1. DESCRIPTION OF THE BUSINESS

Take-Two Interactive Software, Inc. (the "Company") was incorporated 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 manufactured by third-parties.

2. RESTATEMENT OF FINANCIAL STATEMENTS

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 assessment 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 fiscal years ended October 31, 2000 and 2001 to increase its provision 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:

                                                          Year Ended
                                                       October 31, 2002
                                                   -------------------------
                                                   As Reported   As Restated
                                                   -------------------------
Statement of Operations Data:
  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

                                                        October 31, 2002
                                                   -------------------------
                                                   As Reported   As Restated
                                                   -----------   -----------
Balance Sheet Data:
  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

* Restated amounts reflect a reclassification relating to the presentation of allowances.

The Company's Consolidated Statement of Operations for the year ended October 31, 2001 has been restated as follows:

                                                          Year Ended
                                                       October 31, 2001
                                                   -------------------------
                                                   As Reported   As Restated
                                                   -------------------------
Statement of Operations Data:
  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)

* As required by Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), 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 as follows: $3,165 of loss on extinguishment to non-operating expenses and $1,217 of tax benefit to benefit for income taxes in the above table.

All applicable amounts relating to the aforementioned restatements have been reflected in these consolidated financial statements and notes thereto.

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries and for entities 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 inter-company balances and transactions have been eliminated in consolidation.

Certain amounts in the financial statements of the prior years have been reclassified to conform to the current year presentation for comparative purposes.

Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates 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 royalties, capitalized software development costs and other intangibles, valuation of 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.

Concentration of Credit Risk

A significant portion of the Company's cash balance is maintained with several major financial institutions. While the Company attempts to limit credit exposure with any single institution, there are times that balances will exceed insurable amounts.

If the financial condition and operations of the Company's customers deteriorate, the risk of collection could increase substantially. As of October 31, 2003 and 2002, the receivable balances from the Company's five largest customers amounted to approximately 54.6% and 43.6% of the Company's net receivable balance, respectively, with two customers accounting for 16.6% and 11.7% at October 31, 2003 and with two customers representing 14.1% and 10.3% at October 31, 2002. For each of the three years in the period ended October 31, 2003, the Company's five largest customers accounted for 38.6%, 31.4%, and 20.8% of net sales, respectively. For the year ended October 31, 2003, one customer accounted for $117,636, or 11.4%, of net sales. Except for the largest customers noted above, all receivable balances from the remaining individual customers were less than 10% of the Company's net receivable balance. The Company maintained insurance, to the extent available, on the receivable balances, with certain limits, in the event of a customer's bankruptcy or insolvency. In November 2003, the Company terminated this insurance.

Revenue Recognition

Publishing revenue is derived from the sale of internally developed interactive software titles or from the sale of titles licensed from third-party developers. Publishing revenue amounted to $671,892, $568,492, and $244,071 in 2003, 2002 and 2001, respectively.

Distribution revenue is derived from the sale of third-party interactive software titles, hardware and accessories. Distribution revenue amounted to $361,801, $226,184 and $207,325 in 2003, 2002 and 2001, respectively.

The Company recognizes revenue upon the transfer of title and risk of loss to its customers. The Company applies the provisions of Statement of Position 97-2, "Software Revenue Recognition" in conjunction with the applicable provisions of Staff Accounting Bulletin No. 101, "Revenue Recognition." Accordingly, the Company recognizes revenue for software when there is (1) persuasive evidence that an arrangement with our customer exists, which is generally a customer purchase order, (2) the software is delivered, (3) the selling price is fixed or determinable and (4) collection of the customer receivable is deemed probable. The Company's payment arrangements 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 the Company does not have a reliable basis to estimate returns and price concessions or is unable to determine that collection of receivables is probable, it defers the sale until such time as it can reliably estimate any related returns and allowances and determine that collection of the receivables is probable.

The Company accepts returns and grants price concessions in connection with its publishing arrangements. Following reductions in the price of the Company's products, it grants price concessions to permit customers to take credits against amounts they owe the Company with respect to merchandise unsold by them. The Company's 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.

The Company's distribution arrangements with customers do not give them the right to return titles or to cancel firm orders. However, the Company sometimes accepts returns from its distribution customers for stock balancing and makes accommodations to customers, which includes credits and returns, when demand for specific titles falls below expectations.

The Company makes estimates of future product returns and price concessions related to current period product revenue. The Company estimates 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 its 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. The Company believes it 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.

Effective November 1, 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". Consistent with the guidelines provided in SAB No. 101, the Company changed its revenue recognition policy to recognize revenue as noted above. Prior to the adoption of SAB 101, the Company recognized revenue upon shipment. As a result of adopting SAB 101, net sales and cost of sales of approximately $23.8 million and $15.1 million, respectively, which were originally recognized in the year ended October 31, 2000 were also recognized in the year ended October 31, 2001. The cumulative effect of the application of the revenue recognition policies set forth in SAB 101 for the year ended October 31, 2001, as restated, was approximately $5.2 million net of tax benefit of approximately $3.5 million, or $0.15 per share.

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 generally 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 amortized 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 cancel 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:

                                    Years Ended October 31,
                              -----------------------------------
                                2003        2002          2001
                              --------   ----------    ----------
                                         (Restated)    (Restated)

Beginning balance             $ 26,418    $ 33,149      $ 24,718
Additions                       30,034      28,555        25,423
Amortization                   (19,065)    (21,238)      (15,798)
Reclassification                (7,251)      1,419            --
Write down                      (9,525)    (15,126)       (1,196)
Foreign exchange                    24        (341)            2
                              --------    --------      --------
Ending balance                  20,635      26,418        33,149
Less current balance            12,196      14,215        22,052
                              --------    --------      --------
Non-current balance           $  8,439    $ 12,203      $ 11,097
                              ========    ========      ========

The reclassification for the year ended October 31, 2003 principally 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 establishing technological feasibility of a title. Capitalized software development costs represent the costs associated with the internal development 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 Company 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:

                                 Years Ended October 31,
                              -----------------------------
                                2003       2002      2001
                              --------   -------    -------
Opening balance               $ 10,385   $ 9,739    $ 7,668
Additions                       15,923     9,645      6,293
Amortization                   (10,940)   (7,633)    (3,780)
Reclassification                    --    (1,419)        --
Write down                         (63)     (490)      (389)
Foreign exchange                 1,031       543        (53)
                              --------   -------    -------
Balance, October 31           $ 16,336   $10,385    $ 9,739
                              ========   =======    =======

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. Leasehold 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 are capitalized, 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.

