Konami Grp Corp Regulatory News (KNM)

Consolidated Financial Results

for the Six Months Ended September 30, 2008

(Prepared in Accordance with U.S. GAAP)

November 6, 2008

KONAMI CORPORATION

Address:

7-2, Akasaka 9-chome, Minato-ku, Tokyo, Japan

Stock code number, TSE:

9766 

Ticker symbol, NYSE:

KNM

URL:

www.konami.net

Shares listed:

Tokyo Stock Exchange, New York Stock Exchange, London Stock Exchange

and Singapore Exchange

Representative:

Kagemasa Kozuki, Representative Director and Chief Executive Officer

Contact:

Noriaki Yamaguchi, Representative Director and Chief Financial Officer

(Phone: +81-3-5771-0222)

Date of dividend payment:

November 28, 2008

Adoption of U.S. GAAP:

Yes

1. Consolidated Financial Results for the Six Months Ended September 30, 2008

(Amounts are rounded to the nearest million)

(Millions of Yen, except per share data)

Net revenues

Operating

income 

Income before income taxes

Net income 

Six months ended September 30, 2008

% change from previous period

146,904

9.8%

22,844

75.2%

22,408

71.4%

11,964

90.3%

Six months ended September 30, 2007

% change from previous period

133,743

11.8%

13,042

28.9%

13,075

32.3%

6,288

23.0%

Basic net income per share (yen)

Diluted net income per share (yen)

Six months ended September 30, 2008

87.07

87.01

Six months ended September 30, 2007

45.81

45.80

(Millions of Yen, except per share amounts)

Total assets

Total stockholders'

equity

Equity ratio

Stockholders'

equity per share

September 30, 2008

324,583

191,135

58.9%

1,390.45

March 31, 2008

319,248

182,759

57.2%

1,330.88

2. Cash Dividends

Record Date

Cash dividends per share (yen)

Interim

Year end

Annual

Year ended March 31, 2008

27.00

27.00

54.00

Year ending March 31, 2009

27.00

-

-Forecast- 

-

27.00

54.00

3. Consolidated Earnings Forecast for the Year Ending March 31, 2009

(Millions of Yen, except per share data)

Net revenues

Operating

income 

Income before income taxes

Net income

Net income per share

Year ending March 31, 2009

% change from previous year

330,000

11.0%

45,000

33.0%

44,500

35.5%

26,000

41.7%

189.34

4. Other

 1.

Changes accompanying amendment of accounting standard: Yes

 2.

Other: None

Please refer to page 10 for details.

 1.

Number of shares issued: (Treasury stock included)

 Six months ended September 30, 2008

143,500,000

 shares

 Year ended March 31, 2008

143,500,000

 shares

 2.

Number of Treasury Stock:

 Six months ended September 30, 2008

6,037,956

 shares

 Year ended March 31, 2008

6,178,443

 shares

 3.

Average number of shares outstanding:

 Six months ended September 30, 2008

137,406,295

 shares

 Six months ended September 30, 2007

137,272,418

 shares

Cautionary Statement with Respect to Forward-Looking Statements:

Statements made in this document with respect to our current plans, estimates, strategies and beliefs, including the above forecasts, are forward-looking statements about our future performance. These statements are based on management's assumptions and beliefs in light of information currently available to it and, therefore, you should not place undue reliance on them. A number of important factors could cause actual results to be materially different from and worse than those discussed in forward-looking statements. Such factors include, but are not limited to: (i) changes in economic conditions affecting our operations; (ii) fluctuations in currency exchange rates, particularly with respect to the value of the Japanese yen, the U.S. dollar and the Euro; (iii) our ability to continue to win acceptance of our products, which are offered in highly competitive markets characterized by the continuous introduction of new products, rapid developments in technology and subjective and changing consumer preferences; (iv) our ability to successfully expand internationally with a focus on our Digital Entertainment business and Gaming & System business; (v) our ability to successfully expand the scope of our business and broaden our customer base through our Health & Fitness business; (vi) regulatory developments and changes and our ability to respond and adapt to those changes; (vii) our expectations with regard to further acquisitions and the integration of any companies we may acquire; and (viii) the outcome of existing contingencies.

Please refer to page 8 for information regarding the assumptions and other related items used in the preparation of these forecasts.

