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Eidos PLC – ‘20-F’ for 3/31/02

On:  Monday, 9/30/02, at 3:19pm ET   ·   For:  3/31/02   ·   Accession #:  1021231-2-240   ·   File #:  0-28994

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

 9/30/02  Eidos PLC                         20-F        3/31/02    8:1.2M                                   St Ives Burrups/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 20-F        Annual Report of a Foreign Private Issuer           HTML    920K 
 2: EX-1        Underwriting Agreement                              HTML     13K 
 3: EX-2        Plan of Acquisition, Reorganization, Arrangement,   HTML      8K 
                          Liquidation or Succession                              
 4: EX-3        Articles of Incorporation/Organization or By-Laws   HTML      9K 
 5: EX-4        Instrument Defining the Rights of Security Holders  HTML    105K 
 6: EX-5        Opinion re: Legality                                HTML    169K 
 7: EX-6        Opinion re: Discount on Capital Shares              HTML      8K 
 8: EX-7        Opinion re: Liquidation Preference                  HTML      8K 

FORM 20-F

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

(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 March 31, 2002
OR
	For the transition period from                                        to                                         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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, 44 208 636 3000
(Address and telephone number 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
(Title of Class)

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

As of March 31, 2002, there were outstanding 4,397,443 American Depositary Shares and 139,652,515 Ordinary Shares of the Company (including the 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  

In this document, Eidos plc is referred to as the "Company" and the Company and its consolidated subsidiaries are together referred to as the "Group."

Cautionary Statement With Respect to Forward-Looking Statements

Statements made in this annual report with respect to the Group's plans, strategies and beliefs and other statements that are not historical facts are forward-looking statements 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 continual new product introductions, rapid developments in technology and subjective and changing consumer preferences (particularly in the entertainment business); and those factors identified under "Item 3 – Key Information – Risk Factors."

TABLE OF CONTENTS

Please Note: Eidos plc changed its year end to June 30 during the year. In the United Kingdom it will file 15 month accounts for the period ended June 30, 2002.

A transitional report on Form 20-F for the three months to June 30, 2002 will also be filed in the United States of America by September 30, 2002.

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PART I

ITEM 3 – KEY INFORMATION

General

Eidos 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, Soul Reaver and Commandos, and original titles which 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 28 million units.

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 U.K. GAAP, which differs in certain material respects from 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.

The selected consolidated financial data presented below for the Company in accordance with U.K. GAAP for the years ended March 31, 2000, 2001 and 2002 and at March 31, 2001 and 2002 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, 1998 and 1999 and at March 31, 1998, 1999 and 2000 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 for the years ended March 31, 1998, 1999, 2000, 2001 and 2002 and at March 31, 1998, 1999, 2000, 2001 and 2002 are derived from the Company's audited financial statements, but are unaudited except for the amounts covered by the reconciliation set forth in Note 32 of the Notes to the Consolidated Financial Statements of the Company.

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U.K. GAAP

Consolidated Statement of Operations Data:

Consolidated Balance Sheet Data:

Effects of reclassifications

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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. See Note 2 of the Notes to the Consolidated Financial Statements of the Company.

Fiscal Year Ended March 31,

Monthly exchange rates for the previous six months

On August 30, 2002 the Noon Buying Rate was $1.55 for each £1.00.

Risk Factors

In addition to the other information contained and incorporated by reference in this Report, the following risk factors should be considered carefully in evaluating the Group and its business. Also see "Cautionary Statement with Respect to Forward-Looking Statements" at the beginning 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 recently undergone a major transition with the introduction of next generation consoles such as the Sony PlayStation 2, Microsoft's Xbox and Nintendo's GameCube. 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.

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

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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 next generation 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. 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. In addition, the Group has also entered into arrangements with The Sony Computer Entertainment Company under which certain titles based on the Group's Tomb Raider franchise, will be exclusive to PlayStation 2 on the videogame console format. There is no guarantee that this hardware platform will achieve the sales penetration that the Group has forecast and consequently the Group's ability to meet its revenue and profitability forecasts for this title and as a whole, may be adversely affected.

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 internally generated 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 jeopardize 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 it's 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

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a product introduction beyond the end of a financial reporting period may materially adversely affect 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 and progress achieved, 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 high 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 accept 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 and historically the Group has earned a significant proportion of its annual revenues and profits in the quarter to December 31. Due to the seasonal nature of the demand for entertainment software 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 recently announced that it was changing it's year end to June 30 and that in future, it would no longer report it's quarterly results, only those at the half year and the year-end. Failure to meet new product release dates may also mean that the Group falls short of analyst's 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.

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 materially adversely affect 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. Although the Group believes that it maintains adequate reserves, there can be no assurance that actual returns or price reductions will not exceed such reserves, particularly where entertainment software products fail to achieve widespread market acceptance.

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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. The Group has experienced delays and significant technical support expenses in the past. 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. The Group believes that the market for on-line gaming is not sufficiently mature or predictable enough to warrant more significant levels of investment at this time. 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.

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.

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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.

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.

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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 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) 44 208 636 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.

The Group's future success is dependant 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 has been through a period of transition during the past 18 months 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 experienced fluctuating and un-predictable levels of demand for its titles during this period, which contributed significantly to it's poor operating results during the years ended March 31, 2000 and 2001.

In July 2001 the Group successfully completed a 1 for 3 Rights Issue raising £51.6 million, net of costs. All of the next generation of videogame consoles had been launched by March 31, 2002.

Acquisitions, investments and disposals in the last three fiscal years

Express.com, Inc.

