TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) 1. DESCRIPTION OF THE BUSINESS 2. RESTATEMENT OF FINANCIAL STATEMENTS 3. SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Take-Two Interactive Software, Inc. (the “Company”) was incorpo- rated in the State of Delaware in September 1993. The Company develops interactive software games designed for PCs, video game consoles and handheld platforms and publishes games developed internally and by third parties. The Company also distributes games for video game consoles and handheld platforms published internally and by third parties, as well as hardware and accessories manufac- tured by third parties. The Company restated its previously issued financial statements for the fiscal years ended October 31, 2000 (not presented herein), 2001 and 2002 to reflect its revised revenue recognition policy. Under this policy, the Company recognizes as a reduction of net sales a reserve for estimated future price concessions in the period in which the sale is recorded. Measurement of the reserve is based on, among other factors, an historical analysis of price concessions, an assess- ment of field inventory levels and sell-through for each product,  current industry conditions and other factors affecting the estimated timing and amount of concessions management believes will be granted. The Company previously recognized price concession reserves in the period in which it communicated the price concessions to its customers. The Company also restated its financial statements for the years ended October 31, 2000 and 2001 to increase its provi- sion for returns at October 31, 2000 by approximately $4.9 million for certain sales transactions primarily to retail customers in fiscal 2000, and to reflect the fiscal 2001 returns as a reduction of the revised October 31, 2000 reserve for returns rather than the previously reported reduction of sales in fiscal 2001. Additionally, fiscal 2000 and 2001 revenues were restated for approximately $0.2 million to adjust for sales cut-off transactions at the end of fiscal 2000. The impact of these changes on opening retained earnings as of November 1, 2000 was $2.6 million. See Note 19. The Company’s 2002 financial statements have been restated  as follows: The consolidated financial statements include the financial state- ments of the Company and its wholly owned subsidiaries and for enti- ties for which the Company is deemed to be the primary beneficiary as defined in FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” All material intercompany balances and transactions have been eliminated in consolidation. All applicable amounts relating to the aforementioned restate- ments have been reflected in these consolidated financial statements and notes thereto. The Company’s Consolidated Statement of Operations for the year ended October 31, 2001 has been restated as follows: As of October 31, 2002 Balance Sheet Data: As Reported As Restated Accounts receivable, net* $107,188 $105,576 Prepaid royalties, current $ 13,723 $ 14,215 Deferred tax asset $ 5,392 $ 6,245 Total current assets $328,632 $328,365 Total assets $491,707 $491,440 Accrued expenses and other current liabilities* $ 49,821 $ 50,698 Income taxes payable $ 1,603 $ 1,357 Total current liabilities $131,179 $131,810 Retained earnings $ 87,804 $ 86,906 Total liabilities and stockholders’ equity $491,707 $491,440 Year Ended October 31, 2001 Statement of Operations Data: As Reported As Restated Net sales $448,801 $451,396 Product costs $283,522 $282,279 Royalties $ 18,573 $ 19,875 Cost of sales $306,264 $306,323 Gross profit $142,537 $145,073 Income from operations $ 25,841 $ 28,377 Loss before benefit for income taxes and cumulative change in accounting principle* $ (6,660) $ (4,124) Benefit for income taxes* $ (3,417) $ (2,450) Net loss before cumulative change  in accounting principle $ (3,243) $ (1,674) Cumulative change in accounting principle $ (5,337) $ (5,244) Net loss $ (8,580) $ (6,918) Basic net loss per share $  (0.25) $ (0.20) Diluted net loss per share $ (0.25) $ (0.20) Year Ended October 31, 2002 Statement of Operations Data: As Reported As Restated Net sales $793,976 $794,676 Product costs $410,118 $411,518 Royalties $ 80,774 $ 80,442 Cost of sales $499,016 $500,084 Gross profit $294,960 $294,592 Depreciation and amortization $ 11,187 $ 10,829 Income from operations $122,715 $122,705 Income before provision for income taxes $120,948 $120,938 Provision for income taxes $ 49,383 $ 49,375 Net income $ 71,565 $ 71,563 Basic net income per share $ 1.88 $ 1.88 Diluted net income per share $ 1.81 $ 1.81 32 * Restated amounts reflect a reclassification relating to the presentation of allowances. * As required by Statement of Financial Accounting Standards No. 145, “Rescis- sion of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections”, the $1,948 net loss on extinguishment of debt for the year ended October 31, 2001, previously classified as an extraordinary item, has been reclassified in the As Reported column in the above table as  follows: $3,165 of loss on extinguishment to non-operating expenses and $1,217 of tax benefit to benefit for income taxes.