Business Performance

1. Consolidated Results of Operations

(1) Business Overview

KONAMI CORPORATION and its subsidiaries ("Konami") are major players in the entertainment industry, which has experienced the widespread distribution of games consoles and handheld game devices in the home video market, particularly in expanding overseas markets, such as North America and Europe.

In the health industry, as a result of the introduction of the "designated checkups and health guidance" program, launched by the Japanese government in April 2008 in an effort to prevent lifestyle diseases; the demand for products and services aimed at maintaining and promoting good health, especially in the area of metabolic syndrome, is expected to increase.

Under these conditions, in Konami's Digital Entertainment segment, METAL GEAR SOLID 4 GUNS OF THE PATRIOTS recorded steady sales upon its simultaneous worldwide release in June 2008. Winning Eleven (titled PRO EVOLUTION SOCCER outside Japan), DanceDanceRevolution, and the JIKKYOU PAWAFURU PUROYAKYU series also enjoyed brisk sales, while, in September 2008, a home video game version of the popular amusement arcade game QUIZ MAGIC ACADEMY appeared to widespread market acclaim. Sales of products for amusement arcades and card games have also been strong.

In our Health & Fitness segment, we opened several new clubs under our own direct management and adding new facilities to the list of those outsourced to us. We have also expanded our product lineup and have taken steps to enhance the range of services available, including launches of fitness club programs that feature computerized health management and incorporate new products.

In our Gaming & System segment, slot machines such as the K2V series and the Advantage 5 sold well. Steady sales were also generated from the Konami Casino Management System and from participation agreements (a form of equipment sale under which profits are shared). A sustained effort was made to expand our market share in the North American market and elsewhere.

In terms of the consolidated results for the six months ended September 30, 2008, net revenues amounted to Y146,904 million (a year-on-year increase of 9.8%), operating income was Y22,844 million (a year-on-year increase of 75.2%), income before income taxes was Y22,408 million (a year-on-year increase of 71.4%), and net income was Y11,964 million (a year-on-year increase of 90.3%).

(2) Performance by Business Segment

Summary of net revenues by business segment:

Millions of Yen

Six months ended

September 30, 2007

Six months ended

September 30, 2008

 % change 

Digital Entertainment 

Y74,141

Y93,030

25.5

Health & Fitness 

43,899

45,456

3.5

Gaming & System

7,600

7,854

3.3

Other and Eliminations

8,103

564

(93.0)

Consolidated net revenues

Y133,743

Y146,904

9.8

Digital Entertainment

Computer & Video Games business: METAL GEAR SOLID 4 GUNS OF THE PATRIOTS for PlayStation 3 was released simultaneously worldwide. Truly overwhelming in scale, this is the first PlayStation 3 title to use the full capacity of a Blu-Ray Disc. It received accolades even before its release and was honored with the prize of excellence in the Entertainment Division of the 11th Japan Media Arts Festival sponsored by the Japanese Agency for Cultural Affairs. The total number of the copies shipped has already passed the four million mark and the sales are still steadily increasing - testimony to the prowess of the METAL GEAR SOLID brand.

In Japan, QUIZ MAGIC ACADEMY DS, the DS version of the hit arcade game QUIZ MAGIC ACADEMY, went on sale in September 2008 and has achieved great popularity. This game features an "Amusement Link" that enables coordination with the arcade version of QUIZ MAGIC ACADEMY V. It can also download the latest quiz data or check the national quiz matchup rankings using a special original mode.

In the field of home video game software, J.League Winning Eleven 2008 CLUB CHAMPIONSHIP and beatmania IIDX 14 GOLD both enjoyed brisk sales, as did the standard series JIKKYOU PAWAFURU PUROYAKYU.

Amusement business: jubeat, an innovative new music game that utilizes our "e-AMUSEMENT" service that network with amusement arcades throughout Japan, registered impressive sales. HORSERIDERS, a horserace-simulation game using racehorse cards also achieved robust sales. Meanwhile MAH-JONG FIGHT CLUB7, the latest offering in the series, maintained the series' popularity thanks in part to the addition of a new league system feature. WORLD SOCCER Winning Eleven ARCADE CHAMPIONSHIP 2008 also continued to sell well.

In the field of token-operated games for commercial arcades, FantasicFever3 TwinkleFairytale, an extra-large token-operated game machine, recorded favorable sales. The Tower Pusher series - the WONDERMARCH and the METEOR SPARK, the first single-pusher machines to utilize the "e-AMUSEMENT" service - enjoyed strong sales.

