—		14,175
Short-term investments:
Municipal securities	—		17,241		—		17,241
Corporate securities	—		64,354		—		64,354
Negotiable certificates of deposit	—		1,346		—		1,346
Short-term investments, pledged:
Student loan ARS	—		—		21,036		21,036
Put option	—		—		1,738		1,738
Long-term investments:
Municipal securities	—		—		1,851		1,851
Other long-term assets, net:
Investment in Yuke's	5,564		—		—		5,564
Total	$	26,613	$	134,100	$	24,625	$	185,338

Level 3 assets at March 31, 2010 primarily consist of ARS, the majority of which are AAA/Aaa rated and collateralized by student loans guaranteed by the U.S. government under the Federal Family Education Loan Program and backed by monoline bond insurance companies. Substantially all of the remaining ARS are also backed by monoline bond insurance companies.

In connection with the UBS Agreement, as discussed in "Note 3 — Investment Securities," at March 31, 2010, we had a put option with a fair value of $1.7 million recorded in short-term investments, pledged in our condensed consolidated balance sheet. We elected fair value accounting for the put option in order to mitigate volatility in earnings caused by accounting for the put option and underlying ARS under different methods. We estimated the value of the put option as the difference between the par value of the underlying ARS and the fair value of the ARS, after applying an estimated risk discount, as the put option gave us the right to sell the underlying ARS to the broker during the period June 30, 2010 to July 2, 2012 for a price equal to the par value. On June 30, 2010, we exercised the put option and sold all of the remaining ARS underlying the UBS Agreement to UBS at par value in accordance with the terms of the UBS Agreement.

The following tables provide a summary of changes in fair value of our Level 3 financial assets in the three and six months ended September 30, 2010 and 2009 (in thousands):


	Three Months Ended September 30,
	2010		2009
Beginning balance	$	1,840	$	35,399
Total gains or (losses) (realized/unrealized):
Included in earnings	—		76
Included in accumulated other comprehensive income	52		424
Purchases, sales, issuances and settlements, net	—		(3,850		)
Transfers in/out of Level 3	—		(2,411		)
Ending balance	$	1,892	$	29,638

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	Six Months Ended September 30,
	2010			2009
Beginning balance	$	24,625		$	35,643
Total gains or (losses) (realized/unrealized):
Included in earnings	1			93
Included in accumulated other comprehensive income	41			213
Purchases, sales, issuances and settlements, net	(22,775		)	(3,900		)
Transfers in/out of Level 3	—			(2,411		)
Ending balance	$	1,892		$	29,638

In the three and six months ended September 30, 2009, transfers out of Level 3 represent ARS for which we received a call notice prior to September 30, 2009. Accordingly, these ARS were valued using Level 1 inputs and were classified as short-term investments in the condensed consolidated financial statements at September 30, 2009.

Financial Instruments

The carrying value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, accrued royalties, and secured credit line approximate fair value based on their short-term nature. Investments classified as available for sale and trading are stated at fair value.

The book value and fair value of our convertible senior notes at September 30, 2010 was $100.0 million and $87.1 million, respectively; the fair value was determined using quoted market prices in active markets.

We transact business in many different foreign currencies and are exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the GBP and the Euro, which may result in a gain or loss of earnings to us. We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign currency-denominated assets and liabilities, primarily certain inter-company receivables and payables. Our foreign exchange forward contracts are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in our condensed consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in interest and other income (expense), net in the condensed consolidated statements of operations.

Cash Flow Hedging Activities. From time to time, we hedge a portion of our foreign currency risk related to forecasted foreign currency denominated sales and expense transactions by entering into foreign exchange forward contracts that generally have maturities of less than 90 days. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements in net sales and operating expenses. During the six months ended September 30, 2010 and 2009, we did not enter into any foreign exchange forward contracts related to cash flow hedging activities.

Balance Sheet Hedging Activities. We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign currency-denominated assets and liabilities, primarily certain inter-company receivables and payables. Our foreign exchange forward contracts are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in our consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in interest and other income (expense), net in the consolidated statements of operations. The forward contracts generally have a contractual term of one month or less and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant at each month-end.

At September 30, 2010 and March 31, 2010, we had foreign exchange forward contracts related to balance sheet hedging activities in the notional amount of $85.4 million and $90.1 million, respectively, with a fair value that approximates zero at both September 30, 2010 and March 31, 2010. We estimated the fair value of these contracts using Level 1 inputs, specifically, inputs obtained in quoted public markets. The net loss recognized from these contracts during the three months ended September 30, 2010 was $0.4 million and the net gain recognized from these contracts during the six months ended September 30, 2010 was $2.3 million and was included in interest and other income (expense), net in our condensed consolidated statements of operations.

5. Balance Sheet Details

Inventory. Inventory at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):

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	September 30, 2010		March 31, 2010
Components	$	5,752	$	2,447
Finished goods	15,482		11,523
Inventory	$	21,234	$	13,970

Prepaid expenses and other current assets. Included in prepaid expenses and other current assets at September 30, 2010 were product prepayments of $25.3 million related to the upcoming holiday season; product prepayments at March 31, 2010 were $1.2 million.

Licenses and Software development. At September 30, 2010 we had total capitalized licenses and software development assets of $170.4 million and $224.1 million, respectively. We evaluate the future recoverability of our capitalized licenses and software development on a quarterly basis. As a result of those evaluations, we recorded a license impairment charge in the three months ended September 30, 2010 of $5.9 million on an unannounced title and we had software development impairment charges in the three and six months ended September 30, 2010 of $4.5 million and $7.0 million, respectively, on one of our titles. In the six months ended September 30, 2009, we had a license impairment charge of $5.4 million related to one of our licenses.

Property and equipment, net. Property and equipment, net at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):


	Useful lives	September 30, 2010			March 31, 2010
Building	30 yrs	$	730		$	730
Land	-	401			401
Computer equipment and software	3-10 yrs	58,044			53,454
Furniture, fixtures and equipment	5 yrs	8,448			7,444
Leasehold improvements	3-6 yrs	15,021			12,978
Automobiles	2-5 yrs	82			78
		82,726			75,085
Less: accumulated depreciation		(51,688		)	(46,711		)
Property and equipment, net		$	31,038		$	28,374

Depreciation expense associated with property and equipment amounted to $2.9 million and $5.6 million for the three and six months ended September 30, 2010, respectively, and $3.4 million and $6.7 million for the three and six months ended September 30, 2009, respectively.

Accrued and other current liabilities. Accrued and other current liabilities at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):


	September 30, 2010		March 31, 2010
Accrued liabilities	$	17,246	$	16,613
Settlement payment due to Jakks	6,000		6,000
Accrued compensation	17,400		34,696
Deferred revenue, net	10,443		6,403
Accrued third-party software developer milestones	18,791		23,676
Accrued royalties	71,797		49,944
Accrued and other current liabilities	$	141,677	$	137,332

Other long-term liabilities. Other long-term liabilities at September 30, 2010 and March 31, 2010 consisted of the following (in thousands):

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	September 30, 2010		March 31, 2010
Accrued royalties	$	63,611	$	75,163
Unrecognized tax benefits and related interest	—		1,612
Deferred rent	8,257		5,148
Accrued liabilities	4,263		4,741
Settlement payment due to Jakks	6,725		12,161
Other long-term liabilities	$	82,856	$	98,825

A portion of the settlement payment due to Jakks is reflected in current liabilities and a portion is reflected in long-term liabilities at the present value of the consideration payable under the agreement between THQ and Jakks. See "Note 17 — Settlement Agreements" in the notes to the condensed consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010 for a discussion of the Jakks settlement payments.

6. Other Long-Term Assets

Other long-term assets include our investment in Yuke's, a Japanese video game developer. We own approximately 15% of Yuke's, which is publicly traded on the Nippon New Market in Japan. This investment is classified as available-for-sale and reported at fair value with unrealized holding gains and losses excluded from earnings and reported as a component of accumulated other comprehensive income until realized. The pre-tax unrealized holding gain related to our investment in Yuke's for the six months ended September 30, 2010 and 2009 was $0.4 million and $1.8 million, respectively. As of September 30, 2010, the inception-to-date unrealized holding gain on our investment in Yuke's was $2.8 million. Due to the long-term nature of this relationship, this investment is included in other long-term assets in the condensed consolidated balance sheets.

Other long-term assets as of September 30, 2010 and March 31, 2010 consisted of the following (in thousands):


	September 30, 2010		March 31, 2010
Investment in Yuke's	$	5,955	$	5,564
Deferred financing costs	2,464		2,781
Other	3,852		2,255
Total other long-term assets	$	12,271	$	10,600

7. Restructuring

During the twelve months ended March 31, 2009 ("fiscal 2009"), we updated our strategic plan in an effort to increase our profitability and cash flow generation. We significantly realigned our business to focus on fewer, higher quality games, and established an operating structure that supports our more focused product strategy. The realignment included the cancellation of several titles in development, the closure or spin-off of several of our development studios, and the streamlining of our corporate organization in order to support the new product strategy, including reductions in worldwide personnel. Restructuring charges and adjustments are recorded as restructuring expenses in our consolidated statement of operations and have included the costs associated with lease abandonments less estimates of sublease income, write-off of related long-lived assets due to the studio closures, as well as costs of other non-cancellable contracts. As of September 30, 2010, restructuring charges under the fiscal 2009 realignment amounted to $18.0 million. In the three and six months ended September 30, 2010, restructuring charges and adjustments were minimal. We do not expect any future charges under the fiscal 2009 realignment, other than additional facility related charges and adjustments in the event actual and estimated sublease income changes.

The following tables summarize the significant components and activity under the restructuring plan for the three and six months ended September 30, 2010 and 2009, and the related restructuring reserve balances (in thousands).

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	Lease and Contract Terminations

	Three months ended September 30, 2010			Six months ended September 30, 2010
Beginning balance	$	2,085		$	2,392
Charges to operations	(161		)	7
Non-cash write-offs	—			—
Cash payments	(615		)	(1,203		)
Foreign currency and other adjustments	177			290
Ending balance	$	1,486		$	1,486


	Three months ended September 30, 2009										Six months ended September 30, 2009
		Lease and Contract Terminations			Net Asset Impairments			Total			Lease and Contract Terminations			Net Asset Impairments			Total

Beginning Balance		$	5,534		$	—		$	5,534		$	5,056		$	—		$	5,056
Charges to operations		791			79			870			1,553			969			2,522
Non-cash write-offs		—			(79		)	(79		)	—			(969		)	(969		)
Cash payments		(892		)	—			(892		)	(1,490		)	—			(1,490		)
Foreign currency and other adjustments		(268		)	—			(268		)	46			—			46
Ending Balance		$	5,165		$	—		$	5,165		$	5,165		$	—		$	5,165

As of September 30, 2010, $1.1 million of the restructuring accrual is included in accrued short-term liabilities and $0.4 million is included in other long-term liabilities. As of March 31, 2010, $1.6 million of the restructuring accrual was included in accrued short-term liabilities and $0.8 million was included in other long-term liabilities. The accrual balances at September 30, 2010 and March 31, 2010 related to future lease payments for facilities vacated under our 2009 restructuring plan, offset by estimates of future sublease income. We expect the final settlement of this accrual to occur by August 1, 2015, which is the last payment date under our lease agreements that were abandoned.

8. Secured Credit Line

In October 2008, in conjunction with the UBS Agreement (see "Note 3 — Investment Securities"), we entered into a Credit Agreement with UBS Bank USA, which allowed us to borrow up to 75% of the market value of the ARS (as determined by UBS) at any time, on a no net interest basis, to the extent that such ARS continued to be illiquid or until June 30, 2010. Borrowings under the credit line were due on demand and were secured by certain of our ARS held with UBS. In the three months ended June 30, 2010, we repaid the entire amount outstanding under the credit line, which was $13.2 million. At June 30, 2010 we had no borrowings outstanding under the Credit Agreement and the credit line was terminated, pursuant to its terms, on July 2, 2010.

9. Convertible Senior Notes

On August 4, 2009, we issued $100.0 million 5% convertible senior notes ("Notes"). After offering costs, the net proceeds to THQ were $96.8 million. The Notes are due August 15, 2014, unless earlier converted, redeemed or repurchased. The Notes pay interest semiannually, in arrears on February 15 and August 15 of each year, beginning February 15, 2010, through maturity and are convertible at each holder's option at any time prior to the close of business on the trading day immediately preceding the maturity date. The Notes are our unsecured and unsubordinated obligations.

The Notes are initially convertible into shares of our common stock at a conversion rate of 117.4743 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $8.51 per share. At this conversion rate and upon conversion of 100% of our Notes outstanding at September 30, 2010, our Notes would convert into 11.7 million shares of common stock. The conversion rate is subject to adjustment in certain events such as a stock split, the declaration of a dividend or the issuance of additional shares. Also, the conversion rate will be subject to an increase in certain events constituting a make-whole fundamental change; provided, however, that the maximum number of shares to be issued thereunder cannot exceed 14.7 million, subject to adjustment. The Notes will be redeemable, in whole or in part, at our option, at any time after August 20, 2012 for cash, at a redemption price of 100% of the principal amount of the Notes, plus accrued but unpaid interest, if the price of a share of our common stock has been at least 150% of the conversion price then in effect for specified periods. In the case of

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certain events such as the acquisition or liquidation of THQ, or delisting of our common stock from a U.S. national securities exchange, holders may require us to repurchase all or a portion of the Notes for cash at a purchase price of 100% of the principal amount of the Notes, plus accrued and unpaid interest.

Costs incurred related to the Notes offering amounted to $3.2 million and are classified as other long-term assets, net in the condensed consolidated balance sheet at September 30, 2010; these costs are being amortized over the term of the Notes. Amortization expense associated with these costs was $0.1 million and $0.3 million in the three and six months ended September 30, 2010, respectively, and is classified as interest and other income (expense), net in the condensed consolidated statements of operations. Additionally, interest expense related to the Notes was $1.2 million and $2.5 million in the three and six months ended September 30, 2010, respectively, and is classified as interest and other income (expense), net in the condensed consolidated statement of operations. The effective interest rate, including amortization of debt issuance costs, for the three and six months ended September 30, 2010 was 5.6%.

10. Credit Facility

On June 30, 2009, we entered into a Loan and Security Agreement (the "Credit Facility") with Bank of America, N.A. ("B of A"), as agent, and the lenders party thereto from time to time. The Credit Facility provides for a $35.0 million revolving credit facility, which can be increased to $50.0 million, subject to lender consent, pursuant to a $15.0 million accordion feature, and includes a $15.0 million letter of credit subfacility.

The Credit Facility has a three-year term and bears interest at a floating rate equivalent to, at our option, either the base rate plus a spread of 1.0% to 2.5% or LIBOR plus 2.5% to 4.0%, depending on the fixed charge coverage ratio. Borrowings under the Credit Facility are conditioned on our maintaining a certain fixed charge coverage ratio and a certain liquidity level, as set forth in the Credit Facility. The amount we can borrow under the Credit Facility fluctuates based upon our levels of eligible North American accounts receivable. At September 30, 2010, we had no borrowings under the Credit Facility.

The Credit Facility is guaranteed by most of our domestic subsidiaries (each, an "Obligor") and secured by substantially all of our assets.

The Credit Facility contains customary affirmative and negative covenants, including, among other terms and conditions, limitations on our and each Obligor's ability to: create, incur, guarantee or be liable for indebtedness (other than certain types of permitted indebtedness); dispose of assets outside the ordinary course (subject to certain exceptions); acquire, merge or consolidate with or into another person or entity (other than certain types of permitted acquisitions); create, incur or allow any lien on any of their respective properties (except for certain permitted liens); make investments or capital expenditures (other than certain types of investments or capital expenditures); or pay dividends or make distributions (each subject to certain limitations). In addition, the Credit Agreement provides for certain events of default such as nonpayment of principal and interest when due thereunder, breaches of representations and warranties, noncompliance with covenants, acts of insolvency and default on certain material contracts (subject to certain limitations and cure periods). At September 30, 2010 we were in compliance with all covenants related to the Credit Facility.

11. Commitments and Contingencies

A summary of annual minimum contractual obligations and commercial commitments as of September 30, 2010 is as follows (in thousands):


	Contractual Obligations and Commercial Commitments (6)
Fiscal Years Ending March 31,	License / Software Development Commitments (1)		Advertising (2)		Leases (3)		Debt (4)		Other (5)		Total
Remainder of 2011	$	72,671	$	14,722	$	7,932	$	—	$	291	$	95,616
2012	79,864		18,070		15,180		—		6,582		119,696
2013	20,850		10,811		11,350		—		4,000		47,011
2014	14,000		5,000		10,100		—		4,000		33,100
2015	13,500		532		9,038		100,000		—		123,070
Thereafter	22,500		1,000		11,373		—		—		34,873
	$	223,385	$	50,135	$	64,973	$	100,000	$	14,873	$	453,366

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(1)

Licenses and Software Development. We enter into contractual arrangements with third parties for the rights to exploit intellectual property and for the development of products. Under these agreements, we commit to provide specified payments to an intellectual property holder or developer. Assuming all contractual provisions are met, the total future minimum contract commitments for such agreements in place as of September 30, 2010 are $223.4 million. License/software development commitments in the table above include $131.1 million of commitments to licensors/developers that are included in our condensed consolidated balance sheet as of September 30, 2010 because the licensors/developers do not have any significant performance obligations to us. These commitments may be included in both current and long-term licenses and accrued royalties/current and long-term software development and accrued liabilities.


(2)	Advertising. We have certain minimum advertising commitments under many of our major license agreements. These minimum commitments generally range from 3% to 12% of net sales related to the respective license.

(3)

Leases. We are committed under operating leases with lease termination dates through 2020. Most of our leases contain rent escalations. Of these obligations, $1.1 million and $0.4 million are accrued and classified as accrued and other current liabilities and other long-term liabilities, respectively, in the September 30, 2010 condensed consolidated balance sheet due to abandonment of certain lease obligations in connection with our fiscal 2009 realignment. We expect future sublease rental income under non-cancelable agreements of approximately $1.4 million; this income is not contemplated in the lease commitments shown in the table above.

(4)

Convertible Senior Notes. On August 4, 2009 we issued the Notes. The Notes pay interest semiannually, in arrears on February 15 and August 15 of each year, beginning February 15, 2010, through maturity and are convertible at each holder's option at any time prior to the close of business on the trading day immediately preceding the maturity date. Absent any conversions, we expect to pay $2.5 million in the remainder of fiscal 2011, $5.0 million in each of the fiscal years 2012 through 2014, and $2.5 million in fiscal 2015, for an aggregate $20.0 million in interest payments over the term of the Notes that remains as of September 30, 2010 (see "Note 9 — Convertible Senior Notes").

(5)

Other. As described in "Note 17 — Settlement Agreements" in the notes to the condensed consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2010, amounts payable to Jakks totaling $14.0 million are reflected in the table above. The present value of these amounts is included in other current liabilities and other long-term liabilities in our condensed consolidated balance sheet at September 30, 2010. The remaining other commitments included in the table above are also included as current or long-term liabilities in our September 30, 2010 condensed consolidated balance sheet.

(6)

We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding the timing and amount of certain payments related to these unrecognized tax benefits. The underlying positions have not been fully developed under audit to quantify at this time. At September 30, 2010, we had $6.2 million of unrecognized tax benefits. See "Note 14 — Income Taxes" for further information regarding the unrecognized tax benefits.

Manufacturer Indemnification. We must indemnify the platform manufacturers (Microsoft, Nintendo, Sony) of our games with respect to all loss, liability and expenses resulting from any claim against such manufacturer involving the development, marketing, sale or use of our games, including any claims for copyright or trademark infringement brought against such manufacturer. As a result, we bear a risk that the properties upon which the titles of our games are based, or that the information and technology licensed from others and incorporated into the products, may infringe the rights of third parties. Our agreements with our third-party software developers and property licensors typically provide indemnification rights for us with respect to certain matters. However, if a manufacturer brings a claim against us for indemnification, the developers or licensors may not have sufficient resources to, in turn, indemnify us.

Indemnity Agreements. We have entered into indemnification agreements with the members of our Board of Directors, our Chief Executive Officer and our Chief Financial Officer, to provide a contractual right of indemnification to such persons to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by any such person as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which such person is sued as a result of service as a member of our Board of Directors, as Chief Executive Officer or as Chief Financial Officer. The indemnification agreements provide specific procedures and time frames with respect to requests for indemnification and clarify the benefits and remedies available to the indemnitees in the event of an indemnification request.

Litigation

Patent Infringement litigation. On June 15, 2010, THQ was served with a lawsuit entitled Software Restore Solutions, LLC v.

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Apple, Inc., et al., filed in the United States District Court for the Northern District of Illinois. The Plaintiff claims that Defendants, including THQ, have infringed upon a patent owned by the Plaintiff entitled "Workgroup Network Manager for Controlling the Operation of Workstations within the Computer Network." Plaintiff is seeking injunctive relief, an award of damages not less than a reasonable royalty, treble damages and attorneys' fees, costs and expenses. Defendants in the lawsuit include THQ, Electronic Arts Inc., Activision Blizzard, Inc., Sega of America, Inc., Square Enix, Inc., Apple, Inc., Adobe Systems, Inc., and International Business Machines, Inc., among others. THQ has entered into a joint defense agreement with several of the other Defendants and intends to vigorously defend the claims against us. We believe that we will settle this litigation for an insignificant amount.

Additionally, we are subject to ordinary routine claims and litigation incidental to our business. We do not believe that any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our consolidated financial position or results of operations.

12. Stock-based Compensation

Prior to July 20, 2006, we utilized two stock option plans: the THQ Inc. Amended and Restated 1997 Stock Option Plan (the "1997 Plan") and the THQ Inc. Third Amended and Restated Nonexecutive Employee Stock Option Plan (the "NEEP Plan"). The 1997 Plan provided for the issuance of up to 14,357,500 shares available for employees, consultants and non-employee directors, and the NEEP Plan provided for the issuance of up to 2,142,000 shares available for nonexecutive employees of THQ of which no more than 20% was available for awards to our nonexecutive officers and no more than 15% was available for awards to the nonexecutive officers or general managers of our subsidiaries or divisions. The 1997 Plan and the NEEP Plan were cancelled on July 20, 2006, the same day THQ's stockholders approved the THQ Inc. 2006 Long-Term Incentive Plan ("LTIP").

Under the 1997 Plan, we granted incentive stock options, non-qualified stock options, performance accelerated restricted stock ("PARS") and performance accelerated restricted stock units ("PARSUs"). The NEEP Plan provided for the grant of only non-qualified stock options to non-executive officers of the Company. The LTIP provides for the grant of stock options (including incentive stock options), stock appreciation rights ("SARs"), restricted stock awards, restricted stock units ("RSUs"), and other performance awards (in the form of performance shares or performance units) to eligible directors and employees of, and consultants or advisors to, the Company. Subject to certain adjustments, as of September 30, 2010, the total number of shares of THQ common stock that may be issued under the LTIP shall not exceed 11,500,000 shares. Shares subject to awards of stock options or SARs will count as one share for every one share granted against the share limit, and all other awards will count as 2.17 shares for every one granted against the share limit. As of September 30, 2010, we had 4,351,893 shares available for grant under the LTIP.

The purchase price per share of common stock purchasable upon exercise of each option granted under the 1997 Plan, the NEEP Plan and the LTIP may not be less than the fair market value of such share of common stock on the date that such option is granted. Generally, options granted under our plans become exercisable over three years and expire on the fifth anniversary of the grant date. Other vesting terms are as follows:

• PARS and PARSUs that have been granted to our officers under the 1997 Plan and the LTIP vest with respect to 100% of the shares subject to the award on the fifth anniversary of the grant date subject to continued employment of the grantee; provided, however, 20% of the shares subject to each award will vest on each of the first through fourth anniversaries of the grant date if certain performance targets for the Company are attained each fiscal year.

• PARSUs granted to our non-employee directors under the 1997 Plan are currently fully vested.

• Deferred Stock Units ("DSUs") granted to our non-employee directors under the LTIP vest monthly over a twelve month period; provided, however, DSUs may not be released to a director until thirteen months after the date of grant. DSUs granted to our non-employee directors prior to July 31, 2008 under the LTIP vested immediately but were also subject to a thirteen-month release restriction.

• RSUs granted to our employees do not carry any performance or acceleration conditions. Certain awards vest with respect to 100% of the shares on the third anniversary of the grant date and other awards vest at each anniversary of the grant date over a three-year period, all subject to continued employment of the grantee.

The fair value of our restricted stock and restricted stock units is determined based on the closing trading price of our common stock on the grant date. The fair value of PARS, PARSUs, DSUs and RSUs granted is amortized over the vesting period.

Beginning in March 2007, we offered our non-executive employees the ability to participate in an employee stock purchase plan, as amended and restated ("ESPP"). Under the ESPP, up to 1,500,000 shares of our common stock may be purchased by eligible employees during six-month offering periods that commence each March 1 and September 1, or the first business day thereafter (each, an "Offering Period"). The first business day of each Offering Period is referred to as the "Offering Date." The last business day of each Offering Period is referred to as the "Purchase Date." Pursuant to our ESPP, eligible employees may authorize payroll

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deductions of up to 15 percent of their base salary, subject to certain limitations, to purchase shares of our common stock at 85 percent of the lower of the fair market value of our common stock on the Offering Date or Purchase Date. The fair value of the ESPP options granted is amortized over the offering period.

Stock-based compensation includes all awards and purchase opportunities: stock options, PARS, PARSUs, DSUs, RSUs and ESPP options. Nonvested shares and vested shares refer to our PARS, PARSU, DSU and RSU awards.

In the three and six months ended September 30, 2010 and 2009, stock-based compensation expense, recognized in the condensed consolidated statements of operations was as follows (in thousands):


	Three Months Ended September 30,					Six Months Ended September 30,
	2010			2009		2010		2009
Cost of sales - software amortization and royalties	$	548		$	830	$	819	$	1,367
Product development	(118		)	578		623		1,165
Selling and marketing	318			304		676		401
General and administrative	1,081			742		2,239		2,455
Stock-based compensation expense before income taxes	$	1,829		$	2,454	$	4,357	$	5,388

We capitalize relevant amounts of stock-based compensation expense. The following table summarizes stock-based compensation expense included in our condensed consolidated balance sheets as a component of software development (in thousands):


Balance at March 31, 2010	$	1,602
Stock-based compensation expense capitalized during the period	1,356
Amortization of capitalized stock-based compensation expense	(819		)
Balance at September 30, 2010	$	2,139

Stock-based compensation expense is based on awards that are ultimately expected to vest and accordingly, stock-based compensation expense recognized in the six months ended September 30, 2010 has been reduced by estimated forfeitures. Our estimate of forfeitures is based on historical forfeiture behavior as well as any expected trends in future forfeiture behavior.

The fair value of stock options and ESPP options granted is estimated on the date of grant using the Black-Scholes option pricing model. Anticipated volatility is based on implied volatilities from traded options on our stock and on our stock's historical volatility. The expected term of our stock options granted is based on historical exercise data and represents the period of time that stock options granted are expected to be outstanding and the expected term for our ESPP options is the six-month offering period. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The risk-free rate for periods within the expected lives of stock options and ESPP options are based on the US Treasury yield in effect at the time of grant.

