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Article by DailyStocks_admin    (07-02-08 10:04 AM)

Filed with the SEC from June 19 to June 25:

Take-Two Interactive Software (TTWO)
Money manager Steven A. Cohen reported owning 4,099,540 shares (5.3%) after buying 1,671,357 from April 28 to June 24 at $25.74 to $27.78 each. Cohen said that he might discuss the videogame maker's business and plans with it or with other shareholders. Electronic Arts (ERTS) has made a so far unsuccessful $2 billion hostile bid for Take-Two.

BUSINESS OVERVIEW

General

We are a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. Our publishing segment consists of our Rockstar Games, 2K Games, 2K Sports and 2K Play publishing labels. We develop, market and publish software titles for the leading gaming and entertainment hardware platforms, including Sony's PLAYSTATION®3 ("PS3") and PlayStation®2 ("PS2") computer entertainment systems; Sony's PSP® (PlayStation®Portable) ("PSP") system; Microsoft's Xbox 360® ("Xbox 360") and Xbox® ("Xbox") video game and entertainment systems; Nintendo's Wii™ ("Wii"), GameCube™, DS™ ("DS") and Game Boy® Advance ("GBA"); and for the PC and Games for Windows®. Our distribution segment, which includes our Jack of All Games subsidiary, distributes our products as well as software, hardware and accessories produced by others to retail outlets in North America. We have pursued a strategy of capitalizing on the widespread market acceptance of interactive entertainment, as well as the growing popularity of innovative action, sports and strategy games that appeal to the expanding demographic of video game players.

Expanding gamer demographics have driven demand for interactive entertainment software in recent years, with video games becoming a mainstream entertainment choice for a maturing, sophisticated audience. According to the Entertainment Software Association, U.S. computer and video game software sales grew six percent in 2006 to $7.4 billion—almost tripling industry software sales since 1996. At least half of all Americans claim to play PC and video games, with an estimated 67% of heads of households playing games. The average game player is 33 years old and has been playing for nearly 12 years. The International Development Group, a consulting and market research firm, estimates that sales of PC, console and handheld games (excluding wireless applications) will be $8.5 billion in 2007 in North America and estimates that such sales will reach $9.4 billion in 2008.

The video game industry is cyclical and the installed base of hardware platforms has historically had a significant effect on the demand for gaming software. The prior-generation of console platforms includes the PS2, Xbox and GameCube ("prior-generation") and the next-generation of console platforms includes the PS3, Xbox 360 and Wii ("next-generation"). In 2007, demand for prior-generation gaming software began to diminish as consumers continued to upgrade to the latest generation of hardware platforms. Additionally, the introduction of new hardware platforms has, in many cases, been characterized by delays in launch dates or reductions in launch quantities or both. Each of these circumstances had a significant financial impact on us. In addition, these next-generation consoles are more complex than their predecessors, and in some cases contain multi-processor technology, new and unique game controllers, online gameplay functionality and high definition video capabilities, which in turn require video game developers to create games that are progressively more elaborate and costly to develop.

Transition periods also mark a shift in the software development process for next-generation gaming systems. During console transition periods, software publishers and developers often devote significant resources to producing next-generation software products for new gaming consoles, which have a limited installed hardware base. As a result, next-generation software products often start out selling at relatively low unit volumes and the time required for software publishers to recognize a return on their investment is increased.

We were incorporated under the laws of the State of Delaware in 1993 and are headquartered in New York, New York with approximately 1,900 employees globally. Our telephone number is (646) 536-2842 and our Internet address is www.take2games.com . We make all of our filings with the Securities and Exchange Commission available, free of charge, on our website under the caption "Corporate—Corporate Overview—SEC Filings." Included in these filings are our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, which are available as soon as reasonably practicable after we electronically file or furnish such materials with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. You may also obtain copies of our reports without charge by writing to:

Take-Two Interactive Software, Inc.
622 Broadway
New York, NY 10012
Attn: Investor Relations

You may read and copy any document we file with the SEC at the SEC's public reference room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an Internet website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC's Internet website is www.sec.gov.

Strategy

Overview. Our strategy is to capitalize on the growth of the interactive entertainment market, particularly the expanding demographics of video game players, through a focus on creating premium quality games and successful franchises for which we can create sequels. We have established a portfolio of successful proprietary software content for the major hardware platforms in a wide range of genres including action, adventure, strategy, role-playing, sports, racing, music, party and puzzle. We believe that our commitment to creativity and innovation is a distinguishing strength, allowing us to differentiate many of our products in the marketplace by combining advanced technology with compelling story lines and characters to provide unique gameplay experiences for consumers. We have created, licensed and acquired a group of highly recognizable brands to match the variety of consumer demographics we aspire to serve, ranging from adults to children and hard-core game enthusiasts to casual gamers.

Support Multiple Labels to Target Distinct Market Segments. We publish our titles under four separate labels: Rockstar Games, 2K Games, 2K Sports and 2K Play, with each label focused on distinct product genres and target demographics. We expect Rockstar Games, the publisher of our blockbuster Grand Theft Auto and Midnight Club franchises, to continue to be a leader in the action product category by leveraging our existing titles as well as developing new brands. We also anticipate that 2K Games, the publisher of the critically acclaimed BioShock title and Civilization series, will continue to develop new and successful franchises in the future. Our 2K Sports label, which publishes the Major League Baseball 2K , NBA 2K , NHL 2K and College Hoops 2K series, is intended to provide more consistent year over year revenue streams because we publish these titles on an annual basis. Our recently launched 2K Play label, publisher of our successful Carnival Games title, is focused on the growing casual and family gaming market, and we recently entered into a licensing agreement with Nickelodeon to publish games based on top rated Nick Jr. preschool television properties, including Dora the Explorer and Go, Diego, Go!.

Maximize Product Selection and Development. Our primary strategy is to publish a select number of high quality titles based on internally owned and developed intellectual property, which tends to offer higher margins than licensed products. We currently have over 15 proprietary brands which we expect to leverage in the future. In addition, we will selectively develop titles based on licensed properties, including sports, and also publish externally developed titles. We have recently implemented a product investment review process to evaluate potential titles for investment, to review existing titles in development, and to review titles after their release to assess product performance. We apply this process to all of our products, whether externally or internally developed. The product investment review process includes in-depth reviews of each project at various stages of development by our executive management team and senior management of our publishing labels, and includes coordination between our sales and marketing personnel before the launch of the title. This disciplined approach to product investment is expected to enhance the competitiveness and profitability of our titles.

We develop our products using a combination of our internal development resources and external development resources acting under contract with us. We typically select our external developers based on their track record and expertise in producing products in the same category. One developer will often produce the same game for multiple platforms and will produce sequels to the original game. We believe that selecting and using development resources in this manner allows us to leverage the particular expertise of our internal and external development resources, which we believe adds to the quality of our products.

Diversify Revenue by Title, Genre, Platform, and Target Demographic. We believe the diversification of our product mix will reduce our operating risks and increase our revenue. We expect to continue to increase revenue in our sports business and offer a wider variety of titles for an expanded group of customers through the recent launch of our 2K Play label, focused on family and casual games. We are also increasingly offering our titles on additional hardware platforms to take advantage of the increasing installed base of these platforms, including the Xbox 360, PlayStation 3, Wii, PlayStation Portable, Nintendo DS and PC.

Improve Financial Performance. We are seeking to return to profitability in fiscal 2008 through a combination of our company-wide cost reduction program, the introduction of a greater number of internally owned and developed titles, the reduction of legal expenses and professional fees as we resolve our outstanding regulatory and litigation issues, and the enhanced financial performance of our distribution business. We expect to improve financial performance in our sports business through a combination of higher average retail price points as more of our titles are sold on next-generation platforms, increased unit sales, and the introduction of new titles, including proprietary, non-licensed sports titles. We also expect to expand our low cost development capabilities in Asia.

Leverage Emerging Technologies. The technological advances in our industry are leading to new revenue streams which we are seeking to capitalize on. We see opportunities in a variety of areas, including episodic content, in-game advertising, micro-transactions and networked gameplay. We plan to release episodic content for Grand Theft Auto IV on Xbox Live in fiscal 2008. We are currently including advertising in many of our sports titles. We also plan to pursue opportunities that exist for networked gameplay, particularly for our wholly-owned franchises, as well as micro-transactions, where gamers can pay to download additional content to enhance their game playing experience.

Expand International Business. The global market for interactive entertainment continues to grow, and we seek to increase our presence internationally, particularly in Asia, Eastern Europe and Latin America. We typically distribute our products in Asia through license and royalty agreements with local publishers. While we retain title to all intellectual property, local publishers are responsible for localization of software content, distribution and marketing of the products in their respective local markets. We intend to build upon these relationships and establish new relationships to expand our international business.

Our Publishing and Software Development Businesses

The interactive software that we develop and publish is broken down into two major categories: 1) games developed by our internal development studios, and 2) games that we publish with, or market and distribute on behalf of, third party developers.

We have internal development studios located in the United States, Canada, United Kingdom, France, Australia and China. As of October 31, 2007, we had a research and development staff of 1,178 employees with the technical capabilities to develop software titles for all major prior and next-generation consoles, handheld hardware platforms and PCs in several languages and territories.