Card games business: The YU-GI-OH! TRADING CARD GAME series continued to record brisk sales.

In North America, DanceDanceRevolution X and DanceDanceRevolution Hottest Party 2, the latest additions to the repeatedly popular DanceDanceRevolution series, were released to popular acclaim. Meanwhile repeat sales of DanceDanceRevolution SuperNOVA 2, DanceDanceRevolution HOTTEST PARTY and KARAOKE　REVOLUTION　American　Idol　ENCORE, all of which went on sale last year, were all strong.

In Europe, DancingStage Hottest Party sold briskly, while PRO EVOLUTION SOCCER 2008, released last year, remained popular. The Wii version has sold particularly well.

In terms of financial performance, consolidated net revenues for the six months ended September 30, 2008 of this segment amounted to Y93,030 million (a year-on-year increase of 25.5%).

Health & Fitness

Operation of fitness clubs: As Japanese society becomes more health-conscious, the country's fitness clubs are attracting more middle-aged and senior members. Nonetheless, competition has intensified due to a decline in younger members, who were once the mainstay of the industry, and the accelerated pace with which new clubs are opening. As a result, the number of membership per club continues to decline. Given these circumstances, Konami has taken steps to offer high-quality services on two fronts: the services available at our clubs and the products we sell. Specifically, we have opened new locations under our own direct management, increased the number of facilities outsourced to us, and enhanced our product lineup.

Three new clubs under Konami's direct management opened during the quarter: in Shinnagata (Hyogo Prefecture), in April 2008, and in Musashi-Kosugi (Kanagawa Prefecture), and in Imazato (Osaka Prefecture), both opened in June 2008. Each of these facilities offers something unique: the Shinnagata club, for example, has a spacious seven-lane, 25-meter pool, while the Imazato club has a wading pool. In August, a new program to fight metabolic syndrome, the Targeting Waist Program, was launched simultaneously at all directly run clubs nationwide. Meanwhile the facilities of what used to be Sportsplex Japan Co., Ltd. (SPJ), which was merged with Konami Sports & Life Co., Ltd. on June 30, 2008, have been upgraded by expanding Konami's broad range of high-quality services to them.

Operation of sports facilities outsourced to us: The list of facilities outsourced to us also grew with the addition of five new clubs, such as Shitsugen no Kaze Arena Kushiro in Hokkaido. In running such public facilities Konami makes use of its extensive knowhow and proven record of achievement, thus helping local residents get into better shape. As a result of the above additions, as of September 30, 2008 the number of fitness clubs either run directly by Konami or outsourced to it totaled 337 throughout Japan.

Health products: Konami exhibited at the Health & Fitness Japan 2008 in June 2008 and was represented by Combi Wellness Corporation at the International Home Care & Rehabilitation Exhibition 2008 in September　2008. Both events provided the opportunity to unveil products designed to contribute to healthy living on all fronts, including exercise, welfare, and prevention of the need for nursing care. We also introduced enhanced fitness club programs featuring computerized health management and incorporating new products. A case in point is the Targeting Waist Program which combines exercise and diet advice from an instructor with an exercise management system utilizing the multifunctional USB pedometer e-walkeylife2 and use of a new supplement called GLAVONOID.

Three members of the Konami swimming and gymnastics teams were chosen to represent Japan at the Beijing Olympics. They helped bring home a silver medal in the men's team gymnastics and a bronze medal in the men's 400m medley relay.

In terms of financial performance, consolidated net revenues for the six months ended September 30, 2008 of this segment amounted to Y45,456 million (a year-on-year increase of 3.5 %).

Gaming & System

In North America Konami has steadily increased market share. The K2V series, now a mainstay of the market, and the Advantage 5, Konami's first five-reel mechanical slot machine, both enjoyed strong sales. An increase was also seen in sales under participation agreements, a form of profit sharing that ensures steady revenues, and in sales of the Konami Casino Management System, which brings in revenue from maintenance and service.

In the Australian casino market, demand continued to decline due to restrictions imposed by some states on the number of gaming machines installed, the effects of smoking restrictions at clubs and pubs, and the latest amendments to the Australian tax code. As a result, Konami's slot machine sales were negatively affected. In this market climate, Konami introduced Australia's first mechanical slot machine, the Advantage 5, following its release in North America. We are aiming at boosting the Konami Casino Management System adopted by major casino operators, and increasing sales by enhancing services to current customers, offering a steady stream of new products, and developing new clientele both domestically and overseas.

Konami products were showcased at the NIGA Convention & Trade Show held in California in April 2008, Global Gaming Expo Asia in Macao in June 2008, and the Australasian Gaming Expo, which was the largest casino trade show in Oceania, in Sydney, Australia, in August 2008. Those drew large crowds and featured both North American and Australian models of the Advantage 5 as well as the Konami Casino Management System, already highly acclaimed in North America. We highlighted our extensive lineup of products by also displaying our popular video reel slot machine, the link progressive machine RAPID FIRE Grand Prix, and, targeting the New Zealand market, the multigame SELEXION.

In terms of financial performance, consolidated net revenues for the six months ended September 30, 2008 of this segment amounted to Y7,854 million (a year-on-year increase of 3.3%).

2. Cash Flows

Cash flow summary for the six months ended September 30, 2008:

Millions of Yen

Six months ended

September 30, 2007

Six months ended

September 30, 2008

Change

Net cash provided by operating activities

Y7,159  

Y16,044

Y8,885

Net cash used in investing activities

(10,580)

(1,593)

8,987

Net cash used in financing activities

(5,349)

(5,082)

267

Effect of exchange rate changes on cash and cash equivalents

525

(354)

(879)

Net increase (decrease) in cash and cash equivalents 

(8,245)

9,015

17,260

Cash and cash equivalents, end of the period

49,088

61,145

12,057

Cash and cash equivalents (hereafter, referred to as "Net cash"), for the six months ended September 30, 2008, amounted to Y61,145 million, an increase of Y9,015 million compared to the year ended March 31, 2008, and a year-on-year increase of 24.6%.

Cash flow summary for each activity for the six months ended September 30, 2008 is as follows:

Cash flows from operating activities:

Net cash provided by operating activities amounted to Y16,044 million for the six months ended September 30, 2008, a year-on-year increase of 124.1%. Despite the increase in inventories and payments for accounts payable, this increase primarily resulted from an increase in net income and collection of accounts receivable.

Cash flows from investing activities:

Net cash used in investing activities amounted to Y1,593 million for the six months ended September 30, 2008, a year-on-year decrease of 84.9%. In spite of the increase in capital expenditures, the decrease in the amount used mainly resulted from the proceeds of sales of property and equipment.

Cash flows from financing activities:

Net cash used in financing activities amounted to Y5,082 million for the six months ended September 30, 2008, a year-on-year decrease of 5.0%. This primarily resulted from purchases of treasury stock and payments of dividends. 

3. Outlook for Fiscal Year Ending March 31, 2009

Digital Entertainment

We intend to focus on the European and North American video game software markets, where growth is more stable than in the mature domestic Japanese market. The Winning Eleven soccer game series (titled PRO EVOLUTION SOCCER abroad), of which over 48 million copies have been shipped worldwide to date, will continue being offered for multiple platforms across the globe. The latest addition to the Winning Eleven series (titled PRO EVOLUTION SOCCER 2009 outside Japan) has already been released to the European market with its many soccer fans, appearing there on October 16, 2008. This new game has even more selling power as it is under license with the Union of European Football Associations (UEFA) and it now features the UEFA Champions League, something fans have long desired.

In North America, we intend to focus on the ever-popular genre of music games, such as the DanceDanceRevolution series which is being promoted with a new offering available for multiple platforms, Rock Revolution, which featuring guitar, bass, and drums.

We intend to enhance our lineup of titles distributed online, starting with the dungeon adventure RPG Chaotic Eden, which is to be released for distribution in Korea before the end of the fiscal year. With the spread of network-enabled game consoles we will also actively cater to demand for download sales, offering new titles and Konami's own original content.

In the field of video games for commercial arcades, our lineup of products utilizing the "e-AMUSEMENT" service will be further enhanced.

In the field of music games, DanceDanceRevolution X and beatmania IIDX 16 EMPRESS are planned to be released before the end of the fiscal year. Other offerings from our standard series are also to be released, including BASEBALL HEROES 2008 制覇.

In the field of card games, the YU-GI-OH! TRADING CARD GAME series will continue to be sold worldwide.

