Activision, Inc. — 2004 Annual Report Notes to Consolidated Financial Statements Advertising Expenses Investment Income, Net Income Taxes Foreign Currency Translation Earnings Per Common Share Estimates Comprehensive Income We expense advertising as incurred, except for production costs associated with media advertising which are deferred and charged to expense the first time the related ad is run. Advertising expenses for the years ended March 31, 2004, 2003 and 2002 were approximately $76.6 million, $60.0 million and $50.3 million, respectively, and are included in sales and marketing expense in the consolidated statements of operations. Investment income, net is comprised of the following, (amounts in thousands): We account for income taxes using SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those  temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Comprehensive income includes net income, unrealized appreciation (depreciation) on short-term investments, foreign currency translation adjustments, and the effective portion of gains or losses on cash flow hedges that are presented as a component of accumulated other comprehensive income (loss) in shareholders’ equity. The functional currencies of our foreign subsidiaries are their local currencies. All assets and liabilities of our foreign  subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenue and expenses are translated at weighted average exchange rates during the period. The resulting translation adjustments are reflected as a component of accumulated other comprehensive income (loss) in shareholders’ equity. 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 or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for all periods. Diluted earnings per share is computed by dividing income avail- able to common shareholders by the weighted average number of common shares outstanding, increased by common stock equivalents. Common stock equivalents are calculated using the treasury stock method and represent incremental shares issuable upon exercise of our outstanding options and warrants and, if applicable in the period, conversion of  our convertible debt. However, potential common shares are not included in the denominator of the diluted earnings  per share calculation when inclusion of such shares would be anti-dilutive, such as in a period in which a net loss  is recorded. page 52 Year ended March 31, 2004 2003 2002 Interest expense $ (348) $ (933) $(1,188) Interest income 6,502 9,259 3,734 Net realized gain on short-term investments 21 234 — Investment income, net $6,175 $8,560 $ 2,546