Konami Grp Corp Regulatory News (KNM)

Consolidated Financial Results

for the Nine Months Ended December 31, 2008

(Prepared in Accordance with U.S. GAAP)

February 5, 2009

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)

Adoption of U.S. GAAP:

Yes

1. Consolidated Financial Results for the Nine Months Ended December 31, 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 

Nine months ended December 31, 2008

% change from previous period

234,011

5.1%

34,712

25.7%

31,703

15.7%

17,826

17.3%

Nine months ended December 31, 2007

% change from previous period

222,746

4.9%

27,610

3.4%

27,390

3.1%

15,201

4.2%

Basic net income per share (yen)

Diluted net income per share (yen)

Nine months ended December 31, 2008

129.72

129.72

Nine months ended December 31, 2007

110.72

110.70

(Millions of Yen, except per share amounts)

Total assets

Total stockholders'

equity

Stockholders' 

equity ratio

Stockholders'

equity per share

December 31, 2008

327,684

189,811

57.9%

1,380.83

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

307,000

3.2%

39,000

15.3%

36,000

9.6%

18,500

0.8%

134.58

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)

 Nine months ended December 31, 2008

143,500,000

 shares

 Year ended March 31, 2008

143,500,000

 shares

 2.

Number of Treasury Stock:

 Nine months ended December 31, 2008

6,038,344

 shares

 Year ended March 31, 2008

6,178,443

 shares

 3.

Average number of shares outstanding:

 Nine months ended December 31, 2008

137,422,938

 shares

 Nine months ended December 31, 2007

137,282,833

 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

The sudden slowdown in the global economy and prevailing economic uncertainty due to the spread of financial unrest around the world, decline in personal spending, appreciation of the yen and other factors have brought about a severe business environment surrounding KONAMI CORPORATION and its subsidiaries ("Konami"). In the entertainment industry, the amusement arcades' market was under such severe conditions resulting from, for instance, credit contractions. Owing to the widespread distribution of game consoles and handheld game devices, the home video game market continued strong, with a focus in North America and Europe.

Despite expectations for greater demand and interest in products for the maintenance and promotion of good health, including efforts to combat metabolic syndrome, it was a harshly-competitive business environment for the health and fitness industry. Deteriorating employment situations and other factors have increased anxiety over the future and the need to safeguard one's livelihood, accelerating a curb on consumer spending.

Against this backdrop, our Digital Entertainment segment saw steady sales in home video game software for PRO EVOLUTION SOCCER 2009, which was sold in Europe for multiple platforms. Sales of products for card games also displayed a strong showing.

In our Health & Fitness segment, we strove to enhance services supporting good health by opening new fitness clubs under our direct management, increasing the number of facilities outsourced to us and promoting the computerization of health management and introduction of health-enhancement programs, as well as expanding our product lineup.

Sales were steady in our Gaming & System segment of slot machines such as the K2V series and Advantage 5 as well as the Konami Casino Management System and participation agreements (a profit-sharing equipment sales method). We continued to endeavor to expand our market share, with a focus on North America.

In terms of the consolidated results for the nine months ended December 31, 2008, net revenues amounted to Y234,011 million (a year-on-year increase of 5.1%), operating income was Y34,712 million (a year-on-year increase of 25.7%), income before income taxes was Y31,703 million (a year-on-year increase of 15.7%), and net income was Y17,826 million (a year-on-year increase of 17.3%).

(2) Performance by Business Segment

Summary of net revenues by business segment:

Millions of Yen

Nine months ended

December 31, 2007

Nine months ended

December 31, 2008

 % change 

Digital Entertainment 

Y134,412

Y148,711

10.6

Health & Fitness 

64,985

67,737

4.2

Gaming & System

12,645

13,297

5.2

Other and Eliminations

10,704

4,266

(60.1)

