TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES Management’s Discussion and Analysis of Financial  Condition and Results of Operations  (continued) (Dollars in thousands, except per share amounts) Cost of Sales Operating Expenses 18 Selling and marketing. The increase in selling and marketing expense was attributable to television and other advertising expenses relating to  Grand Theft Auto 3, Max Payne, Grand Theft Auto: Vice City and  Conflict Desert Storm during fiscal 2002. General and administrative. The increase in general and adminis- trative expense was attributable to increased personnel expenses  primarily relating to salaries of additional executive, financial, account- ing and information technology personnel and legal and professional fees incurred in connection with legal proceedings and regulatory matters as well as litigation settlement costs relating to a distribution arrangement. Research and development . The increase in research and devel- opment costs was attributable to bonus compensation, increased staffing levels and the acquisition of Barking Dog Studios. Once soft- ware development projects reach technological feasibility, which is relatively early in the development process, a substantial portion of our research and development costs are capitalized and subsequently amortized as cost of goods sold. Depreciation and amortization. The depreciation and amortiza- tion expense decrease was due to our adoption of SFAS 142, and was partly offset by increased depreciation related to the implementation of a new accounting software system and amortization related to the Max Payne acquisition. Income from Operations. Income from operations increased by $94,328, or 332.4%, to $122,705 for fiscal 2002 from $28,377 for  fiscal 2001, due to the changes referred to above. Interest (Income) Expense, net. Interest expense decreased by $8,030, or 94.4%, to $480 for fiscal 2002 from $8,510 for fiscal 2001. The decrease was attributable to substantially lower levels of borrowing from our credit facilities and interest income earned on invested cash. Gain on Sale of Subsidiary. We recorded a non-operating gain of $651 on the sale of our Jack of All Games UK subsidiary during fiscal 2001. (Gain) Loss on Internet Investments. For fiscal 2002, we recog- nized a gain of $181 from the sale of marketable securities. During  fiscal 2001, we incurred an impairment charge of $21,477 relating  primarily to our investments in Gameplay and eUniverse to reflect other- than-temporary declines in the value of these investments. Years ended October 31, % of % of $ Increase % Inc 2002 Sales 2001 Sales (Decrease) (Dec) Selling and marketing $ 77,990 9.8 $ 52,998 11.7 $24,992 47.2 General and administrative 71,544 9.0 44,867 9.9 26,677 59.5 Research and development 11,524 1.5 6,190 1.4 5,334 86.2 Depreciation and amortization 10,829 1.4 12,641 2.8 (1,812) (14.3) Total operating expenses $171,887 21.6 $116,696 25.9 $55,191 47.3 Years ended October 31, % of % of 2002 Sales 2001 Sales % Increase % Inc Product costs $411,518 51.8 $282,279 62.5 $129,239 45.8 Royalties 80,442 10.1 19,875 4.4 60,567 304.7 Software development costs 8,124 1.0 4,169 0.9 3,955 94.9 Total cost of sales $500,084 62.9 $306,323 67.9 $193,761 63.3 Cost of Sales. The decrease in product costs as a percentage of net sales was due to the higher proportion of publishing net sales which have lower product costs than distribution net sales, partly  offset by the shift in publishing product mix to higher cost console titles from lower- cost PC titles. Fiscal 2002 includes $3,064 of litiga- tion settlement costs relating to a distribution agreement, while fiscal 2001 includes an impairment charge of $3,397 relating to a reduction in the value of certain acquired Internet assets. Product costs in fiscal 2001 included $15,106 related to the adoption of SAB 101. Royalties.  The increase in royalties were due to higher royalty  payments and increased amortization of prepaid royalties as a result of increased product sales, principally for  State of Emergency ,  Max Payne ,  Midnight Club and  Smuggler’s Run . In addition, we wrote off $14,122 of prepaid royalties, principally due to the termination of  several projects in 2002. We also implemented a royalty program for certain of our development personnel based on product sales. Software Development Costs.  The increase in software develop- ment costs in absolute dollars reflects higher amortization principally related to the  Grand Theft Auto titles. These software development costs relate to our internally developed titles.