Activision, Inc. — 2004 Annual Report Notes to Consolidated Financial Statements Financial Instruments Equity Investments Software Development Costs page 48 Software development costs include payments made to independent software developers under development agree- ments, as well as direct costs incurred for internally developed products. From time to time, we may make a capital investment and hold a minority interest in a third-party developer in con- nection with entertainment software products to be developed by such developer for us. We account for those  capital investments over which we have the ability to exercise significant influence using the equity method. For those investments over which we do not have the ability to exercise significant influence, we account for our investment using the cost method. We utilize forward contracts in order to reduce financial market risks. These instruments are used to hedge foreign  currency exposures of underlying assets, liabilities, or certain forecasted foreign currency denominated transactions. Our accounting policies for these instruments are based on whether they meet the criteria for designation as hedging trans- actions. Changes in fair value of derivatives that are designated as cash flow hedges, are highly effective, and qualify as hedging instruments, are recorded in other comprehensive income until the underlying hedged item is recognized in earnings within the financial statement line item consistent with the hedged item. Any ineffective portion of a derivative change in fair value is immediately recognized in earnings. Changes in fair value of derivatives that do not qualify as hedging instruments are recorded in earnings. The fair value of foreign currency contracts is estimated based on the spot rate of the various hedged currencies as of the end of the period. As of March 31, 2004 and 2003, we had no outstanding foreign exchange forward contracts. We account for derivative instruments in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS 133” and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS Nos. 133, 138 and 149 require that all derivatives, including foreign exchange contracts, be recognized in the balance sheet in other current assets or accrued expenses at their fair value. The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to their short-term nature. Short-term investments are carried at fair value with fair values being estimated based on quoted market prices. The estimated fair values of financial instruments have been determined using available market information and valua- tion methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. Our customer base includes retail outlets and distributors, including mass-market retailers, consumer electronics stores, discount warehouses and game specialty stores in the United States and countries worldwide. We perform ongoing credit evaluations of our customers and maintain allowances for potential credit losses. We generally do not require  collateral or other security from our customers. As of and for the years ended March 31, 2004, 2003 and 2002, we had one customer that accounted for 20%, 16% and 14%, respectively, of consolidated net revenues and 39%, 46% and 22%, respectively, of consolidated accounts receivable, net. This customer was the same customer in all  periods and was a customer of both our publishing and distribution businesses.