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## Advertising 

The Company expenses advertising costs as incurred. Advertising expense for the years ended October 31, 2003, 2002 and 2001 amounted to $55,795, $39,909 and $22,983, respectively. 

## Cash and Cash Equivalents 

The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents. 

## Inventory 

Inventories are stated at the lower of average cost or market. The Company periodically evaluates the carrying value of its inventories and makes adjustments as necessary. Estimated product returns are included in the inventory balance at their cost. Estimated product returns at October 31, 2003 and 2002 were $8,706 and $5,015, respectively. 

## Prepaid Royalties 

The Company’s agreements with licensors and developers gener- ally provide it with exclusive publishing rights and require it to make advance royalty payments that are recouped against royalties due to the developer based on product sales. Prepaid royalties are amor- tized as cost of sales on a title-by-title basis, based on the greater of the proportion of current year sales to total of current and estimated future sales for that title or the contractual royalty rate based on actual net product sales. The Company continually evaluates the recoverability of prepaid royalties and charges to cost of sales the amount that management determines is probable that will not be recouped at the contractual royalty rate in the period in which such determination is made or if the Company determines that it will can- cel a development project. Included in prepaid royalties at October 31, 2003 and 2002, respectively, are $14,241 and $22,561 related to titles that have not been released yet. Prepaid royalties are classified as current and non-current assets based upon estimated net product sales within the next year. 

The following table provides the details of total prepaid royalties: 

<img src='content_image/88304.jpg'>

## Notes to Consolidated Financial Statements (continued) 

## TAKE-TWO INTERACTIVE SOFTWARE, INC. AND SUBSIDIARIES 

(Dollars in thousands, except per share amounts) 

The reclassification for the year ended October 31, 2003 principal- ly reflects the transfer of prepaid royalties paid to Angel Studios, Inc. and Frog City, Inc. prior to their acquisition by the Company as a component of the purchase price of the acquisitions. 

## Capitalized Software Development Costs 

The Company capitalizes internal software development costs, as well as film production and other content costs, subsequent to estab- lishing technological feasibility of a title. Capitalized software develop- ment costs represent the costs associated with the internal develop- ment of the Company’s publishing products. Amortization of such costs as a component of cost of sales is recorded on a title-by-title basis, based on the greater of the proportion of current year sales to total of current and estimated future sales for the title or the straight-line method over the remaining estimated useful life of the title. The Com- pany continually evaluates the recoverability of capitalized software costs and will charge to cost of sales any amounts that are deemed unrecoverable or for projects that it will abandon. 

The following table provides the details of capitalized software development costs: 

<img src='content_image/88306.jpg'>

For the year ended October 31, 2001, capitalized software development costs of $389 were written off as cost of sales—software development costs, as part of the impairment charge as described in Note 4. 

## Property and Equipment 

Office equipment, furniture and fixtures and automobiles are depreciated using the straight-line method over their estimated lives ranging from five to seven years. Computer equipment and software are depreciated using the straight-line method over three years. Lease- hold improvements are amortized over the lesser of the term of the related lease or estimated useful lives. Accumulated amortization includes the amortization of assets recorded under capital leases, which amounted to approximately $88 and $92 at October 31, 2003 and 2002, respectively. The cost of additions and betterments is capi- talized, and repairs and maintenance costs are charged to operations in the periods incurred. When depreciable assets are retired or sold, the cost and related allowances for depreciation are removed from the accounts and the gain or loss is recognized. The carrying amounts of these assets are recorded at historical cost. 