Intangible Assets

Intangible assets consist of identifiable intangibles and the remaining excess purchase price paid over identified intangible and tangible net assets of acquired companies (goodwill). Effective November 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") in its entirety and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination shall be recognized as assets apart from goodwill. SFAS 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that intangible assets with indefinite lives and goodwill not be amortized. The Company discontinued the amortization of goodwill as of November 1, 2001. Identifiable intangibles are amortized under the straight-line method over the period of expected benefit ranging from three to ten years, except for intellectual property, which is amortized based on the shorter of the useful life or expected revenue stream. Prior to November 1, 2001, intangible assets were amortized under the straight line method over the period of expected benefit of seven years for the acquisition of development studios and ten years for the acquisition of distribution operations. Upon completion of the transitional impairment test, the fair value for each of our reporting units exceeded the reporting unit's carrying amount and no impairment was indicated.

SFAS 142 requires an annual test for impairment of goodwill, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. In assessing potential impairment of goodwill, the Company determines the implied fair value of each reporting unit using discounted cash flow analysis and compares such values to the respective reporting unit's carrying amount. The Company performs its annual test for indication of goodwill impairment in the fourth quarter of each fiscal year. At October 31, 2003 and 2002, the fair value of the Company's reporting units exceeded the carrying amounts and no impairment was indicated.

Impairment of Long-Lived Assets

The Company accounts for long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which was adopted in the first quarter of fiscal 2003 with no material effect on the Company's financial condition and results of operations. SFAS 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, including assets to be disposed of by sale, whether previously held and used or newly acquired. The Company compares the carrying amount of the asset to the estimated undiscounted future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company records an impairment charge for the difference between the carrying amount of the asset and its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the Company's incremental borrowing rate or fair value if available.

Stock-Based Compensation

The Company accounts for its employee stock option plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- Based Compensation" ("SFAS 123").

Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net income and the net income per share would have been reduced to the pro forma amounts indicated below.

                                                                                         Years ended October 31,
                                                                             ------------------------------------------------
                                                                                 2003              2002             2001
                                                                             -------------     -------------    -------------
                                                                                                 (Restated)      (Restated)
Net income (loss), as reported                                              $       98,118    $       71,563   $       (6,918)

Add: Stock-based employee compensation expense included in reported net
  income, net of related tax effects                                                 2,133             1,878                3

Deduct: Total stock-based employee compensation expense determined
  under fair value based method for all awards, net of related tax effects         (18,194)          (16,415)         (11,713)
                                                                            --------------    --------------   --------------
Pro forma net income (loss)                                                 $       82,057    $       57,026   $      (18,628)
                                                                            ==============    ==============   ==============

Earnings (loss) per share:
 Basic - as reported                                                        $         2.34    $         1.88   $        (0.20)
                                                                            ==============    ==============   ==============
 Basic - pro forma                                                          $         1.96    $         1.50   $        (0.55)
                                                                            ==============    ==============   ==============
 Diluted - as reported                                                      $         2.27    $         1.81   $        (0.20)
                                                                            ==============    ==============   ==============
 Diluted - pro forma                                                        $         1.90    $         1.44   $        (0.55)
                                                                            ==============    ==============   ==============

The pro forma disclosures shown are not representative of the effects on net income and the net income per share in future periods.

Pro forma net income (loss) and net income (loss) per share for the years ended October 31, 2002 and 2001 also differ from amounts previously reported as a result of adjustments made to correct computational errors.

The fair value of the Company's stock options used to compute pro forma net income and the net income per share disclosures is the estimated present value at the grant date using the Black-Scholes option-pricing model. The weighted average fair values of options granted were $15.05, $9.13 and $5.76 for the years ended October 31, 2003, 2002 and 2001, respectively. The following weighted average assumptions for 2003 were used to value grants:
expected volatility of 78%; a risk-free interest rate of 2.60%; and an expected holding period of 4.2 years. The following weighted average assumptions for 2002 were used to value grants: expected volatility of 74%; a risk-free interest rate of 1.77%; and an expected holding period of 4.1 years. The following weighted average assumptions for 2001 were used to value grants: expected volatility of 85% for grants with a holding period of 2 years, 79% for a holding period of 3 years and 75% for holding periods of 4 to 5 years; a risk-free interest rate of generally 4.85% to 5.0%; and an expected holding period of two to five years. Dividends were assumed to be zero for years ended October 31, 2003, 2002 and 2001.

Net Income (Loss) per Share

Basic earnings per share ("EPS") is computed by dividing the net income
(loss) applicable to common stockholders for the year by the weighted-average number of common shares outstanding during the year. Diluted EPS is computed by dividing the net income (loss) applicable to common stockholders for the year by the weighted-average number of common and common stock equivalents, which include common shares issuable upon the exercise of stock options, restricted stock (for fiscal 2003) and warrants outstanding during the year. Common stock equivalents are excluded from the computation if their effect is antidilutive.

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income adjusted for the change in foreign currency translation adjustments and the change in net unrealized gain (loss) from investments.

Income Taxes

The Company recognizes deferred taxes under the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at currently enacted statutory tax rates for the years in which the differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized after considering tax planning strategies, if applicable. No income taxes have been provided on the undistributed earnings of foreign subsidiaries, as such earnings are expected to be permanently reinvested in those companies.

Foreign Currency Translation

The functional currency for the Company's foreign operations is the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using quarter or year-end exchange rates for assets and liabilities at the balance sheet date and average prevailing exchange rates for the period for revenue and expense accounts. Adjustments resulting from translation are included in other comprehensive income (loss). Realized and unrealized transaction gains and losses are included in income in the period in which they occur. Foreign exchange transaction gains (loss) included in net income for fiscal years ended October 31, 2003, 2002 and 2001 amounted to $2,015, $840 and $(108), respectively.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value because of their short maturities. Investments are reported at fair value. The carrying amount of prepaid royalties approximate fair value based upon the recoverability of these assets. The carrying amount of the Company's lines of credit approximates fair value because the interest rates of the lines of credit are based on floating rates identified by reference to market rates. The carrying amounts of the Company's loan payable and capital lease obligations approximate the fair value of such instruments based upon management's best estimate of interest rates that would be available to the Company for similar debt obligations.

Consideration Given to Customers or Resellers

In November 2001, the Financial Accounting Standards Board ("FASB") Emerging Issues Task Force (EITF) reached a consensus on EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products, which is a codification of EITF 00-14, 00-22 and 00-25. This EITF presumes that consideration from a vendor to a customer or reseller of the vendor's products to be a reduction of the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue when recognized in the vendor's income statement and could lead to negative revenue under certain circumstances. Revenue reduction is required unless consideration relates to a separate identifiable benefit and the benefit's fair value can be established. The Company has early adopted EITF 01-09 effective November 1, 2001. The adoption of the new standard did not have a material impact on the consolidated financial statements. The prior period financial statements have been reclassified in accordance with this statement and as a result, net sales and selling and marketing expenses have been reduced by $2,255 for the year ended October 31, 2001, with no impact on reported net loss.