In developing popular content, moreover, we intend to pursue synergies by adopting a multi-pronged strategy not restricted only to video game software, video games for commercial arcades, or card games.

Health & Fitness

Konami is committed to the challenge of becoming a total health services provider with a strong focuses on "exercise," "leisure," and "nutrition." We are therefore designing and offering health programs that combine fitness instruction with nutritional guidance, and developing health-related equipment that is both practical and effective. Konami Sports & Life Co., Ltd. is one of the largest fitness club operators in Japan, with a network of over 300 locations and also designs and manufactures its own fitness equipment and supplements. That duality gives us a big advantage: we can test the effectiveness of our equipment and products at our own sports clubs, then reflect the results in developing new products. In promoting our health services business Konami's basic strategy centers on making the most of this strength to achieve synergies between different aspects of our operations - enhancing club programs, computerizing health management and expanding product lineup.

While middle-aged and older adults in Japan are becoming more health-conscious and joining fitness clubs in greater numbers, competition in the industry continues to intensify due to a decline in younger members and the proliferation of new clubs. It is thus expected that membership per club will continue to decline. Nonetheless, as the Japanese population ages, and with the adoption of a national strategy for preventing lifestyle diseases in the form of the designated health guidance program, new opportunities promise to manifest themselves in the areas of running fitness clubs and developing and marketing fitness equipment. Konami intends to continue to respond to the diverse needs of this market by offering fitness promotion programs designed in light of what we have learned from our experience in the fitness club management, and by developing practical health-related equipment.

Gaming & System

Konami's five-reel mechanical slot machine the Advantage 5 has proved immensely popular in the North American market, where mechanical slot machines predominate. Konami intends to aggressively promote it in Australia and other markets as well. We also plans to increase efforts to market video slot machines, which are popular in Australia, focusing chiefly on the mainstay K2V series. Konami also intends to increase new sales of the Konami Casino Management System in Australia, which is already acclaimed in North America, focus on increasing regular income from participation (profit-sharing) agreements and maintenance and servicing of casino management systems, and promote them to achieve the goal of placing our business on a firmer footing.

By strengthening R&D collaboration between the three hubs of our business - the United States, Australia, and Japan - we intend to achieve greater management efficiency, develop new products that respond to the needs of a changing society, enhance the added value of our existing lineup, and bolster production and sales. Entertaining people is our special domain, and at the Global Gaming Expo to take place in Las Vegas in November 2008 - the industry's biggest trade show - we will unveil a slate of new products designed to entertain people more than ever.

Projected consolidated results for the fiscal year ending March 31, 2009 are as follows: net revenue of 330,000 million yen; operating income of 45,000 million yen; income before income taxes of 44,500 million yen; and net income of 26,000 million yen. Thus, there is no change from the figures released in the Consolidated Financial Results for the Year Ended March 31, 2008, dated May 15, 2008.

4. Other

(1) Changes in significant consolidated subsidiaries during the period (status changes of subsidiaries due to changes in the scope of consolidation) : None

(2) Adoption of simplified methods in accounting principles for quarterly consolidated financial statements: None

(3) Changes in accounting principles, procedures and reporting policies for quarterly consolidated financial statements (items to be disclosed in "Significant change in preparation basis for quarterly consolidated financial statements")

1.

Changes accompanying amendment of accounting standard: Yes

Effective April 1, 2008, Konami has adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements."SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and specifies disclosures about fair value measurement. The adoption of SFAS No. 157 did not have a significant impact on our consolidated results of operations and financial condition.

 2.

Other: None

5. Consolidated Financial Statements

(1) Consolidated Balance Sheets (Unaudited)

Millions of Yen

Thousands of U.S. Dollars

September 30, 2007

September 30, 2008

March 31, 2008

September 30, 2008

%

%

ASSETS

CURRENT ASSETS:

Cash and cash equivalents 

Y49,088

Y61,145

Y52,130

$590,374

Trade notes and accounts receivable, net 

30,764

23,336

33,802

225,317

of allowance for doubtful accounts of 

Y501 million, Y266 million 

($2,568 thousand) and Y260 million at 

September 30, 2007, September 30, 

2008 and March 31, 2008, respectively 

Inventories 

26,540

32,909

24,374

317,746

Deferred income taxes, net

15,245

19,442

18,275

187,718

Prepaid expenses and other current

assets

12,864

10,439

11,498

100,792

Total current assets

134,501

44.0

147,271

45.4

140,079

43.9

1,421,947

PROPERTY AND EQUIPMENT, net

58,509

19.2

65,821

20.3

66,690

20.9

635,522

INVESTMENTS AND OTHER ASSETS:

Investments in marketable securities 

655

618

659

5,967

Investments in affiliates

6,317

6,433

6,414

62,113

Identifiable intangible assets 

38,249

37,982

38,161

366,728

Goodwill

22,541

21,951

21,935

211,943

Lease deposits

26,446

28,218

28,205

272,453

Deferred income taxes, net

2,028

2,915

2,687

28,145

Other assets

16,000

13,374

14,418

129,130

Total investments and other assets

112,236

36.8

111,491

34.3

112,479

35.2

1,076,479

TOTAL ASSETS

Y305,246

100.0

Y324,583

100.0

Y319,248

100.0

$3,133,948

Millions of Yen

Thousands of U.S. Dollars

September 30, 2007

September 30, 2008

March 31, 2008

September 30, 2008

%

%

%

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Current portion of long-term debt and 

Y7,895

Y8,166

Y8,115

$78,845

capital lease obligations

Trade notes and accounts payable

21,516

15,691

20,410

151,502

Accrued income taxes

4,382

9,498

9,523

91,706

Accrued expenses 

17,041

16,588

21,934

160,162

Deferred revenue 

6,003

12,225

7,848

118,036

Other current liabilities

8,099

8,761

7,283

84,590

Total current liabilities

64,936

21.3

70,929

21.8

75,113

23.5

684,841

LONG-TERM LIABILITIES:

Long-term debt and capital lease 

obligations, less current portion 

38,123

35,330

35,613

341,122

Accrued pension and severance costs 

2,673

2,717

2,699

26,234

Deferred income taxes, net 

12,296

11,221

11,559

108,342

Other long-term liabilities

6,130

8,468

7,181

81,761

Total long-term liabilities

59,222

19.4

57,736

17.8

57,052

17.9

557,459

TOTAL LIABILITIES

124,158

40.7

128,665

39.6

132,165

41.4

1,242,300

MINORITY INTEREST IN

CONSOLIDATED SUBSIDIARIES

3,639

1.2

4,783

1.5

4,324

1.4

46,181

COMMITMENTS AND 

CONTINGENCIES

STOCKHOLDERS' EQUITY:

Common stock, no par value-

Authorized 450,000,000 shares;

47,399

15.5

47,399

14.6

47,399

14.8

457,652

issued 143,555,786 shares, 143,500,000 shares and 143,500,000 shares at September 30, 2007, September 30, 2008 and March 31, 2008, respectively

Additional paid-in capital

77,215

25.3

77,091

23.8

77,078

24.1

744,337

Legal reserve

284

0.1

284

0.1

284

0.1

2,742

Retained earnings

65,142

21.3

81,749

25.2

73,492

23.0

789,312

Accumulated other comprehensive

income

5,711

1.9

2,323

0.7

2,579

0.8

22,429

Treasury stock, at cost-

6,261,702 shares, 6,037,956 shares and 6,178,443 shares at September 30, 2007, September 30, 2008 and March 31, 2008, respectively

(18,302)

(6.0)

(17,711)

(5.5)

(18,073)

 (5.6)

(171,005)

Total stockholders' equity 

177,449

58.1

191,135

58.9

182,759

57.2

1,845,467

TOTAL LIABILITIES AND 

STOCKHOLDERS' EQUITY

Y305,246

100.0

Y324,583

100.0

Y319,248

100.0

$3,133,948

Millions of Yen

Thousands of U.S. Dollars

Six months

ended

September 30, 2007

Six months

ended

September 30, 2008

Year ended

March 31, 2008

Six months

ended

September 30, 2008

%

%

%

NET REVENUES:

Product sales revenue 

Y93,539

Y105,431

Y218,306

$1,017,969

Service revenue 

40,204

41,473

79,096

400,434

Total net revenues 

133,743

100.0

146,904

100.0

297,402

100.0

1,418,403

COSTS AND EXPENSES:

Costs of products sold

56,384

55,865

131,890

539,393

Costs of services rendered 

38,208

39,865

73,298

384,909

Selling, general and administrative

26,109

28,330

58,375

273,535

Total costs and expenses

120,701

90.2

124,060

84.4

263,563

88.6

1,197,837

Operating income

13,042

9.8

22,844

15.6

33,839

11.4

220,566

OTHER INCOME (EXPENSES):

Interest income 

505

381

894

3,679

Interest expense

(516)

(863)

(1,105)

(8,333)

Other, net 

44

46

(794)

444

Other income (expenses), net

33

0.0

(436)

(0.3)

(1,005)

(0.4)

(4,210)

INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EQUITY IN NET INCOME OF AFFILIATED COMPANIES

13,075

9.8

22,408

15.3

32,834

11.0

216,356

INCOME TAXES

5,988

4.5

9,990

6.8

13,080

4.4

96,456

INCOME BEFORE MINORITY INTEREST AND EQUITY IN NET INCOME OF AFFILIATED COMPANIES

7,087

5.3

12,418

8.5

19,754

6.6

119,900

MINORITY INTEREST IN INCOME

OF CONSOLIDATED SUBSIDIARIES

946

0.7

514

0.4

1,589

0.5

4,963

EQUITY IN NET INCOME OF AFFILIATED COMPANIES

147

0.1

60

0.0

180

0.1

579

NET INCOME

Y6,288

4.7

Y11,964

8.1

 Y18,345 

6.2

$115,516

PER SHARE DATA:

Yen

U.S. Dollar

Six months ended

Six months ended

Year ended

Six months ended

September 30, 2007

September 30, 2008

March 31, 2008

September 30, 2008

Basic net income per share

Y 45.81

Y 87.07

Y 133.63

0.84

Diluted net income per share

45.80

87.01

133.57

0.84

Weighted-average common 

share outstanding

137,272,418

137,406,295

137,290,259

Diluted weighted-average

common shares outstanding

137,304,220

137,508,812

137,344,709

(3) Consolidated Statements of Cash Flows (Unaudited)

Millions of Yen

Thousands of 

U.S. Dollars

Six months ended

September 30, 2007

Six months ended

September 30, 2008

Year ended

March 31, 2008

Six months ended

June 30, 2008

Cash flows from operating activities:

Net income

Y6,288

Y11,964

Y18,345

$115,516

Adjustments to reconcile net income to net cash provided by operating activities -

Depreciation and amortization 

5,875

6,204

12,069

59,902

Provision for doubtful receivables 

(22)

13

(248)

126

Equity in net income of affiliated company

(147)

(60)

(180)

(579)

Minority interest 

946

514

1,589

4,963

Deferred income taxes

381

(1,856)

(3,225)

(17,920)

Change in assets and liabilities, net of business acquired:

Decrease (increase) in trade notes and accounts receivable

(1,508)

10,164

(7,483)

98,136

Increase in inventories

(2,974)

(9,007)

(2,117)

(86,965)

Decrease in other receivables

1,349

1,233

902

11,905

Decrease (increase) in prepaid expense

(937)

(1,984)

747

(19,156)

Decrease in trade notes and accounts payable

(2,169)

(4,426)

(623)

(42,734)

Increase in accrued income taxes, net of tax refunds

1,951

478

6,845

4,615

Increase (decrease) in accrued expenses

(3,162)

(3,725)

827

(35,966)

Increase in deferred revenue

343

4,377

2,192

42,261

Increase (decrease) in advance received

739

753

(427)

7,270

Decrease in deposits

(1,261)

(530)

(850)

(5,117)

Other, net

1,467

1,932

2,425

18,654

Net cash provided by operating activities 

7,159

16,044

30,788

154,911

Millions of Yen

Thousands of 

U.S. Dollars

Six months ended

September 30, 2007

Six months ended

September 30, 2008

Year ended

March 31, 2008

Six months ended

September 30, 2008

Cash flows from investing activities:

Capital expenditures

(7,983)

(4,658)

(11,995)

(44,974)

Proceeds from sales of property and equipment

3

1,331

8

12,851

Acquisition of new subsidiaries, net of cash acquired

-

-

(367)

-

Increase in lease deposits, net

(2,369)

1,784

(2,627)

17,225

Other, net

(231)

(50)

(378)

(483)

Net cash used in investing activities

(10,580)

(1,593)

(15,359)

(15,381)

Cash flows from financing activities:

Net decrease in short-term borrowings

-

-

(1,869)

-

Repayments of long-term debt

(296)

(296)

(2,969)

(2,858)

Proceeds from Issuance of bonds

15,000

-

15,000

-

Redemption of bonds

(15,000)

-

(20,000)

-

Principal payments under capital lease

 obligations

(1,327)

(1,437)

(2,596)

(13,875)

Dividends paid

(3,712)

(3,713)

(7,419)

(35,850)

Purchases of treasury stock by parent company

(13)

(100)

(31)

(965)

Other, net

(1)

464

66

4,480

Net cash used in financing activities 

(5,349)

(5,082)

(19,818)

(49,068)

Effect of exchange rate changes on cash and cash equivalents

525

(354)

(814)

(3,417)

Net increase (decrease) in cash and cash equivalents 

(8,245)

9,015

(5,203)

87,045

Cash and cash equivalents, beginning of the period 

57,333

52,130

57,333

503,329

Cash and cash equivalents, end of the period

Y49,088

Y61,145

Y52,130

$590,374

(4) Going concern assumption:

None

(5) Significant changes in stockholders' equity:

None

(6) Segment Information (Unaudited)

Six months ended 

September 30, 2007

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

73,944

Y

43,740

Y

7,600

Y

8,459

Y

133,743

 Intersegment

197

159

-

(356)

-

Total

74,141

43,899

7,600

8,103

133,743

Operating expenses

61,226

40,286

6,650

12,539

120,701

Operating income (loss)

Y

12,915

Y

3,613

Y

950

Y

(4,436)

Y

13,042

Six months ended 

September 30, 2008

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

92,873

Y

45,317

Y

7,854

Y

860

Y

146,904

 Intersegment

157

139

-

(296)

-

Total

93,030

45,456

7,854

564

146,904

Operating expenses

66,725

43,892

6,814

6,629

124,060

Operating income (loss)

Y

26,305

Y

1,564

Y

1,040

Y

(6,065)

Y

22,844

Year ended 

March 31, 2008

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

178,382

Y

86,196

Y

18,471

Y

14,353

Y

297,402

 Intersegment

557

348

-

(905)

-

Total

178,939

86,544

18,471

13,448

297,402

Operating expenses

143,579

81,251

15,677

23,056

263,563

Operating income (loss)

Y

35,360

Y

5,293

Y

2,794

Y

(9,608)

Y

33,839

Six months ended 

September 30, 2008

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Thousands of U.S. Dollars)

Net revenue:

 Customers

$

896,717

$

437,549

$

75,833

$

8,304

$

1,418,403

 Intersegment

1,516

1,342

-

(2,858)

-

Total

898,233

438,891

75,833

5,446

1,418,403

Operating expenses

644,250

423,791

65,791

64,005

1,197,837

Operating income (loss)

$

253,983

$

15,100

$

10,042

$

(58,559)

$

220,566

Notes:

1.

Primary businesses of each segment are as follows:

Digital Entertainment Segment:

Production and sale of digital content and related products including Computer & Video Games, Amusement, Card Games, and Online.

Health & Fitness Segment:

Operation of health and fitness clubs, and production and sale of health and fitness related goods.

Gaming & System Segment: 

Production, manufacture, sale and service of gaming machines and the Casino Management System for overseas markets.

2.

"Other" consists of segments which do not meet the quantitative criteria for separate presentation under SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information."

3.

"Corporate" primarily consists of administrative expenses of the Company.

4.

"Eliminations" primarily consist of eliminations of intercompany sales and of intercompany profits on inventories.

Six months ended

September 30, 2007

Japan 

North America

Europe

Asia

/Oceania

Total 

Eliminations 

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

111,761

Y

12,026

Y

6,457

Y

3,499

Y

133,743

-

Y

133,743

 Intersegment

4,489

2,184

0

160

6,833

Y

(6,833)

-

Total

116,250

14,210

6,457

3,659

140,576

(6,833)

133,743

Operating expenses

102,116

14,797

7,373

3,320

127,606

(6,905)

120,701

Operating income (loss)

Y

14,134

Y

(587)

Y

(916)

Y

339

Y

12,970

Y

72

Y

13,042

Six months ended

September 30, 2008

Japan 

North America

Europe

Asia

/Oceania

Total 

Eliminations 

Consolidated

(Millions of Yen)