Agreements with third party developers generally give us exclusive publishing and marketing rights and require us to make advance royalty payments, pay royalties based on product sales and satisfy other conditions. Royalty advances for software titles are typically recoupable against royalties otherwise due to developers. Our agreements with third party developers generally provide us with the right to monitor development efforts and to cease making advance payments if specified development milestones are not satisfied. We also regularly monitor the level of advances in light of expected sales for the related titles.

The development cycle for our titles generally ranges from 12 to more than 24 months. Although we often simultaneously develop our software for multiple platforms, in certain cases it can take nine to 12 months to adapt a product for additional hardware platforms after initial development for one platform is completed. The cost to develop a front-line software product generally ranges from $5 million to $20 million. We expect that development costs and time will continue to increase for next-generation platforms.

Rockstar Games. Software titles published by our Rockstar Games label are primarily internally developed. Rockstar Games is the publisher of our blockbuster Grand Theft Auto ® franchise and is focused on creating premium content and groundbreaking entertainment. We believe that Rockstar has established a uniquely original popular culture phenomenon with its Grand Theft Auto series and we have taken advantage of its success by developing new proprietary brands as well as sequels to our existing titles. For the years ended October 31, 2007, 2006 and 2005, our Grand Theft Auto titles accounted for 13.1%, 22.4% and 38.2% of our total net revenue, respectively. No other products accounted for more than 10% of our revenue for the year ended October 31, 2007. Rockstar is also well known for developing titles in multiple genres, such as Midnight Club , Max Payne, Manhunt, Rockstar Games Presents Table Tennis, The Warriors, Red Dead Revolver and Bully .

We expect our next iteration in the Grand Theft Auto series, Grand Theft Auto IV, to be released on the Xbox 360 and PS3 platforms in the second quarter of fiscal 2008. In addition, Rockstar and Microsoft announced an agreement whereby Rockstar will publish episodic content for Grand Theft Auto IV exclusively on Xbox Live®, Microsoft's online entertainment and gaming network. The digitally delivered episodic content will be available for purchase by Xbox Live subscribers, allowing them to expand their Grand Theft Auto IV gameplay experience. We believe that online delivery of episodic content will continue to become more prevalent as broadband connectivity gains popularity and digital delivery platforms such as Xbox Live, PlayStation Network and Valve's Steam gain additional customers.

2K Games. Most of our third party developed titles are published by our 2K Games label. 2K Games has actively secured rights to publish popular entertainment properties, including The Elder Scrolls IV: Oblivion, The Darkness, Ghost Rider and Fantastic Four: Rise of the Silver Surfer. While many of our 2K Games titles are developed by third party developers, we also develop software titles for our 2K Games label through our internal development studios, such as Sid Meier's Railroads!, Sid Meier's Pirates!, and the critically acclaimed, multi-million unit selling BioShock and Civilization franchises.

2K Sports. We develop most of our 2K Sports software titles through our internal development studios including the Major League Baseball 2K series, NBA 2K series, NHL 2K series, College Hoops 2K series and our Top Spin tennis series. Since its formation, our 2K Sports label has been actively securing major sports league licenses including long-term, third party exclusive licensing relationships with Major League Baseball Properties, the Major League Baseball Players Association and Major League Baseball Advanced Media.

2K Play. Our 2K Play label focuses on developing and publishing titles for the growing market for casual and family-friendly games. While the majority of our 2K Play titles are developed by third party developers, we have also developed software titles for our 2K Play label internally, such as Carnival Games and the Deal or No Deal series. As part of our 2K Play initiative, we also announced an expansive new handheld and console video game licensing agreement with Nickelodeon, a partnership involving top-rated properties including Nick Jr. preschool television hits, Dora the Explorer and Go, Diego, Go! .

Our Distribution Business

Through our distribution business, which primarily operates in North America and includes our Jack of All Games subsidiary, we supply retailers with our internally developed products as well as software, hardware and accessories produced by others. We distribute third party console, handheld and PC products, consisting principally of newly released and popular software titles, budget and catalog software titles, hardware and accessories.

Jack of All Games seeks to capitalize on the growing installed base of hardware and the proliferation of software titles and outlets to purchase software. It has established a strong presence in the budget segment of the business due to its expanding portfolio of value-priced products and its expertise in selling these titles. Jack of All Games continues to leverage this strategy by serving as the distributor of our value-priced publishing products.

Intellectual Property

Our business is significantly dependent on the creation, acquisition, licensing and protection of intellectual property. Some of the intellectual property rights we have created and acquired for our portfolio of brands are: Grand Theft Auto, Midnight Club, Bully, Rockstar Games Presents Table Tennis, Sid Meier's Civilization, Sid Meier's Railroads!, Sid Meier's Pirates, The Darkness, Manhunt, Red Dead Revolver, Max Payne, Smuggler's Run, Spec Ops, BioShock, Top Spin, The Bigs, All-Pro Football, Carnival Games, Railroad Tycoon and X-Com. We believe that content ownership facilitates our internal product development efforts and maximizes profit potential. We attempt to protect our software and production techniques under copyright, trademark and trade secret laws as well as through contractual restrictions on disclosure, copying and distribution. Although we generally do not hold any patents, we obtain trademark and copyright registrations for many of our products.

We also enter into content license agreements, such as those with sports leagues and players associations, movie studios and performing talent, music labels and musicians. These licenses are typically limited to use of the licensed rights in products for specific time periods. In addition, our products that play on game consoles and handhelds include technology that is owned by the console manufacturer and licensed non-exclusively to us for use. While we may have renewal rights for some licenses, our business and our ability to develop many of our products is dependent on our ability to continue to obtain the intellectual property rights from the owners of these rights at reasonable rates.

Interactive entertainment software is susceptible to piracy and unauthorized copying. Unauthorized third parties may be able to copy or to reverse engineer our titles to obtain and use programming or production techniques that we regard as proprietary. Well organized piracy operations have proliferated in recent years, resulting in the ability to download pirated copies of software over the Internet. Although we attempt to incorporate protective measures into our software, piracy of our products could negatively impact our future profitability.

As the amount of interactive entertainment software in the market increases and the functionality of this software further overlaps, we believe that interactive entertainment software will increasingly become the subject of claims that such software infringes the copyrights or patents of others. From time to time, we receive notices from third parties or are named in lawsuits by third parties alleging infringement of their proprietary rights. Although we believe that our titles and the titles and technologies of third party developers and publishers with whom we have contractual relationships do not and will not infringe or violate proprietary rights of others, it is possible that infringement of proprietary rights of others may occur. Any claims of infringement, with or without merit, could be time consuming, costly and difficult to defend. See "Item 1A.—Risk Factors."

Arrangements with Platform Manufacturers

We have entered into license agreements with Sony, Microsoft and Nintendo to develop and publish software in North America, Europe and Australia. We are not required to obtain any licenses to develop titles for the PC.

Sony. Under the terms of the license agreements that we have entered into, or will enter into, with Sony Computer Entertainment, Inc., Sony granted us the right and license to develop, market, publish and distribute software titles for the PS3, PS2 and PSP hardware platforms. The agreements require us to submit products to Sony for approval and for us to make royalty payments to Sony based on the number of units manufactured. In addition, products for the PS3, PS2 and PSP are required to be manufactured by Sony approved manufacturers.

Microsoft. Under the terms of the license agreements that we have entered into with Microsoft Corporation and its affiliates, Microsoft granted us the right and license to develop, market, publish and distribute software titles for the Xbox 360 and Xbox. The agreements require us to submit products to Microsoft for approval and for us to make royalty payments to Microsoft based on the number of units manufactured. In addition, products for the Xbox 360 and Xbox are required to be manufactured by Microsoft approved manufacturers.

We expect to launch Grand Theft Auto IV on the Xbox 360 and PlayStation 3 platforms in the second quarter of fiscal 2008. In addition, we expect that our Rockstar subsidiary will offer exclusive episodic content for Grand Theft Auto IV on Xbox Live®, Microsoft's online entertainment and gaming network. The digitally delivered episodic content will be available for purchase by Xbox Live subscribers, allowing them to expand their Grand Theft Auto IV gameplay experience.

Nintendo. Under the terms of the license agreements that we have entered into with Nintendo Co., Ltd. and its affiliates, Nintendo granted us the right and license to develop, market, publish and distribute software for Nintendo's Wii, GameCube, DS and GBA. The agreements require us to submit products to Nintendo for approval and for us to make royalty payments to Nintendo based on the number of units manufactured. In addition, products for such platforms are required to be manufactured by Nintendo approved manufacturers.

Manufacturing

Sony, Nintendo and Microsoft are the sole manufacturers, or control selection of manufacturers, of software products sold for use on their respective hardware platforms. We place a purchase order for the manufacture of our products with Sony, Nintendo or Microsoft utilizing our payment terms with the manufacturer and then send software code and a prototype of the product to the manufacturer, together with related artwork, user instructions, warranty information, brochures and packaging designs for approval, defect testing and manufacture. Games are generally shipped within two weeks of receipt of our manufacturing order.

Production of PC software is performed by third party vendors in accordance with our specifications and includes CD-ROM pressing, assembly of components, printing of packaging and user manuals and shipping of finished goods. We send software code and a prototype of a title, together with related artwork, user instructions, warranty information, brochures and packaging designs to the manufacturers. Games are generally shipped within two weeks of receipt of our manufacturing order.

