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. Such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such forward-looking statements, including, but not limited to, business, competitive, economic, legal, political and technological factors affecting our industry, operations, markets, products or pricing. The forward-looking statements contained herein speak only as of the date on which they were made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report.

Our business is subject to many risks and uncertainties which may affect our future financial performance. For a discussion of our risk factors, see "Part II
- Item 1A. Risk Factors."

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, 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 Report on Form 10-K for the fiscal year ended March 31, 2009 (the "2009 10-K") and our Quarterly Reports on Form 10-Q for the quarters ended September 30, 2008 and June 30, 2009.

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, Nintendo Wii, Sony PlayStation 3 and Sony PlayStation 2;

† Handheld platforms such as the Nintendo DS and DSi, Sony PSP and wireless devices; and

† Personal computers (including games played online).

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 children and the mass market to products targeted at core gamers. Our portfolio of licensed properties includes games based on popular fighting brands such as World Wrestling Entertainment and the Ultimate Fighting Championship; kids and family brands such as DreamWorks Animation, Disney•Pixar, Marvel Entertainment and Nickelodeon; core gamer brand Warhammer 40,000; as well as others. In addition to licensed properties, we also develop games based upon our own intellectual properties, including Company of Heroes, de Blob, MX vs. ATV, Red Faction and Saints Row.

Trends Affecting Our Business

For general trends affecting our business, please refer to 2009 10-K and our Form 10-Q for the quarterly period ended June 30, 2009.

Second Quarter Updates

Economic Conditions. The video games industry in North America and Europe had combined overall decreases of 16% and 12% in sales revenues for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008, according to The NPD Group, Chart-Track and GfK, as a result of a stronger base in the

2008 periods primarily due to a larger number of blockbuster product launches and a weaker economy in 2009. Despite this challenging macroeconomic environment THQ gained market share in both the United States and Europe during the nine months ended September 30, 2009. We continue to monitor the adverse economic conditions that may have unfavorable impacts on our business in the upcoming holiday season, which is the season in which we generally earn a substantial portion of our revenue.

Digital Migration. In addition to selling packaged goods games, recently we have begun to provide a variety of electronically delivered products. Many of our games that are available as packaged goods products are also available by direct electronic download through the Internet (from websites that we maintain and others that we license). We believe that consumers want greater control over in-game content and thus we also offer electronically delivered content that is add-on or related to our packaged goods products. Additionally, we are beginning to offer games that are completely played online, such as Dragonicain North America and Company of Heroes Onlinein China, Korea, and other Asian territories.

Current Generation Game Consoles. Video game hardware systems have historically had a life cycle of four to six years, which causes the video game software market to be cyclical as well. The current cycle began with Microsoft's launch of the Xbox 360 in 2005, and continued in 2006 when Sony and Nintendo launched their next-generation systems, the PlayStation 3 and the Wii, respectively. Unlike past cycles, we believe the current game consoles are on separate cycles, based upon each console's target market and price point. While this may prolong the life of a specific console, it also leads to a more segmented market. Unlike with past console cycles, we do not believe it is viable to port a single title across multiple SKUs. Thus, we need to make decisions about which games to bring to which consoles, well in advance of when the games will be sold to the end users. This may cause us to publish games for platforms that are no longer as popular as when we initially began development of the game. Since the beginning of the current console cycle, the Wii has been the best-performing platform, with an installed base of more than 37 million units in North America and Europe. However, year-to-date, sales of Wii hardware units are down more than 20% in the US and Europe. The slowing sales of Wii hardware could negatively impact sales of our games, particularly our kids, family and casual portfolio; however, Nintendo recently reduced the price of the Wii, which stimulated sales of the console in September 2009. We will continue to monitor console sales so that we can manage our product delivery on each platform.

Our Strategy

In our fiscal year ended March 31, 2009, in order to address the significant trends affecting our business, we updated our strategic plan to focus on 1) developing a select number of high quality titles targeted at the core gamer, 2) extending our leadership in the fighting and racing categories, 3) reinvigorating our product portfolio and improving profitability in our kids' business, 4) building strong mass appeal/family game franchises, and 5) extending our brands into online markets. In order to support this new business strategy, we restructured our business into three key business units - Core Games, which oversees the production and marketing of action, fighting, racing, shooter and strategy games primarily targeted to avid or core gamers; Kids, Family and Casual Games, which oversees production and marketing of console, PC and wireless games targeted to mass market and family gamers; and Online Games, which oversees all online initiatives and assists our Core Games group and Kids, Family and Casual Games group in achieving their online objectives.