The weighted-average grant-date fair value of options granted during the three and six months ended September 30, 2010 was $1.94 and $2.38, respectively, and $3.33 and $2.84 during the three and six months ended September 30, 2009, respectively.


	Three Months Ended September 30,				Six Months Ended September 30,
Stock Option Grants	2010		2009		2010		2009
Dividend yield	—	%	—	%	—	%	—	%
Anticipated volatility	72	%	67	%	71	%	65	%
Weighted-average risk-free interest rate	0.7	%	1.6	%	1.0	%	1.5	%
Expected lives	3.0 years		3.0 years		3.0 years		3.0 years

The fair value of our ESPP options for the six-month offering periods that began on September 1, 2010, March 1, 2010 and September 1, 2009, was estimated using the Black-Scholes option pricing model with the weighted-average assumptions noted in the table below, and the per share fair value for those offering periods was $1.03, $1.62, and $1.89, respectively.

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Employee Stock Purchase Plan	September 1, 2010		March 1, 2010		September 1, 2009
Dividend yield	—	%	—	%	—	%
Anticipated volatility	58.3	%	48.1	%	85	%
Weighted-average risk-free interest rate	0.2	%	0.2	%	0.2	%
Expected lives	0.5 years		0.5 years		0.5 years

A summary of our stock option activity for the six months ended September 30, 2010, is as follows (in thousands, except per share amounts):


	Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value
Outstanding at March 31, 2010	9,206		$	13.51
Granted	1,986		5.06
Exercised	(18	)	4.41
Forfeited/expired/cancelled	(1,289	)	13.28
Outstanding at September 30, 2010	9,885		$	11.86	3.1	$	199
Vested and expected to vest	9,054		$	12.35	3.1	$	187
Exercisable at September 30, 2010	4,520		$	18.26	1.9	$	65

The aggregate intrinsic value is calculated as the difference between the exercise price of a stock option and the quoted price of our common stock at September 30, 2010. It excludes stock options that have exercise prices in excess of the quoted price of our common stock at September 30, 2010. The aggregate intrinsic value of stock options exercised during the three and six months ended September 30, 2010 and 2009 was insignificant.

A summary of the status of our nonvested shares as of September 30, 2010 and changes during the six months then ended, is as follows (in thousands, except per share amounts):


	Shares		Weighted- Average Grant-date Fair Value Per Share
Nonvested shares at March 31, 2010	459		$	19.40
Granted	225		6.27
Vested	(49	)	20.09
Forfeited/cancelled	(77	)	15.25
Nonvested shares at September 30, 2010	558		$	14.12

The unrecognized compensation cost, that we expect to recognize, related to our nonvested stock-based awards at September 30, 2010, and the weighted-average period over which we expect to recognize that compensation, is as follows (in thousands):


	Unrecognized Compensation Cost at September 30, 2010		Weighted Average Period (in years)
Stock options	$	10,011	1.5
Nonvested shares	2,795		2.2
ESPP	139		0.4
	$	12,945

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Cash received from exercises of stock options for the six months ended September 30, 2010 and 2009 was $0.1 million and $0.2 million, respectively.

The fair value of all our stock-based awards that vested during the three and six months ended September 30, 2010 was $3.3 million and $7.6 million, respectively. The fair value of all our stock-based awards that vested during the three and six months ended September 30, 2009 was $3.9 million and $8.3 million, respectively.

Non-Employee Stock Warrants. In prior years, we granted stock warrants to third parties in connection with the acquisition of licensing rights for certain key intellectual property. The warrants vested upon grant and are exercisable over the term of the warrant. The exercise price of third-party stock warrants is equal to the fair market value of our common stock at the date of grant. No third-party stock warrants were granted or exercised during the six months ended September 30, 2010 and 2009.

At September 30, 2010 and March 31, 2010, we had 150,000 stock warrants outstanding with an exercise price of $10.45 per share and an expiration date of December 31, 2013.

We measure the fair value of our warrants granted on the measurement date. The fair value of each stock warrant issued to licensors is capitalized as a component of licenses and amortized to cost of sales — license amortization and royalties expense when the related product is released and the related net sales are recognized. As of March 31, 2010 these warrants were fully amortized. In the three and six months ended September 30, 2009, $43,000 and $85,000, respectively, was amortized and included in cost of sales — license amortization and royalties expense in the condensed consolidated statements of operations.

13. Capital Stock Transactions

On July 31, 2007 and October 30, 2007, our board authorized the repurchase of up to $25.0 million of our common stock from time to time on the open market or in private transactions, for an aggregate of $50.0 million. As of September 30, 2010 and March 31, 2010 we had $28.6 million, authorized and available for common stock repurchases. During the six months ended September 30, 2010, we did not repurchase any shares of our common stock. There is no expiration date for the authorized repurchases.

14. Income Taxes

We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative taxable loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable. As we have had U.S. tax losses in recent years, we can no longer rely on common tax planning strategies to use our U.S. tax losses and we are precluded from relying on projections of future taxable income to support the recognition of deferred tax assets. As such, the ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.

Our income tax expense for the three and six months ended September 30, 2010 was $0.7 million and $1.5 million, respectively, as compared to $0.2 million and $1.2 million in the same periods last fiscal year. These amounts represent effective tax rates for the three and six months ended September 30, 2010 of 1% and 2% (provision on a loss), respectively, compared to effective tax rates of 3% (provision on a loss) and 81% (provision on income), in the same periods last fiscal year. The rate for the three and six months ended September 30, 2010 differs from the U.S. federal statutory rate of 35% primarily due to the fact that our domestic net operating losses are fully valued.

Our unrecognized tax benefits increased by $0.1 million in the three months ended September 30, 2010, from $6.1 million at June 30, 2010 to $6.2 million at September 30, 2010, of which $6.0 million would impact our effective tax rate if recognized.

We conduct business internationally and, as a result, one or more of our subsidiaries files income tax returns in U.S. Federal, U.S. state, and certain foreign jurisdictions. Accordingly, we are subject to examination by taxing authorities throughout the world, including Australia, China, France, Germany, Italy, Japan, Korea, Luxembourg, Netherlands, Spain, Switzerland, and United Kingdom. Certain state and certain non-U.S. income tax returns are currently under various stages of audit or potential audit by applicable tax authorities and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. We are no longer subject to U.S. Federal, state, and local or foreign jurisdiction income tax examinations by tax authorities for years prior to March 31, 2004.

We are currently under a California state audit for years 2002 - 2007. Management believes that its accrual for tax liabilities is

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adequate for all open audit years. Due to the inherent uncertainty of the resolution of our state tax audits, we are not able to determine the timing and recognition of our unrecognized tax benefits. Additionally, due to the valuation of our deferred tax assets, any benefit recognized would not be realized in our effective tax rate for at least the next 12 months.

Our policy is to recognize interest and penalty expense, if any, related to uncertain tax positions as a component of income tax expense. As of September 30, 2010, we had no amounts accrued for interest and for the potential payment of penalties.

15. Earnings (Loss) Per Share

Basic earnings (loss) per share is computed as net income (loss) attributable to THQ Inc. divided by the weighted-average number of shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, stock-based awards, purchase opportunities under our ESPP, and the conversion of the Notes (see "Note 9 — Convertible Senior Notes"). Under the provisions of the if-converted method, the Notes are assumed to have been converted at the beginning of the respective period or at the time of issuance if later, and are included in the denominator of the diluted calculation and the after-tax interest expense and amortization of debt issuance costs in connection with the Notes are added back to the numerator of the diluted calculation. However, the if-converted amounts are only included in the numerator and denominator of the diluted calculation if the result of the if-converted calculation is dilutive.

The following table is a reconciliation of the weighted-average shares used in the computation of basic and diluted earnings (loss) per share for the periods presented (in thousands):


	For the Three Months Ended September 30,						For the Six Months Ended September 30,
	2010			2009			2010			2009
Net income (loss) attributable to THQ Inc. used to compute basic earnings (loss) per share	$	(46,985	)	$	(5,570	)	$	(77,095	)	$	839

Weighted-average number of shares outstanding — basic	67,813			67,462			67,779			67,466
Dilutive effect of potential common shares	—			—			—			279
Number of shares used to compute earnings (loss) per share — diluted	67,813			67,462			67,779			67,745

For the three and six months ended September 30, 2010 and 2009, the result of the if-converted calculation applied to the Notes was antidilutive and as such we did not include the potential conversion of 11.7 million shares under our Notes in our diluted earnings per share calculation. Additionally, after-tax interest expense and amortization of debt issuance costs in connection with the Notes totaling $1.3 million, $2.8 million, and $0.7 million (net of tax of zero; see "Note 14 — Income Taxes" for further information) in the three months ended September 30, 2010, the six months ended September 30, 2010, and the three and six months ended September 30, 2009, respectively, was not added back to the numerator of the diluted calculation.

As a result of our net loss for the three and six months ended September 30, 2010, and the three months ended September 30, 2009, all potential shares were excluded from the computation of diluted earnings per share, as their inclusion would have been antidilutive. As a result, there were 10.5 million, 10.4 million, and 9.1 million potential common shares that were excluded from the computation of diluted loss per share for the three months ended September 30, 2010, the six months ended September 30, 2010, and the three months ended September 30, 2009, respectively. Had we reported net income for these periods, an additional 0.2 million, 0.4 million, and 0.4 million shares of common stock would have been included in the number of shares used to calculate diluted earnings per share for the three months ended September 30, 2010, the six months ended September 30, 2010, and the three months ended September 30, 2009, respectively.

For the six months ended September 30, 2009, we excluded 9.2 million potential common shares from the computation of diluted earnings per share as their inclusion would have been antidilutive.

16. Segment and Geographic Information

We operate in one reportable segment in which we are a developer, publisher and distributor of interactive entertainment software for home video game consoles, handheld platforms and PCs. The following information sets forth geographic information on our net sales and total assets for the three and six months ended September 30, 2010 and 2009 (in thousands):

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	North America		Europe		Asia Pacific		Consolidated
Three months ended September 30, 2010
Net sales to unaffiliated customers	$	45,253	$	21,774	$	10,026	$	77,053
Total assets	496,590		102,967		43,803		643,360

Six months ended September 30, 2010
Net sales to unaffiliated customers	$	146,388	$	54,556	$	25,488	$	226,432

Three months ended September 30, 2009
Net sales to unaffiliated customers	$	56,471	$	35,021	$	9,798	$	101,290
Total assets	506,070		107,326		32,355		645,751

Six months ended September 30, 2009
Net sales to unaffiliated customers	$	218,785	$	101,819	$	24,187	$	344,791

Information about THQ's net sales by platform for the three and six months ended September 30, 2010 and 2009 is presented below (in thousands):


	Three Months Ended September 30,				Six Months Ended September 30,
Platform	2010		2009		2010		2009
Consoles
Microsoft Xbox 360	$	14,260	$	21,698	$	58,773	$	119,152
Nintendo Wii	13,011		9,359		32,171		22,652
Sony PlayStation 3	12,279		17,467		59,733		95,734
Sony PlayStation 2	1,903		8,189		6,606		14,890
Other	—		—		—		5
	41,453		56,713		157,283		252,433
Handheld
Nintendo Dual Screen	17,246		19,842		36,912		39,862
Sony PlayStation Portable	6,862		7,585		11,203		12,618
Wireless	1,499		2,779		3,088		6,974
	25,607		30,206		51,203		59,454

PC	9,993		14,371		17,946		32,904
Total Net Sales	$	77,053	$	101,290	$	226,432	$	344,791

17. Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force" ("ASU 2009-13"). ASU 2009-13 provides criteria for separating consideration in multiple-deliverable arrangements. It establishes a selling price hierarchy for determining the price of a deliverable and expands the disclosures related to a vendor's multiple-deliverable revenue arrangements. ASU 2009-13 is effective prospectively for arrangements entered into or materially modified in years beginning after June 15, 2010, which will be our fiscal 2012. We are still evaluating the impact that the adoption of ASU 2009-13 will have on our results of operations, financial position or cash flows.

In January 2010, the FASB issued ASU 2010-06, "Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements" ("ASU 2010-06"). ASU 2010-06 amends ASC 820 and clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements and employers' disclosures about postretirement benefit plan assets. ASU 2010-06 disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years, which will be our quarter ending June 30, 2011. The adoption is not expected to have a material impact on our results of operations, financial position or cash flows.

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

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts may be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to statements regarding industry prospects and future results of operations or financial position. We generally use words such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "future," "intend," "may," "plan," "positioned," "potential," "project," "scheduled," "set to," "subject to," "upcoming" and other similar expressions to help identify forward-looking statements. These forward-looking statements are based on current expectations, estimates and projections about the business of THQ Inc. and its subsidiaries and are based upon management's current beliefs and certain assumptions made by management. Our business and any such forward-looking statements are subject to risks and uncertainties that may affect our future results. For a discussion of our risk factors, see "Part II — Item 1A. Risk Factors." The forward-looking statements contained herein speak only as of the date on which they were made, and, except as required by law, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.

All references to "we," "us," "our," "THQ," or the "Company" in the following discussion and analysis mean THQ Inc. and its subsidiaries. Most of the properties and titles referred to in this Quarterly Report are subject to trademark protection.

Overview

The following is a discussion of our operating results and financial condition, as well as material changes in operating results and financial condition from prior reported periods. The discussion and analysis herein should be read in conjunction with the condensed consolidated financial statements, notes to the condensed consolidated financial statements, and management's discussion and analysis (which includes additional information about our accounting policies, practices and the transactions that underlie our financial results) contained in our Annual Reports on Form 10-K and 10-K/A for the fiscal year ended March 31, 2010 (the "2010 10-K") and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

About THQ

We are a leading worldwide developer and publisher of interactive entertainment software for all popular game systems, including:


•	home video game consoles such as the Microsoft Xbox 360 ("Xbox 360"), Nintendo Wii ("Wii"), Sony PlayStation 3 ("PS3") and Sony PlayStation 2 ("PS2");


•	handheld platforms such as the Nintendo DS and DSi (collectively referred to as "DS"), and Sony PlayStation Portable ("PSP");


•	wireless devices, including the iPhone, iTouch and iPad; and


•	personal computers ("PCs"), including games played online.

We also develop and publish titles for digital distribution via Sony's PlayStation Network ("PSN") and Microsoft's Xbox LIVE Marketplace ("Xbox LIVE") and Xbox LIVE Arcade ("XBLA"), as well as digitally offer our PC titles through online download stores and services such as Steam. We believe that digital delivery of games and game content is becoming an increasingly important part of our business and accordingly, we plan to continue integrating a digital component into all of our key franchises.

Our titles span a wide range of categories, including action, adventure, fighting, racing, role-playing, simulation, sports and strategy. We have created, licensed and acquired a group of highly recognizable brands, which we market to a variety of consumer demographics ranging from products targeted at core gamers to products targeted to children and the mass market. Our portfolio of Core Games includes games based on popular fighting brands such as the Ultimate Fighting Championship ("UFC") and World Wrestling Entertainment ("WWE"); racing games based on our MX vs. ATV brand; and action, shooter and strategy games based on our owned intellectual properties such as Company of Heroes, Darksiders, Red Faction, Saints Row and de Blob, as well as games based on Games Workshop's Warhammer 40,000 universe. Our Kids, Family and Casual portfolio includes games based on popular brands such as Disney•Pixar, DreamWorks Animation, Marvel Entertainment, Mattel, NBC's The Biggest Loser, Nickelodeon, and Sony Pictures Consumer Product's JEOPARDY! and Wheel of Fortune, as well as games based on our owned intellectual properties, including Drawn to Life.

In addition to publishing software, in August 2010, we announced our new uDraw GameTablet. The uDraw GameTablet is a first-of-its-kind, innovative new gaming accessory developed by THQ as a Wii exclusive scheduled to be available in the U.S. in November 2010. We plan to launch the uDraw GameTablet together with an expansive drawing, coloring and art-based video game, uDraw Studio, for a suggested retail price of $69.99 in the United States. In addition to uDraw Studio, we are developing and publishing two other video games designed for use with the uDraw GameTablet - Pictionary and Dood's Big Adventure, which are scheduled to be on store shelves on the same day for a suggested retail price of $29.99 each in the United States. The uDraw GameTablet is scheduled to be available in Europe and other international territories in early 2011. We have a long-term product plan that includes a diverse software product offering of games we expect to develop and publish for the uDraw GameTablet.

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Overview of Financial Results for the Three and Six Months Ended September 30, 2010

Net loss attributable to THQ Inc. ("net loss") for the three months ended September 30, 2010 was $47.0 million, or $0.69 per diluted share, compared to a net loss of $5.6 million, or $0.08 per diluted share, for the same period last fiscal year. Net loss for the six months ended September 30, 2010 was $77.1 million, or $1.14 per diluted share, compared to net income of $0.8 million, or $0.01 per diluted share, for the same period last fiscal year.

Our profitability is dependent upon revenue from the sales of our video games. Net sales in the three months ended September 30, 2010 decreased $24.2 million from the same period last fiscal year, to $77.1 million from $101.3 million in the three months ended September 30, 2009. Net sales in the six months ended September 30, 2010 decreased $118.4 million from the same period last fiscal year, to $226.4 million from $344.8 million in the six months ended September 30, 2009. These decreases were primarily due to:


•	net sales in the three and six months ended September 30, 2009 from the releases of Red Faction: Guerrilla and Up with no comparable titles released in the same periods this fiscal year; and


•	lower net sales of UFC Undisputed 2010 in the three and six months ended September 30, 2010 compared to net sales of UFC 2009 Undisputed in the same periods last fiscal year.

Our profitability is also affected by the costs and expenses associated with developing and publishing our games. These costs and expenses include both costs of sales and operating expenses.

Our gross profit as a percent of net sales, decreased 32 points and 19 points in the three and six months ended September 30, 2010, respectively, compared to the same periods last fiscal year. Excluding a $24.2 million one-time benefit recognized in venture partner expense in the three months ended September 30, 2009 related to the settlement of our preferred return dispute with JAKKS Pacific, Inc. (“Jakks”) and classified as “Cost of Sales - License amortization and royalties” in the accompanying statement of operations, our gross profit as a percent of net sales, would have decreased 8 points and 11 points for the three and six months ended September 30, 2010, respectively, compared to the same periods last fiscal year. These decreases were primarily due to a lower average net selling price on our products in the three and six months ended September 30, 2010, compared to the same periods last fiscal year, as well as impairments of software development and licenses in the three and six months ended September 30, 2010.

In the three months ended September 30, 2010, our operating expenses were relatively flat compared to the same period last fiscal year and were $53.6 million and $53.3 million in the three months ended September 30, 2010 and 2009, respectively. In the six months ended September 30, 2010, our operating expenses decreased $16.3 million, or 12%, compared to the same period last fiscal year and were $115.8 million and $132.1 million in the six months ended September 30, 2010 and 2009, respectively. This decrease was primarily due to lower expensed product development costs and general and administrative expenses.

Our principal source of cash is from sales of interactive software games designed for play on video game consoles, handheld devices and PCs, including via the Internet. Our principal uses of cash are for product purchases of discs and cartridges along with associated manufacturer's royalties, payments to external developers and licensors, the costs of internal software development, and selling and marketing expenses. Cash used in operations was $156.3 million in the six months ended September 30, 2010, compared to $35.6 million in the same period last fiscal year. The increase in cash used in operations was primarily the result of our net loss during the six months ended September 30, 2010 compared to net income in the same period last fiscal year (adjusted for non-cash reconciling items such as depreciation and amortization), and an increase in investments in licenses and software development in the current fiscal year. These increases were partially offset by a one-time $32.8 million settlement payment made to Jakks in the six months ended September 30, 2009.

Trends Affecting Our Business

During the three months ended September 30, 2010 there were no material changes to the trends affecting our business that were disclosed in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2010 10-K.

Results of Operations — Comparison of the Three and Six Months Ended September 30, 2010 and 2009

Net Sales

Our net sales are principally derived from sales of interactive software games designed for play on video game consoles, handheld

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devices and PCs, including digitally via the Internet.

In the three and six months ended September 30, 2010, net sales were primarily driven by UFC Undisputed 2010 and catalog titles (titles released in fiscal years prior to the respective fiscal year).

Net Sales by New Releases and Catalog Titles

The following tables detail our net sales of new releases (titles initially released in the respective fiscal year) and catalog titles as well as detailing changes in our deferred net revenue for the three and six months ended September 30, 2010 and 2009 (in thousands):


	Three Months Ended September 30,								Increase/			%
	2010				2009				(Decrease)			Change
New releases	$	17,155	22.3	%	$	44,613	44.0	%	$	(27,458	)	(61.5	)%
Catalog	53,240		69.1		55,768		55.1		(2,528		)	(4.5	)
Changes in deferred net revenue	6,658		8.6		909		0.9		5,749			632.5
Consolidated net sales	$	77,053	100.0	%	$	101,290	100.0	%	$	(24,237	)	(23.9	)%


	Six Months Ended September 30,									Increase/			%
	2010					2009				(Decrease)			Change
New releases	$	118,433		52.3	%	$	222,957	64.7	%	$	(104,524	)	(46.9	)%
Catalog	112,231			49.6		111,323		32.3		908			0.8
Changes in deferred net revenue	(4,232		)	(1.9	)	10,511		3.0		(14,743		)	(140.3	)
Consolidated net sales	$	226,432		100.0	%	$	344,791	100.0	%	$	(118,359	)	(34.3	)%

Net sales of our new releases decreased $27.5 million and $104.5 million in the three and six months ended September 30, 2010, respectively, compared to the same periods last fiscal year. These decreases were primarily due to:


•	net sales in the three and six months ended September 30, 2009 from the release of Red Faction: Guerrilla and Up with no comparable titles released in the same periods this fiscal year; and

•

lower net sales of UFC Undisputed 2010 in the three and six months ended September 30, 2010 compared to net sales of UFC 2009 Undisputed in the same periods last fiscal year; this was due primarily to fewer units shipped in the three months ended September 30, 2010 compared to the same period last fiscal year and a lower average net selling price in the six months ended September 30, 2010 compared to the same period last fiscal year.

Net sales of our catalog titles decreased $2.5 million in the three months ended September 30, 2010, compared to the same period last fiscal year. This decrease was primarily due to a lower average net selling price of the catalog titles sold in the current fiscal quarter compared to the same period last fiscal year; however, the impact of the lower average net selling price was partially offset by an increase in the number of catalog units sold in the three months ended September 30, 2010 compared to the same period last fiscal year. Net sales of our catalog titles in the six months ended September 30, 2010 were relatively flat compared to the same period last fiscal year.

Changes in deferred net revenue reflects the deferral and subsequent recognition of net revenue related to the online service that is offered in some of our games. The revenue deferrals are recognized as net sales over the estimated online service period of six months. The changes in deferred net revenue are driven by the timing of the release of games that offer the online service. Generally, revenue deferred in the first half of our fiscal year would be recognized by the end of that fiscal year, and revenue deferred in the second half of the fiscal year would be partially recognized in that fiscal year with the remaining amounts of deferred revenue recognized in the following fiscal year.

Net Sales by Territory

The following table details our net sales by territory as well as detailing changes in our deferred net revenue for the three and six months ended September 30, 2010 and 2009 (in thousands):

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	Three Months Ended September 30,								Increase/			%
	2010				2009				(Decrease)			Change
North America	$	41,110	53.4	%	$	55,730	55.0	%	$	(14,620	)	(26.2	)%
Europe	19,751		25.6		34,954		34.5		(15,203		)	(43.5	)
Asia Pacific	9,534		12.4		9,697		9.6		(163		)	(1.7	)
International	29,285		38.0		44,651		44.1		(15,366		)	(34.4	)
Changes in deferred net revenue	6,658		8.6		909		0.9		5,749			632.5
Consolidated net sales	$	77,053	100.0	%	$	101,290	100.0	%	$	(24,237	)	(23.9	)%


	Six Months Ended September 30,									Increase/			%
	2010					2009				(Decrease)			Change
North America	$	149,137		65.9	%	$	214,536	62.2	%	$	(65,399	)	(30.5	)%
Europe	55,895			24.7		96,700		28.1		(40,805		)	(42.2	)
Asia Pacific	25,632			11.3		23,044		6.7		2,588			11.2
International	81,527			36.0		119,744		34.8		(38,217		)	(31.9	)
Changes in deferred net revenue	(4,232		)	(1.9	)	10,511		3.0		(14,743		)	(140.3	)
Consolidated net sales	$	226,432		100.0	%	$	344,791	100.0	%	$	(118,359	)	(34.3	)%

Net sales in the three and six months ended September 30, 2010 in North America decreased $14.6 million and $65.4 million, respectively, compared to the same periods last fiscal year. These decreases were primarily due to fewer units sold of UFC Undisputed 2010 at lower average net selling prices compared to sales of UFC 2009 Undisputed in the same periods last fiscal year. Additionally, the decrease in the six months ended September 30, 2010 was also due to net sales in the three and six months ended September 30, 2009 from the release of Red Faction: Guerrilla and Up with no comparable titles released in the same periods this fiscal year.

Net sales in the three and six months ended September 30, 2010 in Europe decreased $15.2 million and $40.8 million, respectively, compared to the same periods last fiscal year. These decreases were due to:


•	net sales in the three and six months ended September 30, 2009 from the release of Red Faction: Guerrilla and Up with no comparable titles released in the same periods this fiscal year;


•	fewer units sold of UFC Undisputed 2010 in the three months ended September 30, 2010 compared to UFC 2009 Undisputed in the same period last fiscal year and a lower average net selling price on UFC Undisputed 2010 in the six months ended September 30, 2010 compared to UFC 2009 Undisputed in the same period last fiscal year; and


•	fewer units sold of our catalog titles at lower average net selling prices.

We estimate that changes in foreign currency translation rates during the three and six months ended September 30, 2010, as compared to the same periods last fiscal year, decreased our reported net sales in Europe by $1.8 million and $4.2 million, respectively.

Net sales in the three months ended September 30, 2010 in the Asia Pacific territories were relatively flat compared to the same period last fiscal year and in the six months ended September 30, 2010 net sales increased $2.6 million compared to the same period last fiscal year. The increase in the six months ended September 30, 2010 was primarily due to a higher average net selling price on our catalog titles, compared to the same period last fiscal year. We estimate that changes in foreign currency translation rates during the three and six months ended September 30, 2010, as compared to the same periods last fiscal year, increased our reported net sales in the Asia Pacific territories by $0.8 million and $2.5 million, respectively.

Cost of Sales; Operating Expenses; Interest and Other Income (Expense), net; Income Taxes; and Noncontrolling Interest

Cost of Sales

Total cost of sales increased $11.6 million in the three months ended September 30, 2010 and decreased $30.9 million in the six months ended September 30, 2010, compared to the same periods last fiscal year. Included in “Cost of sales - License amortization and royalties” in the three months ended September 30, 2009, is a $24.2 million one-time benefit in venture partner expense that

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related to the settlement of our preferred return dispute with Jakks. Excluding this one-time benefit, total cost of sales in the three and six months ended September 30, 2010 would have decreased $12.6 million and $55.1 million, or as a percentage of net sales, increased 8 points and 11 points, respectively, compared to the same periods last fiscal year. These increases in total cost of sales as a percent of net sales were primarily due to the lower average net selling price of our products in the three and six months ended September 30, 2010, compared to the same periods last fiscal year, and impairments of software development and licenses in the three and six months ended September 30, 2010.