We occasionally experience difficulties or delays in the manufacture of our titles; however such delays have not significantly harmed our business to date. We have not experienced material delays due to manufacturing defects. Our software titles typically carry a 90-day limited warranty.

Sales

We sell software titles to retail outlets in North America and Europe through direct relationships with large retail customers and third party distributors. Our customers in North America include leading mass merchandisers, such as Wal-Mart; specialty retailers, such as GameStop; video stores, such as Blockbuster; electronics stores, such as Best Buy and Circuit City; toy stores, such as Toys "R" Us; national and regional drug stores; and supermarket and discount store chains. Our European customers include Carrefour, Dixons, Karstadt, and Media Saturn. We have sales operations in Australia, Austria, Canada, France, Germany, Italy, the Netherlands, New Zealand, Spain, Switzerland, the United Kingdom and the United States.

Sales to our five largest customers in fiscal 2007 accounted for approximately 51.1% of our net revenue, with Wal-Mart, GameStop and Best Buy accounting for 15.1%, 12.8% and 11.5%, respectively, of our net revenue. No other customer accounted for more than 10.0% of our net revenue for the year ended October 31, 2007.

Marketing

Our marketing and promotional efforts are intended to maximize exposure and broaden distribution of our titles, promote brand name recognition, assist retailers and properly position, package and merchandise our titles.

We market titles by:

•
Implementing public relations campaigns, using print and online advertising, television, radio spots and outdoor advertising. We believe that we label and market our products in accordance with the applicable principles and guidelines of the Entertainment Software Rating Board, or the ESRB, an independent self-regulatory body that assigns ratings and enforces advertising guidelines for the interactive software industry.

•
Actively pursuing relationships with participants in the music and entertainment industries. We believe that the shared demographics between various media and some of the software titles marketed by our publishing labels provide excellent cross-promotional opportunities. We continue to work with popular recording artists to create sophisticated game soundtracks, enter into agreements to license high-profile names and likenesses, and make arrangements for co-branding opportunities.

•
Satisfying certain shelf life and sales requirements under our agreements with hardware manufacturers in order to qualify for Sony's Greatest Hits Programs and Microsoft's Platinum Hits Program. In connection with these programs, we receive manufacturing discounts from Sony and Microsoft. Similarly, Nintendo has also established a Player's Choice Program for the Wii and GameCube.

•
Stimulating continued sales and maximizing profits by reducing the wholesale prices of our products to retailers at various times during the life of a product. Price concessions may occur at any time in a product's life cycle, but typically occur three to nine months after a product's initial launch. In fiscal 2007, 2006 and 2005, price concessions to retailers amounted to $68.1 million, $73.9 million and $30.4 million, respectively. In certain international markets, we provide volume rebates to stimulate continued product sales.

We also employ various other marketing methods designed to promote consumer awareness, including in-store promotions and point-of-purchase displays, direct mail, co-operative advertising, as well as attendance at trade shows. We employ separate sales forces for our publishing and distribution operations. As of October 31, 2007, we had a sales and marketing staff of 229 people.

Our front-line products generally sell at retail prices ranging from $19.99 to $59.99 in North America. Products that are designated Sony's Greatest Hits (for both the PlayStation 2 and the PSP) and Microsoft's Platinum Hits (for Xbox) generally sell for $19.99. We release sports titles at retail prices ranging from $19.99 to $59.99, and we position our value-priced product offerings at a retail price starting at $9.99.


CEO BACKGROUND

Ben Feder , age 44, has been serving as the Chief Executive Officer and a director of the Company since he was nominated by certain stockholders of the Company and elected to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. Mr. Feder is also a partner of ZelnickMedia, a media investment and management firm, and is involved in overseeing ZelnickMedia's interest in Columbia Music Entertainment (CME) of Japan. He is a director of CME, which is traded on the Tokyo Stock Exchange. Prior to co-founding ZelnickMedia in 2001, Mr. Feder was Chief Executive Officer of MessageClick, Inc., a leading provider of voice messaging technology for next-generation telephone networks, and held a senior position with News Corporation.

Strauss Zelnick , age 50, has been Executive Chairman of the Company since February 2008 and has been the non-executive Chairman of the Company since he was nominated by certain stockholders of the Company and elected to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. Mr. Zelnick is also a partner of ZelnickMedia and is Chairman of Columbia Music Entertainment (CME) of Japan, Online Testing Exchange, Inc. and ITN Networks. He also serves on the Boards of Directors of Blockbuster Inc. and Naylor LLC. Mr. Zelnick served as Executive Chairman of Direct Holdings, the parent company of Time Life and Lillian Vernon until the company was sold to Reader's Digest in March 2007. Prior to co-founding ZelnickMedia in 2001, Mr. Zelnick was President and Chief Executive Officer of BMG Entertainment, an entertainment company with more than 200 record labels and operations in 54 countries. Mr. Zelnick has also served as President and Chief Executive Officer of Crystal Dynamics, Inc and as President and Chief Operating Officer of Twentieth Century Fox. He is an associate member of the National Academy of Recording Arts and Sciences and served on the Board of Directors of the Recording Industry Association of America and the Motion Picture Association of America.

Robert A. Bowman , age 52, has been a director of the Company since April 2007. Mr. Bowman is the President and Chief Executive Officer of Major League Baseball Advanced Media, LP, which manages the interactive and Internet rights for Major League Baseball, a position he has held since 2000. Prior to joining MLB Advanced Media, Mr. Bowman was President and Chief Operations Officer of ITT Corporation from 1995 to 2000, where he previously served as Chief Financial Officer from 1991 to 1995. Mr. Bowman served as the Treasurer of the State of Michigan from 1983 to 1990, overseeing its tax policy and collection and the state's pension fund. Mr. Bowman serves as President of the Michigan Education Trust and is a director of Blockbuster Inc., The Warnaco Group, Inc. and World Wrestling Entertainment, Inc., serving as the Chair of the Audit Committee at Blockbuster and on the Audit Committee and Compensation Committee at Warnaco and the Audit Committee at World Wrestling Entertainment, Inc.

Grover C. Brown , age 72, has been a director of the Company since March 2006. Mr. Brown was not nominated by certain stockholders of the Company, and therefore not elected, to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. However, at a meeting of the Board held immediately thereafter, the Board reappointed him to the Board. Mr. Brown, a former judge, has been special counsel at the law firm of Gordon, Fournaris & Mammarella, P.A. since March 2000. Previously, Mr. Brown was a partner at the law firm of Morris,

James, Hitchens & Williams from 1985 to 2000. Mr. Brown served as Chancellor and Vice Chancellor of the Delaware Court of Chancery from 1973 until 1985 and was a Family Court Judge for the State of Delaware prior to that time. Mr. Brown is a director of Cablevision Systems Corporation, a telecommunications and entertainment company and a member of its Special Litigation Committee.

Michael Dornemann , age 62, was nominated by certain stockholders of the Company and elected to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. Mr. Dornemann is an entertainment and marketing executive with more than 30 years of management consulting, corporate development, strategic advisory and media experience. Since 2001, Mr. Dornemann has served on several boards and currently serves on the Board of Directors of Jet Set AG, a worldwide fashion company based in Switzerland, as Vice-Chairman of Access Worldwide Communications and on the Board of Directors of Columbia Music Entertainment (CME) of Japan. Prior to 2001, Mr. Dornemann was an executive board member of Bertelsmann AG for 16 years and Chief Executive Officer of Bertelsmann Entertainment (music and television division) and held positions with IBM and Boston Consulting Group.

John F. Levy , age 52, has been a director of the Company since March 2006. Since May 2005, Mr. Levy has served as the Chief Executive Officer of Board Advisory Services, a consulting firm that advises public companies in the areas of corporate governance, corporate compliance, financial reporting and financial strategies. From November 2005 to March 2006, Mr. Levy was the Interim Chief Financial Officer of Universal Food & Beverage Company, which filed a voluntary petition under the provisions of Chapter 11 of the United States Bankruptcy Act on August 31, 2007. From November 1997 to May 2005, Mr. Levy served as Executive Vice President and Chief Financial Officer of MediaBay, Inc., a provider of premium spoken word audio content. While at MediaBay, he also served for a period as its Chairman and Vice Chairman. Mr. Levy is a certified public accountant with nine years of experience with the national public accounting firms of Ernst & Young, Laventhol & Horwath and Grant Thornton LLP. Mr. Levy is a director, Lead Director and Chairman of the Audit Committee and a member of the Compensation Committee of Gilman+Ciocia, Inc., which provides tax preparation and financial planning services to individuals. Mr. Levy is also a director of Atlas Mining Company.

J Moses , age 49, was nominated by certain stockholders of the Company and elected to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. Since 1997, Mr. Moses has been the Chief Executive Officer of UGO Networks, Inc., an online publisher delivering information and entertainment for "gamers." Mr. Moses, who co-founded UGO Networks, managed the sale of that company to the Hearst Corporation in August 2007, where he continues to oversee that company. Prior thereto, Mr. Moses served as President of MTV Russia and oversaw the launch of MTV Networks in Russia in 1996. Mr. Moses, a 30 year veteran of the media industry, also served as the President of BMG Interactive from 1992 to 1995.