Overview of Financial Results for the Three and Six Month Periods Ended September 30, 2009

Our net loss attributable to THQ Inc. ("net loss") for the three months ended September 30, 2009 was $5.6 million, or $0.08 per diluted share, compared to a net loss of $115.3 million, or $1.73 per diluted share, for the three months ended September 30, 2008. Our net income attributable to THQ Inc. for the six months ended September 30, 2009 ("net income") was $0.8 million, or $0.01 per diluted share, compared to a net loss of $142.5 million, or $2.14 per diluted share, for the same period last fiscal year. Additionally, our net loss in the six months ended September 30, 2008 included a gain on sale of discontinued operations of $2.1 million, or $0.03.

Our profitability is dependent upon revenues from the sales of our video games. Net sales in the three months ended September 30, 2009 decreased 39% from the same period last fiscal year, to $101.3 million from $164.8 million, and net sales in the six months ended September 30, 2009 increased 14% from the same period last fiscal year, to $344.8 million from $302.4 million. The decrease in our net sales in the three months ended September 30, 2009 was primarily due to a decrease in units sold, which was primarily because we released significantly fewer titles in the three months ended September 30, 2009 compared to the same period last fiscal year. Additionally, net sales decreased due to fewer units sold of Up in the three months ended September 30, 2009 as compared to Wall-E in the same period last fiscal year, as well as lower year-over-year catalog sales. The decrease in units sold in the three months ended September 30, 2009 was partially offset by an increase in average selling prices primarily due to higher priced titles such as UFC 2009 Undisputed. The increase in net sales in the six months ended September 30, 2009 was primarily due to an increase in average selling prices, which was driven by UFC 2009 Undisputed.

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, which is affected by cost of sales, increased 66% in the three months ended September 30, 2009 as compared to the three months ended September 30, 2008, from 17% to 47% of net sales. Our gross profit increased 106% in the six months ended September 30, 2009 as compared to the six months ended September 30, 2008, from 21% to 39% of net sales. The increases in our gross profit were primarily due to the settlement of our preferred return dispute with JAKKS Pacific, Inc. ("JAKKS"), which resulted in a benefit of $24.2 million in our venture partner expense and an increase in average selling prices primarily due to higher priced titles such as UFC 2009 Undisputed.

Our profitability is also affected by our operating expenses, which decreased by $30.0 million in the three months ended September 30, 2009, to $53.3 million from $83.3 million in the three months ended September 30, 2008 and decreased $33.4 million in the six months ended September 30, 2009, to $132.1 million from $165.5 million in the six months ended September 30, 2008. The decreases were primarily due to actions taken as part of our fiscal 2009 business realignment.

Our principal source of cash is from sales of interactive software games designed for play on video game consoles, handheld devices and personal computers, 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 $35.6 million for the six months ended September 30, 2009, as compared to $159.8 million for the same period last fiscal year. The decrease in cash used was primarily the result of our net income in the six months ended September 30, 2009 as opposed to a net loss in the same period last fiscal year as well as fewer investments in licenses and software development, partially offset by the payment of $32.8 million to JAKKS related to the settlement of our preferred return dispute (see "Note 12 - Commitments and Contingencies" in the notes to the condensed consolidated financial statements) and an increase in product prepayments in preparation for the holiday buying season. Additionally, we generated $96.8 million in cash from financing activities due to the issuance of convertible senior notes on August 4, 2009, net of issuance costs. See "Note
10 - Convertible Senior Notes" in the notes to the condensed consolidated financial statements for further information regarding the convertible senior notes.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates as described in Item 7 to our 2009 10-K, under the caption "Critical Accounting Estimates."

Results of Operations - Comparison of the Three and Six Month Periods Ended September 30, 2009 and 2008

Net Sales

Net sales decreased by $63.5 million in the three months ended September 30, 2009 as compared to the same period last fiscal year, from $164.8 million to $101.3 million; however, in the six months ended September 30, 2009 net sales increased by $42.4 million compared to the same period last fiscal year, from $302.4 million to $344.8 million. Our net sales are principally derived from sales of interactive software games designed for play on video game consoles, handheld devices and personal computers, including via the internet. In both the three and six months ended September 30, 2009 net sales were primarily driven by:

† sales of games initially released in the three months ended June 30, 2009 such as our first game based on the UFC franchise, UFC 2009 Undisputed, as well as our owned intellectual property Red Faction: Guerrillaand Disney•Pixar's Up, and

† sales of our catalog titles such as WWE SmackDown vs. Raw 2009, and our owned intellectual properties Saints Row 2 and MX vs. ATV: Untamed.