Recently Adopted Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Obligations Associated with the Retirement of Long-Lived Assets" ("SFAS 143"). The objective of SFAS 143 is to provide accounting guidance for legal obligations associated with the retirement of long-lived assets. The provisions of SFAS 143 are effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 in the first quarter of fiscal 2003 did not have an impact on the Company's financial condition, cash flows and results of operations.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). SFAS 145 eliminates the requirement (in SFAS 4) that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. Under this pronouncement, 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 as follows: $3,165 of loss on extinguishment to non-operating expenses and $1,217 of tax benefit to provision for income taxes. The adoption of SFAS 145 in fiscal 2003 did not have any impact on the Company's financial condition, cash flows and results of operations, other than the reclassification referred to above.

In January 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires the recognition of such costs when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of SFAS 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 in the first quarter of fiscal 2003 did not have a material impact on the Company's financial condition and results of operations.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS 148"). SFAS 148 amends the transition provisions of FASB No. 123, "Accounting for Stock-Based Compensation", for entities that voluntarily change to the fair value method of accounting for stock-based employee compensation. The Company does not currently intend to change its accounting to the fair value method. SFAS 148 also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation and amends APB Opinion No. 28, "Interim Financial Reporting" ("APB 28") to require disclosures about such effects in interim financial information. The disclosure provisions of the amendments to FASB 123 were adopted by the Company in the second quarter of fiscal 2003.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 expands previously issued accounting guidance and disclosure requirements for certain guarantees and requires recognition of an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 in the first quarter of fiscal 2003 did not have any impact on the Company's financial condition or results of operations.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual return or both. FIN 46 also provides criteria for determining whether an entity is a variable interest entity subject to consolidation. FIN 46 requires immediate consolidation of variable interest entities created after January 31, 2003. For variable interest entities created prior to February 1, 2003, consolidation is required on July 1, 2003. The adoption of FIN 46 in the third quarter of fiscal 2003 did not have a material impact on the Company's financial condition or results of operations (see Note 4).

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In general, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS 149 did not have any impact on the Company's financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for the provisions relating to mandatorily redeemable financial instruments which have been deferred indefinitely. The adoption of SFAS 150 in the fourth quarter of fiscal 2003 did not have any impact on the Company's financial condition.

4. BUSINESS ACQUISITIONS AND CONSOLIDATION

The Company acquired seven companies that develop, publish or distribute interactive software games during the three-year period ended October 31, 2003. The aggregate purchase price, including cash payments and issuance of its common stock was $42,075, $7,626 and $28,143 in 2003, 2002 and 2001, respectively. The value of the Company's common stock issued in connection with these acquisitions has been based on the market price of the Company's common stock at the time such proposed transactions were agreed and announced.

The acquisitions described below have been accounted for as purchase transactions in accordance with APB No. 16 and SFAS 141 (for transactions after July 1, 2001) and, accordingly, the results of operations and financial position of the acquired businesses are included in the Company's consolidated financial statements from the respective dates of acquisition.

2003 Transactions

During the quarter ended July 31, 2003, the Company acquired the assets of Frog City, Inc. ("Frog City"), the developer of Tropico 2: Pirate Cove, and the outstanding membership interests of Cat Daddy Games LLC ("Cat Daddy"), another development studio. The total purchase price for both studios consisted of $757 in cash and $319 of prepaid royalties previously advanced to Frog City. The Company also agreed to make additional payments of up to $2,500 to the former owners of Cat Daddy, based on a percentage of Cat Daddy's profits for the first three years after acquisition, which will be recorded as compensation expense if the targets are met. In connection with the acquisitions, the Company recorded goodwill of $1,267 and net liabilities of $191.

In November 2002, the Company acquired all of the outstanding capital stock of Angel Studios, Inc. ("Angel"), the developer of the Midnight Club and Smuggler's Run franchises. The purchase price consisted of 235,679 shares of restricted common stock (valued at $6,557), $28,512 in cash and $5,931 (net of $801 of royalties payable to Angel) of prepaid royalties previously advanced to Angel. In connection with the acquisition, the Company recorded identifiable intangibles of $4,720 (comprised of intellectual property of $2,810, technology of $1,600 and non-competition agreements of $310), goodwill of $37,425 and net liabilities of $1,145.

In April 2003, the Company entered into an agreement with Destineer Publishing Corp. ("Destineer"), a publisher of PC games, under which Destineer granted the Company exclusive distribution rights to eight PC games and two console ports to be published by Destineer. The Company agreed to make recoupable advances to Destineer of approximately $6,700 and to pay Destineer with respect to product sales under the distribution agreement. In addition, the Company agreed to make a loan to Destineer of $1,000. Destineer granted the Company an immediately exercisable option to purchase a 19.9% interest in Destineer and a second option to purchase the remaining interest for a price equal to a multiple of Destineer's EBIT, exercisable during a period following April 2005. The fair value of these options was not significant. Pursuant to the requirements of FIN 46, since Destineer is a variable interest entity and the Company is considered to be the primary beneficiary (as defined in FIN 46), the results of Destineer's operations have been consolidated in the accompanying financial statements.

The 2003 acquisitions did not have a material effect on the Company's fiscal 2003 results of operations.

2002 Transaction

In August 2002, the Company acquired all of the outstanding capital stock of Barking Dog Studios Ltd. ("Barking Dog"), a Canadian-based development studio. The purchase price consisted of 242,450 shares of restricted common stock (valued at $3,801), $3,000 in cash, $825 of prepaid royalties previously advanced to Barking Dog and assumed net liabilities of $70. In connection with the acquisition, the Company recorded identifiable intangibles of $1,800, comprised of non-competition agreements of $1,600 and intellectual property of $200, and goodwill of $6,772. The acquisition of Barking Dog did not have a significant effect on the Company's fiscal 2002 results of operations.

2001 Transactions

In July 2001, the Company acquired all of the outstanding capital stock of Techcorp Limited ("Techcorp"), a Hong Kong based design and engineering firm specializing in video game accessories. In consideration, the Company issued 30,000 shares of the Company's restricted common stock (valued at $572), paid $100 in cash and assumed net liabilities of approximately $2,856. In connection with the acquisition, the Company recorded goodwill of $3,558.

In November 2000, the Company acquired all of the outstanding capital stock of VLM Entertainment Group, Inc. ("VLM"), a company engaged in the distribution of third-party software products. In connection with this transaction, the Company paid the former stockholders of VLM $2,000 in cash and issued 875,000 shares of the Company's common stock (valued at $8,039) and assumed net liabilities of approximately $10,627. In connection with this transaction, the Company recorded intangible assets of approximately $20,693.