Michael Sheresky , age 40, was nominated by certain stockholders of the Company and elected to the Board of Directors at the Company's 2007 annual meeting of stockholders on March 29, 2007. Since 1997, Mr. Sheresky has held a number of positions at the William Morris Agency, a talent agency, and he currently serves as a Senior Vice President in its Motion Picture Department.

Set forth below is information with respect to the Company's executive officers who are not also directors:

Lainie Goldstein , age 40, became Chief Financial Officer of the Company in June 2007 and prior thereto served as the Company's Senior Vice President of Finance since November 2003. Prior to joining the Company in November 2003, Ms. Goldstein spent seven years in various finance positions with Nautica Enterprises, an apparel company, most recently as Vice President, Finance and Business Development. Ms. Goldstein is a certified public accountant, and held positions in the audit and reorganization departments at Grant Thornton LLP.

Seth Krauss , age 37, has been the Executive Vice President and General Counsel of the Company since March 2007. Prior to that time, he served in the Legal and Compliance Division of Morgan Stanley, a global financial services company, first as Vice President and Counsel and then as Executive Director and Counsel from March 2004 to March 2007, where most recently he had been responsible for coordinating all significant regulatory and law enforcement matters for Morgan Stanley in the United States and served as one of the firm's senior liaisons to its U.S.-based financial regulators and law enforcement agencies. From 1995 until joining Morgan Stanley in March 2004, Mr. Krauss served as an Assistant District Attorney and Senior Investigative Counsel in the New York County District Attorney's Office, where his work included leading complex, long-term investigations into violations of securities, banking, accounting, taxation and related laws and regulations, working closely with the SEC, FINRA (formerly the NASD and the NYSE), as well as numerous state, federal and international financial regulators and law enforcement agencies.

Gary Dale , age 47, became Executive Vice President of the Company in December 2007. Prior to that time, he was Chief Operating Officer of the Company's Rockstar Games publishing label since joining the Company in January 2007. Mr. Dale previously served as the European Managing Director of Capcom Co. Ltd., an interactive entertainment company, from November 2003 to January 2007. From 2000 to 2003, he was Chief Executive Officer of Granada Sky Broadcasting, an operator of television channels in the United Kingdom, where he was responsible for production, programming, operations, sales and marketing. From 1998 to 2000, he served as Senior Vice President of International Marketing at BMG Music, overseeing all marketing activities outside of North America. Prior to that, he was President of the Interactive Software and Video Division of BMG Entertainment from 1994 until the Company acquired BMG Interactive in March 1998.

Karl Slatoff , age 37, became Executive Vice President of the Company in February 2008. Mr. Slatoff is also a partner of ZelnickMedia. Prior to joining ZelnickMedia in 2001, Mr. Slatoff served as Vice President, New Media for BMG Entertainment, where he was responsible for guiding BMG's online digital strategies, including the development of commercial digital distribution initiatives and new business models for the sale and syndication of online content. From 1994 to 1996, Mr. Slatoff worked in strategic planning at the Walt Disney Company, where he focused on the consumer products, studio and broadcast divisions, as well as several initiatives in the educational, publishing and new media sectors. From 1992 to 1994 Mr. Slatoff worked in the corporate finance and mergers and acquisitions units at Lehman Brothers where he focused on the consumer products and retail/merchandising industries.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Business

We are a global publisher, developer and distributor of interactive entertainment software, hardware and accessories. Our publishing segment consists of our Rockstar Games, 2K Games, 2K Sports and 2K Play publishing labels. We develop, market and publish software titles for the leading gaming and entertainment hardware platforms including: Sony's PLAYSTATION®3 ("PS3") and PlayStation®2 ("PS2") computer entertainment systems; Sony's PSP® (PlayStation®Portable) ("PSP") system; Microsoft's Xbox 360® ("Xbox 360") and Xbox® ("Xbox") video game and entertainment systems; Nintendo's Wii™ ("Wii"), GameCube™, DS™ ("DS") and Game Boy® Advance ("GBA"); and for the PC and Games for Windows®. The installed base for the prior-generation of console platforms, including PS2, Xbox and GameCube ("prior-generation platforms") is substantial, and the release of the Xbox 360 platform in fiscal 2006 and the releases of the PS3 and Wii platforms in fiscal 2007 ("next-generation platforms") have further expanded the video game software market. The extent and timing of the increase in the installed base of the next-generation platforms will significantly impact our business and profitability. Our plan is to diversify and continue to expand the number of titles released on the next-generation platforms while continuing to market titles developed for prior-generation platforms given their significant installed base, as long as it is economically attractive to do so.

Our strategy is to capitalize on the growth of the interactive entertainment market, particularly the expanding demographics of video game players, and focus on creating premium quality games and successful franchises for which we can create sequels. We have established a portfolio of successful proprietary software content for the major hardware platforms in a wide range of genres including action, adventure, strategy, role-playing, sports and racing. We have created, licensed and acquired a group of highly recognizable brands to match the variety of consumer demographics we aspire to serve, ranging from adults to children and hard-core game enthusiasts to casual gamers. We expect Rockstar Games, our wholly-owned publisher of the hit Grand Theft Auto and Midnight Club franchises, to continue to be a leader in the action product category by leveraging our existing titles as well as developing new brands. We also expect 2K Games, developer of the successful Civilization series and the critically acclaimed BioShock to continue to develop new and successful franchises in the future. Our 2K Sports series, which includes Major League Baseball 2K , NBA 2K , NHL 2K and College Hoops 2K, provides more consistent year over year revenue streams than our Rockstar Games and 2K Games businesses because we publish them on an annual basis.

Revenue in our publishing segment is primarily derived from the sale of internally developed software titles, software titles developed on our behalf by third parties and the sale of video game accessories and peripherals. Operating margins in our publishing business are dependent in part upon our ability to continually release new, commercially successful products and to manage software product development costs. Although software development costs as well as the development cycle for next-generation platforms have increased compared to prior-generation platforms, the impact is partially offset by the higher selling prices on next-generation software. We develop most of our front-line products internally, and we own many of our most important intellectual properties, which we believe best positions us financially and competitively. Operating margins associated with our externally developed titles, or titles for which we do not own the intellectual property, are generally lower because they require us to acquire licenses and provide minimum development guarantees. We continue to develop new revenue streams as they evolve, including higher margin sources such as in-game advertising and downloadable episodic content, which we expect will become more significant to our business over time.

Our distribution segment, which is primarily comprised of our Jack of All Games subsidiary, distributes our products as well as third party software, hardware and accessories to retail outlets primarily in North America. Revenue in our distribution segment is derived from the sale of third party software titles, accessories and hardware. Operating margins in our distribution business are dependent in part on the mix of software and hardware sales. Software product sales generally yield higher margins than hardware product sales.

2007 Financial Summary

The year ended October 31, 2007 was a transition year for the video game industry and our business performed below our expectations, reflecting the lack of new releases in our Grand Theft Auto franchise and a lower than anticipated installed based of next-generation platforms. We had initially anticipated the release of Grand Theft Auto IV in the fourth quarter of 2007; however its release date was delayed to the second quarter of 2008 to allow for additional development.

Highlighting our 2007 fiscal year were new offerings, such as our critically acclaimed BioShock, released in the fourth quarter of 2007. BioShock was one of the highest rated games to date on Xbox 360 according to both GameRankings.com and Metacritic.com, and shipped approximately 2.1 million units worldwide through October 31, 2007. Our sports titles continued to improve, particularly our NBA 2K series and Major League Baseball 2K series. NBA 2K8, released in the fourth quarter of 2007, was again the highest rated NBA title for the third consecutive year according to GameRankings.com. We also released first iterations of The Darkness and The Bigs and expanded our presence in the casual games market with our release of Carnival Games.

The relatively low installed base of next-generation platforms continued to impact our business in 2007; however, we expect that the recent price reductions on the Xbox 360 and PS3 hardware platforms, and the recent slate of next-generation software titles coming to market will benefit our business in 2008. As a result, we continued to make significant investments in next-generation game development, as reflected in the increase in the balance of our capitalized software costs and licenses. The PS3 gaming platform was not as widely accepted by consumers as we initially expected, which negatively impacted our 2007 results. Conversely, Nintendo's Wii outperformed our expectations. Our 2007 development budgets had initially favored the Sony and Microsoft next-generation platforms; however, with the success of the Wii, we deployed additional resources to develop products for that platform. We released a total of six titles on the Wii in 2007, all during the third and fourth quarters and have announced several titles that will be published for that platform in 2008. Typically, our budgets to develop games on the Wii are lower than the average development costs for other next-generation platforms.

The 2007 fiscal year was also a transition year for our Board and executive management team. In March, stockholders voted to replace five out of six members of our Board, including our Chief Executive Officer. We established a relationship with ZelnickMedia as a result of this transition, and ZelnickMedia now provides executive management services to us and our Board. Subsequent to the management transition, and in response to the difficult operating environment in 2007, we realigned certain management functions, undertook cost cutting measures and shored up our balance sheet with a $100 million secured line of credit (subsequently expanded to $140 million in November 2007). We also began to explore alternatives for businesses that we consider to be non-core, evidenced by the sale of our Joytech accessories manufacturing business in September 2007. See "Management Change" below for the complete details of the management transition and the details of our 2007 reorganization plan.