Net Sales by New Releases and Catalog Titles

The following tables detail our net sales by new releases (titles initially released in the respective fiscal year) and catalog titles (titles released in fiscal years previous to the respective fiscal year) for the three and six months ended September 30, 2009 and 2008 (in thousands):

                            Three Months Ended September 30,         Increase/       %
                                2009                 2008           (Decrease)     Change
New releases              $   44,638    44.1 % $  91,318    55.4 %   $ (46,680 )   (51.1)  %
Catalog                       56,652    55.9      73,499    44.6       (16,847 )   (22.9)
Consolidated net sales    $  101,290   100.0 % $ 164,817   100.0 %   $ (63,527 )   (38.5)  %




                             Six Months Ended September 30,        Increase/       %
                                2009                2008           (Decrease)    Change
New releases             $  223,079    64.7 % $ 133,194    44.0 %   $ 89,885       67.5 %
Catalog                     121,713    35.3     169,201    56.0      (47,488 )   (28.1)
Consolidated net sales   $  344,792   100.0 % $ 302,395   100.0 %   $ 42,397       14.0 %

Net sales of our new releases decreased by $46.7 million in the three months ended September 30, 2009 as compared to the same period last fiscal year. The decrease was primarily due to fewer units sold, which was because we released significantly fewer titles in the three months ended September 30, 2009 compared to the same period last fiscal year. Additionally, net sales of our new releases decreased due to fewer units sold of Up in the three months ended September 30, 2009 as compared to Wall-E in the same period last fiscal year. The decrease in units sold in the three months ended September 30, 2009 was partially offset by an increase in average selling prices primarily due to sales of higher priced titles such as UFC 2009 Undisputed.

Net sales of our new releases increased by $89.9 million in the six months ended September 30, 2009 as compared to the same period last fiscal year primarily due to sales of UFC 2009 Undisputed, which was initially released in the three months ended June 30, 2009 on Xbox 360 and PlayStation 3, at a premium price (e.g.MSRP of $59.99 in the United States). This title was the primary driver of our net sales in the three and six months ended September 30, 2009 and has a higher average selling price compared to the titles released in the same periods last fiscal year. The increase in the average selling price in the six months ended September 30, 2009 was partially offset by fewer units sold of our new releases as described above.

Net sales of our catalog titles decreased by $16.8 million and $47.5 million in the three and six months ended September 30, 2009 due to fewer units sold as compared to the same periods last fiscal year. The decrease in units sold was partially offset by an increase in the average selling price of our catalog titles. Additionally, we had a decrease in the recognition of deferred revenue in the three and six months ended September 30, 2009 as compared to the same periods last fiscal year.

Net Sales by Territory

The following table details our net sales by territory for the three and six months ended September 30, 2009 and 2008 (in thousands):

                             Three Months Ended September 30,           Increase/      %
                                2009                   2008            (Decrease)    Change
North America             $   56,471    55.8 %   $  76,502    46.4 %     $ (20,031 ) (26.2) %

Europe                        35,021    34.6        78,336    47.5         (43,315 ) (55.3)
Asia Pacific                   9,798     9.6         9,978     6.1            (180 )  (1.8)
International                 44,819    44.2        88,314    53.6         (43,495 ) (49.3)
Consolidated net sales    $  101,290   100.0 %   $ 164,816   100.0 %     $ (63,526 ) (38.5) %




                             Six Months Ended September 30,           Increase/      %
                               2009                  2008            (Decrease)    Change
North America            $ 218,785    63.5 %   $ 151,352    50.1 %    $   67,433     44.6 %

Europe                     101,819    29.5       128,226    42.4         (26,407 ) (20.6)
Asia Pacific                24,187     7.0        22,816     7.5           1,371      6.0
International              126,006    36.5       151,042    49.9         (25,036 ) (16.6)
Consolidated net sales   $ 344,791   100.0 %   $ 302,394   100.0 %    $   42,397     14.0 %

Net sales in North America decreased by $20.0 million in the three months ended September 30, 2009 as compared to the same period last fiscal year. The decrease was due to fewer units sold of both our new releases and our catalog titles. The decline in units sold of our new releases was because we released significantly fewer titles in the three months ended September 30, 2009 as compared to the same period last fiscal year. The decrease in units sold in the three months ended September 30, 2009 was partially offset by an increase in average selling prices on our new releases, primarily due to higher priced titles such as UFC 2009 Undisputed.

Net sales in North America increased by $67.4 million in the six months ended September 30, 2009 as compared to the same period last fiscal year. The increase was primarily due to an increase in units shipped of our new releases with higher average selling prices, which was primarily due to sales of UFC 2009 Undisputed,initially released in the three months ended June 30, 2009. This increase was partially offset by a decline in units sold of our catalog titles in the six months ended September 30, 2009 as compared to the same period last fiscal year.