On November 11, 1999, the Group acquired 19.96% of Maximum Holdings, Inc. an internet company for $55 million. Following the acquisition, Maximum Holdings, Inc. merged with another internet company, DVD Express, Inc. and changed its name to Express.com, Inc. This

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diluted the Group's holding to 12.6%. Express.com experienced significant financial difficulties during the year ended March 31, 2001, and on March 7, 2001, Express.com filed for federal bankruptcy protection under Chapter 11 of the U.S. bankruptcy code. The investment of $55 million was written off in the year ended March 31, 2001.

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 it's 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.

Proein SL

In July 1999, the Group acquired 75% of Proein SL, a Spanish distributor and an effective holding of 25% in the related games developer, Pyro Studios SL for $28 million. Both acquisitions are being accounted for as joint ventures because of the joint control arrangements, and are being proportionally consolidated.

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.

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 the CentreGold Group plc, which included Core Design Limited, the 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 five iterations to date, total unit sales currently exceed 28 million. In addition to Tomb Raider, the Group has developed a broadly based publishing portfolio which includes a number of other franchise titles such as Championship Manager, Soul Reaver, Commandos, Deus Ex, TimeSplitters and Hitman.

The Group's market share amongst all independent publishers in the calendar year 2001, based on independent data supplied by ChartTrack in the U.K., GfK in France and Media Control in Germany, was 6 per cent. in the U.K., 7 per cent. in Germany and 5 per cent. in France. This gave the Group the No.3 position in the U.K., the No.4 position in Germany and the No.5 position in France. In the U.S., based on independent data provided by NPD, the Group's market penetration

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in the calendar year 2001 was 1.1 per cent., giving it a No.20 position; in relation to PlayStation and PlayStation 2 sales, the market penetration was 2.5 per cent. giving it a No.10 position.

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. In the past the Group has taken a selective approach to sports action titles and the Directors also expect this to continue.

The Directors have promoted a ''developer friendly'' culture within the business and currently the Group has over 300 development staff working within 13 teams in 4 studios, which are wholly-owned or partly-owned. This resource is augmented by an external development programme. Of total sales of £120.3 million in the year ended March 31, 2002, 60 per cent. 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 fulfillment 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 for the last 3 fiscal years. The Group's sales are highly seasonal with most of the revenue being earned in the quarter ended December 31, due to an increase in sales in the lead-up to year end holiday buying season. See ''Item 3 – Risk Factors – The Group's Business is Highly Seasonal''.

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 demos and 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.

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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:

With the exception of the companies marked⁽¹⁾, the share capital of the above companies is held directly by the Company. In the case of Ion Storm⁽²⁾, the holding is in the form of partnership units rather than Ordinary Shares.

The registered office of Eidos Interactive Limited is Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London SW19 3RU, United Kingdom. The registered office of Core Design Limited is 2 Roundhouse Road, Pride Park, Derby DE24 8JE, United Kingdom. The registered office of Eidos Interactive, Inc. is 651 Brannan Street, 4th Floor, San Francisco, California 94107, United States of America. The registered office of Crystal Dynamics is 2468 Embarcadero Way, Palo Alto, California 94025-3691, United States of America. The registered office of Eidos Interactive France SARL is 8th Floor, 6 Boulevard du General Leclerc, 92115 Clichy, France. The registered office of Eidos Interactive (Deutschland) GmbH is Grosse Elbstrasse 145d, 22767, Hamburg, Germany. The registered office of Eidos Interactive KK is Etsuzan LK Building 4F, 1-10-4, Hiroo, Shibuya-Ku, Tokyo 150-0012, Japan. The registered office of Eidos Interactive Pte Limited is 15b Circular Road, Singapore 049371. The registered office of Ion Storm LLP is CT Corporation System, 350 North St Paul Street, Dallas, Texas, TX 75021 United States of America. The registered office of Proein SL and Pyro Studios SL is Euromor Building, Avenida de Burgos 16-D, Madrid, Spain

Eidos Interactive, Inc., Crystal Dynamics, Inc., and Ion Storm LLP are incorporated and operate in the United States. Eidos Interactive France SARL, is incorporated, and operates in France. Eidos

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Property, Plant and Equipment

The Group maintains an aggregate of approximately 128,352 square feet of office and commercial studio space in London and Derby, England; in Hamburg, Germany; in Paris, France; in San Francisco and Palo Alto, California, and Austin, Texas, U.S.; in Tokyo, Japan and in Singapore.

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

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 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).

Following a protracted transitional phase in the video game industry, all of the next generation consoles have now been launched in the major commercial markets in which the Group operates. Based on the reported increases in the installed bases of the next generation systems and on independent projections of future installed base numbers, the prospects for growth in the entertainment software market are believed to be strong.

Due to the slippage of a small number of titles and to the relative underperformance of certain other titles released in the year, turnover for the year ended March 31, 2002 is down on the prior year. Gross margins have however improved significantly over the same period and the Group has reduced its fixed cost base. These factors combined with exceptional income on the sale of an investment during the period (see Exceptional Items below) meant that the Group was able to reduce its net loss from £97.3 million in the prior year to £14.2 million in the current year.

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 the write-off of discontinued 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 are typically significantly higher during the fourth calendar quarter, due primarily to the increased demand for entertainment software products during the year-end holiday buying season. Net revenues in other quarters are generally lower and vary significantly as a result of new product introductions and other factors. As a result of the foregoing, results of operations can be expected to fluctuate significantly from period to period.