In connection with the sale of a subsidiary to Gameplay.com plc ("Gameplay") in October 2000, the Company agreed to acquire Gameplay's game software development and publishing business, Neo Software Produktions GMBH ("Neo"). Such acquisition was completed in January of 2001 and the Company assumed net liabilities of $808, in addition to the prepaid purchase price of $17,266. In connection with the acquisition, the Company recorded goodwill and intangibles of $18,183.

                                                             Neo         VLM      Techcorp     Total
                                                           -------    --------    --------   --------
Cost of the acquisition:
  Value of business sold
    (Prepaid purchase price - Neo) or stock issued         $17,266    $  8,039    $    572   $ 25,877
  Cash                                                          --       2,000         100      2,100
  Transaction costs                                            109          27          30        166
                                                           -------    --------    --------   --------
      Total                                                $17,375    $ 10,066    $    702   $ 28,143
                                                           =======    ========    ========   ========
Allocation of purchase price:
  Current assets                                           $     2    $  9,852    $    894   $ 10,748
  Non-current assets                                            71         201         498        770
  Liabilities                                                 (881)    (20,680)     (4,248)   (25,809)
  Goodwill                                                   8,207      12,416       3,558     24,181
  Customer lists                                                --       8,277          --      8,277
  Technology                                                 8,037          --          --      8,037
  Trademarks                                                 1,939          --          --      1,939
                                                           -------    --------    --------   --------
      Total                                                $17,375    $ 10,066    $    702   $ 28,143
                                                           =======    ========    ========   ========

Certain of Neo's internet-related technology assets were determined to be impaired in April 2001. Accordingly, the Company recorded as cost of sales an impairment charge of $3,786, consisting of $2,350 relating to server maintenance technologies and $1,047 relating to multiplayer technologies developed by Neo's development studio in connection with Online Pirates and $389 of capitalized software relating to other products to be developed by Neo. In addition, the Company recorded as selling and marketing expenses an impairment charge of $401 related to online sales promotions.

Pro forma financial information for fiscal 2003 and 2002 acquisitions are not presented since the impact is not material. The unaudited pro forma data below for the year ended October 31, 2001 is presented as if purchase acquisitions for fiscal 2001 had been made as of November 1, 2000. The unaudited pro forma financial information is based on management's estimates and assumptions and does not purport to represent the results that actually would have occurred if the acquisitions had, in fact, been completed on the dates assumed, or which may result in the future.

                                                             Unaudited
                                                             Pro Forma
                                                         October 31, 2001
                                                         ----------------
                                                             (Restated)
Net sales                                                    $459,006
Loss before cumulative effect of change in accounting
  principle                                                  $ (4,458)
Net Loss                                                     $ (9,702)
Net loss per share - Basic                                   $  (0.28)
Net loss per share - Diluted                                 $  (0.28)

Included in the unaudited pro forma information is amortization of goodwill of approximately $7,320, net of taxes of $2,799, for the year ended October 31, 2001.

5. DISPOSITION OF ASSETS

In July 2001, the Company sold all of the outstanding capital stock of Jack of All Games UK, a video game distributor, to Jay Two Limited, an unaffiliated third-party controlled by Freightmasters Ltd., for approximately $215. In connection with the sale, the purchaser assumed net liabilities of $436. The Company recorded a non-operating gain of $651. There were no income taxes payable on this gain.

6. INTANGIBLE ASSETS AND GOODWILL

As a result of the adoption of SFAS 142, the Company discontinued the amortization of goodwill effective November 1, 2001. Identifiable intangible assets are amortized under the straight-line method over the period of expected benefit ranging from three to ten years, except for intellectual property, which is amortized based on the shorter of the useful life or expected revenue stream. The Company re-characterized acquired workforce of $925, which is not defined as an acquired intangible asset under SFAS 141, as goodwill. Additionally, the estimated useful lives of certain identifiable intangible assets were adjusted in conjunction with the adoption of SFAS 142. The adjustment to the useful lives did not have a material effect on the results of operations.

Intangible assets consist of trademarks, intellectual property, customer lists and acquired technology. The excess purchase price paid over identified intangible and tangible net assets of acquired companies are reported separately as goodwill.

During the year ended October 31, 2003, the Company acquired all the intellectual property rights associated with Army Men and School Tycoon for an aggregate cost of $1,075.

In May 2002, the Company acquired all right, title and interest to the Max Payne product franchise, including all of the intellectual property rights associated with the brand, and a perpetual, royalty-free license to use the Max Payne game engine and related technology. The purchase price consisted of $10,000 in cash and 969,932 shares of restricted common stock (valued at $18,543). In October 2003, the Company recorded an additional intangible of $8,000, of which $1,000 related to the delivery of the final version of Max Payne 2 for the PC and $7,000 based on the determination that the sales targets for the PC and console versions of Max Payne would be achieved. The Max Payne assets acquired have been recorded as intellectual property and included in intangible assets.

In December 2000, the Company acquired the exclusive worldwide publishing rights to the franchise of Duke Nukem PC and video games. In connection with the transaction, the Company paid $2,300 in cash and issued 557,103 shares of its common stock (valued at approximately $5,400). In addition, the Company is required to make a further payment of $6,000 contingent upon delivery of the final version of Duke Nukem Forever for the PC. The Company recorded an intangible asset of $7,700 related to the intellectual property purchased in this transaction. The additional $6,000 will be recorded as an additional intangible asset upon resolution of the contingency.

In 2003, the Company recorded a charge of $4,407 related to the impairment of a customer list, which was included in depreciation and amortization (see Note 20.). In addition, cost of sales - product costs include $7,892 of intellectual property and technology written off in 2003, of which $5,499 related to Duke Nukem Forever and its sequel, reflecting the continued development delays for these products.

                                                             As of October 31, 2003                As of October 31, 2002
                                                       ----------------------------------    ----------------------------------
                                                         Gross                                 Gross
                                          Range of     Carrying    Accumulated               Carrying    Accumulated
                                         Useful Life    Amount     Amortization     Net       Amount     Amortization     Net
                                         -----------   --------    ------------   -------    --------    ------------   -------
Trademarks                               7-10 years     $23,667     $ (5,998)     $17,669     $23,342     $ (4,515)     $18,827
Customer lists and relationships         5-10 years       4,673       (2,733)       1,940       9,081       (2,352)       6,729
Intellectual property                     2-6 years      31,487      (10,907)      20,580      25,771       (2,869)      22,902
Non-competition agreements                3-6 years       4,838       (2,105)       2,733       4,880         (906)       3,974
Technology                                  3 years       4,192       (2,278)       1,914       4,640       (1,779)       2,861
                                                        -------     ---------     -------     -------     ---------     -------
                                                        $68,857     $(24,021)     $44,836     $67,714     $(12,421)     $55,293
                                                        =======     =========     =======     =======     =========     =======

Amortization expense (including goodwill for 2001) for the years ended
October 31, 2003, 2002 and 2001 amounted to $11,600, $9,893 and $9,309,
respectively.

Estimated amortization expense for the fiscal years ending October 31, are as
follows:

                      2004                          $16,726
                      2005                            4,657
                      2006                            5,962
                      2007                            2,709
                      2008                            1,628
                                                    -------
                      Total                         $31,682
                                                    =======

The change in goodwill for the fiscal year ended October 31, 2003 is as follows:

Balance October 31, 2002              $ 61,529
 Acquisitions in fiscal 2003
   Angel                                37,425
   Frog City and Cat Daddy               1,267
 Adjustments for 2002 acquisition        1,277
                                      --------
Balance October 31, 2003              $101,498
                                      ========

The addition to goodwill in 2002 was the $5,496 related to the Barking Dog acquisition.

                                                                                                   Years Ended October 31,
                                                                                             ----------------------------------
                                                                                               2003        2002         2001
                                                                                             -------    ----------   ----------
                                                                                                        (Restated)   (Restated)
Net income (loss) - as reported                                                              $98,118     $71,563       $(6,918)
Add: Goodwill amortization, net of taxes                                                          --          --         4,116
                                                                                             -------     -------       -------
Net income (loss) - as adjusted                                                               98,118      71,563        (2,802)

Add: Cumulative effect of change in accounting principle, net of taxes                            --          --        (5,244)
                                                                                             -------     -------       -------
Income (loss) before cumulative effect of change in accounting principle - as adjusted       $98,118     $71,563       $ 2,442
                                                                                             =======     =======       =======
Income (loss) before cumulative effect of
  change in accounting principle- as reported                                                $98,118     $71,563       $(1,706)
                                                                                             =======     =======       =======
Earnings (loss) per share:
Reported earnings (loss) per share - basic                                                   $  2.34     $  1.88       $ (0.20)
Add: Goodwill amortization, net of taxes                                                          --          --          0.12
                                                                                             -------     -------       -------
  Adjusted earnings (loss) per share - basic                                                    2.34        1.88         (0.08)

Add: Cumulative effect of change in accounting principle                                          --          --         (0.15)
                                                                                             -------     -------       -------
Adjusted income (loss) before cumulative effect of change in accounting principle per
  share - basic                                                                              $  2.34     $  1.88       $  0.07
                                                                                             =======     =======       =======
Reported income (loss) before cumulative effect of change in accounting principle per
  share - basic                                                                              $  2.27     $  1.88       $ (0.05)
                                                                                             =======     =======       =======
Reported earnings (loss) per share - diluted                                                 $  2.27     $  1.81       $ (0.20)
Add: Goodwill amortization, net of taxes                                                          --          --          0.12
                                                                                             -------     -------       -------
  Adjusted earnings (loss) per share - diluted                                                  2.27        1.81         (0.08)
Add: Cumulative effect of change in accounting principle                                          --          --         (0.15)
                                                                                             -------     -------       -------
Adjusted income (loss) before cumulative effect of change in accounting principle per
  share - diluted                                                                            $  2.27     $  1.81       $  0.07
                                                                                             =======     =======       =======
Reported income (loss) before cumulative effect of
  change in accounting principle per share - diluted                                         $  2.27     $  1.81       $ (0.05)
                                                                                             =======     =======       =======

7. INVESTMENTS

Investments are comprised of marketable equity securities and are classified as current and non-current assets. The investments are accounted for under the cost method as "available-for-sale" in accordance with Statement of Financial Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities". The investments are stated at fair value, with unrealized appreciation (loss) reported as a separate component of accumulated other comprehensive income (loss) in stockholders' equity.

For the fiscal years ended October 31, 2003 and 2002, the gross proceeds from the sale of investments were $114 and $6,170, respectively. The gross realized gain from these sales totaled $39 and $181, respectively. The gain/loss on sale of securities is based on the average cost of the individual securities sold.

During 2001, the Company recorded an impairment charge of $21,477, consisting of approximately $19,171 relating to its investment in Gameplay, $2,000 relating to its investment in eUniverse, Inc. based on the quoted market prices and $306 relating to its investment in a privately-held company, which is included in other non-current assets. All of these investments were deemed to be other than temporarily impaired.

                                                 2003             2002
                                             -------------    -------------
Parts and supplies                           $       4,793    $       3,221
Finished products                                   96,955           71,170
                                             -------------    -------------
                                             $     101,748    $      74,391
                                             =============    =============

                                                 2003             2002
                                             -------------    -------------
Computer equipment                           $      12,963    $       8,004
Office equipment                                     5,096            3,811
Computer software                                   11,529            8,981
Furniture and fixtures                               3,157            1,850
Automobiles                                             --              219
Leasehold improvements                               6,047            3,265
Capital leases                                         398              398
                                             -------------    -------------
                                                    39,190           26,528
Less: accumulated depreciation and
      amortization                                  16,930           11,209
                                             -------------    -------------
                                             $      22,260    $      15,319
                                             =============    =============

In 2003 and 2002, the Company capitalized costs of approximately $2,923 and $4,113, respectively, associated with software and hardware upgrades to its accounting systems.

Depreciation expense for the years ended October 31, 2003, 2002, and 2001, amounted to $9,510, $6,457 and $3,731, respectively.

10. LINES OF CREDIT

In December 1999, the Company entered into a credit agreement, as amended and restated in August 2002, with a group of lenders led by Bank of America, N.A., as agent. The agreement provides for borrowings of up to $40,000 through the expiration of the line of credit on August 28, 2005. Generally, advances under the line of credit are based on a borrowing formula equal to 75% of eligible accounts receivable plus 35% of eligible inventory. Interest accrues on such advances at the bank's prime rate plus 0.25% to 1.25%, or at LIBOR plus 2.25% to 2.75% depending on the Company's consolidated leverage ratio (as defined). The Company is required to pay a commitment fee to the bank equal to 0.5% of the unused loan balance. Borrowings under the line of credit are collateralized by the Company's accounts receivable, inventory, equipment, general intangibles, securities and other personal property, including the capital stock of the Company's domestic subsidiaries. Available borrowings under the agreement are reduced by the amount of outstanding letters of credit, which were $9,290 at October 31, 2003. The loan agreement contains certain financial and other covenants, including the maintenance of consolidated net worth, consolidated leverage ratio and consolidated fixed charge coverage ratio. As of October 31, 2003, the Company was in compliance with such covenants. The loan agreement limits or prohibits the Company from declaring or paying cash dividends, merging or consolidating with another corporation, selling assets (other than in the ordinary course of business), creating liens and incurring additional indebtedness. The Company had no outstanding borrowings under the revolving line of credit as of October 31, 2003 and 2002.

In February 2001, the Company's United Kingdom subsidiary entered into a credit facility agreement, as amended in March 2002, with Lloyds TSB Bank plc ("Lloyds") under which Lloyds agreed to make available borrowings of up to approximately $22,200. Advances under the credit facility bear interest at the rate of 1.25% per annum over the bank's base rate, and are guaranteed by the Company. Available borrowings under the agreement are reduced by the amount of outstanding guarantees. The facility expires on March 31, 2004. The Company had no outstanding guarantees or borrowings under this facility as of October 31, 2003 and 2002.

                                                 2003             2002
                                             -------------    -------------
                                                                (Restated)
Accrued co-op advertising and product
  rebates                                    $       3,985    $       3,318
Accrued VAT and payroll taxes                       11,593           10,249
Royalties payable                                    8,521           14,784
Deferred revenue                                     2,358           10,596
Sales commissions                                   10,381            6,248
Other                                               19,869            5,503
                                             -------------    -------------
Total                                        $      56,707    $      50,698
                                             =============    =============

12. LOSS ON EARLY EXTINGUISHMENT OF DEBT

In July 2000, the Company entered into a subordinated loan agreement with Finova Mezzanine Capital Inc. ("Finova") in the principal amount of $15 million. The loan was payable in full in July 2005, and bore interest at the rate of 12.5% per annum. In July 2001, the Company prepaid the outstanding subordinated loan and recorded a loss of $3,165 related to the deferred financing costs and the unamortized discount associated with the loan.

Year ending October 31:
-----------------------
2004                                                          $         117
2005                                                                     74
2006                                                                      1
                                                              -------------
Total minimum lease payments                                            192
Less: amounts representing interest                                     (16)
                                                              -------------
Present value of minimum obligations under capital leases     $         176
                                                              =============

Lease Commitments

The Company leases 33 office and warehouse facilities. The former corporate headquarters are leased under a non-cancelable operating lease with a company controlled by the father of the chairman of the board and expires in March 2004. Rent expense and certain utility expenses under this lease amounted to $444, $403 and $474, for the years ended October 31, 2003, 2002, and 2001, respectively. The other offices are under non-cancelable operating leases expiring at various times from December 2003 to October 2013. In addition, the Company has leased certain equipment, furniture and auto leases under non- cancelable operating leases, which expire through October 2007.

In September 2002, the Company relocated its principal executive offices to 622 Broadway, New York, New York. The Company has recently leased additional space at 622 Broadway to accommodate its expanded operations. The Company estimates that as of October 31, 2003 it will incur an additional $1,200 in capital expenditures for continuing renovations and leasehold improvements for this space. In connection with signing a ten year lease, the Company provided a standby letter of credit of $1,560, expiring December 31, 2003. As a result of the relocation, the Company recorded expenses of $363 and $514 in fiscal 2003 and 2002, respectively, related to lease costs with regard to the Company's former executive offices.

Future minimum rentals required as of October 31, 2003 are as follows:

Year ending October 31:
-----------------------
2004                                                         $        7,268
2005                                                                  5,657
2006                                                                  4,840
2007                                                                  4,221
2008                                                                  4,068
Thereafter                                                           12,032
                                                             --------------
Total minimum lease payments                                         38,086
Less minimum rentals to be received under subleases                    (221)
                                                             --------------
                                                             $       37,865
                                                             ==============

Rent expense amounted to $7,445, $5,090 and $3,353, for the years ended October 31, 2003, 2002, and 2001, respectively.

Legal and Other Proceedings

The Company received a Wells Notice from the Staff of the Securities and Exchange Commission stating the Staff's intention to recommend that the SEC bring a civil action seeking an injunction and monetary damages against the Company alleging that it violated certain provisions of the federal securities laws. The proposed allegations stem from the previously disclosed SEC investigation into certain accounting matters related to the Company's financial statements, periodic reporting and internal accounting controls. The Company's Chairman, an employee and two former officers also received Wells Notices. The Company has entered into discussions with the Staff to address the issues raised in the Wells Notice. The SEC's Staff also raised issues with respect to the Company's revenue recognition policies and its impact on its current and historical financial statements. The Company is unable to predict the outcome of these matters.

The Company is involved in routine litigation in the ordinary course of its business, which in management's opinion will not have a material adverse effect on the Company's financial condition, cash flows or results of operations.

Other

The Company periodically enters into distribution agreements to purchase various software games that require the Company to make minimum guaranteed payments. These agreements, which expire between June 2, 2004 and March 22, 2005, require remaining aggregate minimum guaranteed payments of $14,330 at October 31, 2003, including $3,491 of payments due pursuant to an agreement with TDK Mediactive, Inc. ("TDK"). These agreements are collateralized by a standby letter of credit of $3,600 at October 31, 2003. Additionally, assuming performance by third-party developers, the Company has outstanding commitments under various software development agreements to pay developers an aggregate of $27,224 during fiscal 2004. The Company also expects to spend an additional $4,000 in connection with the implementation of accounting software systems for its international operations and the upgrade for its domestic operations.

Additionally, in connection with the Company's acquisition of the publishing rights to the franchise of Duke Nukem PC and video games in December 2000, the Company is contingently obligated to pay $6,000 in cash upon delivery of the final version of Duke Nukem Forever for the PC. In May 2003, the Company agreed to make payments of up to $6,000 in cash upon the achievement of certain sales targets for Max Payne 2. The Company also agreed to make additional payments of up to $2,500 to the former owners of Cat Daddy based on a percentage of Cat Daddy's future profits for the first three years after acquisition. See Note 4. The payables will be recorded when the conditions requiring their payment are met.

14. EMPLOYEE SAVINGS PLAN

The Company maintains a 401(k) retirement savings plan and trust (the "401(k) Plan"). The 401(k) Plan is offered to all eligible employees and participants may make voluntary contributions. The Company did not match employee contributions during the year ended October 31, 2001. The Company began matching contributions in July 2002. The matching contribution expense incurred by the Company during the years ended October 31, 2003 and 2002 was $384 and $95, respectively.

                                     Years Ended October 31,
                         ------------------------------------------------
                             2003              2002             2001
                         -------------     -------------    -------------
                                             (Restated)        (Restated)

Domestic                 $     134,746     $     115,142    $     (29,594)
Foreign                         30,569             5,796           25,470
                         -------------     -------------    -------------
Total                    $     165,315     $     120,938    $      (4,124)
                         =============     =============    =============

Income tax expense (benefit) is as follows:

                                     Years Ended October 31,
                         ------------------------------------------------
                             2003              2002             2001
                         -------------     -------------    -------------
                                             (Restated)        (Restated)

Current:
  Federal                $      33,167     $      35,275    $          --
  State and local                6,287             4,381              500
  Foreign                       14,703             2,993            5,450
Deferred                        13,040             6,726           (8,400)
                         -------------     -------------    -------------
Total                    $      67,197     $      49,375    $      (2,450)
                         =============     =============    =============

The differences between the provision for income taxes and the income tax computed using the U.S. statutory federal income tax rate to pretax income are as follows:

                                                       Years ended October 31,
                                            ------------------------------------------------
                                                2003              2002             2001
                                            -------------     -------------    -------------
                                                               (Restated)        (Restated)

Statutory federal tax expense (benefit)     $      57,860     $      42,324    $      (1,442)
Changes in expenses resulting from:
 State taxes, net of federal benefit                4,035             2,995           (1,729)
 Foreign tax expense differential                   2,191               568           (3,355)
 Goodwill and intangible amortization                 363               513            1,656
 Other permanent items                              1,482             1,874              123
 Foreign income exclusion                          (9,163)               --               --
 Valuation allowances                              10,429             1,101              968
 Impairment of intangibles                             --                --            1,329
                                            -------------     -------------    -------------
Income tax expense (benefit)                $      67,197     $      49,375    $      (2,450)
                                            =============     =============    =============

                                                2003             2002
                                            -------------    -------------
                                                               (Restated)

Current:
Deferred tax asset:
 Sales and related allowances               $       8,173    $       5,861
 Depreciation and amortization                        160              384
                                            -------------    -------------
Total current deferred tax assets                   8,333            6,245

Non-current deferred tax assets -
 Foreign net operating losses                       3,240            2,016
 State net operating losses                         3,311            2,069
 Capital loss carryforward                          7,963            7,983
                                            -------------    -------------
                                                   14,514           12,068
 Less: Valuation allowances                       (14,514)          (4,085)
                                            -------------    -------------
Total non-current deferred tax assets                  --            7,983

Non-current deferred tax liability -
 Capitalized software                              (8,486)          (3,885)
                                            -------------    -------------
   Net deferred tax (liability) asset       $        (153)   $      10,343
                                            =============    =============

At October 31, 2003 and October 31, 2002, the Company had capital loss carryforwards totaling approximately $21,000. The capital loss carryforwards will expire in the periods fiscal 2006 through fiscal 2008. Failure to achieve sufficient levels of taxable income from capital transactions will affect the ultimate realization of the capital loss carryforwards. At October 31, 2002 management had a strategy of selling net appreciated assets of the Company, to the extent required to generate sufficient taxable income prior to the expiration of these benefits. At October 31, 2003, based on management's future plans, this strategy was no longer viable, and accordingly a valuation allowance has been recorded for this asset as it is more likely than not that the deferred tax asset related to these carryforwards will not be realized. At October 31, 2003, the Company had foreign net operating losses of $9,800 expiring between 2005 and 2010, and state net operating losses of $41,700 expiring between 2021 and 2023. Limitations on the utilization of these losses may apply, and accordingly valuation allowances have been recorded for these assets.

The total amount of undistributed earnings of foreign subsidiaries was approximately $60,700 and $41,900 for the years ended October 31, 2003 and 2002, respectively. It is the Company's intention to reinvest undistributed earnings of its foreign subsidiaries and thereby indefinitely postpone their remittance. Accordingly, no provision has been made for foreign withholding taxes or United States income taxes which may become payable if undistributed earnings of foreign subsidiaries were paid as dividends to the Company.

16. STOCKHOLDERS' EQUITY

In July 2001, the Company issued 1,300,000 shares of common stock in a private placement to institutional investors and received proceeds of $20,892, net of $1,400 of selling commissions and offering expenses.

In February 2001, certain stockholders of the Company exchanged and surrendered for cancellation 564,212 shares of the Company's Common Stock (valued at $7,310) for shares of Gameplay having an equal value.

In February 2002, the Company issued 20,000 shares of restricted common stock to a former employee in connection with a separation agreement.

In January 2003, the Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $25,000 of its common stock from time to time in the open market or in privately negotiated transactions. The Company has not repurchased any shares under this program.

In November 2003, at a special meeting, the Company's stockholders voted to amend the certificate of incorporation to increase the Company's authorized shares of common stock from 50,000,000 to 100,000,000.

                                                           Foreign
                                                          Currency                 Net Unrealized            Accumulated Other
                                                         Translation               Gain (Loss) on              Comprehensive
                                                         Adjustments                Investments                Income (Loss)
                                                   -----------------------     -----------------------    -----------------------
  Balance at November 1, 2000                      $                (9,841)    $                (2,831)   $               (12,672)
  Comprehensive income changes during the
year, net of taxes of $1,832                                          (767)                      2,987                      2,220
                                                   -----------------------     -----------------------    -----------------------
  Balance at October 31, 2001                                      (10,608)                        156                    (10,452)
  Comprehensive income changes during the
year, net of taxes of $87                                            5,553                        (142)                     5,411
                                                   -----------------------     -----------------------    -----------------------
  Balance at October 31, 2002                                       (5,055)                         14    $                (5,041)
  Comprehensive income changes during the
year, net of taxes of $9                                             4,119                         (14)                     4,105
                                                   -----------------------     -----------------------    -----------------------
  Balance at October 31, 2003                      $                  (936)    $                    --    $                  (936)
                                                   =======================     =======================    =======================

The taxes in the above table relate to the changes in the net unrealized gain (loss) on investments. The foreign currency adjustments are not adjusted for income taxes as they relate to indefinite investments in non-U.S. subsidiaries.

18. INCENTIVE PLANS

Incentive Stock Plan

The Incentive Stock Plan ("Incentive Plan"), adopted by the Board of Directors on June 12, 2003, allows the granting of restricted stock, deferred stock and other stock-based awards of the Company's common stock to directors, officers and other employees of the Company. A maximum of 500,000 shares are available for distribution under the Incentive Plan. As of October 31, 2003, 285,000 shares of restricted common stock have been granted under the Incentive Plan. The cost of the restricted shares granted is expensed over the vesting period. The Incentive Plan is administered by the Compensation Committee of the Board of Directors.

Stock Option Plans

In June 2002, the stockholders of the Company approved the Company's 2002 Stock Option Plan, as previously adopted by the Company's Board of Directors (the "2002 Plan"), pursuant to which officers, directors, employees and consultants of the Company may receive stock options to purchase up to an aggregate of 3,000,000 shares of Common Stock. In April 2003, the stockholders approved an increase in the aggregate amount of shares to 4,000,000 shares.

In January 1997, the stockholders of the Company approved the Company's 1997 Stock Option Plan, as amended, as previously adopted by the Company's Board of Directors (the "1997 Plan"), pursuant to which officers, directors, employees and consultants of the Company may receive options to purchase up to an aggregate of 6,500,000 shares of the Company's Common Stock.

Subject to the provisions of the plans, the Board of Directors or any Committee appointed by the Board of Directors, has the authority to determine the individuals to whom the stock options are to be granted, the number of shares to be covered by each option, the option price, the type of option, the option period, restrictions, if any, on the exercise of the option, the terms for the payment of the option price and other terms and conditions. As of April 30, 2002, there were no options available for grant under the 1997 Plan.

As of October 31, 2003 and 2002, the plans had outstanding stock options for an aggregate of 3,066,000 and 2,764,000 shares of the Company's Common Stock, respectively, vesting at various times from 1998 to 2006 and expiring at various times from 2002 to 2007. Options granted generally vest over a period of three to five years.

Non-Plan Stock Options

As of October 31, 2003 and 2002, there are non-plan stock options outstanding for an aggregate of 1,503,000 and 2,931,000 shares of the Company's Common Stock, respectively, vesting from 1999 to 2006 and expiring at various times from 2003 to 2007.

For those options with exercise prices less than fair value of the underlying shares at the measurement date, the difference is recorded as deferred compensation and is amortized over the vesting period. Compensation expense for the years ended October 31, 2003, 2002, and 2001 was approximately $26, $1,976 and $5, respectively.

The following table summarizes the activity in options under the plans inclusive of non-plan options:

                                                                   Weighted
                                                                    Average
                                                      Shares       Exercise
                                                  (in thousands)     Price
                                                  --------------   --------
Options outstanding - November 1, 2000                 4,199        $ 8.72
Granted-exercise price equal to fair value             3,351        $ 9.94
Granted-exercise price less than fair value              500        $13.91
Exercised                                             (3,327)       $ 9.00
Forfeited                                               (244)       $10.09
                                                      ------        ------

Options outstanding - October 31, 2001                 4,479        $ 9.93
Granted-exercise price equal to fair value             3,950        $16.40
Granted-exercise price less than fair value               30        $ 0.01
Exercised                                             (2,494)       $10.43
Forfeited                                               (270)       $12.31
                                                      ------        ------

Options outstanding - October 31, 2002                 5,695        $13.96
Granted-exercise price equal to fair value             2,442        $25.26
Exercised                                             (3,438)       $13.53
Forfeited                                               (130)       $17.13
                                                      ------        ------
Options outstanding - October 31, 2003                 4,569        $20.23
                                                      ======        ======

At October 31, 2003 and 2002 the number of options exercisable are 1,389,000 and 3,014,000, respectively, and their related weighted average exercise prices are $15.09 and $12.56, respectively.

The following summarizes information about stock options outstanding and exercisable at October 31, 2003:

                                                      Weighted     Average
                                          Shares      Average    Remaining
                                           (in       Exercise   Contractual
Range of Exercise Prices                thousands)     Price    Life (years)
------------------------                ----------   --------   ------------
     $5.50 - $13.91                         986       $10.43        2.42
     $14.86 - $19.55                      1,365       $18.37        3.61
     $20.10 - $25.31                        963       $21.98        4.33
     $25.78 - $35.71                      1,255       $28.63        4.20
                                          -----
Options outstanding - October 31, 2003    4,569       $20.23        3.67
                                          =====

     $5.50 - $13.91                         675       $10.42        2.16
     $14.86 - $19.55                        523       $17.98        3.53
     $20.10 - $25.31                        114       $21.88        4.10
     $25.78 - $35.71                         77       $26.43        3.98
                                          -----
Options exercisable- October 31, 2003     1,389       $15.09        2.93
                                          =====

19. RESULTS BY QUARTER (UNAUDITED)

The following tables set forth restated quarterly supplementary data for each of the years in the two-year period ended October 31, 2003.

The unaudited quarterly results of operations for each of the quarters in the fiscal year ended October 31, 2002 and for each of the three quarters in the period ended July 31, 2003 have been restated for the revised revenue recognition policy related to the change in the method of accounting for price concessions identified in Note 2.

                               1st          2nd          3rd         4th
2003                         Quarter      Quarter      Quarter     Quarter
----                        ---------    ---------    ---------   --------
                            (Restated)   (Restated)   (Restated)

Net sales                    $411,008     $193,023    $152,055    $277,607
Gross profit                  165,947       71,483      58,519     100,190
Net income                   $ 51,535     $ 14,623    $  5,696    $ 26,264

Per share data:
  Basic - EPS                $   1.26     $   0.35    $   0.13    $   0.60
  Diluted - EPS              $   1.22     $   0.35    $   0.13    $   0.58

2002                                          As Restated
----                         ---------------------------------------------
Net sales                    $286,945     $167,286    $123,117    $217,328
Gross profit                  106,242       60,642      45,997      81,711
Net income                   $ 36,752     $  8,010    $  5,049    $ 21,752

Per share data:
  Basic - EPS                $   1.00     $   0.22    $   0.13    $   0.55
  Diluted - EPS              $   0.97     $   0.21    $   0.13    $   0.53

                                            As                        As
                                         Reported    Restatement   Restated
                                         --------    -----------   --------
Quarter ended January 31, 2003:

Net Sales                                $408,794      $ 2,214     $411,008
Gross Profit                              164,127        1,820      165,947
Net income                               $ 50,462      $ 1,073     $ 51,535
Per share data:
  Basic - EPS                            $   1.24      $  0.02     $   1.26
  Diluted - EPS                          $   1.20      $  0.02     $   1.22

Quarter ended April 30, 2003:

Net Sales                                $194,213      $(1,190)    $193,023
Gross Profit                               72,474         (991)      71,483
Net income                               $ 15,239      $  (616)    $ 14,623
Per share data:
  Basic - EPS                            $   0.37      $ (0.02)    $   0.35
  Diluted - EPS                          $   0.36      $ (0.01)    $   0.35

Quarter ended July 31, 2003:

Net Sales                                $155,587      $(3,532)    $152,055
Gross Profit                               61,669       (3,150)      58,519
Net income                               $  7,649      $(1,953)    $  5,696
Per share data:
  Basic - EPS                            $   0.18      $ (0.05)    $   0.13
  Diluted - EPS                          $   0.18      $ (0.05)    $   0.13