Net sales in Europe decreased by $43.3 million and $26.4 million in the three and six months ended September 30, 2009 as compared to the same periods last fiscal year. The decreases were primarily due to fewer units sold of our new releases, which was due to a decline in units sold of Up in the three and six months ended September 30, 2009 as compared to Wall-E in the same periods last fiscal year. The decline in units sold of Up is partly due to its release timing across the European territories, specifically in the United Kingdom where it was released in the third quarter of fiscal 2010, whereas Wall-Ewas released in the second quarter of fiscal 2009. Additionally, we released significantly fewer titles in the three months ended September 30, 2009 as compared to the same period last fiscal year. The decrease in units sold was partially offset by an increase in the average selling price of our new releases, primarily due to higher priced titles such as UFC 2009 Undisputed. We estimate that unfavorable changes in foreign currency translation rates during the three and six months ended September 30, 2009 resulted in a decrease of reported net sales in Europe of $2.7 million and $15.0 million, respectively, as compared to the same periods last fiscal year.

Net sales in Asia Pacific were relatively similar to the same periods last year, decreasing by $0.2 million, or 1.8%, in the three months ended September 30, 2009 and increasing by $1.4 million, or 6%, in the six months ended September 30, 2009 as compared to the same period last fiscal year. The increase in the six months ended September 30, 2009 was primarily due to an increase in average selling prices on our new releases, primarily due to higher priced titles such as UFC 2009 Undisputed. Additionally, we estimate that unfavorable changes in foreign currency translation rates during the three and six months ended September 30, 2009 resulted in a decrease of reported net sales from our international territories of $0.2 million and $3.3 million, respectively, as compared to the same periods last fiscal year.

Deferral of Revenue

Net sales for the three and six months ended September 30, 2009 and 2008 were impacted by the deferral and/or recognition of revenue from the sale of titles for which the online service is more-than-inconsequential to the overall functionality of the game and as such represents a deliverable. The balance of deferred revenue related to these titles is included within accrued and other current liabilities in our consolidated balance sheets. We also defer certain costs related to these titles; these costs are included within software development, and prepaid expenses and other current assets in our consolidated balance sheets.

Cost of Sales, Operating Expenses, Interest and Other Income, Income Taxes, Noncontrolling Interest and Discontinued Operations

Cost of Sales

Cost of sales decreased by $82.3 million, or 60%, in the three months ended September 30, 2009, and decreased by $26.2 million, or 11%, in the six months ended September 30, 2009, as compared to the same periods last fiscal year. The decrease in the three and six months ended September 30, 2009 was primarily due to the decrease in units sold and the settlement of our preferred return dispute with JAKKS, which resulted in a benefit of $24.2 million in our venture partner expense. Excluding the impact of the JAKKS preferred return settlement, cost of sales as a percent of net sales decreased by 5.5 points and 10.3 points in the three and six months ended September 30, 2009, respectively, as compared to the same periods last fiscal year, due to an increase in average selling prices primarily from higher priced titles such as UFC 2009 Undisputed.

Cost of Sales - Product Costs (in thousands)



                          September 30,    % of net    September 30,    % of net
                              2009          sales          2008          sales      % change
Three Months Ended           $38,975        38.5%         $76,038        46.1%      (48.7)%
Six Months Ended            $118,904        34.5%        $136,046        45.0%      (12.6)%

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 were lower by 7.6 points and 10.5 points for the three and six months ended September 30, 2009, respectively, as compared to the same periods last fiscal year. The decrease as a percent of net sales in the three and six months ended September 30, 2009 was primarily due to sales of UFC 2009 Undisputed which was initially released in the three months ended June 30, 2009 on Xbox 360 and PlayStation 3, at a premium price (e.g. MSRP of $59.99 in the United States). This title was the primary driver of our net sales in the three and six months ended September 30, 2009 and has a higher average selling price compared to the titles released in the same periods last fiscal year.

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



                          September 30,    % of net    September 30,    % of net
                              2009          sales          2008          sales      % change
Three Months Ended           $24,191        23.9%         $39,512        24.0%      (38.8)%
Six Months Ended             $69,227        20.1%         $66,512        22.0%        4.1%

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 based on the ratio of current gross revenues to total projected gross revenues. For the three and six months ended September 30, 2009, software amortization and royalties, as a percentage of net sales, decreased by 0.1 points and 1.9 points, respectively, as compared to the same periods last fiscal year. The decrease in software amortization and royalties as a percentage of net sales in the six months ended September 30, 2009 was driven primarily by UFC 2009 Undisputed's lower capitalized development costs in relation to its total projected gross revenues as compared to most titles recognized in the same period last fiscal year. This decrease was partially offset by Red Faction: Guerrilla, which has higher capitalized development costs . . .