The Group has historically recorded a significant proportion of its costs in pounds sterling. In the year ended March 31, 2002, 48% of the Groups total costs (excluding goodwill) were in sterling and 52% were paid in currencies other than sterling. This represents a 5% increase in the level of the Group's non-sterling expenditure over the year. As in previous years, a higher proportion of turnover, 68%, is denominated in non-sterling currencies, primarily Euros and U.S. dollars. These increases underline the level of savings which have been achieved in sterling denominated operating expenses over the period. In addition the increasing exposure to trade in non sterling currencies reflects the Group's on going commitment to building its overseas operations and in particular, its increasing level of investment in its wholly and partially owned development

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studios, the majority of which are based outside of the UK. 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 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 March 31, 2002, unhedged currency net assets totaled £11.7 million (predominantly U.S. dollars and Euros), and there were no open derivative positions as at this date.

Exceptional Items

Under U.K. GAAP, the Group has disclosed its net profit on the disposal of certain investments during the year ended March 31, 2002 as an ''exceptional,'' item for the period. Details of these disposals are explained below and in Note 13 to the Consolidated Financial Statements. During the year ended March 31, 2001 the Group presented an alternative profit and loss account format to show the effect of a number of unrelated exceptional charges. The exceptional items disclosed in both years do not meet the definition of ''Extraordinary items'' under U.S. GAAP. Any commentary in this document relating to ''exceptional items'' should therefore be read for U.S. GAAP purposes as an ''unusual item.''

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.

Year ended March 31, 2001

Additional returns provisions for products released in prior fiscal year

During the six months ended September 30, 2000, trading conditions for the Group continued to be difficult as the uncertainty persisted surrounding the release of new hardware platforms. Although sales of product launched in the half year were in line with expectations, the sell through during the period of titles released in the previous fiscal year was significantly lower than had previously been anticipated. Consequently, the provisions made at the end of the previous fiscal year against stock then in the retail channel proved to be inadequate and a further £16.9 million exceptional charge to turnover and profit was made.

Write down of investment in Express.com

In November 1999, the Company acquired an interest in Express.com (''Express'') an internet company, for $55 million. During fiscal 2001, it became clear that Express was experiencing severe commercial difficulties in common with many other internet companies and the Group consequently decided to make full provision against the carrying value of the investment during the year. In March 2001, Express filed for federal bankruptcy protection under Chapter 11 of the U.S. bankruptcy code.

Legal and professional fees in relation to aborted takeover talks

During the period £0.9 million legal and professional fees were incurred in respect of bid talks, previously disclosed in the 6-k filing for the quarterly period ended September 30, 2000.

Unless otherwise indicated, all financial results and analyses in this document refer to the Group's U.K. GAAP financial statements.

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Results of Operations

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:

Year ended March 31, 2002 compared to the year ended March 31, 2001

Revenue: Turnover for the twelve months ended March 31, 2002 decreased 26.7% from £164.2 million (pre exceptional charges) to £120.3 million.

In the twelve months ended March 31, 2002 we shipped twenty new titles (2001: twenty), including eleven for PlayStation 2 and two for Xbox. A number of key franchise titles such as Blood Omen 2, Soul Reaver 2, and the PC CD versions of Commandos 2 and Championship Manager Season 01/02, all sold in excess of 350,000 units during the period. Championship Manager Season 01/02 became the UK's fastest selling PC CD title of all time when it launched in October 2001, whilst Blood Omen 2 was a top five title on both PlayStation 2 and Xbox, when it shipped in the USA at the end of March 2002. Whilst we were broadly satisfied with the performance of these particular titles the balance of our portfolio of new releases did not meet expectations. Catalogue sales of earlier versions of franchise titles such as Tomb Raider and TimeSplitters remained strong in the period.

Gross Margin and Cost of Sales: The gross margin for the year ended March 31, 2002 was 59.5% compared to 50.2% (pre exceptional charges) for the corresponding period last year. Improved controls over channel and inventory exposures contributed to the increase in margins in the period, whilst royalty costs were also greatly reduced. This was partly as a result of the shift towards internally developed titles and the reduced reliance on licensed titles during the period. Gross margins are forecast to fall slightly in the coming year as a result of a shift in the sales mix

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towards console titles, however they are nevertheless expected to remain significantly ahead of the levels reported in the year ended March 31, 2001.

Operating expenses before goodwill fell by 24.8% to £80.2 million for the year ended March 31, 2002, compared to £106.7 million for the same period last year (pre exceptional charges). Whilst improved controls over variable marketing expenses have contributed to this decrease, the majority of the savings have come from sustained downward pressure on the Group's fixed cost base. Overall fixed costs excluding goodwill and exceptionals were reduced by 28.7% in the year ended March 31, 2002 from £46.6 million to £33.2 million, on a like for like basis. Over a two-year period the Group has now exceeded its target for reducing the level of fixed costs, by achieving on-going savings of £22.7 million, on this basis. It is the Group's intention to actively manage its fixed costs at this lower level, after adjusting for one off costs and any effects of the change in year end.

Selling and Marketing: Improved controls over variable advertising costs were introduced into the Group's publishing businesses during the period, with the aim of targeting annual expenditure more effectively. Advertising costs in the twelve months ended 31 March 2002 were £12.3 million (10.3% of turnover) compared to £23.1 million (14.1% of pre exceptional turnover) for the same period last year. During the period retail co-operative advertising expenses of £1.9 million incurred in the USA were reclassified from turnover to advertising costs (2001: £3.8 million). This treatment more accurately reflects the nature of the expenditure and allows closer monitoring within the improved framework of controls on variable advertising spend.

The fixed element of selling and marketing costs was down 55.4% to £8.2 million for the year ended March 31, 2002 compared to £18.4 million in the prior year. The significant reduction in expenditure is due to reduced exhibition expenditure in the period and permanent savings arising from salary and licence amortisation costs in our publishing businesses.

Research and Development: Research and development represents the Company's total investment in product development of £39.4 million (2001: £42.5 million). The reduction in expenditure reflects the continued move towards internal development, which is one of the cornerstones of the Group's future development strategy. The Group intends to maintain this level of investment in developing titles for future release.

General and Administrative: General and administrative costs before goodwill amortisation were £20.3 million for fiscal 2002, compared to £22.6 million (pre exceptional charges) for the prior year. The reduction in like for like expenditure reflects significant permanent savings in salary and other costs. Total general and administrative costs for the period were £27.2 million for fiscal 2002 including goodwill amortisation of £6.9 million, compared to £33.5 million including goodwill amortisation of £10.9 million (pre exceptional charges) for the prior year. The reduction in the amortisation charge resulted from the goodwill relating to the 1998 acquisition of Crystal Dynamics becoming fully amortised during the period.

Financing and Cashflow: The Group had net cash balances of £50.6 million at March 31, 2002 (2001: £9.5 million). The strong closing cash position reflects the success of the Rights Issue in July 2001 and the disposal of the Group's remaining stake in Opticom in November and December 2001. Enhanced working capital and tax management procedures have also contributed to the improvement in the Group's cash position, which remains higher than following the Rights Issue.

The net cash outflow from operating activities was £15.4 million for the year ended March 31, 2002 compared to a £1.9 million inflow in the corresponding prior period. This outflow reflects the operating loss incurred and the significant number of new releases which shipped towards the end of the period.

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Exceptional items: 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.

Taxation: Based on the level of losses sustained, there is no tax charge in the period. There are still significant brought forward losses available within the Group to offset future trading profits. The Group has however reviewed the provisions of FRS19 – Deferred Tax, and believes that no further amounts should be recognised in respect of these losses.

Financial Reporting Standard 19 Deferred Tax (FRS 19) has been adopted by the Group. Under FRS 19, deferred tax is provided for on certain timing differences in full. FRS19 requires prior years to be restated. However the impact on net income of the implementation of FRS 19 on the Group was nil for the years ended March 31, 2000, 2001 and 2002. In accordance with FRS 19, deferred tax assets are regarded as recoverable to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

Net Loss: Operating losses pre goodwill and exceptional charges were reduced by 69.2% from £23.3 million for fiscal 2001 to £7.2 million for fiscal 2002. The net loss for the twelve months to March 31, 2002 was £14.2 million, compared to a loss of £97.3 million in fiscal 2001 and net income of £25.2 million in fiscal 2000. The loss per share was 10.7p, or 1.6p excluding goodwill, for the year ended March 31, 2002 compared to 84.5p and 70.5p respectively for the prior year, based on a weighted average number of shares in issue during for the year ended March 31, 2002 of 132,514,410 (2001: 115,223,869). The 2001 comparatives for earnings per share have been restated for the Rights Issue that occurred during the current period, in accordance with FRS14 – Earnings per share.

Year ended March 31, 2001 compared to the year ended March 31, 2000

(NB: This section has been reclassified since the Form 20-F for the year ended March 31, 2001 due to changes to U.K. accounting policies in fiscal 2002, which effected turnover and the split of operating expenses.)

Revenue. Turnover for the full year decreased by 15.7% from £194.8 million to £164.2 million for the year ended March 31, 2001, before the exceptional charge incurred in respect of returns.

Twenty new games, only four fewer than in 2000, were released during the year ended March 31, 2001. Two titles sold significantly in excess of one million units: ''Who Wants To Be A Millionaire?'' and Tomb Raider: Chronicles. ''Who Wants To Be A Millionaire?'' became the fastest selling title to reach one million units sold in the U.K. A German version of ''Who Wants To Be A Millionaire?'' was released in the fourth quarter of fiscal 2001. The Group shipped in excess of 200,000 units to that market, making it the biggest selling game on the PC and PlayStation formats in fiscal 2001.

The Group had further success with other titles during the year. Championship Manager and Sydney 2000 both shipped in excess of 350,000 units during fiscal 2001.

Approximately 61% of the Group's game revenues were derived from console-based games in fiscal 2001 compared to 71% in fiscal 2000. This reflects the strength of certain PC titles released during the year relative to the previous year, notably ''Who Wants to be a Millionaire?'' and Deus Ex.

Gross Margin and Cost of Sales. Cost of sales represents the manufacturing costs of the games, origination (design of packaging and other printed material), storage, distribution and royalties. The manufacturing cost of PlayStation, PlayStation 2 and Dreamcast games includes the royalties payable to Sony and Sega; this had the effect of reducing the gross margin on these

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games. Before the exceptional charge to turnover, gross margin was 50.2% for fiscal 2001 compared to 54.9% in fiscal 2000.

The Group undertook a comprehensive program in the fourth quarter of fiscal 2001 to reduce its exposure to further write downs of retail channel and warehouse inventories and this has contributed to reducing margins for the year.

Selling and Marketing. Selling and marketing expense consists of advertising costs and the cost of promotional licenses and sales and marketing personnel. Advertising costs for fiscal 2001 were £23.1 million (14.0% of turnover excluding exceptional charges) compared to £25.2 million (12.9% of turnover) in 2000.

The cost of promotional licenses and sales and marketing personnel decreased 8.0% to £18.5 million in fiscal 2001 compared to £20.1 million in the prior year. The lower amortization of promotional licenses reported earlier in the year was reversed in the final quarter of fiscal 2001 with a £2.0 million charge arising from the accelerated amortization of certain prepaid license fees. Overall, however, this one time charge was offset by savings generated from the disposal or termination of non-core activities and by the imposition of tighter controls on expenditure in the remaining publishing businesses.

Research and Development. Research and development represents the Company's investment in product development, which was £42.5 million in fiscal 2001 (2000: £46.3 million). Included in this category is pure research and development overhead of £0.3 million (2000: £2.1 million), which largely comprises staff costs. The reduction in research and development expenditure reflected the Group's increasing emphasis on internally-developed titles and the leveraging of established franchises onto new hardware platforms in the product pipeline. The termination of certain non-core activities led to the decrease in pure research and development expenditure.

General and Administrative. Before amortization of goodwill of £10.9 million and excluding exceptional charges, general and administrative costs were £22.6 million in fiscal 2001 (13.8% of turnover excluding exceptional charges), compared to £29.2 million in fiscal 2000 (15.0% of turnover). This reduction is largely the result of the greater control of staff costs and other corporate costs in the year.

Taxation. The taxation charge of £1.0 million in fiscal 2001 comprises £0.6 million in respect of income generated in fiscal 2001 and £0.4 million in respect of adjustments to prior year's taxation provisions. The current year's charge arises entirely from the profitability of certain of the Group's overseas subsidiaries and joint ventures. Certain countries have incurred losses for which no credit had been given in fiscal 2001, which may be available in future years.

Net Loss. The Group reported a net loss of £97.3 million (after exceptional charges of £54.1 million) in fiscal 2001 compared to net income of £25.2 million (after exceptional income of £80.2 million) for the previous fiscal year. Operating losses before exceptional charges were £39.5 million, after goodwill amortization of £16.1 million in fiscal 2001, compared to operating losses of £26.8 million after goodwill amortization of £13.4 million in the previous year. After exceptional charges, the Group reported a loss per share of 84.5p in fiscal 2001 (2000: earnings per share of 23.3p). Excluding goodwill and exceptional charges, the loss per share was 23.5p for fiscal 2001 (2000: loss per share of 38.5p).

Critical Accounting Policies

The Group prepares its consolidated financial statements in accordance with UK GAAP as described under the heading ''Item 3 – Key Information – Selected Financial Data'' and reconciles such to US GAAP. In preparing the consolidated financial statements in accordance with both UK GAAP and US 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

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the reporting periods. In doing so, they have to exercise considerable judgement in respect of matters which are inherently uncertain. The 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.

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 and in the year ended March 31, 2001 reported an exceptional charge of £16.9 million in respect of additional returns reserves required. At the time 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 loss 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. The Group's total reserve in respect of future returns and price protection at March 31, 2002 was £16,383,000. (March 31, 2001: £14,244,000).

Pre-paid license fees

The Group prepays certain licence fees paid to celebrities and professional sports organisations for the use of their name over a number of years or for a range of products. Prepaid royalties are charged to the profit and loss account as sales and marketing expenditure over the life of the licence. Management regularly reviews the carrying value of such licences and where it appears unlikely that any remaining prepaid amounts will be recovered through the sale of future licensed titles, then these remaining amounts will be expensed in full immediately. In reviewing the recoverability of prepaid royalties, senior management relies on forecasts of future revenues.

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If revised revenue forecasts fall below the original forecasts, then the charge to the profit and loss account may be greater than expected in any given reporting period.

The total amount of pre-paid royalties carried within debtors at March 31, 2002 was £2,819,000 (March 31, 2001: £3,855,000).

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. 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 the Group has to estimate future taxable income for the relevant countries. To the extent that these estimations indicate that any such assets are not recoverable, then full provision will be made against their carrying value. 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.

Valuation of Investments and Asset Impairment

The Group capitalises and amortises goodwill in respect of the acquisition of certain subsidiaries and associated undertakings in accordance with FRS10: Goodwill and Intangibles. Certain other investments in subsidiaries and associated undertakings are carried at cost. 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 consequent 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, then the amortisation 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 unamortised goodwill held within intangible assets at March 31, 2002 was £2,552,000. (March 31, 2001: £13,837,000). The carrying value of investments carried at cost within fixed asset investments at March 31, 2002 was £2,887,000. (March 31, 2001: £5,063,000)

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

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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 March 31, 2002 was £3,928,000 (March 31, 2001: £3,115,000).

New Accounting Standards

New UK Accounting Standards and Pronouncements Applicable to the Group

There were no new UK accounting standards applicable to the Group.

New US Accounting Standards and Pronouncements Applicable to the Group

Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board ("FASB'') issued Statement of Financial Accounting Standard ("SFAS'') No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible a ssets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

The Group is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.

SFAS No. 141 requires that the Group evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. SFAS No. 142 requires the Group to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Group is required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss is measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle.

In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires the Group to perform an assessment of whether there is an indication that goodwill and equity-method goodwill is impaired as of the date of adoption. To accomplish this the Group must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Group has up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit's carrying amount. To the extent a reporting unit's carrying amount exceeds its fair value, an indication

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exists that the reporting unit's goodwill may be impaired and the Group must perform the second step of the transitional impairment test. In the second step, the Group must compare the implied fair value of the reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of it assets (recognized and unrecognised) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Group's statement of earnings.

And finally, any unamortized negative goodwill and negative equity-method goodwill existing at the date SFAS No. 142 was adopted must be written off as the cumulative effect of a change in accounting principle.

At March 31, 2002, the Group was required to segregate and specifically identify intangible assets into goodwill and other intangible assets recorded in our consolidated financial statements comprise only goodwill. In addition, because of the extensive effort required to comply with SFAS No. 141 and 142, it is not practicable to reasonably estimate the impact of any transitional impairment losses required to be recognised as the cumulative effect of a change in accounting principle at the date of this document.

Impairment or Disposal of Long-Lived Assets

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. SFAS No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale.

SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Statement is to be applied prospectively. Early adoption is permitted. The Group has not yet determined the impact, if any, the adoption of this standard will have on its financial position or results of operations.

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 (repayable May 2003). This facility is secured by a fixed and floating charge over the assets of the Group. During the year a separate borrowing facility of £0.8 million was secured by the Group's Japanese subsidiary.

As at March 31, 2002, the Group had undrawn committed facilities of £15.7 million, denominated £15 million in Sterling and £0.7 million in Japanese Yen. Following the successful Rights Issue

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and the sale of its remaining stake in Opticom, the Group did not need to draw down against its Sterling facility during the year. Under the terms of the Sterling facility, a draw down would only have been permissible if certain covenants had been complied with. For certain periods during the year, one of these covenants was not met. The Group does not believe that this factor affected either its commercial credit rating or its ability to access alternative sources of financing.

The Group also held short-term deposits at March 31, 2002 of £34.0 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.

The Group has now negotiated a new revised £15 million facility with the Royal Bank of Scotland. It will be made available to the Group for 364 days from the date of signing. The facility has a covenant package that will vary over its term. Should the Group fail to meet any of the covenants which apply at any given point in time, then it may be unable to draw down under the facility. Other factors which may affect the Group's ability to maintain an appropriate level of liquidity include, but are not limited to, the degree to which new product releases achieve market acceptance, the ability to collect account's receivable as they fall due and general economic conditions in the major markets in which the Group operates. The other matters discussed under the heading "Risk Factors'', should also be considered in this respect.

The Group believes that the requirements of its existing business and future investment can be met for at least the next 12 months from the capital raised from the rights issue, cash generated internally and from the £15 million bank facility.

Capital Resources

At March 31, 2002, the Group had net assets of £73.4 million, compared to £30.6 million at the start of the year. The increase is mainly the result of from the proceeds from the rights issue discussed above.

Net assets as at March 31, 2002 included goodwill of £2.6 million (2001: £13.8 million), tangible fixed assets and investments of £8.2 million (2001: £9.6 million), net current assets of £65.6 million (2001: £9.5 million) and other liabilities of £3.0 million (2001: £2.3 million).

Net funds (ie net cash less net debt) increased by £41.2 million during the year. This reflects the net cash outflow before management of liquid resources and financing of £11.4 million and the proceeds from the Rights Issue. Operating activities generated a net cash outflow of £15.4 million (2001: cash inflow of £1.9 million) reflecting primarily the £15.5 million operating loss for the year.

Material commitments

The following table shows amounts committed to as at March 31, 2002. Further details are available in Item 8, Notes 26 and 27.

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The Euro

On January 1, 1999, 11 of the 15 European Union member states irrevocably locked their currencies at fixed rates of exchange and adopted a new currency, the Euro. Effective from that date the Euro became legal currency in those member states for all financial transactions except for those involving notes or coins. Early in 2002 Euro notes and coins were introduced to replace the respective local currencies of the participating member states. It is not clear whether or when the United Kingdom will adopt the Euro, such a change requiring a decision by the U.K. Government to proceed. The current U.K. Government has stated that it would subsequently hold a national referendum on the issue of entry into the European Monetary Union.

The financial information systems used in the European offices are all capable of operating in multiple currencies including the Euro. The costs relating to the introduction of the Euro have been negligible.

To date, the Group has not yet experienced any significant margin erosion due to retail price-points moving to the Euro. As the introduction of the Euro is still in the initial stages we will continue to monitor the position carefully. Whilst there is no consistent Pan-European price-point, we are seeing closer parity in pricing in the major markets and where this does not occur in the 'smaller' markets, product localisation continues to minimise any grey imports.

Research and Development, Patents and Licenses

During the three fiscal years ended March 31, 2000, 2001 and 2002 the Group has invested an aggregate of just over £128 million (including employment costs) on research and development. 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 of the Group's net revenues, liquidity and capital resources.

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ITEM 6 – DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

Directors and Executive Officers of the Company

The business address of the directors and executive officers of the Group is Wimbledon Bridge House, 1 Hartfield Road, Wimbledon, London SW19 3RU.

Stuart Cruickshank joined Eidos as Group Finance Director in September 2001 from Kingfisher Plc, where he was the Finance Director of Woolworths. Prior to joining Kingfisher, Mr. Cruickshank was Corporate Financial Director at United Biscuits and Finance Director of McVities U.K. and KP Foods. Mr. Cruickshank has also worked at Grand Metropolitan (Diageo) and Whitbread, where he undertook a wide variety of senior financial roles.

Jeremy Heath-Smith has served as a director of the Company since April 1996. From November 1994 to April 1996, Mr. Heath-Smith served as a main Board Director of CentreGold plc in addition to his role as Managing Director of U.S. Gold Limited. In July 1988, he founded Core Design Limited, an interactive software developer and publisher that was acquired by CentreGold plc in 1994, where he continues to serve as Managing Director.

Ian Livingstone has served as Creative Director since April, 2002 and was previously Chairman of the Company's Board of Directors since October 1995. From May 1994 to October 1995, Mr. Livingstone served as Managing Director of Domark. Since 1982, he has authored and co-authored the "Fighting Fantasy'' series of interactive game books, which have sold in excess of 14 million copies worldwide. In 1975, he co-founded Games Workshop Limited, a role-playing game company, where he served as Joint Managing Director and subsequently Chairman of the Board until 1991. In 2000 he was awarded an Honorary Doctorate by the University of Abertay Dundee for his services to computer gaming

Michael McGarvey has served as Chief Executive Officer since November 1, 2000 and as a director of the Company since October 1998. From May 1996 to October 1998, Mr. McGarvey served as Chief Executive Officer of Eidos Interactive, Inc., a wholly owned subsidiary of the

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Company. From November 1994 to May 1996, he served as Vice President of Sales and Marketing of Domark Software, Inc. From February 1994 to November 1994, he served as Director of Sales of Domark Software, Inc. From May 1990 to February 1994, he served as Director of Sales for Diceon Electronics, a manufacturer of printed circuit boards.