Consolidated net revenues

Y222,746

Y234,011

5.1

Digital Entertainment

Computer & Video Games business: METAL GEAR SOLID 4 GUNS OF THE PATRIOTS, released simultaneously around the world in June 2008, was named by the U.S. major video gaming site Game Spot, the Game of the Year in its Best of 2008 roundup of winning titles. The METAL GEAR series is exhibiting its strength as a brand, steadily increasing the number sold year-to-date to more than 4.5 million units as of the end of this consolidated third quarter. Furthermore, in November 2008, the online action game METAL GEAR ONLINE surpassed 1 million accounts worldwide in roughly the first four months since the service was launched in June 2008. Meanwhile, a license agreement was concluded with the Union of European Football Associations (UEFA) for WORLD SOCCER Winning Eleven 2009 (known as PRO EVOLUTION SOCCER 2009 in the U.S. and Europe). The inclusion of the much-awaited UEFA Champions League mode further enhanced the strength of this product, with 7.41 million units sold for the Winning Eleven series overall.

In Japan, QUIZ MAGIC ACADEMY DS, the DS version of the hit arcade game QUIZ MAGIC ACADEMY, went on sale and has achieved great popularity. This game 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 addition, Enchanted Folk and the School of Wizardry, a communication game for enjoying campus life at a magic academy, and GENSO SUIKODEN TIERKREIS, the latest title in the fantasy RPG GENSO SUIKODEN series, were released to favorable reviews. In animation titles A penguin's troubles saikyo penguin densetsu! and standard favorites pawapurokun pocket11 sold steadily, contributing to stable revenues.

Amusement business: A horserace-simulation game using racehorse cards HORSERIDERS, which utilizes the e-AMUSEMENT service linking amusement arcades nationwide through its network, remained strong. 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. Sales were firm for BASEBALL HEROES 2008 制覇, which employs the largest number of baseball cards (514) in the history of the BASEBALL HEROES series, and WORLD SOCCER Winning Eleven ARCADE CHAMPIONSHIP 2008, which loads the long-awaited option enabling game players to choose from 126 European soccer club teams.

Among token-operated game machines for commercial arcades, FantasicFever3 TwinkleFairytale, an extra-large token-operated game machine, recorded favorable sales. ETERNAL KNIGHTS2, which contains dungeon RPG elements, and the Tower Pusher series - the WONDERMARCH and the METEOR SPARK, the first single-pusher machines to utilize the "e-AMUSEMENT" service - enjoyed healthy sales. However since October, there has been a shift in demand as a result of the disturbing effects caused by the current severe business environment.

Card games business: We continued to record favorable sales in the YU-GI-OH! TRADING CARD GAME series.

In North America, DanceDanceRevolution has gained popularity and continued to enjoy favorable sales, with the standard favorite and KARAOKE REVOLUTION American Idol ENCORE 2, which were sold under multiple platforms, sold well. Castlevania: Order of Ecclesia, for the Nintendo DS platform also sold briskly, pushed by the deep-rooted popularity of the AKUMA JO DRACULA (known outside Japan as Castlevania) series. Repeat sales of DanceDanceRevolution SuperNOVA 2, DanceDanceRevolution HOTTEST PARTY and KARAOKE　REVOLUTION　American　Idol　ENCORE, all of which went on sale previous fiscal year, were all strong.

In Europe, DancingStage Hottest Party sold briskly, while PRO EVOLUTION SOCCER 2008 besides new soccer titles, released in the previous fiscal year, remained popular. The Wii version has sold particularly well. Meanwhile online distribution of GTI Club+ RALLY COTE D'AZUR, a driving game for PlayStation 3 that can be played in an online multiplayer mode, began at PlayStation Stores.

In terms of financial performance, consolidated net revenues for the nine months ended December 31, 2008 of this segment amounted to Y148,711 million (a year-on-year increase of 10.6%).

Health & Fitness

Operation of fitness clubs: With consumer spending held down in Japan as the U.S. originated financial crisis shrank the markets and brought uncertainty over employment prospects, the competition continues to intensify in the fitness club industry. This is due to an increase in the opening of competitor outlets and severe conditions against bringing in new customers. Despite such circumstances, Konami was no exception in striving to enhance quality, both in terms of facility services and products offered. Efforts made included the opening of new fitness clubs and expansion of the product lineup.