Management Change

During the second quarter of 2007, our stockholders elected five new directors and one incumbent director to our Board, rather than the six incumbent directors nominated for election by the incumbent Board. The newly elected Board elected a new Chairman, Chief Executive Officer of the Company and one additional incumbent director, and on March 30, 2007, we entered into an agreement with ZelnickMedia for executive management services. The Board and ZelnickMedia immediately began to implement a plan to restructure our executive management team, which included entering into separation agreements with our former Chief Executive Officer and Chief Financial Officer. The Board also appointed an eighth board member in the second quarter of 2007.

ZelnickMedia agreed to provide executive management services to us and our Board for an initial term through October 31, 2011. In consideration for its services, we agreed to pay ZelnickMedia an annual management fee of $750,000 and a bonus of up to $750,000 per fiscal year based on achieving and exceeding a budgeted earnings level. In addition, on August 27, 2007, we issued ZelnickMedia stock options to acquire 2,009,075 shares of our common stock at an exercise price of $14.74 per share in connection with this agreement. The options granted in connection with this agreement vest over 36 months and expire 10 years from the date of grant.

Our newly elected Chairman and Chief Executive Officer are partners of ZelnickMedia and the cost for their services to us is covered by our management agreement with ZelnickMedia. Except for health benefits and reimbursement of expenses, our newly elected Chairman and Chief Executive Officer are not compensated by us.

In the second quarter of 2007, we began to implement a business reorganization plan. The priorities and progress of such plan are as follows:

1.
We have taken the following measures to review and optimize our management and organizational structure:

•
We restructured our international operations to consolidate and align the marketing, sales and operational functions according to business discipline rather than geography to create a more efficient and responsive international organization.

We realigned label and studio administrative functions to report to their respective departments at the corporate level, thereby ensuring increased control and accountability.

•
We are in the process of consolidating the management, marketing and business development operations of the 2K Games and 2K Sports labels on the West Coast of the United States to improve access to resources, work more closely with the sports development teams, and provide a centralized organization to increase efficiency and better support the growth of these labels.

•
We consolidated our third party PC distribution into our North American sales operations.

We expect these measures to reduce fixed overhead by approximately $25 million on an annualized basis by the end of fiscal 2008. In order to achieve such annualized cost savings, we expect to incur approximately $20 million of business reorganization and related charges through fiscal year 2008. These charges will consist of approximately $10 million of restructuring costs related to our cost savings initiatives and approximately $10 million of expenses related to our management and board changes. Through October 31, 2007, approximately $17.5 million of these charges have been incurred, primarily consisting of severance, office closing costs and professional fees.

2.
We continue to assess our business units and develop strategic alternatives for any business that is determined to be non-core. In September 2007, we completed the sale of our Joytech accessories business to Mad Catz Interactive, Inc. for approximately $3.6 million in cash and notes receivable.

3.
We continue to seek ways to maximize the value of our critical external relationships, such as those with our hardware and intellectual property licensors.

4.
We established a disciplined approval process for software titles in an effort to develop only those with adequate market potential. In the third quarter of 2007, we formalized a product investment review committee consisting of our Chairman, Chief Executive Officer, and Chief Financial Officer, and the senior management of our publishing labels and sales force. The committee meets on a periodic basis throughout software development cycles and reviews development budgets, milestones, sales scenarios, expected return on investment analysis, and launch plans. The committee also conducts retrospective reviews to assess performance versus projections. We believe this new process will improve the competitiveness and profitability of our titles.

5.
We are aggressively pursuing resolution of our outstanding legal and regulatory matters. We remain in contact with the regulatory agencies to assure them of our continued cooperation. In November 2007, we announced the preliminary settlement of all consumer class action lawsuits pending against us in connection with the "Hot Coffee Modification" that could be used by consumers to alter the content of our Grand Theft Auto: San Andreas video game.

Results of Operations

Years Ended October 31, 2007 and 2006

Net revenue from our Grand Theft Auto franchise was $103.7 million lower in 2007, reflecting a decrease from the strong sales of Grand Theft Auto: Liberty City Stories for PSP and PS2 in the prior year. In addition, net revenue related to The Elder Scrolls IV: Oblivion, which was released in the second quarter of 2006, was approximately $63.1 million lower in 2007. Partially offsetting the decline in our net revenue were sales of BioShock, our new title that was released in the fourth quarter of 2007 on the Xbox 360 and PC, and which had sales of $85.1 million. In addition, revenue from our baseball titles increased by $38.2 million due to better performance of Major League Baseball 2K7 compared to its predecessor title and a greater number of product releases, including The Bigs on five platforms and MLB Power Pros on two platforms .

Although consumer demand for the PS3 system did not increase as quickly as anticipated in 2007, revenue for our titles for that platform accounted for $66.2 million, or 9.6%, of our net publishing revenue in the current year. Nintendo's Wii system sold at a stronger than expected rate in 2007; our software sales for the Wii system accounted for $35.5 million, or 5.1%, of our net publishing revenue in 2007. Software sales for the Xbox 360 accounted for 29.7% of net revenue and increased $31.2 million, or 17.9%, again reflecting the 2007 sales of BioShock for this platform of $63.1 million, offset by a decrease of $34.4 million in sales of The Elder Scrolls IV: Oblivion . Software sales for the PSP handheld system decreased $68.9 million in 2007, primarily due to the strong sales of Grand Theft Auto: Liberty City Stories in 2006 . Sales for the PS2 and Xbox prior-generation systems decreased $81.2 million due to the continuing hardware transition and increased availability of the PS3 and Xbox 360. We have also continued to reduce prices of our software titles for the PS2 and Xbox platforms as the next-generation hardware installed base grows. Software sales for PC declined $31.6 million, or 25.3%, primarily due to a $28.7 million decrease in revenue for sales of The Elder Scrolls IV: Oblivion for PC, and a $14.1 million decrease in sales of our Civilization series, both of which were released in 2006. The decrease was partially offset by sales of BioShock for the PC of $22.0 million in 2007.

Product costs as a percentage of net revenue remained relatively consistent compared to the prior year. Software development costs decreased in 2007, reflecting the above average external royalty costs for The Elder Scrolls IV: Oblivion and approximately $18.8 million of impairment charges for unreleased titles in 2006. We recorded $4.1 million of impairment charges for unreleased titles in 2007. In addition, in 2007 we were able to realize a significant increase in the gross profit margin of our internally developed titles, particularly BioShock and our sports products. Both Major League Baseball 2K7 and our NBA 2K series had significantly higher gross margins than their predecessor games due to higher revenues on a comparable amount of software development costs. Internal royalty expense was lower as a percentage of net revenue in 2007 as a result of fewer Rockstar titles being released and significantly lower sales of Grand Theft Auto products. License expense was a greater percentage of net revenue in 2007, reflecting the releases of Fantastic Four: Rise of the Silver Surfer, All-Pro Football 2K8, Ghost Rider and The Darkness, compared to The Da Vinci Code, Torino 2006 and 24: The Game in the prior year. Sports licensing costs, however, were a lower percentage of net revenue, particularly for our baseball titles where we had a greater number of products released and higher overall revenues than in the prior year. We expect to realize increasing margins in fiscal 2008 with the release of internally developed, wholly-owned titles such as Grand Theft Auto IV and Midnight Club: Los Angeles .

Revenue earned from licensing our intellectual property to third parties increased to $30.8 million in 2007 from $10.9 million in 2006, primarily related to our January 2007 release of Grand Theft Auto: San Andreas for the PS2 and the July 2007 release of Grand Theft Auto: Liberty City Stories for the PSP and PS2 in Japan. We recognize substantially higher gross profit margins on revenue earned in connection with licensing our products.

Revenue earned outside of North America accounted for approximately $239.9 million in 2007 compared to $305.1 million in 2006. The year-over-year decrease was primarily attributable to a decrease in sales of The Elder Scrolls IV: Oblivion and Grand Theft Auto: Liberty City Stories from the prior year. Foreign exchange rates benefited revenue by approximately $18.7 million in 2007.

Distribution revenue associated with software sales for next-generation platforms increased $23.3 million, which reflected the releases of PS3 and Wii hardware in the first quarter of 2007 and the continuing increase in the installed base of the Xbox 360. Next-generation software also has higher price points than their predecessor products. We expect to see increases in sales for next-generation platforms as the installed base of the hardware continues to grow. In addition, sales of hardware increased $7.9 million, or 8.4%, due to the introduction of the PS3 and Wii systems. The increase in net revenue was partially offset by a decrease in prior-generation software sales of $14.8 million in 2007 as a result of the continued decline in sales volume and average selling price of value and front-line software titles as the gaming industry transitions to next-generation platforms. We also continue to see increased competition in the value software market. In addition, we experienced a decline in sales of our PC products of $10.0 million, or 18.5%. Foreign currency exchange rates increased net revenue by approximately $2.8 million in 2007. Gross profit margins remained relatively consistent compared to the prior year.

We maintained a consistent level of selling and marketing expense on a percentage of net revenue basis in 2007. The decreased expense level compared to the prior year reflects larger expenditures in 2006 for marketing and promotion for our Grand Theft Auto products. We also spent $2.5 million less in marketing at the annual E3 trade show event in 2007 as a result of the industry wide downsizing of the event compared to past years.