Cost of Sales - Product Costs (in thousands)


	September 30, 2010		% of net sales		September 30, 2009		% of net sales		% Change
Three Months Ended	$	35,003	45.4	%	$	38,975	38.5	%	(10.2	)%
Six Months Ended	$	95,706	42.3	%	$	118,904	34.5	%	(19.5	)%

Product costs primarily consist of direct manufacturing costs, including platform manufacturer license fees, net of manufacturer volume rebates and discounts. Product costs as a percentage of net sales increased 7 points and 8 points for the three and six months ended September 30, 2010, respectively, compared to the same periods last fiscal year. These increases were due to the lower average net selling price of our products and the shift in our net sales mix to more catalog titles, in the current fiscal periods compared to the same periods last fiscal year.

Cost of Sales - Software Amortization and Royalties (in thousands)


	September 30, 2010		% of net sales		September 30, 2009		% of net sales		% Change
Three Months Ended	$	21,162	27.5	%	$	24,191	23.9	%	(12.5	)%
Six Months Ended	$	54,515	24.1	%	$	69,227	20.1	%	(21.3	)%

Software amortization and royalties expense consists of amortization of capitalized payments made to third-party software developers and amortization of capitalized internal studio development costs. Commencing upon product release, capitalized software development costs are amortized to software amortization and royalties expense based on the ratio of current gross revenues to total projected gross revenues. As a percentage of net sales, software amortization and royalties expense increased 4 points in the three and six months ended September 30, 2010, compared to the same periods last fiscal year. These increases were primarily due to an impairment charge of $4.5 million on one of our titles in the three months ended September 30, 2010 and lower average net selling prices in the three and six months ended September 30, 2010, compared to the same periods last fiscal year. These increases were partially offset by a high software development amortization rate on Red Faction: Guerrilla, relative to its net sales, in the same periods last fiscal year.

Cost of Sales - License Amortization and Royalties (in thousands)


	September 30, 2010		% of net sales		September 30, 2009			% of net sales		% Change
Three Months Ended	$	9,583	12.4	%	$	(9,049	)	(8.9	)%	205.9	%
Six Months Ended	$	30,473	13.5	%	$	23,490		6.8	%	29.7	%

License amortization and royalties expense consists of royalty payments due to licensors, which are expensed at the higher of (1) the contractual royalty rate based on actual net product sales for such license, or (2) an effective rate based upon total projected revenue for such license. Also included in license amortization and royalties expense is venture partner expense which was zero in the three and six months ended September 30, 2010 and a benefit of $23.7 million and $22.4 million in the three and six months ended September 30, 2009, respectively (see “Note 1 — Basis of Presentation” in the notes to the condensed consolidated financial statements included in Part I, Item I).

Net sales from our licensed properties represented 63% and 81% of our total net sales in the three and six months ended September 30, 2010, respectively, as compared to 73% in each of the three and six months ended September 30, 2009.

Excluding a $24.2 million one-time benefit recognized in venture partner expense in the three months ended September 30, 2009 related to the settlement of our preferred return dispute with Jakks, license amortization and royalties expense, as a percent of net sales, would have decreased 3 points in the three months ended September 30, 2010 and would have been flat in the six months ended September 30, 2010, compared to the same periods last fiscal year. The decrease in the three months ended September 30,

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2010 was primarily due to the shift in our net sales mix to more games based on our owned intellectual properties compared to the same period last fiscal year, and a high licensing rate on Up in the same period last fiscal year, relative to its net sales. These decreases were partially offset by an impairment charge of $5.9 million in the three months ended September 30, 2010 on an unannounced title. In the six months ended September 30, 2010, our net sales mix was consistent with the same period last fiscal year. The high licensing rate on Up in the same period last fiscal year, relative to its net sales, was offset by higher impairment charges in the six months ended September 30, 2010, both on a dollar basis and relative to our reported net sales.

Operating Expenses

Our operating expenses in the three months ended September 30, 2010, were relatively flat compared to the same period last fiscal year. In the six months ended September 30, 2010, our operating expenses decreased $16.3 million, or 12%, compared to the same period last fiscal year; this decrease was primarily due to lower product development and general and administrative expenses.

Product Development (in thousands)


	September 30, 2010		% of net sales		September 30, 2009		% of net sales		% Change
Three Months Ended	$	17,900	23.2	%	$	19,304	19.1	%	(7.3	)%
Six Months Ended	$	34,375	15.2	%	$	41,462	12.0	%	(17.1	)%

Product development expense primarily consists of expenses incurred by internal development studios and payments made to external development studios prior to products reaching technological feasibility. Once a product has reached technological feasibility the related development costs are capitalized to software development. In the three and six months ended September 30, 2010, product development expense decreased $1.4 million and $7.1 million, respectively, as compared to the same periods last fiscal year. These decreases were primarily due to reductions in personnel-related costs. Additionally, the decrease in the six months ended September 30, 2010, was also due to a shift in our mix of products under development to a higher portion of technologically feasible products in the three months ended June 30, 2010, compared to the same period last fiscal year.

Selling and Marketing (in thousands)


	September 30, 2010		% of net sales		September 30, 2009		% of net sales		% Change
Three Months Ended	$	24,023	31.2	%	$	19,028	18.8	%	26.3	%
Six Months Ended	$	57,649	25.5	%	$	57,471	16.7	%	0.3	%

Selling and marketing expenses consist of advertising, promotional expenses, and personnel-related costs. In the three months ended September 30, 2010, selling and marketing expenses increased $5.0 million, compared to the same period last fiscal year, primarily due to increased advertising support for future releases as well as for games released in the first quarter of the respective fiscal year. In the six months ended September 30, 2010, selling and marketing expenses were relatively flat, compared to the same period last fiscal year.

In the three and six months ended September 30, 2010, selling and marketing expenses as a percent of net sales increased 12.4 points and 8.8 points, respectively, as compared to the same periods last fiscal year. These increases, as a percent of net sales, were primarily due to the lower net sales in the three and six months ended September 30, 2010, compared to the same periods last fiscal year. Additionally, in the three months ended September 30, 2010, the increase, as a percent of net sales, was also due to the increased advertising support in the three months ended September 30, 2010.

General and Administrative (in thousands)


	September 30, 2010		% of net sales		September 30, 2009		% of net sales		% Change
Three Months Ended	$	11,878	15.4	%	$	14,055	13.9	%	(15.5	)%
Six Months Ended	$	23,722	10.5	%	$	30,633	8.9	%	(22.6	)%

General and administrative expenses consist of personnel and related expenses of executive and administrative staff and fees for professional services such as legal and accounting. In the three and six months ended September 30, 2010, general and administrative expenses decreased $2.2 million and $6.9 million, respectively, as compared to the same periods last fiscal year. These decreases were primarily due to lower legal and personnel related costs. The decrease in general and administrative expenses,

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in the three and six months ended September 30, 2010 was partially offset by recoveries of bad debt in the same periods last fiscal year.

Restructuring

Restructuring charges can include the costs associated with lease abandonments less estimates of sublease income, write-offs of related long-lived assets due to studio closures, as well as costs of other non-cancelable contracts. In the three and six months ended September 30, 2010, restructuring charges and adjustments were minimal and reflected facility related charges and adjustments due to changes in actual and estimated sublease income related to our fiscal 2009 realignment. For further information related to our restructuring charges, see “Note 7 — Restructuring” in the notes to the condensed consolidated financial statements included in Part I, Item 1.

Interest and Other Income (Expense), net

Interest and other income (expense), net, consists of interest earned on our investments, gains and losses resulting from exchange rate changes for transactions denominated in currencies other than the functional currency, and interest expense and amortization of debt issuance costs on our $100.0 million 5% convertible senior notes (“Notes”). For further discussion of the Notes, see “Note 9 — Convertible Senior Notes” in the notes to the condensed consolidated financial statements included in Part I, Item 1. Interest and other income (expense), net, in the three and six months ended September 30, 2010, primarily consisted of interest expense and amortization of debt issuance costs on our Notes. The Notes were issued on August 4, 2009 and accordingly, the interest expense and amortization of debt issuance costs recognized in the three and six months ended September 30, 2009 was lower compared to the three and six months ended September 30, 2010, reflecting the period the Notes were actually outstanding.

Income Taxes

Income tax expense for the six months ended September 30, 2010 and 2009 was $1.5 million and $1.2 million, respectively. Income tax expense in both periods relates primarily to income earned in foreign jurisdictions, which is not reduced by carryforward losses in the U.S. The effective tax rate differs significantly from the federal statutory rate primarily due to taxable losses in the U.S. that are fully offset by a valuation allowance.

Noncontrolling Interest

We sold our interest in THQ*ICE LLC (a joint venture with ICE Entertainment, Inc.) on April 30, 2010 and recognized an insignificant gain. In the three and six months ended September 30, 2009, we recognized $0.4 million and $0.6 million, respectively, of noncontrolling interest reflecting the loss allocable to equity interests in THQ*ICE LLC that were not owned by THQ.

Liquidity and Capital Resources


(In thousands)	September 30, 2010			March 31, 2010			Change
Cash and cash equivalents	$	66,391		$	188,378		$	(121,987	)
Short-term investments	56,372			82,941			(26,569		)
Cash, cash equivalents and short-term investments	$	122,763		$	271,319		$	(148,556	)
Percentage of total assets	19		%	38		%


	Six Months Ended September 30,
(In thousands)	2010			2009			Change
Net cash used in operating activities	$	(156,251	)	$	(35,599	)	$	(120,652	)
Net cash provided by (used in) investing activities	42,503			(32,520		)	75,023
Net cash provided by (used in) financing activities	(12,729		)	90,628			(103,357		)
Effect of exchange rate changes on cash	4,490			10,633			(6,143		)
Net increase (decrease) in cash and cash equivalents	$	(121,987	)	$	33,142		$	(155,129	)

Our primary sources of liquidity are cash, cash equivalents, and short-term investments. In addition, as further discussed below, we may elect to sell or borrow against certain of our eligible North American accounts receivable. Our principal source of cash

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is from sales of interactive software games designed for play on video game consoles, handheld devices and PCs, including via the Internet. Our principal uses of cash are for product purchases of discs and cartridges along with associated manufacturer's royalties, payments to external developers and licensors, the costs of internal software development, and selling and marketing expenses.

During the six months ended September 30, 2010 our cash, cash equivalents and short-term investments decreased $148.5 million, from $271.3 million at March 31, 2010 to $122.8 million at September 30, 2010. The decrease is primarily due to our investments in software development and licenses. In the second half of fiscal year 2011, we expect to continue to use a substantial portion of this balance to fund additional product development, invest in additional licenses and for working capital needs, as we continue to position THQ for long-term growth. As a result of this investment in our business in fiscal 2011, we expect to generate significant positive cash flow in fiscal 2012.

Cash Flow from Operating Activities. Cash used in operations was $156.3 million in the six months ended September 30, 2010, compared to $35.6 million in the same period last fiscal year. The increase in cash used in operations was primarily the result of our net loss during the six months ended September 30, 2010 compared to net income in the same period last fiscal year (adjusted for non-cash reconciling items such as depreciation and amortization), and an increase in investments in licenses and software development in the current fiscal year. These increases were partially offset by a one-time $32.8 million settlement payment made to Jakks in the six months ended September 30, 2009 (see "Note 11 — Commitments and Contingencies" in the notes to the condensed consolidated financial statements in Part I, Item 1).

Cash Flow from Investing Activities. Cash provided by investing activities was $42.5 million in the six months ended September 30, 2010, compared to cash used in investing activities of $32.5 million in the same period last fiscal year. The change in cash flow from investing activities was primarily due to proceeds from sales and maturities of short-term investments.

Cash Flow from Financing Activities. Cash used in financing activities was $12.7 million in the six months ended September 30, 2010, compared to cash provided by financing activities of $90.6 million in the same period last fiscal year. The change in cash flow from financing activities was primarily due to proceeds from the issuance of the Notes on August 4, 2009.

Effect of exchange rate changes on cash. Changes in foreign currency translation rates increased our reported cash balance by $4.5 million.

Key Balance Sheet Accounts

At September 30, 2010, our total current assets were $448.5 million, down from $562.5 million at March 31, 2010. In addition to cash, cash equivalents and short-term investments, our current assets consist primarily of:

Accounts Receivable. Accounts receivable decreased $30.8 million, from $41.3 million at March 31, 2010 to $10.5 million at September 30, 2010. The decrease was primarily due to lower net sales in the three months ended September 30, 2010 compared to the three months ended March 31, 2010, which was primarily due to our release schedule. Accounts receivable allowances were $56.3 million at September 30, 2010, a $21.2 million decrease from $77.5 million at March 31, 2010. The decrease is primarily due to lower levels of inventory in the retail channel at September 30, 2010 compared to March 31, 2010. Allowances for price protection and returns as a percentage of trailing nine month net sales were 11% at September 30, 2010 and 2009. We believe these allowances are adequate based on historical experience, inventory remaining in the retail channel, and the rate of inventory sell-through in the retail channel.

Inventory. Inventory increased $7.2 million, from $14.0 million at March 31, 2010 to $21.2 million at September 30, 2010. The increase in inventory was primarily due to inventory on hand for the holiday season. Inventory turns on a rolling twelve month basis were 13 and 12 at September 30, 2010 and March 31, 2010, respectively.

Licenses. Our investment in licenses, including the long-term portion, increased $30.1 million, from $140.3 million at March 31, 2010 to $170.4 million at September 30, 2010. The increase was primarily due to extensions of existing licenses as well as investments in new licenses, partially offset by amortization of our existing licenses and an impairment charge in the three months ended September 30, 2010 on an unannounced title.