Regarding directly managed facilities, new fitness clubs were opened in Shin-Nagata (Hyogo Prefecture), Musashi-Kosugi (Kanagawa Prefecture) and Imazato (Osaka Prefecture) in this consolidated first quarter accounting period, and Izumi-Chuo (Osaka Prefecture) and Kawaguchi (Saitama Prefecture) in this consolidated third quarter accounting period, November, 2008. Services that leverage the characteristic feature of each facility is being provided, such as an open-air bath, specialized pool for walking and women-only wellness room at the club in Izumi-Chuo and a spacious 595 sq. meters (6,405 sq. feet) machine gym at the Kawaguchi club in LaLa garden KAWAGUCHI, a community-based commercial facility. The Targeting Waist Program for countering metabolic syndrome was simultaneously introduced at directly managed facilities nationwide in Japan in August, 2008. Furthermore, the name of the facilities of the former Sportsplex Japan Co., Ltd., merged effective June 30, 2008 by Konami Sports & Life Co., Ltd., was changed to Konami Sports Club in October, thereby further enriching and expanding the network of directly-owned Konami Sports Club facilities.

Operation of sports facilities outsourced to us: In the management of sports facilities outsourced to Konami, six facilities, including Shitsugen no Kaze Arena Kushiro (Hokkaido Prefecture) and IPS Sports Club (Tochigi Prefecture) were added to our portfolio. We made full use of the Konami Group's know-how and track record in the operation of such public facilities, etc., in advancing the promotion of the health of community residents. As a result, the combined number of facilities managed by the Konami Group, including those directly managed or managed on an outsourced basis, was 341 nationwide as of the end of December 2008. 

Health products: We launched the AEROWALKER 2200, which combines the functions of professional treadmill walkers into a treadmill for home use; PROTEIN PRO, a protein drink in jelly form; and Mixed Green Vegetables Tablets, which is green juice in tablet form; and we launched HEART TRAINER, which is a wristwatch with a heartbeat-counting feature convenient for measuring the workout load during aerobic exercises. These products are being well received by our customers.

In December 2008, we also made a major renewal of the Konami Sports Club website for mobile phones, launching a new service that allows users to record the content of their exercise and diet, and view and analyze such results with the number of calories consumed or burnt and nutrient balance. Combined with e-XAX, the IT health management system found at Konami Sports Clubs, allows each member's exercise history at the Konami Sports club to be automatically recorded on the site. We promoted the enrichment of services both within and outside of our facilities through the computerization of health management and new product development.

In terms of financial performance, consolidated net revenues for the nine months ended December 31, 2008 of this segment amounted to Y67,737 million (a year-on-year increase of 4.2%).

Gaming & System

In the North American market, Advantage 5, Konami's five-reel mechanical slot machine continues to be popular. Together with the K2V series video slot machine which has become popular as a standard item, Advantage 5 continues to steadily increase its sales. Sales through participation agreements, which ensure stable revenues, as well as the Konami Casino Management System which provides regular income from maintenance and servicing are also on the increase. This is allowing us to steadily capture a greater market share.

Meanwhile, demand has decreased in the Australian market due to the economic slowdown, restrictions placed in key states on the number of machines installed, effect of smoking restrictions in clubs and pubs and tax code revisions, all of which has impacted sales of Konami slot machines. Amid such a backdrop, we are striving to improve sales by working towards the enhancement of services to existing customers, the steady launch of new products and acquisition of new customers both in and outside Australia. Such efforts include the promotion of the full-fledged adoption of the Konami Casino Management System by major Australian casino groups, following its adoption in North America, and launch of the Advantage 5 mechanical slot machine. 

Our gaming machines have been exhibited at various trade shows around the world including the NIGA Convention & Trade Show (April 2008/California); the Global Gaming Expo Asia (June/Macao); Australasian Gaming Expo (August/Sydney, Australia), the largest gaming machine trade fair in the Oceania region; the South American Gaming Suppliers Expo (October/Argentina), the largest gaming trade show in Latin America; and the Global Gaming Expo (November/Las Vegas), which is the world's largest gaming trade fair. Housing of next-generation machines under development were exhibited in addition to the Konami Casino Management System, which is already highly recognized in North America, and popular standard items such as Advantage 5 and the K2V series, commanded much attention at the exhibits.

In terms of financial performance, consolidated net revenues for the nine months ended December 31, 2008 of this segment amounted to Y13,297 million (a year-on-year increase of 5.2%).

2. Cash Flows

Cash flow summary for the nine months ended December 31, 2008:

Millions of Yen

Nine months ended

December 31, 2007

Nine months ended

December 31, 2008

Change

Net cash provided by operating activities

Y19,560

Y14,105

Y(5,455)

Net cash used in investing activities

(13,487)

(3,705)

9,782

Net cash used in financing activities

(14,601)

(14,466)

135

Effect of exchange rate changes on cash and cash equivalents

598

(2,536)

(3,134)

Net increase (decrease) in cash and cash equivalents 

(7,930)

(6,602)

1,328

Cash and cash equivalents, end of the period

Y49,403

Y45,528

Y (3,875)

Cash and cash equivalents (hereafter, referred to as "Net cash"), for the nine months ended December 31, 2008, amounted to Y45,528 million, a decrease of Y6,602 million compared to the year ended March 31, 2008, and a year-on-year decrease of 7.8%.

Cash flow summary for each activity for the nine months ended December 31, 2008 is as follows:

Cash flows from operating activities:

Net cash provided by operating activities amounted to Y14,105 million for the nine months ended December 31, 2008, a year-on-year decrease of 27.9%. Despite the increase in net income and the collection amount of sales proceeds, this decrease primarily resulted from an increase in inventories and payments for tax payable.

Cash flows from investing activities:

Net cash used in investing activities amounted to Y3,705 million for the nine months ended December 31, 2008, a year-on-year decrease of 72.5%. This decrease in the amount used mainly resulted from a decrease in capital expenditures for investments and the proceeds of sales of property and equipment.

Cash flows from financing activities:

Net cash used in financing activities amounted to Y14,466 million for the nine months ended December 31, 2008, a year-on-year decrease of 0.9%. These financing activities primarily resulted from the redemption of bonds and payments of dividends besides purchases of treasury stock.

3. Outlook for Fiscal Year Ending March 31, 2009

Digital Entertainment

In addition to efforts made in Japan where the digital entertainment is a mature market, we will focus on the North American and European video game markets which are growing steadily. In particular, we will continue to roll out the Winning Eleven (known in the U.S. and Europe as PRO EVOLUTION SOCCER) series on multiple platforms around the world.

Furthermore, in North America, we will focus on music games, which maintain a deep-rooted popularity, and continue to roll out the DanceDanceRevolution series on multiple platforms.

We intend to enrich the lineup of titles distributed online, including Chaotic Eden, a dungeon exploration-type RPG scheduled to begin distribution in South Korea. We will also proactively respond to the online marketing of titles for game consoles with network connectivity, introducing new titles and content original to Konami.

In the arcade video games, we will strive to further enrich and expand the product lineup that uses the e-AMUSEMENT service.

In music games, we will be launching pop'n music 17 THE MOVIE, and we are also scheduled to launch other popular standard series titles such as QUIZ MAGIC ACADEMY VI. 

In card games, we will continue to rollout the YU-GI-OH! TRADING CARD GAME series worldwide.

As for popular content, we will pursue high synergy through multifaceted development that is not restricted to video game software, arcade video games and card games.