Simon Protheroe has served as Technical Director of the Company and as a director since June 1994. From July 1993 to December 1993, Mr. Protheroe served as a consultant to the Group. He has conducted post-graduate studies and subsequent research in the field of image processing and he has published works in the fields of image sequence analysis, machine vision and neural networks. He has developed software for the Joint European Torus and the Defence Research Agency.

David Adams, was appointed to the Board in May 2001 as a Non-Executive Director. He is currently Deputy Chief Executive and the Finance Director of House of Fraser Plc, a position he has held since 1997. Prior to his House of Fraser role, Mr. Adams had been Finance Director of Asprey Plc, Finance Director of Texas Homecare and Finance Director of Dorothy Perkins & Top Shop.

John van Kuffeler has served as Non-Executive Chairman of the Company since April 2002. He is also Chairman of Provident Financial PLC; The Fleming Technology Trust PLC; The Finsbury Smaller Quoted Companies Trust PLC; and Huveaux PLC. Prior to taking up these appointments he was Chief Executive of Provident Financial PLC and Brown Shipley Holdings PLC.

Victor Steel has served as a Non-Executive Director of the Company since September 1998. He is also Chairman of Forbidden Technologies plc, Mygard plc and Ideas Hub plc and non executive Deputy Chairman of the Navy, Army and Air Force Institutes. Mr. Steel's previous appointments were as Chairman of Mansfield Brewery and European Leisure plc and as executive Director of Kingfisher Plc, Guinness Plc and Beecham Group Plc. He is a fellow of the Institute of Marketing.

Allen Thomas, a lawyer qualified in England and America, has served as a Non-Executive Director of the Company since September 1998. Mr. Thomas currently also serves as a non-executive director of Marconi plc, Highway Insurance Holdings plc and Penna Consulting Plc. Mr. Thomas was a partner at the international law firm Paul, Weiss, Rifkind, Wharton & Garrison from 1973 to 1992, and was the founding partner of the firm's Hong Kong office.

Rolf Duhnke has served as Managing Director of Eidos Interactive (Deutschland) GmbH, a wholly owned subsidiary, of the Company since March 1995. From 1988 to 1995 Mr. Duhnke served as Logistics Director of Sega, Germany. Prior to that he served as a Label Manager of Bertelsmann-Daughter Ariolasoft.

Robert Dyer has served as President of Eidos Interactive, Inc., a wholly owned subsidiary of the Company, since November 1998. From February 1994 to October 1998, Mr. Dyer worked at Crystal Dynamics, Inc. and in his most recent position, was President. Prior to joining Crystal Dynamics, Mr. Dyer worked for Disney Home Video International as Director of Sales and Business Development from December 1991 through January 1994.

Erik Ford has served as General Manager of Eidos Interactive PTE Limited (Singapore), a wholly owned subsidiary of the Company, since November 1998. Mr. Ford helped established this office to oversee sales and marketing in the Asia Pacific region. From March 1996 to October 1998, Mr. Ford served as the Sales and Marketing Manager for Virgin Interactive Entertainment (Asia Pacific).

Satoshi Honda has served as Managing Director of Eidos Interactive KK (Japan), a wholly owned subsidiary of the Company, since June 1998. From 1992 to April 1998, he served as President and

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Chief Executive Officer of Electronic Arts, Japan. From 1982 to 1992, he served in various senior positions for Victor Entertainment Inc. and Victor Musical Industries Inc.

Jonathan Kemp has served as European Managing Director of the Company since November 2000 and as Managing Director of Eidos Interactive Limited, a wholly owned subsidiary of the Company since November 1998. From October 1997 to November 1998, Mr. Kemp served as Sales Director of Eidos Interactive Limited. From March 1994 to October 1998, Mr. Kemp served as Director of Sales of Microprose Software Limited.

Patrick Melchior has served as Managing Director of Eidos Interactive France SARL, a wholly owned subsidiary of the Company, since October 1996. From January 1995 to September 1996, Mr. Melchior served as European Sales and Marketing Director of EMME. From September 1993 to December 1994, Mr. Melchior served as Sales Director at EURO- CD. From January 1991 to August 1993, Mr. Melchior was General Manager, Microprose, France. Prior to that he spent six years in the food industry in the U.S.

Compensation Paid to Directors

The amounts paid to Directors during fiscal 2002 was as follows:

All the staff in the Group's publishing division with at least six months continuous service were paid a £500 bonus during the period in acknowledgment of their on going commitment to the business in the face of a Group-wide pay freeze and continued difficult trading conditions.

Benefits paid to Mr. McGarvey and Mr. Heath-Smith include £63,908 and £75,042 respectively for housing allowances, which in respect of Mr. Heath-Smith has been terminated with effect from 2 September 2002.

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Employment Contracts of Currently Serving Directors and Executive Officers

Mr. Cruickshank and the Company are parties to a Service Agreement pursuant to which Mr. Cruickshank serves as Finance Director. The initial salary paid under the agreement is £190,000, reviewable from time to time. Either party may terminate the agreement with six months' notice. Mr. Cruickshank is also entitled to bonuses as determined by the Board of Directors of the Company, however in the year ended March 31, 2002, no bonus was paid.