General and administrative expenses decreased due to lower stock-based compensation expense, reflecting cost savings associated with the departure of our former management team. We also achieved approximately $2.8 million of cost savings in 2007 as a result of our 2006 studio closures, for which we recorded $1.9 million of severance and lease termination expenses in 2006. The 2006 year also included $2.3 million related to the relocation of our international publishing headquarters to Geneva, Switzerland. Higher expenses related to information technology system improvements of approximately $2.6 million in 2007 offset the decrease in our 2007 general and administrative expenses discussed above.

General and administrative expenses for 2007 and 2006 also included occupancy expenses (primarily rent, utilities and office expenses) of $14.9 million and $15.2 million, respectively, related to our development studios.

In 2006, we recorded approximately $3.5 million of severance expense relating to the termination of research and development employees resulting from studio closures. The 2006 studio closures resulted in a reduced number of development personnel and cost savings of approximately $4.0 million in 2007. In addition, we realized higher software capitalization rates as a result of increased development work in progress for next-generation platforms.

Business reorganization and related expenses include employee termination costs of $10.1 million, primarily as a result of severance for former management and consolidating our international operations. We recorded $2.9 million of relocation and lease termination costs related to the relocation of our 2K headquarters to California. In total, we spent $4.4 million on professional fees related to the replacement of prior management and the election of five new directors to our Board of Directors at our annual stockholders' meeting (rather than the six incumbent directors nominated and recommended by our incumbent Board of Directors), $2.0 million of which was investment banking fees incurred by prior management to consider the possibility of presenting alternative proposals to our stockholders, including a potential sale of the Company. We expect to incur approximately $3.0 million of reorganization expenses in fiscal 2008.

In 2006, we recorded an impairment charge of $8.1 million related to goodwill and fixed assets at our Joytech subsidiary, a manufacturer and distributor of video game accessories, which operates within our publishing segment. The impairment charges reflected a decline in the fair value of Joytech's business resulting from increased competition and a decline in the price and sales volume of prior-generation accessories due to weaker market conditions and the ongoing transition to next-generation platforms. Additional impairment charges of approximately $7.5 million were related to the write-off of certain trademarks, acquired intangibles, investments and fixed assets. These write-offs were based on management's assessment of the future value of these assets, including future business prospects and estimated cash flows to be derived from these assets.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Three Months ended April 30, 2008 compared to April 30, 2007

Our increase in net revenue primarily reflects higher sales of titles from our Grand Theft Auto franchise primarily due to our release of Grand Theft Auto IV on April 29, 2008. Total revenue generated from our Grand Theft Auto titles was $336.5 million higher in the 2008 period. In addition, net revenue from our Bully franchise including our release of Bully: Scholarship Edition in the second quarter of 2008, was $21.3 million higher in the 2008 period. Partially offsetting the increase in net revenue was a decrease of $11.2 million in net sales of Ghost Rider released in the second quarter of 2007 and a decrease in sales of peripherals of $4.7 million in 2008 reflecting the sale of the Joytech accessories business in the fourth quarter of 2007.

Sales on current generation platforms accounted for approximately 88.9% of our total net publishing revenue in the second quarter of 2008. Xbox 360 and PS3 software sales in the second quarter of 2008 increased from the same period in 2007 by $191.9 million and $159.3 million, respectively, primarily due to the release of Grand Theft Auto IV . Wii software sales accounted for $31.3 million of our net publishing revenue in the 2008 period, reflecting the strong sales of Bully: Scholarship Edition and Carnival Games . Sales on the prior generation platforms decreased by $35.3 million or 55.8%, mainly reflecting lower sales of Grand Theft Auto: Vice City Stories, which was released in the second quarter of 2007. We expect sales on the prior generation platforms to continue to decline as a result of the ongoing hardware transition and have therefore reduced the number of titles in development for these platforms. We have reduced pricing on several of our software titles for the prior generation platforms as the current generation hardware installed base grows. PC sales decreased by $9.4 million, primarily due to decreased sales of The Elder Scrolls IV: Oblivion and The Elder Scrolls IV: The Shivering Isles , which were released in the second quarter of 2006 and 2007, respectively.

Gross profit as a percentage of net revenue increased significantly due to the release of Grand Theft Auto IV in the second quarter of 2008, as this title is internally developed and the intellectual property is wholly-owned. Product costs decreased as a percentage of net revenue, primarily due to manufacturing discounts we received related to the release of Grand Theft Auto IV. Internal royalties increased as a percentage of net revenue, reflecting increased sales of our Grand Theft Auto titles.

Excluding the impact of Grand Theft Auto IV , product costs decreased as a percentage of net revenue, primarily due to a $5.2 million impairment charge recorded on intellectual property in the second quarter of 2007. Software development costs and royalties as a percentage of net revenue were relatively unchanged from period to period. License costs increased as a percentage of net revenue due to higher royalty expense related to our Major League Baseball license.

Revenue earned from licensing our intellectual property to third parties decreased to $4.0 million in the second quarter of 2008 from $5.9 million in the 2007 period, primarily due to our January 2007 release of Grand Theft Auto: San Andreas for the PS2 in Japan, partially offset by our December 2007 release of Grand Theft Auto: Vice City Stories for the PS2 and PSP in Japan.

Revenue earned outside of North America accounted for approximately 34.9% of our net revenue in the second quarter of 2008 compared to 27.5% in the 2007 period. This increase was primarily attributable to our simultaneous global release of Grand Theft Auto IV for the Xbox 360 and PS3. Foreign exchange rates increased revenue by approximately $14.0 million in the second quarter of 2008.

Net revenue associated with software on current generation platforms increased $4.6 million, reflecting increased availability of the current generation platforms, especially the Wii, partially offset by a decrease in sales of prior generation software of $3.0 million, as consumers continued to shift their spending to current generation software. In addition, we experienced an increase in PC sales of $4.0 million. Foreign currency exchange rates increased net revenue by approximately $4.2 million in the second quarter of 2008, primarily as a result of a weakening U.S. dollar.

Selling and marketing

Selling and marketing expenses increased $17.8 million for the three months ended April 30, 2008 as compared to the same period in 2007 primarily due to:

i.
an increase in marketing expense of $12.7 million, mainly for the releases of Grand Theft Auto IV and Bully: Scholarship Edition in the second quarter of 2008; and

ii.
a $4.3 million increase in personnel costs, mainly resulting from higher severance and incentive compensation expense in our European territories.


General and administrative

General and administrative expenses were $49.2 million in the three months ended April 30, 2008 as compared to $40.5 million in the three months ended April 30, 2007, an increase of $8.7 million. This increase was primarily due to:

i.
$3.4 million of legal and investment banking expenses related to the Offer;

ii.
$3.2 million of stock-based compensation expense related to the management agreement with ZelnickMedia;

iii.
an increase in bad debt expense of $3.9 million as a result of our increase in sales and the related accounts receivable balances; partially offset by

iv.
$2.0 million of settlement expense recorded in the three months ended April 30, 2007 related to the consumer class action suit for Grand Theft Auto: San Andreas.

General and administrative expenses for the three months ended April 30, 2008 and 2007 also includes occupancy expense (primarily rent, utilities and office expenses) of $3.7 million and $3.9 million, respectively, related to our development studios.

Research and development

Research and development expenses increased $2.9 million for the three months ended April 30, 2008 as compared to the same period in 2007 primarily due to:

i.
a $1.4 million increase in personnel expense, mainly for payroll related expenses in our European territories; and

ii.
a $0.8 million increase in legal expense related to an accrual for an ongoing legal matter.

Business reorganization and related

Business reorganization and related expenses were $0.9 million in the three months ended April 30, 2008, as compared to $9.0 million in the three months ended April 30, 2007, a decrease of $8.0 million. This decrease is primarily due to:

i.
$5.2 million of severance expense for the termination of employment agreements with our former Chief Executive Officer and Chief Financial Officer in April 2007; and

ii.
$3.8 million of professional fees related to the change in a majority of the members of our Board at our Annual Meeting and the subsequent replacement of prior management, $2.0 million of which was investment banking fees incurred by prior management to consider the possibility of presenting alternative proposals to our stockholders, including a potential sale of the Company in March 2007; partially offset by

iii.
$0.9 million of lease termination, relocation and employee termination costs incurred as a result of the consolidation of certain of our operations in the three months ended April 30, 2008.

We expect to incur additional reorganization expenses of approximately $3.0 million through the remainder of fiscal 2008.

Provision for income taxes. For the three months ended April 30, 2008, income tax expense was $4.1 million compared to income tax expense of $1.5 million in the second quarter of 2007, an increase of $2.6 million primarily attributable to earnings in foreign jurisdictions. Our effective tax rate differed from the federal, state and foreign statutory rates primarily due to the reversal and recording of valuation allowances in the respective periods. Accordingly, we decreased our valuation allowance by approximately $24.5 million in the three months ended April 30, 2008 and increased our valuation allowance by approximately $18.9 million in the three months ended April 30, 2007.

We are regularly audited by domestic and foreign taxing authorities. Audits may result in tax assessments in excess of amounts claimed and the payment of additional taxes. We believe that our tax positions comply with applicable tax law, and that we have adequately provided for reasonably foreseeable tax assessments.