Health & Fitness

Konami's promotion of health and fitness focuses on the themes, "exercise," "leisure" and "nutrition." We therefore develop and provide health-promotion programs that offer guidance in both exercise techniques and nutrition, and also develop effective and highly useful health-related equipment. Our goal is to explore all of the potentials of a wide range of health-promoting services. Furthermore, with more than 300 related facilities, Konami Sports & Life Co., Ltd. is one of the largest operators of sports club facilities in Japan. At the same time, it is a manufacturer that carries out in-house design and production of fitness machines, supplements, and other products. It is characterized by its ability to verify the efficacy of the equipment and products at its sports clubs and reflect the results of such marketing in its next product development. Konami's basic strategy is to promote its Health & Fitness business by continuing to leverage this strength to the maximum and creating synergy, such as the enrichment of the programs it offers at facilities, computerization of health management and upgrade and expansion of products.

As the decline in consumer spending in Japan continues as a result of the global recession, the health and fitness market environment is expected to see continued intensified competition due to decline in the number of users in the young adult segment and new fitness club openings. The decrease in the number of members per fitness club is also expected to continue. However, we believe that health-consciousness will escalate across Japanese society, thanks in part to the aging of the Japanese population and the introduction of specified healthcare guidance measures, etc., to combat lifestyle diseases taken at the national government level.

We believe that opportunities, such as in fitness club management and healthcare equipment development and sales, will continue to expand under such circumstances. Konami will continue to make full use of its achievements in the fitness facility management in the provision of health promotion programs and development of healthcare equipment that incorporate information technology.

While we renewed the website for mobile phones during this consolidated third quarter accounting period, we will continue to aim for further improvement of products and services and continue to aim to enable members to access the various menus on the website even outside of our facilities, such as through personal computers, mobile phones and healthcare equipment, in order to better manage their health.

Gaming & System

Advantage 5, the five-reel mechanical slot machine, is proving extremely popular in North America, where mechanical slot machines prevail. We will market even more aggressively in other markets, including Australia. At the same time, in connection with the video slot machines that are popular in Australia, we will continue to execute product rollouts and marketing reinforcement of these items with a focus on the K2V series, which is the popular standard there. Furthermore, we will strive to stabilize management by fortifying sales of the Konami Casino Management System, which is already highly recognized in North America, to existing and new markets while also increasing sales through participation agreements and boosting regular income from the maintenance service, etc., of the Konami Casino Management System.

We will further strengthen collaboration in product research and development at our three hubs in North America, Australia and Japan, and by reinforcing our partnerships, we intend to boost management efficiency, develop new products that respond to social changes and people's preferences, and add value to existing products, while promoting an increase of production and sales. With entertainment, which is Konami's main business area, as the foundation, we will continue to introduce new products that will be enjoyed to an even greater extent by our customers.

Meanwhile, the sudden slowdown in the global economy due to the spread of financial unrest around the world, decline in personal spending, appreciation of the yen and other factors have brought about a severe business environment surrounding Konami. In light of this stringent circumstance, projected consolidated results for the fiscal year ending March 31, 2009 are revised from the figures released in the Consolidated Financial Results for the Year Ended March 31, 2008, dated May 15, 2008, as follows:

< Consolidated Earnings Forecast for the Fiscal Year 2009, ending March 31, 2009 >

4. Other

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

December 31, 2007

December 31, 2008

March 31, 2008

December 31, 2008

%

%

ASSETS

CURRENT ASSETS:

Cash and cash equivalents 

Y49,403

Y45,528

Y52,130

$500,143

Trade notes and accounts receivable, net 

45,730

40,470

33,802

444,578

of allowance for doubtful accounts of 

Y530 million, Y293 million 

($3,219 thousand) and Y260 million at 

December 31, 2007, December 31 

2008 and March 31, 2008, respectively 

Inventories 

26,466

34,690

24,374

381,083

Deferred income taxes, net

19,570

20,066

18,275

220,434

Prepaid expenses and other current assets

11,641

9,840

11,498

108,096

Total current assets

152,810

47.1

150,594

46.0

140,079

43.9

1,654,334

PROPERTY AND EQUIPMENT, net

59,573

18.4

66,648

20.3

66,690

20.9

732,154

INVESTMENTS AND OTHER ASSETS:

Investments in marketable securities 

649

615

659

6,756

Investments in affiliates

6,343

6,388

6,414

70,175

Identifiable intangible assets 

38,066

37,808

38,161

415,336

Goodwill

22,518

21,889

21,935

240,459

Lease deposits

26,649

27,855

28,205

305,998

Deferred income taxes, net

1,730

2,494

2,687

27,397

Other assets

15,771

13,393

14,418

147,127

Total investments and other assets

111,726

34.5

110,442

33.7

112,479

35.2

1,213,248

TOTAL ASSETS

Y324,109

100.0

Y327,684

100.0

Y319,248

100.0

$3,599,736

Millions of Yen

Thousands of U.S. Dollars

December 31, 2007

December 31, 2008

March 31, 2008

December 31, 2008

%

%

%

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Current portion of long-term debt and 

Y7,807

Y3,286

Y8,115

$36,098

capital lease obligations

Trade notes and accounts payable

20,828

19,188

20,410

210,787

Accrued income taxes

9,568

7,447

9,523

81,808

Accrued expenses 

23,002

21,034

21,934

231,067

Deferred revenue 

12,607

15,827

7,848

173,866

Other current liabilities

9,630

7,459

7,283

81,940

Total current liabilities

83,442

25.7

74,241

22.7

75,113

23.5

815,566

LONG-TERM LIABILITIES:

Long-term debt and capital lease 

obligations, less current portion 

32,555

36,656

35,613

402,680

Accrued pension and severance costs 

2,677

2,660

2,699

29,221

Deferred income taxes, net 

12,459

10,779

11,559

118,412

Other long-term liabilities

6,669

8,673

7,181

95,276

Total long-term liabilities

54,360

16.8

58,768

17.9

57,052

17.9

645,589

TOTAL LIABILITIES

137,802

42.5

133,009

40.6

132,165

41.4

1,461,155

MINORITY INTEREST IN

CONSOLIDATED SUBSIDIARIES

3,849

1.2

4,864

1.5

4,324

1.4

53,433

COMMITMENTS AND 

CONTINGENCIES

STOCKHOLDERS' EQUITY:

Common stock, no par value-

Authorized 450,000,000 shares;

47,399

14.6

47,399

14.5

47,399

14.8

520,696

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

Additional paid-in capital

77,220

23.8

77,090

23.5

77,078

24.1

846,864

Legal reserve

284

0.1

284

0.1

284

0.1

3,120

Retained earnings

70,348

21.7

83,899

25.6

73,492

23.0

921,663

Accumulated other comprehensive

income

5,469

1.7

(1,150)

(0.4)

2,579

0.8

(12,633)

Treasury stock, at cost-

6,246,880 shares, 6,038,344 shares and 6,178,443 shares at December 31, 2007, December 31, 2008 and March 31, 2008, respectively

(18,262)

(5.6)

(17,711)

(5.4)

(18,073)

 (5.6)

(194,562)

Total stockholders' equity 

182,458

56.3

189,811

57.9

182,759

57.2

2,085,148

TOTAL LIABILITIES AND 

STOCKHOLDERS' EQUITY

Y324,109

100.0

Y327,684

100.0

Y319,248

100.0

$3,599,736

Millions of Yen

Thousands of U.S. Dollars

Nine months

ended

December 31, 2007

Nine months

ended

December 31, 2008

Year ended

March 31, 2008

Nine months

ended

December 31, 2008

%

%

%

NET REVENUES:

Product sales revenue 

Y163,213

Y172,177

Y218,306

$1,891,431

Service revenue 

59,533

61,834

79,096

679,271

Total net revenues 

222,746

100.0

234,011

100.0

297,402

100.0

2,570,702

COSTS AND EXPENSES:

Costs of products sold

97,207

95,004

131,890

1,043,656

Costs of services rendered 

55,229

59,885

73,298

657,860

Selling, general and administrative

42,700

44,410

58,375

487,861

Total costs and expenses

195,136

87.6

199,299

85.2

263,563

88.6

2,189,377

Operating income

27,610

12.4

34,712

14.8

33,839

11.4

381,325

OTHER INCOME (EXPENSES):