Mr. Heath-Smith and Core Design Limited are parties to a Service Agreement. The initial salary payable under the agreement was £150,000 per year, reviewable from time to time. Mr. Heath-Smith's salary was subsequently increased by the Board of Directors to £250,000 per year. Either party may terminate the agreement with six months' notice. Mr. Heath-Smith is also entitled to bonuses as determined by the Board of Directors of the Company, however in the year ended March 31, 2002 no bonus was paid. Mr. Heath-Smith is also entitled to a royalty based upon the underlying profitability of Core Design Limited, the internal development studio responsible for Tomb Raider and many of the Group's games. In the year ended March 31, 2002, he earned a royalty of £143,000.

Mr. Livingstone stepped down as Chairman of the Board in April 2002 and became Creative Director. He has a Service Agreement with the Company. His initial salary was £70,000 per year, reviewable from time to time. Mr. Livingstone's currently salary is £240,000 per year. Either party may terminate the agreement with six months' notice. Mr. Livingstone is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. McGarvey and the Company are parties to a Service Agreement pursuant to which Mr. McGarvey serves as Chief Executive Officer. The initial salary payable under the Agreement was £150,000 per year, reviewable from time to time. Mr. McGarvey's salary was subsequently increased by the Board of Directors to £348,190 per year. Either party may terminate the agreement with twelve months' notice. Mr. McGarvey is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Protheroe and the Company are parties to a Service Agreement pursuant to which Mr. Protheroe serves as Technical Director. The initial salary payable under the Agreement was £30,000 per year, reviewable from time to time. Mr. Protheroe's salary was subsequently increased by the Board of Directors to £82,500 per year. Either party may terminate the agreement with six months' notice. Mr. Protheroe is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Duhnke and Eidos Interactive Limited are parties to a Service Agreement pursuant to which Mr. Duhnke serves as Managing Director of Eidos Interactive (Deutschland) GmbH. The initial salary payable was DM160,000 per year, reviewable from time to time. Mr. Duhnke's salary was subsequently increased by the Board of Directors to Euro 205,361. Either party may terminate the agreement with six months' notice. Mr. Duhnke is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Dyer serves as President of Eidos Interactive, Inc. The initial salary payable was agreed at $180,000 per year, reviewable from time to time. Mr. Dyer's salary was subsequently increased to $260,000. Mr. Dyer is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Ford and Eidos Interactive Limited are parties to a Service Agreement pursuant to which Mr. Ford serves as General Manager of Eidos Interactive Pte Limited (Singapore). The initial salary payable was U.S.$57,035 per year, reviewable from time to time. Mr. Ford's salary was subsequently increased by the Board of Directors to Sing $141,115. Either party may terminate

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the agreement with three months' notice. Mr. Ford is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Satoshi Honda and Eidos Interactive Limited are parties to a Service Agreement pursuant to which he serves as Managing Director of Eidos Interactive KK. The initial salary payable is Yen 28,000,000 per year, reviewable from time to time. Either party may terminate the agreement with six months' notice. Satoshi Honda is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Kemp and Eidos Interactive Limited are parties to a Service Agreement pursuant to which Mr. Kemp serves as European Managing Director. The initial salary payable under the agreement is £175,000 per year, reviewable annually. Either party may terminate the agreement with six months' notice. Mr. Kemp is also entitled to other bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

Mr. Melchior and Eidos Interactive Limited are parties to a Service Agreement pursuant to which Mr. Melchior serves as Managing Director of Eidos Interactive France SARL. The initial salary payable was FF 600,000 per year, reviewable from time to time. Mr. Melchior's salary was subsequently increased by the Board of Directors to Euro 205,361. Either party may terminate the agreement with six months' notice. Mr. Melchior is also entitled to bonuses as determined by the Board of Directors of the Company and in the year ended March 31, 2002, a £500 bonus was paid.

As is stated in the above descriptions of employment contracts, bonuses are being paid entirely at the discretion of the Board of Directors of the Company. Executive Directors' and Officers' remuneration and bonuses are based on recommendations made by the Remuneration Committee.

Board Practices

The Audit Committee

This committee currently comprises Mr. Steel (Chairman), Mr. Thomas and Mr. Adams. The Company believes all members of the Audit Committee are "independent'' within the meaning of the Sarbanes-Oxley Act of 2002 and the rules of the Nasdaq stock market. The Committee meets no less than three times a year with the external auditors together with various representatives of the executive, finance and internal audit functions in attendance. It also meets with the external auditors in private after each meeting.

The Committee reviews the interim and full-year results before presentation to the Board, the findings of the internal and external auditors and the Group's internal control systems and financial accounting procedures and policies. It also advises the Board on the appointment of external auditors and on the scope, results and cost effectiveness of both the audit and non-audit work.

The Remuneration Committee

This committee currently comprises Mr. Thomas (Chairman), Mr. Steel, Mr. van Kuffeler and Mr. Adams. It is responsible for the remuneration of the Executive Directors and Officers and advises the Board on the broad framework for executive remuneration and determines, on behalf of the Board, the remuneration packages of individual Directors and senior management. In setting the policy, the Committee considers a number of factors including:

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The Committee meets on an ad hoc basis and has also received independent advice from external remuneration consultants.

Employee Information

The average weekly number of persons (including Executive Directors) employed by the Group during the year was:

Computer entertainment software staff can be further analyzed as follows:

Relationship between management and unions

There are no relationships between labor unions and any company within the Group.

Temporary employees

Within the Group, during fiscal 2002 there were on average 34 non-permanent employees every month.

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Share Ownership – Directors and Executive Officers

Interest in Shares

The interests of the current Directors and Executive Officers in the shares of the company as at August 31, 2002 were as follows.