Net income (loss) and income (loss) per share. For the three months ended April 30, 2008, net income was $98.2 million, compared to a net loss of $51.2 million in the 2007 period. Net income per share for the three months ended April 30, 2008 was $1.31 and $1.29 for basic and diluted, respectively, compared to a net loss per share of $0.71 for the three months ended April 30, 2007. Weighted average shares outstanding increased compared to the prior period, mainly due to an increase in the exercise of stock options as a result of a higher average stock price in the 2008 period and the issuance of 1,490,605 shares of restricted stock in connection with our acquisition of Illusion Softworks.

CONF CALL

Cindy Buckwalter

Good afternoon. Thank you all for joining us today. Today’s call will be led by Strauss Zelnick, Chairman of Take-Two; Ben Feder, our CEO; and Lainie Goldstein, our CFO. We are also joined by Seth Krauss, our Chief Legal Counsel. Our team will be available to answer your questions during the Q&A session following our prepared remarks.

Before we begin, I would first like to quickly review our Safe Harbor statement by reminding everyone that the statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors, including the risks related to Electronic Arts’ tender offer. These important factors are described in our filings with the SEC, including our 10-K for the fiscal year ended October 31, 2007, and our 10-Q for the first quarter ended January 31, 2008. These filings may be obtained from our website at www.taketwogames.com or by contacting the SEC.

Now let me turn the call over to Strauss.

Strauss Zelnick

Thanks, Cindy and good afternoon, everyone. Thanks for joining us. We are pleased to report very strong second quarter results that beat both our own guidance and analyst expectations, continuing the trend of the prior three quarters. Based on our excellent results year-to-date, as well as our positive outlook for the balance of fiscal 2008, we’ve increased our full year guidance for the second quarter this year.

Our performance clearly demonstrates that Take-Two is creating significant stockholder value, primarily through the efforts of our Rockstar and 2K labels, who are producing the best interactive entertainment on the market today.

I should note that it’s early days yet. We are only one year into the revitalization of this company. We still have much more to achieve. That said, I am most pleased with the progress we are making so far in transforming Take-Two into the most creative, the most innovative, and the most efficient company in our industry.

Clearly the major factor in our performance this quarter was Grand Theft Auto 4. While the tremendous consumer, critical, and media acclaim for the game speaks for itself, I would like to take this opportunity to congratulate the entire Rockstar Games team on this stunning achievement. It’s been widely reported that GTA 4 had the largest debut of any entertainment product in history. Now, we always knew GTA 4 would be a triumph and it success has blown away not only our own expectations but those of its millions of fans as well.

We have proven our ability to create powerful entertainment franchises whose value extends beyond the traditional interactive entertainment market. This is illustrated by the deal we announced last month for a Bioshock feature film to be produced and directed by Gore Verbinski, director of Pirates of the Caribbean. Our partnership with top film industry talent speaks volumes about the value we are creating at Take-Two.

The fact is our industry is now a source of entertainment that can equal or surpass both in consumer appeal and economic strength more established media, such as film, television, music, or books. This reaffirms our enormous confidence in the future potential of our industry in general and Take-Two in particular.

In addition to the successes on the creative front, Take-Two has also executed on initiatives to expand our development talent and our geographic reach. Ben is going to talk about these in a few moments.

Before I turn the call over to Ben, I would like to give you a brief update on the company’s efforts to maximize stockholder value. As you know, at the time of EA’s highly conditional, unsolicited tender offer, we emphasized the board’s commitment to explore all strategic alternatives, including remaining independent and pursuing business combinations with third parties. We said we were willing to begin formal discussions with interested parties on April 30th following the launch of Grand Theft Auto 4 and we are actively engaged in that process now.

In fact, we have had and continue to have formal discussions with a number of interested parties. It wouldn’t be appropriate to comment further on the status of our efforts at this time.

Now Ben will provide an overview of the quarter’s results and highlight some of the initiatives we are pursuing to continue to grow the business and realize its exciting potential.

Benjamin Feder

Thanks, Strauss. We are extremely pleased with our second quarter results. I will review some of the financial highlights and then Lainie will provide further detail in a few moments.

Net revenue for the quarter was $540 million, more than double the $205 million we reported in Q2 last year. Earnings on a non-GAAP basis were $1.52 per share, reversing net losses in the year-ago period in the first quarter. Based on our strong Q2 results and favorable outlook on the balance of the year, we are raising our fiscal year 2000 guidance with -- excuse me, $1.4 billion to $1.5 billion in revenue and non-GAAP EPS of $1.65 to $1.85.

The company’s cash position has increased from Q1 by approximately $18 million and we’ve paid down $20 million of our credit line. Our cash balance will be significantly higher by the end of Q3 as the substantial orders we’ve received for GTA 4 late in the second quarter convert to cash.

We are very proud of our accomplishments in Q2. I would like to thank everyone at Rockstar Games as well as the teams at Jack Of All Games and the entire Take-Two team, all of whom contributed to the successful launch of GTA 4.

GTA 4’s performance in the marketplace has continued to be extremely strong post-launch. As of May 31st, we’ve sold over 11 million units into retail channels worldwide, with approximately $8.5 million of those units sold through to consumers. The game has broad global appeal and is the best-selling interactive entertainment title in North America and has broken sales records in Europe.

It is also a cultural phenomenon. The New York Times, L.A. Times, Wall Street Journal, Variety, Newsweek and countless other publications have lauded the game’s breathtaking technological and artistic achievements. Even national public radio remarked on how much they enjoyed listening to public liberty radio in the game.

On the commercial side, GTA 4 earned a Guinness world record for the highest revenue generated by an entertainment product in 24 hours. And by one account, GTA 4 single-handedly propped up the U.K. economy by helping retail sales for April and exceeding expectations.

GTA 4 should continue to deliver value for Take-Two well into the future. For example, GTA San Andreas sold 12 million units in the first four months through January 2005 and went on to sell another 9.5 million units since that time. This is proof positive of the longevity of the extraordinary franchise, a track record that we expect to be reflected in the performance of GTA 4.

I would like to comment on a few other factors that contributed to the stronger-than-expected results in the second quarter. We are very, very pleased of the continued strength of Carnival Games and other catalog titles. We are continuing to see the positive impact of our cost reduction initiatives.

I also want to emphasize -- the actions we have taken during the second quarter to broaden the product portfolio, expand our development resources and extend the reach of our intellectual property into the Asian market. Each of these initiatives is intended to strengthen our capacity to deliver profitable growth and stockholder value.

Turning for a moment to our product portfolio, Take-Two's pipeline today is the strongest, most diverse, and the most exciting in the company’s history. All of our labels -- Rockstar, 2K Games, 2K Play, and 2K Sports -- are producing some of their best and most creative work ever. We are developing new versions of many of our strongest franchises, as well as a number of new brands.

While the full list of titles in progress is too extensive to mention, I will highlight a few that are particularly exciting for the summer and the fall of fiscal 2008. Rockstar’s lineup for the second half includes Midnight Club Los Angeles for Xbox 360 and PS3 and Midnight Club L.A. Remix for PSP. 2K Games will release the highly anticipated Sid Meier Civilization Revolution for Xbox 360, PS3, and DS. The successful Bioshock franchise will be extended with a new version for PS3. We’ve sold over 2.2 million units of this blockbuster title on Xbox 360 and PC to date.

Continuing the growth of our casual games business, 2K Play will reveal Carnival Games for DS and Carnival Games mini-golf for Wii. Carnival Games for the Wii has sold over 1.5 million units so far and the title is still going strong at retail. The DS title is shipping in July and is receiving strong support from Nintendo, who is currently offering it on their demo download stations in stores, and are also planning to have demos of the title place on their in-store kiosks.

2K Sports has an extensive roster, including Top Spin 3 for PS3, Wii, Xbox 360 and DS, and Don King Presents Prizefighter for Xbox 360, Wii, and DS.

We are also pleased MLB -- excuse me; we’ll also release MLB Power Pros 2008 for Wii, PS2, and DS, as well as NHL 2K9 and NBA 2K9 for multiple platforms.

Let’s look for a moment at our fiscal 2009 lineup and we’ve already announced some of our key titles -- Bioshock 2, Mafia 2, Borderland, and we’ve also announced today that we will release the first installment of episodic content for GTA 4 for Xbox 360 in the first quarter of fiscal 2009. We think the 2009 release of this highly anticipated episode will provide better balance among our top titles and further strengthens our fiscal 2009 release schedule, and we’ll have more to say about our 2009 lineup in the coming months.

We’ve continued to make investments to expand our creative resources and extend our global market presence. Since we spoke with you in March, we enhanced our world-class development capabilities by forming Rockstar New England through the acquisition of Mad Dog Software. The team at Mad Dog is extremely talented and accomplished, and most recently worked with Rockstar on Xbox 360 version of the critically acclaimed Bully Scholarship Edition.

We are also actively targeting opportunities in the fast-growing Asia market where we already have a solid foothold thanks to the global popularity of our products. Recently we named Hubert Larenaudie, formerly of Electronic Arts and Vivendi Universal Games, to the newly appointed -- newly created position of President for Asia. Hubert will be establishing an office in Singapore as the focal point for our Asia operations. His track record of building leading market positions in South Korea, China, Japan, Taiwan, Southeast Asia, and his experience in growing an online games business will be important to our efforts to build critical mass in the Asia-Pacific region.

We have several priorities in the Asia-Pacific market. In addition to expanding distribution in the region for our products and developing a strong presence in Japan, we also intend to establish an online game operation with particular focus on China and Korea. We are confident in Take-Two's ability to achieve growth in Asia and we are proud to have attracted an executive of Hubert’s caliber to help leverage the opportunities we have at Take-Two.