Interest income

699

410

894

4,504

Interest expense

(791)

(1,184)

(1,105)

(13,007)

Foreign currency exchange gain (loss), net

(101)

(2,224)

(704)

(24,431)

Other, net 

(27)

(11)

(90)

(121)

Other income (expenses), net

(220)

(0.1)

(3,009)

(1.3)

(1,005)

(0.4)

(33,055)

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

27,390

12.3

31,703

13.5

32,834

11.0

348,270

INCOME TAXES

11,165

5.0

13,318

5.6

13,080

4.4

146,304

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

16,225

7.3

18,385

7.9

19,754

6.6

201,966

MINORITY INTEREST IN INCOME

OF CONSOLIDATED SUBSIDIARIES

1,159

0.5

593

0.3

1,589

0.5

6,514

EQUITY IN NET INCOME OF AFFILIATED COMPANIES

135

0.1

34

0.0

180

0.1

374

NET INCOME

Y15,201

6.9

Y17,826

7.6

 Y18,345 

6.2

$195,826

PER SHARE DATA:

Yen

U.S. Dollar

Nine months ended

Nine months ended

Year ended

Nine months ended

December 31, 2007

December 31, 2008

March 31, 2008

December 31, 2008

Basic net income per share

Y  110.72

Y 129.72

Y 133.63

1.42

Diluted net income per share

110.70

129.72

133.57

1.42

Weighted-average common 

share outstanding

137,282,833

137,422,938

137,290,259

Diluted weighted-average

common shares outstanding

137,318,036

137,422,938

137,344,709

3. Consolidated Statements of Cash Flows (Unaudited)

Millions of Yen

Thousands of 

U.S. Dollars

Nine months ended

December 31, 2007

Nine months ended

December 31, 2008

Year ended

March 31, 2008

Nine months ended 

December 31, 2008

Cash flows from operating activities:

Net income

Y15,201

Y17,826

Y18,345

$195,826

Adjustments to reconcile net income to net cash

 provided by operating activities -

Depreciation and amortization 

9,199

9,555

12,069

104,965

Provision for doubtful receivables 

(27)

52

(248)

571

Equity in net income of affiliated company

(135)

(34)

(180)

(374)

Minority interest 

1,159

593

1,589

6,514

Deferred income taxes

(3,599)

(2,445)

(3,225)

(26,859)

Change in assets and liabilities, net of business acquired:

Decrease (increase) in trade notes and accounts receivable

(16,770)

(11,350)

(7,483)

(124,684)

Decrease (increase) in inventories

(3,415)

(12,414)

(2,117)

(136,373)

Increase (decrease) in trade notes and accounts payable

(2,555)

2,839

(623)

31,188

Increase (decrease) in accrued income taxes, net of tax refunds

7,307

(1,255)

6,845

(13,786)

Increase (decrease) in accrued expenses

2,055

2,093

827

22,992

Increase (decrease) in deferred revenue

6,949

8,009

2,192

87,982

Other, net

4,191

636

2,797

6,987

Net cash provided by operating activities 

19,560

14,105

30,788

154,949

Millions of Yen

Thousands of 

U.S. Dollars

Nine months ended

December 31, 2007

Nine months ended

December 31, 2008

Year ended

March 31, 2008

Nine months ended

December 31, 2008

Cash flows from investing activities:

Capital expenditures

(10,666)

(6,732)

(11,995)

(73,954)

Proceeds from sales of property and equipment

1

1,339

8

14,709

Acquisition of new subsidiaries, net of cash acquired

-

-

(367)

-

Decrease (increase) in lease deposits, net

(2,601)

1,762

(2,627)

19,356

Other, net

(221)

(74)

(378)

(813)

Net cash used in investing activities

(13,487)

(3,705)

(15,359)

(40,702)

Cash flows from financing activities:

Net decrease in short-term borrowings

-

-

(1,869)

-

Repayments of long-term debt

(444)

(444)

(2,969)

(4,877)