Software Development. Capitalized software development, including the long-term portion, increased $65.1 million, from $159.0 million at March 31, 2010 to $224.1 million at September 30, 2010. The increase in software development was primarily the result of our investment in titles scheduled to be released in the remainder of fiscal 2011 and beyond, partially offset by software development amortization of titles released in the six months ended September 30, 2010 and an impairment charge in the three

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months ended September 30, 2010 on one of our titles. The majority of the software development asset balance at September 30, 2010 is for games that have expected release dates in the remainder of fiscal 2011 and beyond.

Total current liabilities at September 30, 2010, were $200.8 million, up from $190.9 million at March 31, 2010. Current liabilities consist primarily of:

Accounts Payable. Accounts payable increased $18.9 million, from $40.3 million at March 31, 2010 to $59.2 million at September 30, 2010. The increase in accounts payable was primarily due to timing, as reserves for price protection were not offset by customer receivables.

Accrued and Other Current Liabilities. Accrued and other current liabilities increased $4.4 million, from $137.3 million at March 31, 2010 to $141.7 million at September 30, 2010. The increase was primarily due to movements of accrued royalties from long-term to short-term liabilities. The increase was partially offset by a decrease in accrued compensation.

Secured Credit Line. Secured credit line decreased by $13.2 million, from $13.2 million at March 31, 2010 to zero at September 30, 2010. The credit line was related to a settlement agreement we entered into with UBS related to certain ARS. In the three months ended June 30, 2010, we paid the entire outstanding borrowings under the credit line, $13.2 million (see “Note 8 — Secured Credit Line” in the notes to the condensed consolidated financial statements in Part I, Item 1). The credit line was terminated, pursuant to its terms, on July 2, 2010.

Our liabilities at September 30, 2010 also consisted of:

Other long-term liabilities. Other long-term liabilities decreased $15.9 million, from $98.8 million at March 31, 2010 to $82.9 million at September 30, 2010. The decrease was primarily due to movements of accrued royalties and a portion of the settlement payment due to Jakks, from long-term to short-term liabilities.

Convertible Senior Notes. We issued the Notes on August 4, 2009 and the full principal amount of $100.0 million is outstanding as of September 30, 2010 (see “Note 9 — Convertible Senior Notes” in the notes to the condensed consolidated financial statements in Part I, Item 1).

Inflation

Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.

Financial Condition

At September 30, 2010, we held cash, cash equivalents, and short-term investments of $122.8 million. We believe that we have sufficient working capital, including cash expected to be generated from operations to meet our operating requirements for at least the next twelve months. Our business is cyclical and is impacted by both seasonality and the timing of new product releases; as a result, we expect our cash flow from operations to improve during the second half of this fiscal year as compared to the first half of the fiscal year.

On November 3, 2010, we entered into a Receivables Purchase Agreement ("Purchase Agreement") with Wells Fargo Bank, N.A. ("Wells Fargo"). The Purchase Agreement gives us the option to sell our receivables from Walmart Stores, Inc. ("Walmart") to Wells Fargo, at our discretion, and significantly expedite our receivables collections from Walmart. Wells Fargo will pay us the value of any receivables we elect to sell, less LIBOR + 1.25% per annum, and then collect the receivables from Walmart.

In June 2009, we entered into a Loan and Security Agreement (the "Credit Facility") with Bank of America, N.A. ("B of A"), as agent, and the lenders party thereto from time to time. The Credit Facility provides for a $35.0 million revolving credit facility, which can be increased to $50.0 million, subject to lender consent, pursuant to a $15.0 million accordion feature, and includes a $15.0 million letter of credit subfacility. See "Note 10 — Credit Facility" in the notes to the condensed consolidated financial statements in Part I, Item 1, for additional information regarding the Credit Facility. We may use the Credit Facility to provide us with working capital and cash for other corporate purposes; however, our ability to borrow, and the lenders' obligation to lend, under the Credit Facility is subject to our compliance with certain terms and conditions, including a requirement that we meet a minimum fixed charge coverage ratio. The amount we can borrow under the Credit Facility fluctuates based upon our levels of eligible North American accounts receivable. At September 30, 2010 we had no borrowings under the Credit Facility.

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Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties described in "Part II, Item 1A. Risk Factors." We may choose at any time to raise or borrow additional capital to strengthen our cash position, facilitate expansion, pursue strategic investments or to take advantage of business opportunities as they arise.

Contractual Obligations

Guarantees and Commitments

A summary of annual minimum contractual obligations and commercial commitments as of September 30, 2010 is as follows (in thousands):


	Contractual Obligations and Commercial Commitments (6)
Fiscal Years Ending March 31,	License / Software Development Commitments (1)		Advertising (2)		Leases (3)		Debt (4)		Other (5)		Total
Remainder of 2011	$	72,671	$	14,722	$	7,932	$	—	$	291	$	95,616
2012	79,864		18,070		15,180		—		6,582		119,696
2013	20,850		10,811		11,350		—		4,000		47,011
2014	14,000		5,000		10,100		—		4,000		33,100
2015	13,500		532		9,038		100,000		—		123,070
Thereafter	22,500		1,000		11,373		—		—		34,873
	$	223,385	$	50,135	$	64,973	$	100,000	$	14,873	$	453,366

(1)


(2)	Advertising. We have certain minimum advertising commitments under many of our major license agreements. These minimum commitments generally range from 3% to 12% of net sales related to the respective license.

(3)

(4)

(5)

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(6)

We have omitted unrecognized tax benefits from this table due to the inherent uncertainty regarding the timing and amount of certain payments related to these unrecognized tax benefits. The underlying positions have not been fully developed under audit to quantify at this time. At September 30, 2010, we had $6.2 million of unrecognized tax benefits. See "Note 14 — Income Taxes" in the notes to the condensed consolidated financial statements included in Part I, Item 1 for further information regarding the unrecognized tax benefits.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates as described in Part II, Item 7 to our 2010 10-K, under the caption “Critical Accounting Estimates.”

Recently Issued Accounting Pronouncements

See “Note 17 — Recently Issued Accounting Pronouncements” in the notes to the condensed consolidated financial statements in Part 1, Item 1.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We are exposed to certain market risks arising from transactions in the normal course of business, principally risks associated with interest rate and foreign currency fluctuations. Market risk is the potential loss arising from changes in market rates and market prices. We employ established policies and practices to manage these risks. We use foreign exchange option and forward contracts to hedge anticipated exposures or mitigate some existing exposures subject to foreign currency exchange rate risk as discussed below. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

We have interest rate risk primarily related to our investment portfolio. At September 30, 2010, our $66.4 million of cash and cash equivalents were comprised of cash and time deposits, money market funds, negotiable certificates of deposit, and corporate securities; $6.0 million of our cash equivalents are classified as trading securities (specifically the negotiable certificates of deposit and corporate securities). At September 30, 2010, our $56.4 million of short-term investments included $3.7 million of municipal securities, $49.3 million of corporate securities, and $3.4 million of negotiable certificates of deposit; our long-term investments of $1.9 million consisted entirely of municipal securities. Our September 30, 2010 short-term and long-term investments were classified as available-for-sale. We manage our interest rate risk by maintaining an investment portfolio generally consisting of debt instruments of high credit quality and relatively short maturities. However, because short-term investments mature relatively quickly and are generally reinvested at the then current market rates, interest income on a portfolio consisting of cash equivalents and short-term investments is more subject to market fluctuations than a portfolio of longer term investments. The value of these investments may fluctuate with changes in interest rates, however, the contractual terms of the investments do not permit the issuer to call, prepay or otherwise settle the investments at prices less than the stated par value. Interest income recognized in the three and six months ended September 30, 2010 was $0.8 million and $0.3 million, respectively, and was included in interest and other income (expense), net in our condensed consolidated statements of operations.

At September 30, 2010, we had no outstanding balances under the Bank of America Credit Facility or under the UBS Credit Agreement, which was terminated, pursuant to its terms, on July 2, 2010.

Foreign Currency Exchange Rate Risk

We transact business in many different foreign currencies and are exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, particularly the GBP and the Euro, which may result in a gain or loss of earnings to us. Our international business is subject to risks typical of an international business, including, but not limited to, foreign currency exchange rate volatility. Accordingly, our future results could be materially and adversely affected by changes in foreign currency exchange rates. Throughout the year, we frequently monitor the volatility of the GBP and the Euro (and all other applicable currencies).

Cash Flow Hedging Activities. From time to time, we hedge a portion of our foreign currency risk related to forecasted foreign currency denominated sales and expense transactions by entering into foreign exchange forward contracts that generally have maturities less than 90 days. Our hedging programs reduce, but do not entirely eliminate, the impact of currency exchange rate movements in net sales and operating expenses. During the six months ended September 30, 2010 and 2009, we did not enter into any foreign exchange forward contracts, related to cash flow hedging activities.

Balance Sheet Hedging Activities. We utilize foreign exchange forward contracts to mitigate foreign currency risk associated with foreign currency-denominated assets and liabilities, primarily certain inter-company receivables and payables. Our foreign exchange forward contracts are not designated as hedging instruments and are accounted for as derivatives whereby the fair value of the contracts are reported as other current assets or other current liabilities in our condensed consolidated balance sheets, and the associated gains and losses from changes in fair value are reported in interest and other income (expense), net in the condensed consolidated statements of operations. The forward contracts generally have a contractual term of one month or less and are transacted near month-end. Therefore, the fair value of the forward contracts generally is not significant at each month-end.

At September 30, 2010, we had foreign exchange forward contracts related to balance sheet hedging activities in the notional amount of $85.4 million with a fair value that approximates zero. All of the contracts had maturities of one month and consisted primarily of Euro, GBP, CAD, and AUD. The net loss recognized from these contracts during the three and six months ended September 30, 2010 was $0.4 million and $2.3 million, respectively, and was included in interest and other income (expense), net in our condensed consolidated statements of operations.

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Foreign exchange forward contracts are designed to offset gains and losses on the underlying foreign currency denominated assets and liabilities. Any movement in foreign currency exchange rates resulting in a gain or loss on our foreign exchange forward contracts are offset by an opposing gain or loss in the underlying foreign currency denominated assets and liabilities that were hedged and would not have a material impact on our financial position.

The counterparties to these forward contracts are creditworthy multinational commercial or investment banks. The risks of counterparty non-performance 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 mitigating or hedging activities will adequately protect us against the risks associated with foreign currency fluctuations.

We do not hedge foreign currency translation risk. A hypothetical 10% adverse change in foreign currency translation rates would result in a reduction of reported net sales of approximately $8.0 million and a reduction of reported income before taxes of approximately $0.3 million in the six months ended September 30, 2010. A hypothetical 10% adverse change in foreign currency translation rates would result in a reduction of reported total assets of approximately $14.7 million. These estimates assume an adverse shift in all foreign currency exchange rates, which do not always move in the same direction; actual results may differ materially.

Item 4. Controls and Procedures

Definition and limitations of disclosure controls and procedures. Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. These limitations include the possibility of human error, the circumvention or overriding of the controls and procedures and reasonable resource constraints. In addition, because we have designed our disclosure controls and procedures based on certain assumptions, which we believe are reasonable, about the likelihood of future events, our disclosure controls and procedures may not achieve their desired purpose under all possible future conditions. Accordingly, our disclosure controls and procedures provide reasonable assurance, but not absolute assurance, of achieving their objectives.

Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures, have concluded that as of October 2, 2010, our disclosure controls and procedures were effective in providing the requisite reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our second quarter of fiscal 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

There were no new material pending legal proceedings or material developments in legal proceedings previously reported that occurred during the three months ended September 30, 2010. See the 2010 10-K and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 for a discussion of material legal proceedings.

Item 1A. Risk Factors

Our business is subject to many risks and uncertainties that may impact our future financial performance. Some of those important risks and uncertainties that may cause our operating results to vary or may materially and adversely impact our operating results are as follows:

We must continue to develop and sell new titles in order to generate net sales and remain profitable.

We derive almost all of our net sales from sales of interactive software games. Even the most successful video games remain popular for only limited periods of time, often less than six months, and thus the success of our business is dependent upon our ability to continually develop and sell successful new games. Because net sales associated with an initial product launch generally constitutes a high percentage of the total net sales associated with the life of a product, the inability of our products to achieve significant market acceptance, delays in product releases or disruptions following the commercial release of our products may have a material adverse impact our net sales and profitability.

Our business is "hit" driven. If we do not deliver "hit" games, our net sales and profitability can suffer.

While many new products are regularly introduced, only a relatively small number of "hit" titles account for a significant portion of video game sales. If we fail to develop "hit" titles, or if "hit" products published by our competitors take a larger share of consumer spending than we anticipate, our product sales could fall below our expectations, which could negatively impact both our net sales and profitability.

Ongoing uncertainty regarding the duration and extent of the current economic downturn could result in a prolonged reduction in discretionary spending by consumers that could reduce demand for our products.

Our products involve discretionary spending on the part of consumers. Consumers are generally more willing to make discretionary purchases, including purchases of products like ours, during periods in which favorable economic conditions prevail. As a result, our products may be sensitive to general economic conditions and economic cycles. A continuation or worsening of current, adverse worldwide economic conditions, including declining consumer confidence, inflation, recession and rising unemployment may lead consumers to delay or reduce purchases of our products. Reduced consumer spending may also require us to incur increased selling and promotional expenses. A reduction or shift in domestic or international consumer spending could negatively impact our business, results of operations and financial condition.

We may not be able to adequately adjust our cost structure in a timely fashion in response to a sudden decrease in demand.

A significant portion of our selling and marketing and our general and administrative expense is attributable to expenses for personnel and facilities. In the event of a significant decline in net sales, we may not be able to dispose of facilities, reduce personnel or make other changes to our cost structure without disruption to our operations or without significant termination and exit costs. Management may not be able to implement such actions in a timely manner, if at all, to offset an immediate shortfall in net sales and profit. Moreover, reducing costs may impair our ability to produce and develop software titles at sufficient levels in the future.

We have significant net operating loss and tax credit carryforwards ("NOLs"). If we are unable to use our NOLs, our future profitability may be significantly impacted.

As of March 31, 2010, we had federal net operating loss carryforwards of $353.8 million and federal R&D tax credit carryforwards of $24.5 million. Under applicable tax rules, we may "carry forward" these NOLs in certain circumstances to offset any current and future taxable income and thus reduce our income tax liability, subject to certain requirements and restrictions. Therefore, we believe that these NOLs could be a substantial asset. However, if we experience an "ownership change," as defined in Section 382 of the Internal Revenue Code, our ability to use the NOLs could be substantially limited, which could significantly increase our future income tax liability. An "ownership change" generally is deemed to occur if our "5-percent shareholders"

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increase their aggregate percentage ownership of our stock by more than 50 percentage points over the lowest percentage of our stock owned by these 5-percent shareholders at any time during the three-year period prior to any such increase in ownership. While the rules for identifying 5-percent shareholders and their ownership are quite complex, 5-percent shareholders generally include persons that own, at any time during the three-year testing period, 5% or more of our stock directly, as well as by attribution from other persons, and certain groups of stockholders, each of whom owns less than 5% of our stock. On May 12, 2010, we entered into a Section 382 Rights Agreement with Computershare Trust Company, N.A., as rights agent, in an effort to prevent an "ownership change" from occurring and thereby protect the value of the NOLs. There can be no assurance, however, that the Section 382 Rights Plan will prevent an ownership change from occurring, or that entering into the Section 382 Rights Plan will, in fact, protect the value of the NOLs.

We believe our financial condition, including cash expected to be generated from operations, is sufficient to meet our operating requirements for at least the next twelve months. However, in the event our net sales and/or required expenditures differ significantly from our expectations, we may need to defer and/or curtail currently-planned expenditures, and/or pursue additional funding to meet our cash needs.

We operate in a capital intensive business. During fiscal 2011, we have invested and will continue to invest in product development and licenses and thus do not expect to generate positive cash flow from operations in fiscal 2011. As a result, the balance of our cash, cash equivalents, and short-term investments has decreased from $271.3 million as of March 31, 2010 to $122.8 million as of September 30, 2010 and we expect that amount to continue to decrease during the remainder of fiscal 2011. Although we believe that our financial condition, including cash we expect to generate from our operations, is sufficient to meet our operating requirements for at least the next twelve months, in the event our future net sales and/or required expenditures differ significantly from our expectations, we may need to defer and/or curtail currently-planned expenditures, and/or pursue additional funding to meet our cash needs.

Since a significant portion of our net sales are based upon licensed properties, failure to renew such licenses, or renewals of such licenses on less advantageous terms, could cause our net sales and/or our profitability to decline.

Games we develop based upon licensed brands make up a substantial portion of our sales each year. Sales of our games based upon our two top-selling licensed brands, UFC and WWE, comprised approximately 35% of our net sales in fiscal 2010. In fiscal 2009, sales of our games based upon our three top-selling licensed brands, Disney•Pixar, Nickelodeon, and WWE, comprised 47% of our net sales. A limited number of licensed brands may continue to produce a disproportionately large amount of our sales. Due to the importance to us of a limited number of brands and the intense competition from other video game publishers to publish games based upon these licensed brands, we may not be able to renew our current licenses or may have to renew a brand license on less advantageous terms, which could significantly lower our net sales and/or our profitability. On January 1, 2010, we entered into an eight year license with WWE. Our license with UFC expires on December 31, 2018. There can be no assurance that we will be able to extend such licenses and if we are not able to extend them, our net sales may decline significantly.

A decrease in the popularity of our licensed brands could materially impact our net sales and financial position.

As previously mentioned, a significant portion of our net sales are derived from products based on popular licensed properties. A decrease in the popularity of the underlying property of our licenses could negatively impact our ability to sell games based on such licenses and could lead to lower net sales, profitability, and/or an impairment of our licenses.

Our inability to acquire or create new intellectual property that has a high level of consumer recognition or acceptance could negatively impact our net sales and profitability.

We generate a portion of our net sales from wholly-owned intellectual property. The success of our internal brands depends upon our ability to create original ideas that appeal to the core gamer. Titles based on wholly-owned intellectual property can be expensive to develop and market since they do not have a built-in consumer base or licensor support. Our inability to create new products that find consumer acceptance could negatively impact our net sales and profitability.

Increasing development costs for games which may not perform as anticipated and failure of platforms to achieve significant market penetration could decrease our profitability and result in potential impairments of capitalized software development costs.

Over the last few years, video games have become increasingly expensive to develop. Because the current generation console platforms and PCs have greater complexity and capabilities than the earlier platforms and PCs, costs to develop games

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for the current generation platforms and PCs are higher. In the last two fiscal years, these greater costs have led to lower operating margins, negatively impacting our profitability. If these increased costs are not offset by higher net sales and other cost efficiencies in the future, our margins and profitability will continue to be impacted, and could result in impairment of capitalized software development costs. If these platforms, or games we develop for these platforms, do not achieve significant market penetration, we may not be able to recover our development costs, which could result in the impairment of capitalized software costs, which would negatively impact our profitability.

We are a software company and do not have experience developing hardware products. Our uDraw GameTablet may experience quality or supply problems or may fail to achieve our sales expectations, which could negatively impact our net sales and profitability.

Our uDraw GameTablet is our first hardware product. Hardware products can be highly complex and can have defects in design, manufacture, or associated software. We could incur significant expenses, lost revenue, and reputational harm if we fail to detect or effectively address such issues through design, testing, or warranty repairs. In addition, we obtain some components of our hardware devices from sole suppliers. If a component delivery from a sole-source supplier is delayed or becomes unavailable or industry shortages occur, we may be unable to obtain timely replacement supplies, resulting in reduced sales. Either component shortages or excess or obsolete inventory may increase our cost of sales. uDraw is assembled in China; disruptions in the supply chain may result in console shortages that would affect our net sales and profitability. Additionally, failure to achieve our sales expectations with respect to the uDraw could negatively impact our net sales and profitability in fiscal 2011.

We rely on a small number of customers that account for a significant amount of our sales. If these customers reduce their purchases of our products or become unable to pay for them, our business could be harmed.

Our largest customers, Best Buy, GameStop, Target and Wal-Mart, accounted for approximately 43% of our gross sales in fiscal 2010. A substantial reduction, termination of purchases, or business failure by any of our largest customers could have a material adverse impact on us.

A significant portion of our net sales are derived from our international operations, which may subject us to economic, currency, political, regulatory and other risks.

In fiscal 2010, we derived 38% of our net sales from outside of North America. Our international operations subject us to many risks, including: different consumer preferences; challenges in doing business with foreign entities caused by distance, language and cultural differences; unexpected changes in regulatory requirements, tariffs and other barriers; difficulties in staffing and managing foreign operations; and possible difficulties collecting foreign accounts receivable. These factors or others could have an adverse impact on our future foreign sales or the profits generated from those sales.

There are additional risks inherent in doing business in certain international markets, such as China. For example, foreign exchange controls may prevent us from expatriating cash earned in China, and standard business practices in China may increase our risk of violating U.S. laws such as the Foreign Corrupt Practices Act.

Additionally, sales generated by our international offices will generally be denominated in the currency of the country in which the sales are made, and may not correlate to the currency in which inventory is purchased, or software is developed. To the extent our foreign sales are not denominated in U.S. dollars, our sales and profits could be materially and adversely impacted by foreign currency fluctuations. Year-over-year changes in foreign currency translation rates had the mathematical effect of increasing our reported net loss by approximately $0.2 million in fiscal 2010.

Fluctuations in our quarterly operating results due to seasonality in the interactive entertainment software industry and other factors related to our business operations could result in substantial losses to investors.

We have experienced, and may continue to experience, significant quarterly fluctuations in sales and operating results. The interactive entertainment software industry is highly seasonal, with sales typically significantly higher during the year-end holiday buying season. Other factors that cause fluctuations in our sales and operating results include:

• the timing of our release of new titles as well as the release of our competitors' products;

• the popularity of both new titles and titles released in prior periods;

• the profit margins for titles we sell;

• the competition in the industry for retail shelf space;

• fluctuations in the size and rate of growth of consumer demand for titles for different platforms;

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• the timing of the introduction of new platforms and the accuracy of retailers' forecasts of consumer demand; and

• the deferral or subsequent recognition of net sales and costs related to certain of our products which contain online functionality.

We believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. We may not be able to maintain consistent profitability on a quarterly or annual basis. It is likely that in some future quarter, our operating results may be below the expectations of public market analysts and investors as a result of the factors described above and others described throughout this "Risk Factors" section, which may in turn cause the price of our common stock to fall or significantly fluctuate.

Our stock price has been volatile and may continue to fluctuate significantly.

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 (including those discussed in this "Risk Factors" section, as well as others not currently known to us or that we currently do not believe are material), to changes in securities analysts' earnings estimates or ratings, to our results or future financial guidance falling below our expectations and analysts' and investors' expectations, to factors impacting the entertainment, computer, software, Internet, media or electronics industries, to our ability to successfully integrate any acquisitions we may make, or to national or international economic conditions. In particular, economic downturns may contribute to the public stock markets' experiencing extreme price and trading volume volatility. These broad market fluctuations have and could continue to adversely impact the market price of our common stock.

Video game product development schedules are difficult to predict and can be subject to delays. Postponements in shipments can substantially impact our sales and profitability in any given quarter.

Our ability to meet product development schedules is impacted by a number of factors, including the creative processes involved, the coordination of large and sometimes geographically-dispersed development teams required by the complexity of our products, the need to localize certain products for distribution outside of the U.S., the need to refine our products prior to their release, and the time required to manufacture a game once it is submitted to the platform manufacturer. In the past, we have experienced development and manufacturing delays for several of our products. Failure to meet anticipated production schedules may cause a shortfall in our expected sales and profitability and cause our operating results in any given quarter to be materially different from expectations. Delays that prevent release of our products during peak selling seasons or in conjunction with specific events, such as the release of a related movie, could significantly impact the sales of such products and thus our profitability.

Catastrophic events or geo-political conditions may disrupt our business.

Our net sales are derived from sales of our games, which are developed within a relatively small number of studio facilities located throughout the world. If a fire, flood, earthquake or other disaster, condition or event such as political instability, civil unrest or a power outage adversely affected any of these facilities while personnel were finishing development of a game, it could significantly delay the release of the game, which could result in a substantial loss of sales in any given quarter and cause our operating results to differ materially from expectations.

Our business is dependent upon the success and availability of the video game platforms on which consumers play our games.

We derive most of our net sales from the sale of products for play on video game platforms manufactured by third parties, such as PS3 and PSP, Xbox 360, and the Wii and DS. The following factors related to such platforms can adversely impact sales of our video games and our profitability:

Popularity of platforms. In the previous console platform cycle, the PS2 was the best-selling platform and games for that platform dominated software sales. In the current platform cycle, the Wii is the best-selling console platform to date, and in calendar 2009, the Wii surpassed the Xbox 360 as the most popular console in terms of software game sales, according to IDG. However, recent trends indicate that the PS3 and Xbox 360 may be gaining popularity over the twelve months ended March 31, 2011. Since the typical development cycle for a console, handheld, or PC game is from 9 to 36 months, we must make decisions about which games to develop on which platforms based on current expectations of what the consumer preference for the platforms will be when the game is finished. Launching a game on a platform that has declined in popularity, or failure to launch a game on a platform that has grown in popularity, could negatively impact our net sales and profitability.

Platform pricing. Prices for the current generation of console platforms are higher than for their respective predecessor platforms. In the United States, general platform pricing is as follows: Xbox 360 is $299.99; Wii is $199.99; and PS3 is $299.99.

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The cost of the hardware could adversely impact the sales of these platforms, which could in turn negatively impact sales of our products for these platforms since consumers need a platform in order to play our games.

Platform shortages. From time to time, the platforms on which our games are played have experienced shortages. Platform shortages generally negatively impact the sales of video games since consumers do not have consoles on which to play the games.

Our inability to enter into agreements with the manufacturers to develop, publish and distribute titles on their platforms could seriously impact our operations.

We are dependent on the platform manufacturers (Microsoft, Nintendo and Sony) and our non-exclusive licenses with them, both for the right to publish titles for their platforms and for the manufacture of our products for their platforms. Our existing platform licenses require that we obtain approval for the publication of new games on a title-by-title basis. As a result, the number of titles we are able to publish for these platforms, and our sales from titles for these platforms, may be limited. Should any manufacturer choose not to renew or extend our license agreement at the end of its current term, or if any license were terminated, we would be unable to publish additional titles for that manufacturer's platform, which could negatively impact our operating results.

Additionally, since each of the manufacturers publishes games for its own platform, and also manufactures products for all of its other licensees, a manufacturer may give priority to its own products or those of other publishers in the event of insufficient manufacturing capacity. Unanticipated delays in the delivery of products due to delayed manufacturing could also negatively impact our operating results.

Software pricing and sales allowances may impact our net sales and profitability.

Software prices for games sold for play on the PS3 and Xbox 360 are generally higher than prices for games for the Wii, handheld platforms or PC games. Our product mix in any given fiscal quarter or fiscal year may cause our net sales to significantly fluctuate depending on which platforms we release games on in that quarter or year. Additionally, reductions in software pricing on any platform may result in lower net sales, which could materially impact our profitability.

In addition, we establish sales allowances based on estimates of future price protection and returns with respect to current period product net sales. While we believe that we can reliably estimate future returns and price protection, if product sell-through does not perform in line with our current expectations, return rates and price protection could exceed our reserves, and our net sales could be negatively impacted in future periods.

Increased sales of used video game products could reduce demand for new copies of our games.

Large retailers, including one of our largest customers, GameStop, have increased their focus on selling used video games, which provides higher margins for the retailers than sales of new games. This focus reduces demand for new copies of our games. We believe customer retention through compelling online play and downloadable content offers may reduce consumers' propensity to trade in games; however, continued sales of used games, rather than new games, may negatively impact our ability to sell new games and thus lower our net sales in any given quarter.

We may face difficulty obtaining access to retail shelf space necessary to market and sell our products effectively.

Retailers typically have a limited amount of shelf space and promotional resources, and there is intense competition among consumer interactive entertainment software products for high quality retail shelf space and promotional support from retailers. To the extent that the number of products and platforms increases, competition for shelf space may intensify and may require us to increase our marketing expenditures. Retailers with limited shelf space typically devote the most and highest quality shelf space to those products expected to be best sellers. We cannot be certain that our new products will consistently achieve such "best seller" status. Due to increased competition for limited shelf space, retailers and distributors are in an increasingly better position to negotiate favorable terms of sale, including price discounts, price protection, marketing and display fees, and product return policies. Our products constitute a relatively small percentage of most retailers' sales volume. We cannot be certain that retailers will continue to purchase our products or to provide those products with adequate levels of shelf space and promotional support on acceptable terms. A prolonged failure in this regard may significantly harm our business and financial results.

Competitive launches may negatively impact the sales of our games.

We compete for consumer dollars with several other video game publishers, and consumers must make choices among

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available games. If we make our games available for sale at the same time as our competitors' games become available, consumers may choose to spend their money on products published by our competitors rather than our products and retailers may choose to give more shelf space to our competitors' products, leaving less space to sell our products. Since the life cycle of a game is short, strong sales of our competitors' games could negatively impact the sales of our games.

Failure to appropriately adapt to rapid technological changes or emerging distribution channels may negatively impact our market share and our operating results.

Rapid technology changes in our industry require us to anticipate, sometimes years in advance, which technologies we must implement and take advantage of in order to make our products and services competitive. Currently, our industry is experiencing an increasing shift to online content and digital downloads. We believe that much of the growth in the industry will come via online markets or digital distribution such as massively multi-player games (both subscription and free-to-play), casual micro-transaction based games, paid downloadable content and digital downloads of games. Accordingly, we plan to continue integrating a digital component into all of our key franchises. However, if we fail to anticipate and adapt to these and other technological changes, our market share and our operating results may suffer. Our future success in providing online games, wireless games and other content will depend upon our ability to adapt to rapidly-changing technologies, develop applications to accommodate evolving industry standards, and improve the performance and reliability of our applications.

Our platform licensors control the fee structures for online distribution of our games on their platforms.

Certain platform licensors have retained the right to change the fee structures for online distribution of both paid content and free content (including patches and corrections) on their platforms. Each licensor's ability to set royalty rates makes it difficult for us to forecast our costs. Increased costs could negatively impact our operating margins. We may be unable to distribute our content in a cost-effective or profitable manner through this distribution channel, which could adversely impact our results of operations.

Development of software by platform manufacturers may lead to reduced sales of our products.

The platform manufacturers, Microsoft, Nintendo and Sony, each develop software for their own hardware platforms. As a result of their commanding positions in the industry, the platform manufacturers may have better bargaining positions with respect to retail pricing, shelf space and retailer accommodations than do any of their licensees, including us. Additionally, the platform manufacturers can bundle their software with their hardware, creating less demand for individual sales of our products. In the twelve month period ended March 31, 2010, Nintendo's market share across North America and top European territories was nearly 49% on its Wii platform and more than 37% on its DS platforms. Continued or increased dominance of software sales by the platform manufacturers may lead to reduced sales of our products and thus lower net sales.

Increased development of software and online games by intellectual property owners may lead to reduced net sales.

As discussed above, a significant portion of our net sales are due to sales of games based upon licensed properties. In recent years, some of our key licensors, including Disney and Viacom (Nickelodeon), have increased their development of video games, which could lead to such licensors not renewing our licenses to publish games based upon their properties that we currently publish, or not granting future licenses to us to develop games based on their other properties. For example, in fiscal 2009, Disney decided to internally develop video games based upon its upcoming movie Toy Story 3 rather than granting the license to develop and publish the game to an external publisher such as us. This impacted our net sales in the first half of fiscal 2011, as we did not release a new Disney•Pixar title this year as we did in the first quarter of fiscal 2010. If intellectual property owners continue expanding internal efforts to develop video games based upon properties that they own rather than renewing our licenses or granting us additional licenses, our net sales could be significantly impacted.

Competition for licenses may negatively impact our profitability.

Some of our competitors have greater name recognition among consumers and licensors of properties, a broader product line, or greater financial, marketing and other resources than we do. Accordingly, these competitors may be able to market their products more effectively or make larger offers or guarantees in connection with the acquisition of licensed properties. As competition for popular properties increases, our cost of acquiring licenses for such properties may increase, which could result in reduced margins and thus negatively impact our profitability.

Competition with emerging forms of home-based entertainment may reduce sales of our products.

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We also compete with other forms of entertainment and leisure activities. For example, we believe the overall growth in the use of the Internet and online services, including social networking, by consumers may pose a competitive threat if customers and potential customers spend less of their available time using interactive entertainment software and more of their time using the Internet and online services.

Competition for qualified personnel is intense in the interactive entertainment software industry and failure to hire and retain qualified personnel could seriously harm our business.

To a substantial extent, we rely on the management, marketing, sales, technical and software development skills of a limited number of employees to formulate and implement our business plan. To a significant extent, our success depends upon our ability to attract and retain key personnel. Competition for employees can be intense and the process of locating key personnel with the right combination of skills is often lengthy. The loss of key personnel could have a material adverse impact on our business.

We rely on external developers for the development of some of our titles.

A large percentage of our net sales are derived from games developed by third-party developers. While we own approximately 15% of Yuke's, the developer of our UFC Undisputed and WWE SmackDown vs. Raw games, we do not have direct control over the business, finances and operational practices of these external developers, including Yuke's. A delay or failure to complete the work performed by external developers has and may in the future result in delays in, or cancellations of, product releases. Additionally, the future success of externally-developed titles will depend on our continued ability to maintain relationships and secure agreements on favorable terms with skilled external developers. Our competitors may acquire the businesses of key developers or sign them to exclusive development arrangements. In either case, we would not be able to continue to engage such developers' services for our products, except for those that they are contractually obligated to complete for us. We cannot guarantee that we will be able to establish or maintain such relationships with external developers, and failure to do so could result in a material adverse impact on our business and financial results.

Defects in our game software could harm our reputation or decrease the market acceptance of our products.

Our game software may contain defects. In addition, because we do not manufacture our games for console platforms, we may not discover defects until after our products are in use by retail customers. Any defects in our software could damage our reputation, cause our customers to terminate relationships with us or to initiate product liability suits against us, divert our engineering resources, delay market acceptance of our products, increase our costs or cause our net sales to decline.

We may not be able to protect our intellectual property rights against piracy, infringement by third parties, or declining legal protection for intellectual property.

We defend our intellectual property rights and combat unlicensed copying and use of software and intellectual property rights through a variety of techniques. Preventing unauthorized use or infringement of our rights is difficult. Unauthorized production occurs in the computer software industry generally, and if a significant amount of unauthorized production of our products were to occur, it could materially and adversely impact our results of operations. We hold copyrights on the products, manuals, advertising and other materials owned by us and we maintain certain trademark rights. We regard our titles, including the underlying software, as proprietary and rely on a combination of trademark, copyright and trade secret laws as well as employee and third-party nondisclosure and confidentiality agreements, among other methods, to protect our rights. We include with our products a "shrink-wrap" or "click-wrap" license agreement which imposes limitations on use of the software. It is uncertain to what extent these agreements and limitations are enforceable, especially in foreign countries. Policing unauthorized use of our products is difficult, and software piracy is a persistent problem, especially in some international markets. Further, the laws of some countries where our products are or may be distributed, either do not protect our products and intellectual property rights to the same extent as the laws of the U.S., or are poorly enforced. Legal protection of our rights may be ineffective in such countries. We cannot be certain that existing intellectual property laws will provide adequate protection for our products.

Software piracy may negatively impact our business.

Software piracy is increasing rapidly in the video game industry. Piracy related to customers obtaining products through peer-to-peer networks and other Internet channels has increased substantially. Modified chips for the Xbox 360 and Wii systems have allowed increased piracy of games for those systems, and the R4 chip has dramatically increased illegal downloads of DS games. While we are taking various steps to protect our intellectual property and prevent illegal downloading of our video games, we may not be successful in preventing or controlling such piracy, which may negatively impact our business.

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Third parties may claim we infringe their intellectual property rights.

Although we believe that we make reasonable efforts to ensure our products do not violate the intellectual property rights of others, from time to time, we receive notices from others claiming we have infringed their intellectual property rights. The number of these claims may grow. Responding to these claims may require us to enter into royalty and licensing agreements on unfavorable terms, require us to stop selling or to redesign impacted products, or pay damages or satisfy indemnification commitments including contractual provisions under various license arrangements. If we are required to enter into such agreements or take such actions, our operating margins may decline as a result.

We cannot be certain of the future effectiveness of our internal control over financial reporting or the impact of the same on our operations and the market price for our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in our Annual Report on Form 10-K our assessment of the effectiveness of our internal control over financial reporting. Furthermore, our independent registered public accounting firm is required to report on whether it believes we maintain, in all material respects, effective internal control over financial reporting. Although we believe that we currently have adequate internal control procedures in place, we cannot be certain that our internal control over financial reporting will be effective in the future. If we cannot adequately maintain the effectiveness of our internal control over financial reporting, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC. Any such action could adversely impact our financial results and the market price of our common stock.

Rating systems and future legislation may make it difficult to successfully market and sell our products.

Currently, the interactive entertainment software industry is self-regulated and products are rated by the Entertainment Software Rating Board ("ESRB"). Our retail customers take the ESRB rating into consideration when deciding which of our products they will purchase. If the ESRB or a manufacturer determines that a product should have a rating directed to an older or more mature consumer, we may be less successful in our marketing and sales of a particular product.

From time to time, legislation has been introduced for the establishment of a government mandated rating and governing system in the U.S. and in foreign countries for our industry. In April 2010, the U.S. Supreme Court granted the state of California's certiorari petition in connection with the constitutionality of California's proposed legislation to regulate the sale of violent video games to minors. Various foreign countries already allow government censorship of interactive entertainment products. We believe that if our industry were to become subject to a government rating system or other regulation (such as the law at issue in the California case), our ability to successfully market and sell our products could be adversely impacted.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no repurchases of our common stock by the Company during the quarter ended September 30, 2010.

Limitations upon Payment of Dividends

Our Credit Facility contains limitations on our ability to pay cash dividends.

Item 3. Defaults Upon Senior Securities

None

Item 4. (Removed and Reserved)

Item 5. Other Information

None

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Item 6. Exhibits


Exhibit Number		Title

3.1		Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-3 filed on January 9, 1998 (File No. 333-32221) (the "S-3 Registration Statement")).

3.2		Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to Post-Effective Amendment No. 1 to the S-3 Registration Statement).

3.3		Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001).

3.4		Amendment to Certificate of Incorporation (incorporated by reference to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the period ended September 30, 2007).

3.5		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 12, 2009).

3.6		Amended and Restated Certificate of Designation, Preferences, and Rights of Series A Junior Participating Preferred Stock of THQ Inc. (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form 8-A filed on May 13, 2010 (File No. 001-15959) (the "May 2010 8-A")).

4.1		Rights Agreement dated as of May 12, 2010, by and between the Company and Computershare Trust Company, N.A., as rights agent, which includes as Exhibit B the Form of Rights Certificate (incorporated by reference to Exhibit 4.1 to the May 2010 8-A).

4.2		Amended and Restated Rights Agreement, dated as of August 22, 2001 between the Company and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 1 to Amendment No. 2 to the Company's August 2001 8-A).

4.3		First Amendment to Amended and Restated Rights Agreement, dated April 9, 2002 between the Company and Computershare Investor Services, LLC, as Rights Agent (incorporated by reference to Exhibit 2 to Amendment No. 3 to the Company's Registration Statement on Form 8-A filed on April 12, 2002 (file No. 000-18813).

4.4		Second Amendment to Amended and Restated Rights Agreement, dated as of May 12, 2010 between the Company and Computershare Investor Services, LLC (incorporated by reference to Exhibit 10.1 to the Form 8-K filed with the SEC on May 13, 2010).

4.5		Indenture dated as of August 4, 2009, between the Company and Union Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 4, 2009).

4.6		Form of 5.00% Convertible Senior Note (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on August 4, 2009).

10.1	*	Amendment to the Xbox 360 Publisher License Agreement (Multiscreen Content) effective September 2, 2010 between Microsoft Licensing, GP and the Company.

10.2		Second Amendment to Confidential License Agreement for Nintendo DS (Western Hemisphere) effective October 31, 2010 between Nintendo of America Inc. and the Company (incorporated by referenced to Exhibit 10.1 to the Form 8-K filed with the SEC on September 14, 2010).

31.1	*	Certification of Brian J. Farrell, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


31.2	*	Certification of Paul J. Pucino, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32	*	Certification of Brian J. Farrell, Chief Executive Officer, and Paul J. Pucino, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


Dated: November 5, 2010	THQ INC.

	By: /s/ Brian J. Farrell
	Brian J. Farrell,
	Chairman of the Board, President and Chief Executive Officer


Dated: November 5, 2010	THQ INC.

	By: /s/ Paul J. Pucino
	Paul J. Pucino,
	Executive Vice President, Chief Financial Officer


Dated: November 5, 2010	THQ INC.

	By: /s/ Teri J. Manby
	Teri J. Manby,
	Vice President, Chief Accounting Officer