I want to thank our employees for remaining focused during what could have been a very distracting time on developing, marketing, and selling great interactive entertainment and driving value for our stockholders. We are very pleased with 2K’s -- excuse me, with Take-Two's strong performance in the first half of 2008. We are extremely confident in the future of our business.

Take-Two is delivering on the potential we saw when we joined the company only a year ago. We are continuing to invest in great products, expanded creative resources, and a global market presence.

I would like now to turn the call over to Lainie.

Lainie Goldstein

Thanks, Ben and good afternoon, everyone. I will be covering several topics today. First a review of second quarter results; second, our outlook for fiscal 2008; and third, our guidance for the third and fourth quarter. Let’s look at our Q2 results.

Net revenue was $540 million compared with $205 million a year ago. Non-GAAP net income was $115.4 million compared to a non-GAAP net loss of $29.2 million last year, with earnings per share of $1.52 compared to a loss of $0.41 last year. Please see today’s press release for a reconciliation of our non-GAAP to GAAP numbers.

We are really pleased that we are exceeding our guidance for our fourth quarter in a row. Sales of Grand Theft Auto 4 surpassed our expectations and was the primary reason for our better than expected performance.

Our GAAP results for the second quarter were net income of approximately $98.2 million or $1.29 per share, compared with a net loss of $51.2 million or $0.71 per share in the second quarter of 2007.

Our GAAP results included $12.4 million in stock-based compensation expense and a total of $4.7 million in expenses related to professional fees and legal expenses related to unusual matters, as well as business reorganization costs. Professional fees related to the EA tender offer were $3.4 million of the $4.7 million total.

Our leading title in Q2 was Grand Theft Auto 4, which launched worldwide on April 29th. Other top titles in the quarter were Major League Baseball 2K8, Bully Scholarship Edition, Carnival Games, and Grand Theft Auto: San Andreas.

Jack Of All Games business also grew, led by strong current generation hardware and software sales, especially the Wii.

In looking at our consolidated results, our non-GAAP gross margin for the quarter was 4.2% compared to 25.1% last year. This is primarily due to our revenue mix as publishing was 90% of total revenue and our high margin, internally owned and developed Grand Theft Auto 4 title was a significant percentage of our publishing revenue.

Our split between North America and international revenue was 65% to 35% in Q2. If you back out sports in our distribution business and look at this number for the last 12 months, our North America international revenue split was about 60% to 40%, compared to about 55% to 45% for the same 12 month period a year ago.

Non-GAAP operating expenses in the second quarter were approximately $108 million, up from last year’s second quarter for the following reasons. Sales and marketing expenses accounted for the largest increase in operating expenses year over year, mainly due to the launch of Grand Theft Auto 4 and Bully Scholarship Edition this year. The G&A expenses increased compared to last year due primarily to increased incentive compensation and professional fees and a $3.9 million increase in our provision for bad debt expense. These increases were somewhat offset by approximately $2 million of cost saving initiatives. Our tax expense was primarily for our earnings in our international territories.

Moving on to our balance sheet, at the end of Q2 we had approximately $73 million in cash and $60 million of borrowings on our credit line. Based on our significant GTA 4 sales, we expect to begin to generate cash this quarter as receivables convert to cash.

Our accounts receivable reserve was about $67 million at the end of the quarter, which represented approximately 16% of gross receivables.

Inventories at the end of the quarter were approximately $92 million, up from the same period last year due to the significantly higher business volume.

The increase in our software development costs and licenses is primarily related to our key titles planned for release over the next 12 to 18 months. We currently have approximately 33 titles in various stages of development.

Now to our outlook for fiscal 2008 -- we are raising the guidance that we previously provided in March to reflect the better than expected performance of Grand Theft Auto 4, partially offset by the move the first episodic content for GTA 4 for Xbox 360 from fiscal 2008 into fiscal 2009. Additionally, we no longer anticipate reaching profitability in our 2K Sports business in fiscal 2008 and I will discuss that in more detail in a few minutes.

We now expect $1.4 billion to $1.5 billion in revenue and $1.65 to $1.85 in earnings per share on a non-GAAP basis. The primary assumptions underlining the guidance are as follows: we expect the net revenue breakdown in our publishing business to be approximately 70% from Rockstar, 15% from 2K Sports, and 15% from 2K Games and 2K Play. While we have previously expected 2K Sports to turn profitable in fiscal 2008, we are currently forecasting a loss in our sports business.

We experienced lower attach rates than we expected on the increased install base of Xbox 360 and PlayStation 3 hardware.

On the expense side, sales and marketing is closely tied to our product releases. We expect a larger marketing spend in absolute dollars in 2008. However, sales and marketing expenses should be relatively stable as a percentage of sale.

R&D expense continues to fluctuate from quarter to quarter based on the products in development. On an annual basis, we expect total R&D expenses to increase about 45%, primarily due to the acquisition of Illusion Software, Mad Dog, and continued investment in our development studios.

We are seeing a significant portion of the expected cost reductions in the G&A area, although the annual benefit of our cost savings initiatives won’t be realized until fiscal 2009. Offsetting the cost efficiencies, our 2008 G&A levels reflect increased professional fees. In addition, we’ll have higher employee incentive compensation expense based on the company’s strong performance and we established a $4 million reserve for bad debt expense in Q2.

Overall, we see 2008 G&A levels increasing by approximately 7% in absolute dollars compared to 2007.

Depreciation and amortization should increase modestly and based on our current forecasts, we anticipate our non-GAAP effective tax rate to be about 10% to 12% in fiscal 2008, and for Q3 and Q4, we expect to show a small tax provision, primarily for our international business.

We are issuing guidance today for the third and fourth quarters. For Q3, we expect non-GAAP net income per share in the range of $0.45 to $0.55 on $325 million to $375 million in revenue. This excludes stock-based compensation expense of $0.17 per share and expenses related to unusual matters and reorganization costs of $0.13 per share.

Our Q3 key releases are Sid Meier Civilization Revolution, Top Spin 3, Don King Presents Prizefighter, and Carnival Games on the DS.

Let me discuss some additional data points on our Q3 outlook. We expect our revenue mix to remain heavily weighted towards publishing due to the launch of the Q3 titles I mentioned and the continued strength of Grand Theft Auto 4.

While we expect to see continued strong sales of GTA 4 in Q3, our gross profit margins will decrease slightly due to the launch of several new 2K titles in Q3, and for the full year we expect gross margins of approximately 36%.

On a non-GAAP basis, we expect overall operating expenses to trend up slightly in Q3 as compared to Q2, primarily driven by higher expense for the continued support of Grand Theft Auto 4 and marketing preceding the launch of Midnight Club Los Angeles, as well as our 2K titles.

R&D expense will also increase from Q2 due to the acquisition of Mad Dog. Lower capitalization rates following the release of GTA 4 and a continued investment in our internal studios. These increases will be partially offset by a decrease in G&A expense due to the continued implementation of our cost savings initiatives and the bad debt reserve that was set up during Q2.

For Q4, our key releases are Midnight Club Los Angeles, Bioshock for PlayStation 3, NBA 2K9, NHL 2K9, and Carnival Games Mini-Golf for the Wii.

For Q4, we expect non-GAAP net income per share in the range of $0.10 to $0.20 on $300 million to $350 million in revenue. This includes stock-based compensation expense of $0.18 per share and expenses related to unusual matters and reorganization costs of $0.01 per share.

Our Q4 releases are more broadly distributed among the labels and include our NBA and NHL titles, so we expect gross margin -- gross profit margin to decrease into the low 30s in that quarter.

On a non-GAAP basis, we expect overall operating expenses relatively flat in Q4 as compared to Q3.

Selling and marketing expenses are increasing slightly, primarily driven by higher marketing spend for the continued support of Grand Theft Auto 4, the launch of Midnight Club Los Angeles, as well as the launch of our key sports and other 2K titles.

This increase should be offset by several factors. G&A expense will decrease slightly from Q3 due to our continued cost-savings initiatives and we also expense R&D expense to trend down slightly from Q3 as we see our capitalization rates increase in Q4.

Looking ahead, we are building a strong lineup for fiscal 2009 that will include sequels to some of Rockstar’s Triple A brand and episodic content for Grand Theft Auto 4 and Xbox 360. 2K Games key Triple A titles will include Borderlands, Mafia 2, Bioshock 2, and 2K Sports will deliver their recurring sports titles. 2K Play will publish additional Nick Jr. products under their agreement with Nickelodeon. We’ll be expanding our downloadable content as well as other ancillary revenue streams.

We also expect to see growth in the Asia-Pacific market as a result of our new initiatives in that region.

Fiscal 2009 will also reflect the first full year of our cost savings initiatives and we are very optimistic about our future and the opportunities to further develop shareholder value.

At this point, I will turn the call back to Strauss.

Strauss Zelnick

Thanks, Lainie. To summarize, Take-Two's performance for the first half of fiscal 2008 clearly shows the strong results this company is capable of producing and demonstrates our potential for continued value creation. With our diverse portfolio of popular franchises, unparalleled creative talent, and a vastly improved operational and financial picture, Take-Two is in a unique position to capitalize on the opportunities presented by the current industry cycle.

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