Proceeds from issuance of bonds

15,000

-

15,000

-

Redemption of bonds

(20,000)

(5,000)

(20,000)

(54,927)

Principal payments under capital lease

 obligations

(1,953)

(2,131)

(2,596)

(23,410)

Dividends paid

(7,214)

(7,254)

(7,419)

(79,688)

Purchases of treasury stock by parent company

(22)

(101)

(31)

(1,110)

Other, net

32

464

66

5,097

Net cash used in financing activities 

(14,601)

(14,466)

(19,818)

(158,915)

Effect of exchange rate changes on cash and cash equivalents

598

(2,536)

(814)

(27,857)

Net increase (decrease) in cash and cash equivalents

(7,930)

(6,602)

(5,203)

(72,525)

Cash and cash equivalents, beginning of the period 

57,333

52,130

57,333

572,668

Cash and cash equivalents, end of the period

Y49,403

Y45,528

Y52,130

$500,143

4. Going concern assumption:

None

5. Significant changes in stockholders' equity:

None

6. Segment Information (Unaudited)

Nine months ended 

December 31, 2007

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

134,151

Y

64,714

Y

12,645

Y

11,236

Y

222,746

 Intersegment

261

271

-

(532)

-

Total

134,412

64,985

12,645

10,704

222,746

Operating expenses

106,422

60,268

10,733

17,713

195,136

Operating income (loss)

Y

27,990

Y

4,717

Y

1,912

Y

(7,009)

Y

27,610

Nine months ended 

December 31, 2008

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

148,491

Y

67,517

Y

13,297

Y

4,706

Y

234,011

 Intersegment

220

220

-

(440)

-

Total

148,711

67,737

13,297

4,266

234,011

Operating expenses

110,931

65,619

10,790

11,959

199,299

Operating income (loss)

Y

37,780

Y

2,118

Y

2,507

Y

(7,693)

Y

34,712

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

Nine months ended 

December 31, 2008

Digital Entertainment

Health & Fitness

Gaming & System

Other, Corporate and Eliminations

Consolidated

(Thousands of U.S. Dollars)

Net revenue:

 Customers

$

1,631,231

$

741,701

$

146,073

$

51,697

$

2,570,702

 Intersegment

2,417

2,417

-

(4,834)

-

Total

1,633,648

744,118

146,073

46,863

2,570,702

Operating expenses

1,218,620

720,850

118,532

131,375

2,189,377

Operating income (loss)

$

415,028

$

23,268

$

27,541

$

(84,512)

$

381,325

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.

Nine months ended

December 31, 2007

Japan 

North America

Europe

Asia

/Oceania

Total 

Eliminations 

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

170,476

Y

21,555

Y

25,055

Y

5,660

Y

222,746

-

Y

222,746

 Intersegment

13,626

3,483

33

408

17,550

Y

(17,550)

-

Total

184,102

25,038

25,088

6,068

240,296

(17,550)

222,746

Operating expenses

158,664

25,035

23,438

5,606

212,743

(17,607)

195,136

Operating income (loss)

Y

25,438

Y

3

Y

1,650

Y

462

Y

27,553

Y

57

Y

27,610

Nine months ended

December 31, 2008

Japan 

North America

Europe

Asia

/Oceania

Total 

Eliminations 

Consolidated

(Millions of Yen)

Net revenue:

 Customers

Y

167,090

Y

35,765

Y

27,253

Y

3,903

Y

234,011

-

Y

234,011

 Intersegment

19,220

3,082

91

448

22,841

Y

(22,841)

-

Total

186,310

38,847

27,344

4,351

256,852

(22,841)

234,011

Operating expenses

158,743

34,873

23,977

4,550

222,143

(22,844)

199,299

Operating income (loss)

Y

27,567

Y

3,974

Y

3,367

Y

(199)

Y

34,709

Y

3

Y

34,712

Year ended March 31, 2008

Japan 

North America

Europe

Asia/

Oceania

Total 

Eliminations 

Consolidated

(Millions of Yen)

Net revenue: