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Eidos PLC – ‘20-F’ for 6/30/04

On:  Thursday, 12/23/04, at 6:47am ET   ·   For:  6/30/04   ·   Accession #:  1021231-4-856   ·   File #:  0-28994

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/23/04  Eidos PLC                         20-F        6/30/04    6:1.9M                                   St Ives Burrups/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML   1.13M 
 2: EX-4        Instrument Defining the Rights of Security Holders  HTML    157K 
 3: EX-4        Instrument Defining the Rights of Security Holders  HTML    238K 
 4: EX-12       Statement re: Computation of Ratios                 HTML     11K 
 5: EX-12       Statement re: Computation of Ratios                 HTML     11K 
 6: EX-13       Annual or Quarterly Report to Security Holders      HTML      8K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

(Mark One)

	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ________________

Commission file number 000-28994

(Incorporated with limited liability in England and Wales with registered number 2501949)
(Exact name of Registrant as specified in its charter)

England and Wales
(Jurisdiction of incorporation or organization)

Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London, SW19 3RU
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.
N/a

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
N/a

As at June 30, 2004, there were outstanding 3,493,276 American Depositary Shares and 142,002,471 Ordinary Shares of the Company (including Ordinary Shares underlying the outstanding American Depositary Receipts)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes                                No

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17                               Item 18

Cautionary Statement with Respect to Forward Looking Statements

Certain statements made in this Annual Report on Form 20-F with respect to the plans, strategies and beliefs of Eidos plc (“the Company”) and its consolidated subsidiaries (collectively with the Company, “the Group”) and other statements that are not historical facts are forward-looking statements (as that term is defined in the United States Private Securities Legislation Reform Act of 1995) that involve risks and uncertainties because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements including, without limitation, general economic conditions in the Group’s markets, particularly levels of consumer spending; exchange rates, particularly between the pound sterling and the U.S. dollar, in which the Group makes significant sales; and the Group’s ability to continue to win acceptance of its products, which are offered in highly competitive markets characterized by continuous new product introductions, rapid developments in technology and subjective and changing consumer preferences (particularly in the entertainment business); and other factors identified under “Item 3 Key Information – Risk Factors” in this report.

The Company undertakes no obligation to update any forward-looking statements contained in this Annual Report on Form 20-F, whether as a result of new information, future events or otherwise. No information contained in this Annual Report constitutes or shall be deemed to constitute an invitation or otherwise to deal in Ordinary Shares or ADR’s of Eidos plc. The price of securities and income derived therefrom can go down as well as up.

TABLE OF CONTENTS

3

PART I

ITEM 3 – KEY INFORMATION

Introduction

The Company is one of Europe’s largest developers and publishers of entertainment software. The Group’s primary focus is on the development of its own content through its internal development resources, augmented by relationships with external development studios. The Group has a broad based publishing portfolio built around key franchises such as Tomb Raider, Championship Manager and Hitman, and original titles that it believes have franchise potential. Tomb Raider is one of the most successful video game franchises in the world owned by an independent publisher with total sales currently exceeding 31 million units.

Change of Year End

In 2002, the Group changed its year end from March 31 to June 30. Eidos filed an annual report on Form 20-F for the year ended March 31, 2002 and a transitional report on Form 20-F for the three months ended June 30, 2002.

Selected Financial Data

The following selected consolidated financial data should be read in conjunction with ‘‘Item 5. Operating and Financial Review and Prospects’’ and the consolidated financial statements and other financial information included in Item 8. The Group prepares its financial statements in accordance with accounting principles generally accepted in the United Kingdom (“U.K. GAAP”), which differs in certain material respects from accounting principles generally accepted in the United States of America (“U.S. GAAP”). These differences have a material effect on net income and shareholders’ equity and are described in Note 32 of the notes to the consolidated financial statements of the Company included in Item 8 of this report.

The selected consolidated financial data presented below for the Company in accordance with U.K. GAAP for the years ended March 31, 2002, the three months ended June 30, 2002 and the years ended June 30, 2003 and 2004, and at June 30, 2003 and 2004 are derived from the audited consolidated financial statements included elsewhere in this report.

The selected consolidated financial data presented below for the Company in accordance with U.K. GAAP for the years ended March 31, 2000 and 2001 and at March 31, 2000, 2001 and 2002 are derived from audited financial statements of the Company not included in this report.

The selected consolidated financial data presented below for the Company in accordance with U.S. GAAP are derived from the Company’s audited financial statements.

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U.K. GAAP

Consolidated Statement of Operations Data:

Consolidated Balance Sheet Data:

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U.S. GAAP

Consolidated Statement of Operations Data:

Consolidated Balance Sheet Data:

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Exchange Rates

The following table sets forth certain information with respect to the Noon Buying Rate for Pounds Sterling expressed in U.S. Dollars per pound sterling. These translations should not be construed as a representation that the Pound Sterling amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at such rate. Such rates are not used by the Company in the preparation of its Consolidated Financial Statements included elsewhere herein.

On September 15, 2004 the Noon Buying Rate was $1.77 for each £1.00.

Risk Factors

In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating the Group and its business.

Your particular attention is also drawn to the ‘‘Cautionary Statement with Respect to Forward-Looking Statements’’ on the cover page of this report.

Changing product platforms and formats may lead to consumer uncertainty and reduced demand.

The entertainment software market has evolved rapidly in recent years, primarily as a result of significant ongoing technological development. This is particularly true of the market for proprietary video game hardware and software, which has historically operated on a four to six year cycle, and which has undergone a major transition with the introduction of next generation consoles such as the Sony PlayStation 3 and Microsoft Xbox 2. The introduction of new technologies and new hardware platforms can create instability in the market for entertainment software as a result of consumer uncertainty and fluctuations in demand for software for both old and new hardware systems. This in turn may lead to a deterioration in competitiveness and consequential losses.

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As more technological advances are made, the Group will have to plan its development activities to ensure that it has what it believes to be an appropriate mix of software available to publish as further new hardware platforms or technologies come to market. In order to do this the Group must predict certain key factors over which it exercises little or no control, such as the timing of the launch of new consoles and technologies, the pricing models which the new hardware and software markets will sustain and the levels of market share and penetration which may be achieved. If these projections prove to be inaccurate, the Group might not realize the full potential of its product development program and may fail to recoup its investment in new product development.

The predicted levels of market growth associated with the successful introduction of new hardware platforms may not be achieved.

All of the current range of consoles have now been launched in all of the major commercial markets in which the Group operates. Many commentators continue to forecast a period of significant growth for the industry as these new hardware platforms achieve mass market penetration. There remains however some uncertainty as to what degree these platforms will achieve the forecast levels of sales penetration either collectively or individually. In addition to the above, the next generation of consoles is expected to be launched over the next two years. The Group has invested considerable sums in developing games for these new platforms and the financial performance of the Group may be adversely affected if these platforms do not achieve the degrees of market acceptance that the Group has forecast.

New product releases may fail to achieve market acceptance.

A key aspect of the Group’s strategy is to focus on a relatively small number of high quality entertainment software products based around a number of existing franchise properties and the development of new properties with franchise potential. Due to this dependence on a limited number of products, the Group may be adversely affected if one or more principal entertainment software products fail to achieve anticipated results. Furthermore, whilst the focus on franchise properties, if successful, results in extending product life cycles, there can be no assurance that the Group’s existing franchise titles can continue to be exploited as successfully as in the past. In addition, new products that the Group believes will have potential value as franchise properties may not achieve market acceptance and therefore may not be a basis for future releases.

The Group’s success depends on the timely introduction of new products and new iterations of franchise titles of sufficiently high quality to replace declining revenues from older products. Notwithstanding the Group’s strategy of focusing on franchise and high quality original titles with future franchise potential, few entertainment software products achieve sustained market acceptance and there can be no assurance that new products will be introduced on schedule or that they will achieve widespread market acceptance or generate significant revenues. Due to the highly seasonal nature of the entertainment software market and the substantial revenues that can be generated in the initial months after a new title launch, it is important to choose and achieve an appropriate launch date. A poorly timed launch could affect the potential success of a title and thus the results of the Group. If the Group is unable to develop and publish titles that are capable of achieving market acceptance then it may continue to report operating losses and its prospects for future growth may be limited.

Product release dates are frequently difficult to predict.

The Group’s success depends on the timely introduction of new products to replace declining revenues from older products. The bulk of revenues generated from entertainment software products are generally realized in the first few months following release. Consequently because of the boost to revenues typically associated with the initial shipments of a new product, delaying a product introduction beyond the end of a financial reporting period may have a materially adverse effect on the operating results for that period.

The process of developing entertainment software products such as those offered by the Group is complex and is becoming more so as new hardware platforms and technologies are introduced. In the past, the Group has experienced significant delays in the introduction of certain new products. Whilst every effort has been made by the Group to minimize delays in intended release dates through significant improvements made to the development process, there remains a risk that such delays will occur again in the future and that this might have an adverse impact on the Group’s financial results.

Financial forecasting is difficult.

There is a degree of inherent uncertainty in certain key factors in the forecasting process. These include but are not limited to, the degree to which consumers will continue their interest in both new hardware platforms and the Group’s own new software releases, the timing of new software releases and the general economic conditions in the major markets in which the Group operates. As a consequence, financial forecasting is difficult and there is a risk that the Group may fail to meet its financial forecasts for any given reporting period. There is also a risk that the Group may fail to accurately estimate its working capital requirements.

The Group’s business is highly seasonal.

The market for entertainment software is highly seasonal. As a consequence, any slippage in new product release dates may mean that titles fail to reach their revenue and profitability forecasts and that the Group’s reported results as a whole, may be adversely affected. The Group reports its results at the half year and year-end. Failure to meet new product release dates may also mean that the Group falls short of analysts’ expectations for these reporting periods.

The seasonal nature of the entertainment software industry and the Group’s release schedule, together with the terms on which the Group carries on its business, gives rise at certain times to a pronounced working capital requirement. If the Group does not have access to sufficient working capital during such periods, it may not be able to take full advantage of the commercial opportunities available to it.

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The Group operates in a highly competitive market.

The entertainment software market is highly competitive and is characterized by rapidly changing technology, evolving industry standards and frequent new product introductions. Accordingly, the Group is always at risk from competitors achieving product selection, price, shelf access, marketing support, distribution or other selling advantages. There is a possibility that market forces, over which the Group has little or no control, may result in an unanticipated fall in the retail price of entertainment software. This could have a materially adverse effect on the Group’s projected profit margins.

Unexpected levels of returns may be experienced.

The Group accepts returns and provides markdowns or other credits in the event that a retailer holds excess inventory of the Group’s entertainment software products. When entertainment software is dispatched into the retail channel, the Group establishes reserves, which estimate future potential returns, based on historical return rates, seasonality of sales, retailer and distributor inventories and other factors. The Group believes that it maintains adequate reserves. However there can be no assurance that actual returns or price reductions will not exceed such reserves.

The unauthorized copying and piracy of software is becoming more commonplace.

The entertainment software industry suffers increasingly from the effects of unauthorized copying and piracy. Whilst the Group takes such measures as it believes are appropriate to protect its entertainment software products, it cannot be certain that these measures will be sufficient, and this may result in a loss of revenue.

Complex entertainment software products may contain undetected errors.

Entertainment software products as complex as those offered by the Group may contain undetected errors when first introduced or when new versions are released. The Group has in the past discovered errors in certain of its product offerings after their introduction and has experienced delays or lost revenues during the period required to correct those errors. In particular, the PC hardware environment is characterized by a wide variety of non-standard peripherals (such as sound cards and graphics cards) and configurations that make pre-release testing for programming or compatibility errors very difficult. There can be no assurance that, despite testing by the Group, programming or compatibility errors will not be found in new products or releases after commencement of commercial shipments. Any such errors could result in the loss of, or delay in, achieving market acceptance, which could have a material adverse effect on the Group’s business, results of operations and financial condition.

The effect of on-line gaming on the entertainment software business is difficult to predict.

The Group has adopted a cautious approach to on-line gaming. It does not currently derive any material revenue streams from on-line gaming and it has taken a selective approach to investing in the development of the software and infrastructure required to support on-line gaming. Although the Group believes that the market for online gaming is not sufficiently mature or predictable to warrant significant levels of investment, a number of the Financial Year 2005’s releases will include an online component. It is not clear what effect any increase in the demand for on-line gaming will have on the demand for the conventionally packaged software that the Group currently sells through its existing retail channels.

The Group is dependent upon the protection of its intellectual property and proprietary rights, and could become subject to costly and time-consuming intellectual property litigation.

The Group relies primarily on a combination of patent, copyright, trademark and trade secret laws, employee and third party non-disclosure and non-competition agreements and other methods to protect its proprietary rights. Although the Group is not currently the subject of any intellectual property litigation, which would have a material effect on the Group, there has been substantial litigation regarding copyright, trademark and other intellectual property rights involving computer software companies.

9

There can be no assurance that third parties will not assert infringement claims in the future with respect to current or future products of the Group. Any claims or litigation, with or without merit, could be costly and could require a significant amount of management’s attention and result in adverse determinations, each of which could have a material adverse effect on the Group’s business, results of operations and financial condition. Policing unauthorized use of the Group’s products and trademarks is difficult and, while the Group is unable to determine the extent to which infringement of its proprietary products and marks occurs, software piracy and trademark infringement can be expected to be persistent problems.

The Group relies on hardware manufacturers that are also the Group’s competitors.

The Group publishes products subject to master license agreements with console manufacturers including Sony, Nintendo and Microsoft. Pursuant to these agreements the Group is permitted to use the proprietary information of the manufacturers in connection with the development of products for their platforms.

Although the Group has successfully negotiated agreements for the publication of its products in the past, there can be no assurance that it will be able to obtain publishing rights for all of its products in the future.

Prior to release for manufacturing, the hardware manufacturer has the right to review, evaluate and approve, under standards established by it, each title for its proprietary platform and the right to inspect and evaluate all promotional materials in connection with such title. The inability of the Group to obtain timely approvals or the rejection by the hardware manufacturer of titles or related promotional materials could materially adversely affect its future results of operations or result in variations in operating results if a product scheduled for release in any quarter is delayed.

Changes in international regulatory regimes may restrict the Group’s operations.

Recent developments in the U.S. and elsewhere have led the authorities to consider introducing tighter legislation against so-called ‘‘violent videos’’. Any such regulations could have an impact on the Group, in common with other publishers of video games, which is difficult to measure accurately.

The Group is heavily reliant on key personnel.

The continued success of the Group depends, to a significant extent, upon the performance and contribution of its senior management, together with its ability to continue to attract, motivate and retain highly qualified and creative employees. The loss of key management and employees, or the failure by the Group to attract additional qualified employees or to retain the services of key personnel, could materially adversely affect the Group’s business, results of operations or financial condition.

The results of the Group’s international operations are subject to currency fluctuations.

Currently, the Group’s products and services are marketed in over 35 countries, covering primarily Europe and the U.S. Sales of the Group’s products in such markets are subject to risks inherent in international business activities, including general economic conditions in each country, overlap of differing tax structures, management of an organization spread over various jurisdictions, unexpected changes in regulatory requirements, compliance with a variety of foreign laws and regulations and varying accounts receivable cycles.

The Company publishes its consolidated financial statements in Pounds Sterling. A significant portion of the Group’s assets and net revenues are generated in foreign currencies, primarily Euros and U.S. Dollars. In translating the results of its overseas operations the Group is subject to fluctuations in the exchange rates between pound sterling and the overseas currency.

Accordingly, depreciation in the weighted average value of the overseas currency against pound sterling could decrease reported revenues and appreciation in the weighted average value of the overseas currency against pound sterling could increase reported revenues. As a result of the foregoing, results of operations can be expected to fluctuate significantly from period to period.

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World events.

Events such as the terrorist attacks of September 11, 2001 may trigger un-foreseen economic conditions and cause the demand for computer entertainment software to fluctuate in an un-predictable manner.

Our stock price has been volatile and may continue to fluctuate.

As a result of the factors discussed in this report and other factors that may arise in the future, the market price of our Ordinary Shares historically has been, and may well continue to be, subject to fluctuations. These fluctuations may be due to factors specific to us, to changes in market estimates, or to factors affecting the computer, software, Internet, entertainment, media or electronics business.

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ITEM 4 – INFORMATION ON THE GROUP

History and development of the Group

The legal and commercial name of the Company, which was incorporated on May 14, 1990 under the laws of England and Wales, is Eidos plc. The Company’s Ordinary Shares are traded on the London Stock Exchange and in the form of American Depositary Shares (each representing one Ordinary Share) are traded on the NASDAQ National Market.

The Company’s registered office is located at Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London SW19 3RU, United Kingdom and its main telephone number + (0) 44 20 8636 3000.

The Group develops and publishes advanced entertainment software products.

The Group was formed in May 1990 to develop video editing systems and subsequently expanded its activities to include developing proprietary, software-based video compression technology to be used in CD-ROM and video telephony applications. Sales of video compression products were not significant, and the Company broadened its strategic focus to include developing and publishing entertainment software. To implement this strategy, the Group effected a number of acquisitions, which resulted in a substantial expansion of the Group’s operations. In October 1995, the Group acquired three entertainment software companies (Domark Group Limited, Simis Limited and The Big Red Software Company Limited) for aggregate consideration, including costs, of £13.8 million. In April 1996, the Group acquired CentreGold plc, an entertainment software company, for consideration, including costs, of £17.6 million. The consideration for each of these acquisitions consisted primarily of newly issued Eidos shares. As contemplated at the time of the CentreGold acquisition, in June 1996 the Company disposed of CentreSoft Limited and PDQ Limited, the distribution arms of CentreGold, for £7.5 million in cash, the net book value of such companies at the date of acquisition by the Group. Subsequently CentreSoft Limited was acquired by Activision, Inc. resulting in an additional £0.5 million deferred consideration recognized in fiscal 1999.

In November 1998 the Group acquired Crystal Dynamics, Inc. for $49.1 million including costs. During the year ended March 31, 2000, the Group acquired 75% and 25% holdings in Proein SL and Pyro Studios SL, respectively. During the same year the Group licensed certain of its video compression technologies to Forbidden Technologies plc, a company formed by one of the Group’s original founders. The Group divested itself of its remaining non core activities during the year ended March 31, 2001 to concentrate on developing and publishing high quality entertainment software.

In June 2001 the Group took its holding in Ion Storm LP to 89.6% of the issued partnership units for a nominal sum. The 89.6% holding has been built up over a series of piece-meal acquisitions for which the fair value of the total consideration paid was $536.

In July 2001 the Group successfully completed a 1 for 3 Rights Issue raising £51.6 million, net of costs, to finance the development of its next generation of video games consoles.

In March 2004, the Group entered into an agreement to acquire the entire share capital of IO Interactive for an initial consideration of £23.0 million, which was satisfied by £21.0 million in cash and £2 million in Eidos shares. Contingent consideration of up to £5.0 million in cash is payable dependent upon the number of new game units released in excess of 2.1 million units per annum over the four year period following completion.

The Group’s future success is dependent upon its ability to develop and publish new entertainment software titles that are capable of achieving widespread market acceptance and driving sustainable growth in revenues and operating profits. The Group currently derives a significant proportion of its revenues from the market for videogames. This market went through a period of transition as consumers waited for the next generation of videogame consoles to be released into the market. In common with many other publishers of entertainment software the Group has experienced fluctuating and un-predictable levels of demand for its titles during this period, which contributed significantly to its poor operating results during the years ended March 31, 2000 and 2001, and the 15 months ended June 30, 2002.

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Acquisitions, investments and disposals in the last three fiscal years

Vision Park Entertainment AB

The Group had a 39.54% investment in Innerloop Technologies AS, an entertainment software developer. On September 1, 2000, the whole of the share capital of Innerloop Technologies AS was acquired by Vision Park Entertainment AG (publ.), conditional upon the subsequent listing of Vision Park Entertainment AB (publ.) in Sweden. As part of the acquisition, the Group’s 39.54% holding was converted at the ratio of 1 to 12 into 585,198 Vision Park shares. Vision Park Entertainment AB (publ.) subsequently listed its share on OM Stockholmborsens O-lista in November 2000.

Within the Group accounts, this investment was carried at nil. In November 2000, the Group sold 206,000 shares in Vision Park Entertainment AB (publ.) for £519,000. The Group sold its remaining shares in October 2001 for £122,900.

Opticom

In 1998, the Group made a series of investments in Opticom for a total of £11.2 million. Opticom is a Norwegian based company listed on the Norwegian stock exchange and is a leader in the research and development of polymer based storage and processing devices and has significant interests in internet technologies. In March 2000, the Group sold the majority of its holding in Opticom for £91.5 million, excluding costs. The Group sold its remaining stake in the company in a series of open-market transactions during November and December 2001, for net proceeds of £11.0 million.

Ion Storm Inc

In June 2001, the Group took its holding in Ion Storm LP to 89.6% of the issued partnership units for a nominal sum. The 89.6% holding has been built up over a series of step acquisitions for which the fair value of the total consideration was $536.

Pyro Studios SL

During the year ended June 30, 2003, the Group increased its joint venture interest in Pyro Studios SL from 25.1% to 26.7% at a cost of £19,000. No additional goodwill was generated.

Sports Interactive Limited

On September 4, 2003, Eidos and Sports Interactive Limited announced an agreement to end their existing relationship for the development of the Company’s highly successful Championship Manager football management series. Eidos agreed to sell its 25% interest in Sports Interactive for a cash consideration of £488,000, generating no profit/loss following the transfer of attributable goodwill from reserves.

IO Interactive A/S

On March 3, 2004, the Company entered into an agreement to acquire the entire issued and outstanding share capital of IO Interactive A/S, a Danish studio responsible, together with the Company, for the development of the highly successful Hitman franchise. The acquisition of a 90% controlling interest was declared unconditional on April 1, 2004 and following the compulsory acquisition of the remaining interest, the Company completed the acquisition on May 4, 2004. The total consideration of £23.0 million was satisfied as to £21.0 million in cash and the issue of 1,511,509 new Eidos Ordinary Shares. A further deferred cash payment (not to exceed £5.0 million) is payable over the four year period ending March 31, 2008, dependent upon the number of new game units released by the studio in excess of £2.1 million units per annum.

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Business Overview

The Group is one of Europe’s largest independent developers and publishers of entertainment software. The Group’s publishing activities date from 1995 when it acquired the Domark Group Ltd with the Championship Manager franchise. The following year it acquired CentreGold Group plc, which included Core Design Limited, the original developer of the Tomb Raider franchise.

Tomb Raider is one of the most successful entertainment software franchises in the world owned by an independent publisher. With six iterations to date, total unit sales currently exceed 31 million. In addition to Tomb Raider, the Group has developed a broadly based publishing portfolio, which includes a number of other key franchise titles such as Championship Manager, Deus Ex and Hitman.

The Group’s market share amongst all independent publishers in the calendar year 2003, based on independent data supplied by ChartTrack in the U.K., GfK in France, Media Control in Germany and TRST in the U.S., was 4% in the U.K., 3% in Germany, 3% in France and 2% in the U.S.

The Group’s core activity of publishing entertainment software has become increasingly orientated towards the creation and development of its own content. Historically, the particular publishing strengths of the Group have been in the action adventure, strategy and sports management genres and the Directors expect this will continue to be the case in the short to medium-term based on the titles currently in development.

The Directors have promoted a ‘‘developer friendly’’ culture within the business and currently the Group has over 400 development staff working within 13 teams in 5 studios, which are wholly-owned or partly-owned. This resource is augmented by an external development programme. Of total sales of £133.9 million in the year ended June 30, 2004, 67% was derived from internally-generated product.

The Group has focused on becoming a pure development and publishing house. Unlike a number of other independent entertainment software publishers, the Group does not seek to own its channel to market since the Directors consider this to be a low margin activity. The Group maintains close contact with the retail channel. In Europe the Group has direct relationships with over 500 retailers operating approximately 17,000 outlets in three countries and in the U.S. with 50 retailers and distributors with approximately 10,600 outlets. Distribution to the retail channel is primarily undertaken through fulfilment houses.

The Group sells its products mainly in the United States and Europe. See Item 8, Note 3 for a full breakdown of revenues and profits by activity and geographic market.

The Group markets its products by targeting the retail and end-user customers through a marketing strategy, which includes retail promotions, public relations campaigns, consumer advertising, web-based marketing and direct marketing.

Retail promotions include sending product information to major industry buyers and selected retail store managers. The mailings include game descriptions, preliminary pricing information, ordering information, product merchandise and available press coverage. The Group also carries out ‘‘co-operative’’ marketing campaigns with major retailers to improve store presence and participate in the retailer’s own advertising. Public relations campaigns include personal visits to magazine publishers, trade show appearances, and weekly and monthly mailings to the video game press, on-line publications, lifestyle and sports press, national dailies and broadcast media.

Consumer advertising generally begins two to three months prior to launch of a product. The advertising may include: print, television, radio, outdoor, on-line advertising, cinema advertising, direct mail, co-marketing ventures and creative packaging. In-store promotions may include videos, window displays, product signage and/or product demonstrations. Current Web exposure is focused on bringing the Group closer to its customers by the provision of technical support on its web-site and by providing samples to stimulate interest in products. In relation to direct marketing, the Group holds a considerable database of customers built from the return of warranty cards. The database is used for profiling exercises and segmented direct marketing campaigns. Campaigns are extended via physical mailings and, wherever possible, electronic mailing. The Group also participates in direct marketing activities using databases built by retailers’ loyalty schemes.

The Group publishes products subject to master license agreements with console manufacturers, including Sony, Nintendo and Microsoft. Pursuant to these agreements the Group is permitted to use the proprietary information of the manufacturers in connection with the development of products for their platforms. The Company considers that the platform license agreements entered into with Sony U.S., Sony Europe and Microsoft are material to the results of the business as revenue from games released on these platforms represented 69% of total revenue in the year ended June 30, 2004.

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Organizational structure

The Company is the holding company of the Group. The Company has the following principal subsidiaries and joint ventures:

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Property, plant and equipment

The Group maintains an aggregate of approximately 230,976 square feet of office and commercial studio space in London and Derby, England, in Hamburg, Germany, in Paris, France, in Copenhagen, Denmark, in San Francisco and Palo Alto, California, and Austin, Texas, U.S., in Tokyo, Japan, in Madrid, Spain and in Sydney, Australia.

Details of the principal establishments of the Group are as follows:

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The principal place of business of each of the above companies is the first relevant address shown above.

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ITEM 5 – OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion of the financial condition and results of operations of the Group (under U.K. GAAP) should be read in conjunction with the Group’s Consolidated Financial Statements and Notes included elsewhere in this report. The following discussion contains forward-looking statements that involve risks and uncertainties. See ‘‘Cautionary Statement with Respect to Forward-Looking Statements’’ at the beginning of this report.

Overview

The Group’s future success is dependent upon it developing and publishing additional entertainment software titles and such titles achieving significant market acceptance. The Group maintains its accounting records and reports its results in Pounds Sterling in accordance with U.K. GAAP. There are material differences between U.K. GAAP and U.S. GAAP (these are discussed in Note 32 of the Consolidated Financial Statements in Item 8).

The Group has experienced, and expects to continue to experience, significant fluctuations in operating results due to a variety of factors including, among others: (i) the timing and success of product introductions; (ii) market acceptance of the Group’s products; (iii) delays in product completion; (iv) higher than expected product returns; (v) projected and actual changes in platforms; (vi) changes in pricing policies by the Group and its competitors; (vii) costs associated with development projects; (viii) development and promotional expenses relating to the introduction of new products or new versions of existing products; and (ix) the size and rate of growth of the consumer software market. In response to competitive pressures, the Group may take certain pricing or marketing actions that could materially adversely affect the Group’s business, results of operations and financial condition. Products are generally shipped as orders are received; accordingly, the Group operates with little backlog. The Group’s expense levels are based, in part, on its expectations regarding future sales, and, as a result, operating results would be disproportionately and adversely affected by a decrease in sales or a failure to meet the Group’s sales expectations. Furthermore, the entertainment software business is highly seasonal. Net revenues vary significantly as a result of new product introductions and other factors. Consequently results of operations can be expected to fluctuate significantly from period to period. See ‘‘Item 3 – Risk Factors – The Group’s business is highly seasonal’’.

The Group has historically recorded a significant proportion of its costs in Pounds Sterling. The Group’s sterling/non-sterling trading profile has not changed significantly from 2003. In the year ended June 30, 2004, 41% of the Group’s total costs (including goodwill amortization) were in sterling (year ended June 30, 2003: 46%) and 59% in currencies other than sterling. As in previous years, a high proportion of turnover, 67% in the year ended June 30, 2004 (year ended June 30, 2003: 66%), was denominated in non-sterling currencies, primarily U.S. Dollars and Euros. The Group reports its results in sterling. As a result, changes in the value of the pound sterling in relation to other currencies will affect the Group’s turnover and operating margins. The impact of future exchange rate fluctuations between the pound sterling and other currencies on the Group’s turnover and operating margins cannot be accurately predicted. Over the past several years, the Group has taken steps to reduce its exposure to currency fluctuation through foreign exchange management. This is aimed at protecting margins and fixing future pound sterling cash flows. In particular, the Group has adopted a policy of hedging against the devaluation of a portion of its short-term foreign currency cash flows using forward contracts and currency swaps issued by the Company’s bankers.

At June 30, 2004, unhedged currency net liabilities totalled £24.7 million (June 30, 2003: £21.3 million) (predominantly U.S. Dollars and Euros), and there were £1.2 million open derivative positions as at this date (June 30, 2003: £nil).

Exceptional Items

Under U.K. GAAP, exceptional items are those material items which derive from events or transactions within the ordinary activities of the entity. There is no concept of “exceptional items” under U.S. GAAP. Under U.S. GAAP, events and transactions that are distinguished by both their unusual nature and their infrequency of occurrence are classified as “extraordinary items”. The exceptional items discussed below do not meet the definition of ‘‘Extraordinary items’’ under U.S. GAAP and therefore would not be separately identified in the U.S. GAAP consolidated financial statements as extraordinary or unusual.

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Year ended June 30, 2004

There were no exceptional items in the year ended June 30, 2004.

Year ended June 30, 2003

Litigation settlement

The Group received a £1.4 million litigation settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to 31 March 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

Year ended March 31, 2002

Exceptional income on sale of investments

The Group disposed of its remaining shareholding in Opticom during the year ended March 31, 2002 realising net proceeds of £11.0 million and a net profit of £8.5 million. This profit was partially off-set by write downs and losses on other disposals of £4.1 million, which occurred following a review of the Group’s other investments in the period.

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Results of Operations (U.K. GAAP)

The following table sets forth the actual selected statements of operations data of the Group as a percentage of turnover for the periods presented:

Consolidated Statements of Operations Data:

Operating Review and Prospects (U.K. GAAP)

Overview

While the results reported for the full year are disappointing, the Company continues to make good progress with its new development methodology and its increased focus of leveraging owned intellectual property. Recognising that a number of game releases did not live up to management’s sales targets (specifically Hitman: Contracts, Commandos 3, Legacy of Kain: Defiance and Whiplash), the Company’s financial performance this year was materially impacted by two key events, both of which occurred in the second half. Firstly, the unexpected softness in the games market, particularly in the US, which started back in May (as illustrated by the 17% year-on-year fall in US games software sales for that month⁽¹⁾. Consequently, the previously anticipated c 700,000 units of re-orders for our biggest title release of the year, Hitman: Contracts, did not materialise. This was despite the game both heading the charts and then maintaining a strong chart position in both Europe and the US from its launch in April. Secondly, in view of the prevailing weakness in the games market, the Board decided in June to defer the launch of the ready-to-release ShellShock: Nam ’67 game until September 2004 to give this new franchise a better opportunity to deliver on its true potential. As a consequence, its operating profit contribution moved out of the 2004 financial year and into the 2005 financial year.

¹  Source: US NPD Data, May 2004

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Back to Contents

Review of Operations

In the year to June 30, 2004, the Group achieved a turnover of £133.9 million (2003: £151.5 million) and recorded a loss after tax of £2.9 million compared to a profit of £19.2 million in the year to June 30, 2003. While the total number of units shipped in both 2003 and 2004 were the same at 12.5 million units, gross margins improved in the year to 62.8% (2003: 59.0%). During the year, and for the first time, the Company had all of its 14 titles (22 sku’s) available for release on schedule. Of these titles, Backyard Wrestling: Don’t Try This At Home; Deus Ex: Invisible War; Championship Manager: Season 03/04 and Legacy of Kain: Defiance, each sold between 500,000 and one million units. In addition, Hitman: Contracts, while performing below management’s expectations, has sold 1.7 million units to date. The period also included a further one million unit sales of Tomb Raider: The Angel of Darkness together with back catalogue sales which represented 15.7% of turnover (2003: 11.0%). The Company continued to make operational improvements throughout the year: the European Development and Publishing divisions were restructured and the Company’s global marketing initiative was refocused on brand management and direction. Investment in R&D increased by 20% to £39.2 million in the year and is expected to continue to increase, reflecting the Company’s commitment to invest in developing top quality titles in future.

Intellectual Property (IP) Management

The Company has again made good progress in its objective of securing owned IP supported by stringent cost and development controls. This is reflected by the improved gross margin which rose to 62.8% (2003: 59.0%). In March 2004, the Company acquired IO Interactive A/S (‘IO’), the Danish studio which, together with Eidos, had been responsible for the development of the highly successful Hitman franchise. The Hitman franchise has now sold over 5.5 million units to date and significantly strengthens our European creative base and development expertise. IO is expected to contribute to the Group’s on-going development of unique IP with plans to release a new franchise title next year. IO’s technology is also playing a key role in the Group’s transition programme to next generation Xbox 2 and PS3 platforms, which is on track. We have brought the development of the Company’s best selling Championship Manager football management game in-house and the improved Championship Manager 5 will release on PC during the 2005 financial year. In Spring 2005, the game will also release on PlayStation 2 for the first time, as well as on Xbox. In addition, Championship Manager will go online through subscription during the second half of the 2005 financial year. We are confident that these advances and new applications will give the successful Championship Manager franchise a new fan base and enable the game to appeal to a wider audience. Our Crystal Dynamics Studio in the US is continuing the development of the next Tomb Raider game which will be unveiled this Autumn and is scheduled for release in the fourth quarter of the 2005 financial year. Following the internal transfer of the Tomb Raider franchise from Core Design to Crystal Dynamics, Core Design has been refocused and restructured. A number of the new concept ideas and pre-production works, for both platform and PlayStation Portable (PSP) application, are being developed in this studio. During the year, the Company continued to derive revenue and leverage value from its own intellectual property. This included a movie deal entered into for Fear Effect (similar to those previously entered into for Tomb Raider and Deus Ex) and a dialogue with various film studios in relation to other products is on-going.

New Media

On October 28, 2003, we announced the creation of a New Media Division, formed to help facilitate the extension of our intellectual property into new markets using a coordinated and strategic approach. The division has since undertaken a number of successful projects bringing our existing products to market through new distribution channels, particularly online, and introducing some of our key brands to new platforms such as mobile phone handsets, new handheld game devices and interactive digital TV. During the year, income from these new platforms has been generated following agreements with AT&T, Bell Canada, China Telecom, Metaboli, Nokia, Sky and Vodafone, among many others. The Company has advanced its owned IP into new applications through new franchise titles scheduled to release in the 2005 financial year, namely 25 To Life, Project: Snowblind and Just Cause, each of which are either wholly or partly online game products. Although the New Media Division is at an early stage of development, it continues to gain momentum and is already making a positive contribution to the Company's financial position.

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The Board

On July 15, 2003, the Company announced that Jeremy Heath-Smith, Development Director of Eidos plc and Managing Director of Core Design Limited, was stepping down from the Boards of both companies with immediate effect. On October 28, 2003, the Company announced that Simon Protheroe would step down from the Eidos plc Board following his appointment as head of the New Media Division and that Jonathan Kemp, European Managing Director, was being promoted to the Eidos plc Board on December 1, 2003.

Our People

In what turned out to be a challenging year, our employees have again exerted great efforts in striving to deliver upon the Company’s objectives. We would like to take this opportunity to recognise their achievements and thank them for their continued dedication and support.

Strategic Review

As we have previously indicated, the entertainment software market continues to evolve and mature with franchise scale and diversity, aligned to financial strength, becoming ever more important. In addition, there is the continuing need to invest more heavily in R&D ahead of the next hardware cycle. These market trends and the changing competitive landscape have led Eidos to become increasingly reliant on the performance of key titles. With this in mind, the Board initiated a review of the strategic alternatives available to Eidos in order to exploit fully the potential of the Company’s extensive portfolio of intellectual property and development capabilities. This review commenced in June and remains in progress under the direction of the Chairman. On August 3, the Board of Eidos confirmed that it had received expressions of interest from a number of parties. On October 18, the Board announced that discussions, which relate to a possible sale of the Company, are progressing well, although there can be no certainty at this stage as to whether or not they will lead to an offer being made for the Company.

Continued Development

Notwithstanding the ongoing strategic review, management remains focused on driving the business forward and is committed to providing the design, innovation and technological advancement that can further improve the gameplay experience. To that end, we have a significant release schedule planned for the 2005 financial year which includes a strong mix of sequel and new franchise titles. Five titles are planned for release in the first half and nine titles in the second half, including the next editions in the highly successful Hitman and Tomb Raider franchises.

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Year ended June 30, 2004 compared to year ended June 30, 2003

Turnover

Turnover decreased by 11.6% to £133.9 million compared to £151.5 million in the year to June 30, 2003. Overall, the Group recorded a loss after tax of £2.9 million compared to a profit of £19.2 million in the year to June 30, 2003.

The Company released 22 new game sku’s in the year (2003: 27), including five for PlayStation 2 and six for Xbox with the balance being principally PC game releases. In total, 12.5 million units were shipped in 2004, the same as for 2003. There was a decrease in the gross average selling price from £13.73 to £12.72 over the year reflecting increased sales of our back catalogue titles. Approximately 73% of the Group’s total revenue was derived from console based games, compared to 74% in the same period last year.

Operating Results

The gross margin was 62.8% compared to 59.0% in 2003. This increase reflects the move towards internally generated intellectual property.

Operating expenses increased to £89.7 million from £78.8 million. This increase arises largely from certain non-recurring savings made in 2003 together with the increase in goodwill amortisation arising from the acquisition of IO Interactive A/S in March 2004.

Advertising costs were £20.2 million (15.1% of turnover) compared to £18.3 million (12.1% of turnover) last year. This reflects the trend for increasing advertising support being required to promote game releases. The fixed element of selling and marketing costs was £6.5 million compared to £7.4 million in the previous year. The reduction in expenditure is due to the full year impact of savings made in the prior year.

Research and development, representing the Group’s total investment in product development, totalled £39.2 million (2003: £32.6 million). The 20% increase in this cost reflects the Company’s commitment to invest in developing quality titles in future, and certain non-recurring savings which occurred during the previous year. The Group expects the level of expenditure to increase again in the 2005 financial year.

Total administrative expenses for the year were £23.8 million including goodwill amortisation of £1.6 million, compared to £20.4 million including goodwill amortisation of £0.2 million in 2003. The increase in the amortisation charge resulted from the goodwill arising on the acquisition of IO Interactive A/S on March 31, 2004. Also included in administrative expenses for 2004 are foreign exchange losses of £0.8 million against £0.9 million of foreign exchange gains in 2003. While the Group continues to invest in management and infrastructure, it will also continue to manage its administrative expenses.

After deducting total operating expenses of £89.7 million, the Group made an operating loss of £3.6 million. After deducting operating expenses before goodwill of £88.1 million, the Group made an operating loss before goodwill of £2.0 million. This included the Group’s share of joint venture operating profits of £2.1 million. This compares to an operating profit of £13.2 million and an operating profit before goodwill and exceptional items for the prior year of £13.9 million, which included joint venture operating profits of £3.0 million.

Exceptional Items

There were no exceptional items during the year. During 2003, the Group received a £1.4 million settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to 31 March 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

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Taxation

The Group recorded a tax charge in the year of £1.0 million which largely comprises the Group’s share of taxes payable in its profitable joint venture companies. Significant brought forward losses remain available within the Group to offset future trading profits. The Company has reviewed the provisions of FRS19 –Deferred Tax and believes that no further amounts should be recognized in respect of these losses.

Earnings Per Share

The Group reported a loss of £2.9 million for the year compared to a profit of £19.2 million for the previous year. The basic (loss)/earnings per share was (2.1) p compared to 13.8p for 2003, based on the weighted average number of shares in issue during the year.

Liquidity and Capital Resources

Net assets at June 30, 2004 included goodwill of £25.3 million (2003: £0.3 million), tangible fixed assets and investments of £10.4 million (2003: £7.4 million as restated, see note 2 in Item 8), net current assets of £40.2 million (2003: £67.9 million) and other long term creditors and provisions of £3.9 million (2003: £0.03 million).

At the year end, the Group had cash and cash equivalents of £37.4 million (2003: £58.2 million) and no debt (2003: £nil). The decrease in cash primarily resulted from the acquisition of IO Interactive A/S as referred to below. There was a cash outflow before the management of liquid resources and financing of £18.4 million during the year (2003: £0.8 million). Operating activities generated a cash inflow of £8.2 million (2003: £4.7 million outflow), reflecting the operating loss offset by a decrease in working capital during the year.

Interest received decreased to £1.9 million in the year to June 30, 2004 from £3.1 million in the previous year. The decrease was primarily due to lower average cash balances held during the year and the lower average interest rates that existed throughout the year.

Year ended June 30, 2003 compared to year ended June 30, 2002

NB: Please note that the Company changed its year end during 2002 from March 31, to June 30. This discussion below compares the year ended June 30, 2003, to the year ended June 30, 2002.

The Group’s results for the year ended June 30, 2003 showed continued significant improvements in its operating and financial performance. Turnover increased by 29.8% to £151.5 million compared to £116.7 million in the year to June 30, 2002. Gross margins increased to 59.0% compared to 58.3% and there were further reductions in the Group’s fixed cost base. Overall the Group recorded a net profit after tax of £19.2 million for the year to June 30, 2003 compared to a loss of £15.3 million for the year to June 30, 2002.

Turnover

We released 27 new game versions in the year to June 30, 2003 (2002: 18), including seven for PlayStation 2 and five for Xbox with the balance being principally PC game releases. A number of key franchise titles such as Tomb Raider: The Angel of Darkness, Hitman 2: Silent Assassin, TimeSplitters 2 and Championship Manager 4, each sold circa one million units during the year to June 30, 2003. The balance of our portfolio in favour of pillar titles represented a significant improvement over the prior year.Catalogue sales of earlier versions of franchise titles such as Tomb Raider, Deus Ex and TimeSplitters remained strong in the year. In total, 12.5 million units were shipped in the year to June 30, 2003, compared to 11.4 million units during the year to June 30, 2002. There was an increase in the gross average selling price from £12.22 to £13.73 over the year to June 30, 2003 resulting from the strong performance of our franchise titles. Overall, approximately 75% of Eidos’ revenue for the year to June 30, 2003 was derived from console based games, compared to 65% in the prior year.

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Operating results

The gross margin for the year to June 30, 2003 was 59.0% compared to 58.3% for the year to June 30, 2002.

Total operating expenses for the year ended June 30, 2003 fell to £76.3 million from £82.3 million for the year to June 30, 2002. The decrease in operating expenses arose largely from the full year impact of savings made in prior years together with certain non-recurring savings made in research and development.

Advertising costs in the year to June 30, 2003 were £18.3 million (12.1% of turnover) compared to £13.7 million (11.8% of turnover) for the year to June 30, 2002. This reflected the strong promotional support for our pillar titles released during the year to June 30, 2003. The fixed element of selling and marketing costs was £7.4 million compared to £8.1 million in the prior year. The reduction in expenditure was due to the full year impact of savings that arose from salary and licence amortization costs in our publishing businesses.

Research and development, representing the Group’s total investment in product development, totalled £32.6 million in 2003 (2002: £39.0 million). This decrease reflected the move toward internally developed franchise titles and certain non-recurring savings.

Total administrative expenses for the year to June 30, 2003 were £20.4 million including goodwill amortization of £0.2 million, compared to £24.2 million including goodwill amortization of £4.2 million in 2002. The reduction in the amortization charge resulted from the goodwill relating to the acquisition of Crystal Dynamics becoming fully amortized during the year to June 30, 2002. Administrative expenses before goodwill amortization were £20.2 million compared to £20.0 million for the year to June 30, 2002.

After deducting total operating expenses of £76.3 million, Eidos reported an operating profit of £13.2 million for the year to June 30, 2003. This included the Group’s share of joint venture operating profits of £2.5 million (including goodwill amortization of £0.5 million). This compares to an operating loss for the year to June 30, 2002 of £20.8 million, which included joint venture operating profits of £1.8 million.

Exceptional items

During the year to June 30, 2003 the Group received a £1.4 million litigation settlement, net of costs, in respect of its former investment in Express.com. The Group took an exceptional charge against the full carrying value of this investment in the year to March 31, 2001 and Express.com subsequently filed for Chapter 11 bankruptcy protection.

Taxation

Included within the tax credit for the financial year 2003 was an amount of £5.6 million relating to the release of provisions in respect of prior year contingent tax liabilities. This release reflected the results of discussions with the Inland Revenue during the 2003 financial year.

Earnings per share

Eidos reported a profit after tax of £19.2 million for the year to June 30, 2003 compared to a loss of £15.3 million for the year to June 30, 2002. The basic earnings per share was 13.8p compared to a loss of 11.1p for the year to June 30, 2002, based on the weighted average number of shares in issue during the year to June 30, 2003.

Critical Accounting Policies

The Group prepares its consolidated financial statements in accordance with U.K. GAAP as described under the heading ‘‘Item 3 – Key Information – Selected Financial Data’’ and reconciles such to U.S. GAAP to the extent required by the rules of the US Securities and Exchange Commission. In preparing the consolidated financial statements in accordance with both U.K. GAAP and U.S. GAAP senior management have to make certain key assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In doing so, they have to exercise considerable judgement in respect of matters which are inherently uncertain. The U.K GAAP accounting policies described below are considered critical by senior management because they provide the framework within which the Group attempts to quantify and assess the assumptions and estimates which have the greatest bearing on the consolidated financial statements. Any change in the estimates used could materially affect the reported results and actual conditions may differ from those assumed.

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Sales Returns and Allowances and Price Protection Reserves

The majority of the Group’s reported revenue is derived from the sale of pre-packaged entertainment software. Revenue is recorded at the point of sale, net of taxes and provisions for future returns and price protection. In common with other publishers of entertainment software the Group operates a number of territory-specific programmes under which retailers may qualify to return unsold product, subject to certain qualifying conditions. Alternatively the Group may offer price protection programmes in certain markets, though again these are subject to the satisfaction of certain qualifying conditions. Typically the Group maintains a policy of issuing credits under such programmes.

By analysing historical rates of return and price protection in conjunction with a number of key variables including the prevailing market and economic conditions at that time, the Group is able to estimate future expected rates of returns and price protection. The adequacy of the reserves generated by these estimated rates is reviewed regularly in the light of current market and economic conditions, considering in particular up to date patterns of sell-through, anticipated trends in the hardware and software markets, seasonal factors, perceived consumer preferences and general economic conditions.

In the past the Group has not always been able to accurately estimate the adequacy of its reserves. In 2001 the Group reported that this was caused by the sell through of products released in the previous year being less than anticipated as a result of continuing consumer uncertainty surrounding the release of new video game hardware platforms. Since then all of the new hardware platforms have now been successfully launched and senior management have taken significant steps to impose new procedures and controls on the estimation of the Group’s exposure to future returns and price protection. In addition measures have been put in place to control the flow of new product into the market place as over stocking in retail and distribution channels may also generate significant future exposures for the Group. The senior management of the Group believes that the controls that they have put in place enable it to make a more realistic estimation of the group’s exposure to future returns and price protection. Nevertheless if the Group were to change certain of the key estimates or assumptions that underpin its calculations, then the level of reserves carried at the balance sheet date would be altered as would the reported net gain for the period. Similarly if actual credits issued for returns and price protection are in excess of the level of reserves carried, then future reported revenues might be reduced in the future. Conversely if the level of actual credits is less than the reserve, then this could increase future reported revenues.

Taxes

The estimation of the Group’s consolidated tax charge is a complex matter encompassing many different international tax jurisdictions. In calculating the Group charge management has to make certain estimates regarding individual exposures in different countries and assess the recoverability of deferred tax assets. It can often take many years to finalise individual tax charges and to reach agreement on areas of contention with the relevant tax authorities. The Company recognises tax benefits from exposures only when it is probable that those benefits will be retained. There is no guarantee that the level of provision carried in respect of open tax items at any one time, will be sufficient to meet final liabilities as they are agreed and fall due.

In reviewing the recoverability of deferred tax assets in the jurisdictions with a cumulative history of losses the Group has limited the recognition of deferred tax assets to reversing deferred tax liabilities. Estimates of future income are considered only for those jurisdictions with a history of predictable profits. Changes in the estimates used to assess the recoverability of deferred tax assets could affect the level of assets carried in the balance sheet at the period-end and also the level of tax charge in the profit and loss account for the period.

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Goodwill Impairment

The Group capitalizes and amortizes goodwill in respect of the acquisition of certain subsidiaries and associated undertakings in accordance with FRS10: Goodwill and Intangibles. The Group makes certain estimates regarding the useful life of goodwill that take account of a number of factors including the future prospects for the entity concerned and the projections for both net income and net cash-flow. To the extent that these projections no longer justify the carrying value of any remaining goodwill, the amortization charge will be accelerated to the degree required to reflect the revised estimate of the fair value of the goodwill. The carrying value of investments carried at cost are also reviewed in a similar fashion and to the extent that an investment’s carrying value can be shown to be permanently impaired, then full provision will be made through the profit and loss account.

The estimates used in assessing the carrying value of both goodwill and investments carried at cost rely on assumptions made about the performance and prospects of the entities themselves and also about the markets in which they operate. Where the entities do not have an established track record or where they are operating in new or emerging markets then the inherent uncertainty in forecasting future performance may be compounded. To the extent that projections no longer substantiate the recorded values of either goodwill or investments carried at cost, then net income may be adversely affected.

The value of unamortized goodwill held within intangible assets at June 30, 2004 was £25,258,000 (June 30, 2003: £252,000). The carrying value of investments carried at cost within fixed asset investments at June 30, 2004 was £4,205,000. (June 30, 2003: £2,746,000 as restated (see note 2 in Item 8)).

Valuation of inventory

The Group carries its inventory of finished goods at the lower of cost and net realisable value. In order to determine what this carrying value should be, management has to estimate the price that they expect to achieve on the future sale of the stock. This process involves reviewing current patterns of demand in the market and projecting these forward. It may also require an assessment of how future demand could be affected by changes in the wholesale price charged by the Group and by other factors that may be beyond the control of the group. In this way management will seek to determine the most realistic price that they believe can be achieved and hence the likelihood that inventories on hand can be sold at or above cost. Should management’s estimates of current or future demand prove to be unrealistic, then the Group may fail to achieve a wholesale price that is sufficient to cover the carrying value of the inventory and hence the charge to the profit and loss account may be greater than expected.

The total amount of inventory on hand at June 30, 2004 was £3,457,000 (June 30, 2003: £2,772,000).

New Accounting Standards

New UK Accounting Standards and Pronouncements Applicable to the Group

FRS 20

On April 7, 2004 the Accounting Standards Board issued FRS 20 - Share-based payment. FRS 20 is effective for periods commencing on or after January 1, 2005. The Company will first adopt the standard in its financial statements for the year ended June 30, 2006. Upon adoption it will supersede the accounting requirements of UITF Abstract 17 Employee share schemes. FRS 20 applies to all share options and share purchase schemes, including Save As You Earn schemes, and to both equity-settled and cash-settled share based payment arrangements, whether with employees or third party providers of goods and services. The key change introduced by the standard is the requirement to recognise an expense for all share-based payments based on the fair value of the instrument. Market based performance conditions are taken account of in the measurement of the fair value of the instrument granted, and no subsequent adjustments made. Service conditions and non-market based performance conditions cause subsequent adjustments to the number of shares/options in respect of which the fair value is charged to the profit and loss account. The Company is in the process of evaluating the impact on the financial statements of the Group.

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FRS 21

On May 20, 2004 the Accounting Standards Board issued FRS 21 – Events after the balance sheet date. FRS 21 replaces SSAP 17 – Post balance sheet events, and is effective for periods beginning on or after January 1, 2005. Early adoption is not permitted. The Company will first adopt the standard in its financial statements for the year ended June 30, 2006. The key change introduced by FRS 21 is that an entity will no longer be permitted to recognise dividends declared after the balance sheet date as a liability at the balance sheet date. Equally, dividends receivable cannot be recognized until the entity is entitled to receive payment. The standard is not expected to have a significant impact on the financial statements of the Group.

New US Accounting Standards and Pronouncements Applicable to the Group

FAS 150

In May 2003, the FASB issued Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. Statement 150 requires that certain financial instruments with characteristics of both liabilities and equity be classified as a liability. In November 2003, the FASB deferred application of certain provisions of Statement 150 through FASB Staff Position (FSP) 150-3 which eliminates the disclosure requirements for certain mandatorily redeemable instruments and prohibits early adoption for instruments within the scope of the deferrals established by FSP 150-3. The Company does not expect the adoption of this statement will have a material impact on the Company’s financial position, results of operations or cash flows.

Liquidity and capital resources

The Group’s policy is to use a combination of committed bank facilities and equity in order to ensure that it has sufficient financial resources to meet its short and long term funding requirements. Subsequent to the end of fiscal 2001, a 1 for 3 rights issue was announced. In this rights issue, each holder of three Ordinary Shares (excluding holders of American Depositary Shares, and ordinary shareholders located in the U.S. and Canada, Australia, Ireland or Japan) was offered the right to purchase one ordinary share for £1.55. Following receipt of £51.6 million, net of expenses, raised from the rights issue, the Group’s borrowings were repaid and the terms of the credit facility with the Royal Bank of Scotland amended to a committed £15 million multi currency facility. This facility is secured by a fixed and floating charge over the assets of the Group.. A separate borrowing facility of £0.8 million was secured by the Group’s Japanese subsidiary with Mizuho Bank Limited, also in 2002. This facility was reduced to £0.5 million during fiscal 2003.

The £15 million facility was renewed in fiscal 2005 (maturing in September 2005). Overall at June 30, 2004, the Group had undrawn committed facilities of £16.8 million (June 30, 2003: £15.5 million), denominated £15 million in Sterling, £0.5 million in Japanese Yen and £1.3 million in Danish Krone. Although the Group did not need to draw down against the Sterling facility, under the terms a draw down would only have been permissible if certain covenants were met. During the relevant period the Group was in full compliance with these covenants. The Group believes that the requirements of its existing business and future investment can be met for at least the next 12 months from its current cash reserve and committed facilities.

The Group also held short-term deposits at June 30, 2004 of £12.6 million (June 30, 2003: £30.3 million). Credit risk on transactions is minimized by operating within the parameters of the Group treasury policy. Most of the Group’s surplus funds are held in the United Kingdom and there are no material funds as to which repatriation is restricted as a result of foreign exchange regulations.

Capital Resources

Net assets at June 30, 2004 include goodwill of £25.3 million (June 30, 2003: £0.3 million), tangible fixed assets and investments of £10.4 million (June 30, 2003: £7.4 as restated, see note 2 in Item 8), net current assets of £40.2 million (June 30, 2003: £67.9 million) and other long term creditors and provisions of £3.9 million (June 30, 2003: £nil).

At the year end Eidos had cash balances of £37.4 million (June 30, 2003: £58.2 million) and no gross debt (June 30, 2003: nil). There was a cash outflow before the management of liquid resources and financing of £18.4 million during the year (30 June 2003: 0.8 million). Operating activities generated a cash inflow of £8.2 million (June 30, 2003: cash outflow of £4.7 million), reflecting the operating loss offset by a decrease in working capital during the year.

As discussed above the Group has committed facilities of £16.8 million, £15 million maturing September 2005 and £0.5 million on 31 December 2004. The £1.3 million Danish Krone facility has no maturity date. The facilities bear interest at rates based on inter-bank interest rates. The purpose of the facilities is to meet short and long term requirements. Historically the Group’s borrowing requirements have arisen from a seasonal working capital cycle. The intensity of the cycle can be affected by a number of factors, however it is primarily the Groups release schedule and resulting performance of the titles in the market place (see also ‘Risk Factors’).

The Group also provides working capital to its overseas subsidiaries in their functional currencies and hedges its exposure in accordance with the Group’s Treasury policy. The Group’s objective in managing the currency exposures is to minimise gains and losses arising. To this end the Group may use financial instruments (forward contracts, swaps, options) to manage currency exposures that arise on both funding and trading balances denominated in foreign currencies. Changes in the fair values of instruments used to hedge foreign currency monetary assets and liabilities are recognized in the hedged periods.

29

Research and Development, Patents and Licenses

During the 15 month period ended June 30, 2002, and the years ended June 30, 2003 and June 30, 2004, the Group has invested an aggregate of just over £120 million (including employment costs) on research and development (£48 million, £33 million and £39 million in each period respectively). The investment relates to video compression, processing and storage technology and developing entertainment software. Such investments were made mainly in the U.K. and the U.S.A. and consisted mainly of salaries and related employment costs incurred in the development of its technology and games. See “Item 5 – Operating and Financial Review and Prospects”.

Trend information

The following trends could have a material impact on the Group’s net revenues, profitability, and liquidity and capital resources.

a) The market for video games follows a cycle that is defined by the introduction of new hardware platform that replace older and less sophisticated technology. The market for video games is widely believed to be in the mature upswing of its current cycle as all of the next generation consoles have now been established. It may be the case that this cycle will enter its down swing in the next two to three years as the major manufacturers of videogame platforms announce and introduce their next generation of hardware.

b) The Group may invest in its core business of developing and publishing computer and video games through either or both of organic growth and acquisition.

Safe Harbor Statement

The statements contained herein, which are not historical facts, are considered forward-looking statements under federal securities laws. Such forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to them. The Company has no obligation to update such forward-looking statements. Actual results may vary significantly from these forward-looking statements based on a variety of factors. Your particular attention is drawn to the “Cautionary Statement with Respect to Forward Looking Statements” on the cover page.

Off-Balance Sheet Arrangements

The Group had no material off-balance sheet arrangements at June 30, 2004.

Tabular disclosure of contractual obligations