(Dollars in thousands, except per share amounts) Management’s Discussion and Analysis of Financial  Condition and Results of Operations  (continued) Our principal sources of revenue are derived from publishing and distribution operations. Publishing revenues are derived from the sale of internally developed software titles or software titles licensed from third parties. Operating margins in our publishing business are dependent upon our ability to continually release new, commercially successful products. We develop most of our front-line products inter- nally, and we own all of our major intellectual properties, which we believe permits us to maximize profitability. Our distribution revenues are derived from the sale of third-party software titles, accessories and hardware. Operating margins in our  distribution business are dependent on the mix of software and hard- ware sales, with software generating higher margins than hardware. Publishing activities generate significantly higher margins than distribu- tion activities, with sales of PC software titles resulting in higher margins than sales of products designed for video game consoles. We have pursued a growth strategy by capitalizing on the wide- spread market acceptance of video game consoles and the growing popularity of innovative gaming experiences that appeal to more mature audiences. We have established a portfolio of successful pro- prietary software content, including our premier brands:  Grand Theft Auto, Max Payne and  Midnight Club , for the major hardware plat- forms. We expect to continue to be the leader in the mature, action product category by leveraging our existing franchises and develop- ing new brands, such as  Manhunt . We currently anticipate that the release of new brands in fiscal 2004, including  The Warriors and  Red Dead Revolver , along with the launch of the next installment of  Grand Theft Auto , will generate sig- nificant cash flow from our publishing business. We also believe that we will be able to continue to grow our distribution business through a combination of our retail relationships and our value product offer- ings. Historically, each generation of video game consoles and hand- held platforms experiences a gradual decrease in retail pricing over the life of the system, with retail pricing for software titles following  a similar trend. The PlayStation 2 and Xbox were introduced several years ago, and have been reduced in price since their launch, with additional price reductions anticipated to occur in 2004. Reduced pricing for our titles could result in lower margins for our published products and reduced growth rates in our publishing business.  However, as retail prices for interactive entertainment hardware and software decline, our distribution business benefits from the wider availability of higher margin, value priced software titles. The preparation of financial statements in conformity with general- ly accepted accounting principles requires management to make esti- mates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates and assumptions relate to the recoverability of prepaid roy- alties, capitalized software development costs and other intangibles, 12 inventories, realization of deferred income taxes and the adequacy  of allowances for returns, price concessions and doubtful accounts. Actual amounts could differ significantly from these estimates. We recognize revenue upon the transfer of title and risk of loss to our customers. We apply the provisions of Statement of Position 97-2, “Software Revenue Recognition” in conjunction with the applicable provisions of Staff Accounting Bulletin No. 101, “Revenue Recogni- tion.” Accordingly, we recognize revenue for software when (1) there is persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order, (2) the software is deliv- ered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. Our payment arrange- ments with customers typically provide net 30- and 60-day terms. Revenue is recognized after deducting estimated reserves for returns and price concessions. In specific circumstances when we do not have a reliable basis to estimate returns and price concessions or are unable to determine that collection of receivables is probable, we defer the sale until such time as we can reliably estimate any related returns and allowances and determine that collection of the receiv- ables is probable. We accept returns and grant price concessions in connection with our publishing arrangements. Following reductions in the price of  our products, we grant price concessions to permit customers to take credits against amounts they owe us with respect to merchandise unsold by them. Our customers must satisfy certain conditions to  entitle them to return products or receive price concessions, including compliance with applicable payment terms and confirmation of field inventory levels. Our distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, we some- times accept returns from our distribution customers for stock balanc- ing and make accommodations to customers, which include credits and returns, when demand for specific titles falls below expectations. We make estimates of future product returns and price conces- sions related to current period product revenue. We estimate the amount of future returns and price concessions for published titles based upon, among other factors, historical experience, customer inventory levels, analysis of sell-through rates and changes in demand and acceptance of our products by consumers. Significant management judgments and estimates must be made and used in connection with establishing the allowance for returns and price concessions in any accounting period. We believe we can make reliable estimates of returns and price concessions. However, actual results may differ from initial estimates as a result of changes in circumstances, market conditions and assumptions. Adjustments to estimates are recorded in the period in which they become known. Allowances for Returns and Price Concessions Revenue Recognition Estimates TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES