Consolidated Financial Highlights (U.S. GAAP)

KONAMI CORPORATION and Consolidated Subsidiaries

Years ended March 31, 2002, 2003, and 2004

Review of Operations

Kazumi Kitaue Computer & Video Games Business		Computer & Video Games Business Segment   The Computer & Video Games Business Segment develops, manufactures and sells video game software for home-use, including PCs.   We have a solid position in Japan and overseas markets, underpinned by an outstanding product lineup. This includes sports titles such as the WORLD SOCCER WINNING ELEVEN series, the PAWAFURU PURO YAKYU series; original content, including the METAL GEAR SOLID series; and animation content such as the Yu-Gi-Oh! series.   In fiscal 2004, consolidated net sales in this segment increased 5.8% to ¥92,520 million, operating income was up 15.0% at ¥16,084 million, and the operating margin improved from 16.0% to 17.4%.

Market Environment

In Japan, the market for hardware platforms was characterized by softening demand, as several years have passed since the launch of the PlayStation 2 (PS2), Nintendo GameCube (GC), and Game Boy Advance (GBA) platforms. On the other hand, the maturing market for home-use video games is seeing slower unit sales of entirely new titles, alongside steady sales of sequels to popular game series and games based on strong content.

In contrast, the market for hardware platforms saw continued growth overseas, especially in Europe and the U.S., benefiting in part from hardware price discounts. In Japan and overseas, PS2 held on to the top share in the console platform category. GBA has steadily posted higher unit sales, establishing a dominant position in the handheld game category. There is growing interest in online games alongside existing platforms.

A large number of titles were introduced in every region during the fiscal year, causing customers to become even more selective. The result was an even greater gap between popular games and other titles.

In this environment, companies with a large volume of highly appealing content that have the qualities customers want most have an enormous advantage.

Performance

In fiscal 2004, total shipments, including our distribution business, reached an all-time high of 24.7 million copies, compared with 23.7 million copies in the previous fiscal year. Shipments of KONAMI titles increased from 21 million copies to 21.6 million copies, while shipments in our distribution business of other companies’ games increased from 2.7 million to 3.1 million copies. We held on to a large share of the domestic market, while achieving growth in overseas shipments due to a strong showing by popular titles such as the Yu-Gi-Oh! series and soccer titles. These factors made a significant contribution to results in fiscal 2004.

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In the soccer category, WORLD SOCCER WINNING ELEVEN 7 (Pro Evolution Soccer 3 in Europe) for the PS2, the latest edition of the WINNING ELEVEN series, went on sale in August 2003 (October 2003 in Europe). This game became a hit title alongside its predecessor with sales topping 1 million copies in both Japan and Europe. Another success was recorded by WORLD SOCCER WINNING ELEVEN 7 INTERNATIONAL, which sold very well after its launch in February 2004. In fiscal 2004, we sold 4.6 million copies of soccer games in total, including the WINNING ELEVEN series.

The popularity of the Yu-Gi-Oh! card game series also drove sales growth in Yu-Gi-Oh! titles in the U.S. and Europe. In the U.S., the growing popularity of the Yu-Gi-Oh! card game since the outset of the fiscal year supported strong sales of new titles, including Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined Duel for GBA in April 2003 and Yu-Gi-Oh! The Sacred Cards for GBA in November 2003. We also continued to increase sales of titles rolled out in the previous fiscal year. In Europe, where the Yu-Gi-Oh! trading card game went on sale in December 2002, Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined Duel for GBA and Yu-Gi-Oh! THE DUELISTS OF THE ROSES for PS2, which were launched in April and September 2003, respectively, recorded strong sales. Worldwide sales of the Yu-Gi-Oh! series, a major hit product, totaled 5.01 million copies, including Japan, North America and Europe. Sales were 2.45 million copies in North America and 2.24 million copies in Europe.

     In other product categories, the PAWAFURU PURO YAKYU series saw the debut of JIKKYO PAWAFURU PURO YAKYU 10 for PS2 and GC in July 2003. In the following December, JIKKYO PAWAFURU PURO YAKYU 10 CHOKETTEIBAN 2003 MEMORIAL for PS2 and GC was released. Fiscal 2004 shipments of baseball titles, including the PAWAFURU PURO YAKYU series, reached 1.44 million copies. SILENT HILL 3 for PS2, the latest in the SILENT HILL series, was unveiled in July 2003 in Japan (August 2003 in North America and May 2003 in Europe). Worldwide shipments of the SILENT HILL series reached 990,000 copies centered on shipments of SILENT HILL 3. Following the start of overseas shipments of TEENAGE MUTANT NINJA TURTLES (TMNT) for PS2, GC, GBA, Xbox and PCs, sales of the TMNT series reached 1.48 million copies.

We also took actions to further strengthen our overseas operations. In October 2003, Konami Digital Entertainment, Inc. was established in Los Angeles (U.S.) to serve as a new base for this business. Setting global markets in its sights, the new company produces quality original content, actively acquires licensed content and conducts marketing activities.

As a result, consolidated segment sales increased 5.8% to ¥92,520 million, and operating income rose 15.0% to ¥16,084 million. The operating margin improved from 16.0% to 17.4%.

Outlook

Fiscal 2004 saw growing overseas markets become the center of attention, even more so than the domestic market. This trend is expected to become still more apparent in fiscal 2005 and thereafter. The understanding of customer needs worldwide and global marketing will become critical to our success in the future.

We have a lineup of highly popular content overseas, including the METAL GEAR SOLID, SILENT HILL and Pro Evolution Soccer series. The METAL GEAR SOLID series, in particular, has achieved cumulative worldwide shipments of 14.5 million copies. The latest title in this series, METAL GEAR SOLID 3: SNAKE EATER, will debut in fiscal 2005. Konami Digital Entertainment, our new operating base, will play a key role in helping us capture a greater share of overseas markets.

Aiming to maintain our high market share in Japan, we will continue to reinforce products in strong-selling genres while creating new titles in other ones. The emergence of new game platforms starting in fiscal 2005 presents an opportunity for energizing the market while establishing new brand titles. Preparations are already under way to proactively roll out entirely new and original titles.

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Akihiko Nagata Toy & Hobby Business		Toy & Hobby Business Segment   The Toy & Hobby Business Segment develops, manufactures and sells a variety of toys and hobby products that leverage outstanding content and take advantage of synergies with other businesses. Main products include card games, character goods, educational toys for toddlers, bath and toiletries products, music CDs and game strategy guides.   In addition to efforts to further expand into product categories that have proven popular across a wide range of customer age brackets, this segment is leveraging the creative talents of the KONAMI Group to challenge new categories, delivering products that fit the needs of the times.   Consolidated sales of the Toy & Hobby Business Segment were ¥57,468 million, 25.1% higher than in the previous fiscal year. Operating income increased 17.7% year on year to ¥19,579 million. The operating margin was 34.1%, compared with 36.2% in the previous fiscal year.

Market Environment

In Japan, the toy market is holding firm without any sharp declines in demand, despite a declining birth rate, children growing out of toys at younger ages due to earlier maturity, falling disposable incomes due to the sluggish economy, and increases in spending for other entertainment purposes. The main reasons are that expenditure per child is increasing and toys targeting adults are stimulating demand, in step with the aging of society. While the toy market targeting children faces growing difficulties, non-traditional toys, such as products for adults, are gaining momentum. In this way, the toy industry is expanding through growth in peripheral domains, despite the declining birthrate.

Overseas markets saw strong sales in the Christmas shopping season, when the majority of sales are generated, securing stable market scale. Japan’s major toy manufacturers are taking actions to reinforce overseas sales, fanning heated competition between various players on the global stage.

Performance

In fiscal 2004, we rolled out a broad lineup of toy products ranging from the mainstay Yu-Gi-Oh! card game, to character figurines for boys, electronic toys, educational toys for toddlers, and bath and toiletries products. Sales of the Yu-Gi-Oh! card game series, the mainstay product in this business, declined in Japan. However, strong sales of this product in overseas markets made a significant contribution to results. The Yu-Gi-Oh! official card game series has broad acceptance in the domestic market. In fiscal 2004, sales of the Yu-Gi-Oh! official card game series in Japan and Asia were ¥9.5 billion, compared with ¥13.5 billion in the previous fiscal year.

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In overseas markets, sales remained strong in the North American market, particularly in the first quarter, due to rapid market growth on the back of an increase in the number of players. Sales of the Yu-Gi-Oh! trading card game series in North America were ¥26 billion, compared with ¥24 billion in the previous fiscal year.

In fiscal 2004, we actively launched the Yu-Gi-Oh! trading card game in European markets, alongside North America. This card game was translated into the languages of each country, and steadily increased sales in Europe. Sales of the Yu-Gi-Oh! trading card game series in Europe increased to ¥14.0 billion from ¥0.5 billion in the previous fiscal year.

As a result of the above, worldwide sales of the Yu-Gi-Oh! card game totaled ¥49.5 billion, compared with ¥38.0 billion in the previous fiscal year.

We are also making headway with products in new content genres. In the toy business, the acquisition of toy merchandising rights to The Gransazers, a new SFX superhero TV series, heralded our full-scale entry into the boys’ character toy market. Sales of action figures and accessories based on this series have already begun at retailers across Japan. We will continue to deliver a product lineup that offers the best in quality and entertainment, with the view to making the boys’ character toy market a new pillar of earnings.

In addition to these products, we are introducing products in a diverse array of content genres, such as electronic toys, candy toys, game strategy books and other books, and music CDs. This high quality product lineup is now underpinning the entire Toy & Hobby Business Segment.

As a result, in fiscal 2004, consolidated sales of the Toy & Hobby Business Segment increased 25.1% to ¥57,468 million. Operating income rose 17.7% to ¥19,579 million. The operating margin was 34.1%, compared with 36.2% in the previous year.

Outlook

We will continue to promote measures to nurture the Yu-Gi-Oh! card game into a long-running bestseller over the long term. These measures will see us enhance Yu-Gi-Oh! training seminars to attract new players and hold special events and tournaments that involve our existing fan base. We plan to hold another “Yu-Gi-Oh! World Championship” in 2004, building on the success of the previous championship held in August 2003. The expertise related to game systems and product logistics gained from the Yu-Gi-Oh! card game, will prove an invaluable asset to our business by helping us to establish KONAMI as a leading card game manufacturer, and making this domain a stable pillar of our business.

As for new initiatives, focusing on the potential of the evolving world of Japanese animation, we have begun a full-scale drive to plan and develop an original TV animation series called “Get Ride! AMDRIVER.” TV broadcasts of this series started in April 2004 at 25 stations nationwide centered on the TV Tokyo network. This is a huge “media-mix” project that will promote this content across a variety of media. We will leverage synergies among the Toy & Hobby Business and other KONAMI businesses to enliven this content in its many forms.

In parallel with measures to expand our lineup of toys linked to various media, such as animation and superhero TV series, we will further enhance educational toys for toddlers and bath and toiletries products to buttress our product lineup. Our goal is to achieve steady growth fueled by multiple sources of earnings that combine long-standing bestsellers and new popular products.

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		Amusement Business Segment   This business segment develops, manufactures and sells games for amusement arcades in Japan and overseas and LCD units for pachinko machines in Japan.   The starting point for us, the Amusement Business Segment has successively produced innovative games that leverage our distinctive, industry-leading expertise. Recent hit products include music simulation games such as the beatmania series and the Dance Dance Revolution series, which created headlines. We also rolled out the “e-AMUSEMENT” service, which established a wholly new market in fiscal 2003. This new service links amusement arcades throughout Japan and KONAMI over a single network.   Consolidated sales of this segment increased 3.3% to ¥35,427 million. Operating income rose 62.3% to ¥11,797 million. The operating income ratio was 33.3%, compared with 21.2% in the previous fiscal year.
Fumiaki Tanaka Amusement Business

Market Environment

The amusement arcade market is showing signs of bottoming out in fiscal 2004, after domestic equipment sales and operations sales had declined for five straight years from fiscal 1999 to fiscal 2003. This is mainly attributable to progress in the closure of unprofitable arcades and the opening of large-scale facilities, and active measures to attract families and women to arcades.

By product genre, there was significant growth in sales of video games linked to networks and card systems with frames designed for multiple players. Other strong selling products included token-operated machines and crane-based prize machines that gained popularity among women and families in step with the increase in large multipurpose facilities.

On the other hand, sales of traditional video games fell sharply due to the lack of a hit product.

The pachinko machine market remained flat due to steady growth in demand for pachinko slot machines in recent years.

Performance

In the video games category, the “e-AMUSEMENT” service found greater market acceptance and established itself as the pioneer in network-linked games. Launched in fiscal 2003, this new service links amusement arcades and KONAMI over a single network. This online gaming framework allows players to connect with any other player, anywhere, anytime for as long as they like. It has won accolades from operators and users throughout Japan. MAH-JONG FIGHT CLUB 2, a game that lets people play mah-jong online, made a strong contribution to sales in fiscal 2004. This game is the sequel to our first “e-AMUSEMENT” product, MAH-JONG FIGHT CLUB, which was a huge hit in fiscal 2003. QUIZ MAGIC ACADEMY, a head-to-head online quiz game, also performed well. Since the launch of products based on the “e-AMUSEMENT” service in June 2002, cumulative shipments had reached 26,500 units as of March 31, 2004. Our best-selling music simulation games, including the pop’n music, GUITARFREAKS, and drummania series, also remained popular.

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In token-operated machines, large-scale token-operated game machines, a key strength, retained strong popularity in step with the increase in large-scale amusement facilities. Our broad lineup of token-operated game machines combines a wealth of content with stage effects and entertainment value unmatched by traditional token-operated games. This makes KONAMI machines indispensable to the token-operated game section of any amusement arcade. During fiscal 2004, Fantasic Fever, a new-style of “penny-falls” game machine, which enhances the ambience of amusement facilities with medals flowing overhead and special electrical effects like parades, received favorable reviews. MONSTER GATE ONLINE and GI-TURFWILD, both token-operated machines linked to the “e-AMUSEMENT” service, also made strong contributions to sales.

Sales of LCD units for pachinko machines fell below the previous year’s level.

As a result, consolidated sales in this segment increased 3.3% to ¥35,427 million. Operating income rose 62.3% to ¥11,797 million. The operating margin was 33.3%, compared with 21.2% in the previous fiscal year.

Outlook

The “e-AMUSEMENT” online game service we created for amusement arcades has revitalized the entire amusement arcade market. As a result, the industry as a whole is starting to see a turnaround in domestic equipment sales and operations sales. The “e-AMUSEMENT” service demonstrates that the amusement arcade market promises further growth, driven by the creation of entirely new types of games that can only be enjoyed at amusement arcades.

The “e-AMUSEMENT” service is benefiting from advancements in Japan’s digital communications network. We are actively working to promote greater adoption of this system nationwide, and further reinforce the lineup of “e-AMUSEMENT” products.

In token-operated games, lineups of large-scale token-operated game machines and single-token machines will be upgraded to meet growing demand for token-operated game sections at large-scale amusement arcades.

In the LCD unit business, our focus is on developing products that meet market needs, leveraging our competitive edge in creating products with superior game and entertainment value.

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Satoshi Sakamoto Gaming Business		Gaming Business Segment   The Gaming Business Segment is involved in the development, manufacture and sale of gaming machines and gaming management systems mainly for the Australian and North American markets.   Our video slot machines have been extremely well received in Australia, the world’s second largest market, ever since we began operations there in 1998. This success has helped us to establish a solid position in the country. We are also taking steps to build a stronger presence in North America, the world’s largest market. Actions include enhancing the product lineup and obtaining licenses in more states and provinces.   Consolidated sales in this segment climbed 33.3% to ¥10,947 million. We achieved profitability in fiscal 2004, posting operating income of ¥692 million, compared with a ¥169 million operating loss in the previous fiscal year.

Market Environment

The number of countries and regions where casinos are legal is increasing every year, with casinos currently operating in more than 130 countries and regions around the world. Growth in Australia, the world’s second largest market, is slowing, partly due to an upper limit on the number of gaming machines that can be installed in casinos and steps toward tax code reforms. North America, the world’s largest market, offers solid prospects for steady growth on shorter replacement cycles due to technological advancement in gaming machines, facility expansion at existing casinos, the opening of new casinos, and the legalization of casino gambling in more states and provinces.

The uptake of gaming machines that offer superior entertainment and game value is proceeding apace, alongside growing demand for gaming machines that can withstand the long operating hours at casinos without breakdowns.

Looking ahead, we will have plenty of opportunity to give full play to our competitive advantages in product durability and product creation skills.

Performance

We hold licenses to manufacture and sell gaming machines in every state in Australia. Our video slot machines are highly rated in this market. During fiscal 2004, subsidiary Konami Australia Pty Ltd posted steady unit sales, remaining mostly the same as the previous fiscal year.

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In North America, after receiving a license to manufacture and sell gaming machines in Nevada in January 2000, we acquired similar licenses in Mississippi, California, New Mexico, Illinois, Michigan and other states. As of March 31, 2004, we held licenses in a total of 22 states and provinces in North America.

In September 2003, we displayed numerous gaming machine titles at the Global Gaming Expo in Las Vegas, the world’s largest trade show for gaming machines. Along with our highly rated video slot machines, we displayed mechanical slot machines for the first time. Sales of mechanical slot machines commenced in December 2003. In this way, our product lineup has improved in terms of both quality and quantity. During fiscal 2004, subsidiary Konami Gaming, Inc. saw unit sales of gaming machines double from the previous fiscal year’s level, achieving significant growth.

As a result, consolidated sales in this segment increased 33.3% to ¥10,947 million. We moved into the black for the first time, posting operating income of ¥692 million, compared with an operating loss of ¥169 million in the previous fiscal year.

Outlook

Our goal is to consistently increase market share by delivering distinctive products that maximize the expertise we have gained in the entertainment industry.

We are strengthening operations in North America, the world’s largest market, by ramping up production capacity, reinforcing our product lineup and taking other actions. Our highly rated video slot machines are estimated to have captured a market share of 10% or more in this category. We aim to raise this share further. In parallel, we will drive sales growth in the entire North American market by increasing shipments and our market share in the mechanical slot machine category, which we entered in fiscal 2004. We will continue to implement cost cutting initiatives and efficient management practices with the goal of further improving profitability.

Our drive to maintain and increase market share will also be a key priority in the Australian market.

In regions other than North America and Australia, there is growing demand from Russia, which has achieved rapid growth in recent years, and Macao, where the construction of new casinos is planned. The scheduled lifting of U.K. casino gaming restrictions, and actions toward the possible legalization of casinos in Singapore and Japan may open up exciting new avenues for growth. We will keep a close eye on developments in these regions as we develop our business further.

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Fumiaki Tanaka Health & Fitness Business		Health & Fitness Business Segment   The Health & Fitness Business Segment operates sports clubs and develops, produces and sells health products.   We are currently diversifying into a broad array of businesses themed on health that encompass mental health, diet & nutrition and many more fields. We are making steady progress toward transforming ourselves from a mere operator of sports clubs to a health creation business. Developing businesses that effectively tap our diverse expertise in entertainment and Konami Sports’ health management, we are offering innovative ideas to the market by fundamentally reexamining the nature of fitness businesses.   In fiscal 2004, consolidated net sales increased 0.5% to ¥78,899 million. We moved into the black, posting operating income of ¥2,772 million, compared with an operating loss of ¥49,412 million in the previous fiscal year.

Market Environment

The Japanese sports club market has consistently generated annual revenues of about ¥300 billion over the past few years. One notable trend is the number of mergers and alliances. Another is the increasing disappearance of relatively small-scale companies, operating only a few clubs, as they are absorbed by large companies. The persistent weakness of Japan’s economy is no doubt partly responsible for these events. At the same time, there is rising interest in fitness as Japan’s population ages. Especially significant is the surge in interest in sports clubs among middle-aged and older individuals. Overall, there is much room for growth in the sports club market in Japan, as a much lower share of Japan’s population currently uses these clubs than in the United States and Europe.

One critical shortcoming of the sports club industry is the tendency to offer a generally identical selection of services. This lack of originality prevents clubs from offering services tailored to the needs of different age groups. There is an obvious need for fresh ideas for the operation of these clubs. And ongoing shifts in market dynamics indicate that companies able to cater to these needs will be rewarded.

In the market for fitness machines used in sports clubs, there has traditionally been a high reliance on products imported from Europe and North America. However, there is now a growing volume of equipment developed in Japan to precisely address domestic market demands. Some models even have entertainment-based features. Overall, these events are taking the fitness equipment market in new directions.

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Performance

During fiscal 2004, Konami Sports Corporation, which is responsible for sports club operations, took a fresh look at customer needs, redoubling its commitment to a customer-centric approach.

We also promoted measures to ensure that chain operations deliver the highest standard of safety, cleanliness, and comfort at every one of our 208 sports clubs (as of March 31, 2004) nationwide.

Actions were taken to create a more powerful brand. To cement our position as the No. 1 brand in the sports club industry, we unified our collection of brands, including Eg-zas and People, into a single brand: Konami Sports Club.

In September 2003, we introduced a new membership system and standardized prices. At the same time, we took steps to enhance convenience for members. The new system allows members to use sports clubs other than the one where they joined during vacations or when travelling.

We also implemented measures to develop businesses other than sports clubs. Some examples include the start of the Hawaii Project and collaboration related to the development of outdoor sports programs in conjunction with Hakuba Village in Nagano Prefecture in Japan. The Hawaii Project provides opportunities for people to participate in sports and events in Hawaii. We helped roughly 1,000 people participate in the Honolulu Marathon Tour held in December 2003.

On the cost front, actions were taken to reduce the cost of sales and selling, general and administrative (SG&A) expenses. Cost-of-sales reductions involved measures to adopt more efficient sales promotion techniques and a review of renovation methods for facilities. To lower SG&A expenses, we worked to utilize advertising and promotion budgets more efficiently.

As a result of the above initiatives, income from membership fees at existing sports clubs exceeded the previous year’s level, while our cost structure improved. New facilities opened in fiscal 2003, such as new sports clubs and clubs acquired from other companies, achieved higher sales and earnings. The result was that Konami Sports posted top- and bottom-line growth in fiscal 2004.

In the fitness machine and health products sector, we continued to develop and deploy the EZ series of fitness machines, which combine exercise with entertainment, at Konami sports clubs.

As a result, consolidated net sales rose 0.5% to ¥78,899 million. We moved into the black, posting operating income of ¥2,772 million in fiscal 2004, compared with an operating loss of ¥49,412 million in the previous fiscal year.

Outlook

The number of people who attend sports clubs in Japan is still well below the levels in Europe and the U.S. as a share of the total population. Japan is seeing a steady increase in sports club membership, with growth occurring chiefly among middle-aged and older individuals who are becoming more conscious of the importance of staying fit. In an environment crowded with many sports clubs, success will depend greatly on the ability to offer high-value-added services that are highly distinctive.

In the sports club sector, we will continue to open new locations. The resulting growth in market share and geographic coverage will yield a variety of competitive advantages. Along with this expansion, Konami Sports will adopt the customers’ viewpoint to offer fitness clubs that are safe, clean and pleasant. Another goal is improving services in terms of diversity and quality to address the broadest possible spectrum of customer demands. This thinking will guide us in our shift from price-based competition to value-based competition.

In the fitness machine and health products business, we will continue to deploy fitness machines to Konami sports clubs, while expanding sales to outside clubs and public facilities. Leveraging expertise amassed through the production of commercial fitness machines, we will enter the market for home-use fitness machines, while developing and selling original nutritional supplements on a full scale.

In January 2004, Konami Sports concluded an agreement with the Japanese Olympic Committee (JOC) to form an Official JOC Partnership. To fulfill our social responsibilities in a manner befitting a company that runs sports clubs, we are giving JOC-designated athletes and Japanese athletes competing in the upcoming Athens Olympics free access to all Konami sports clubs nationwide with the aim of helping to improve Japan’s international competitiveness in sports. Hand in hand with these steps, we are also working to improve recognition of Konami sports clubs by conducting promotional campaigns featuring athletes affiliated with KONAMI.

Amid growing general interest in health, we will provide various health-related services to a broad customer base that goes beyond sports club facilities.

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Corporate Governance and Compliance

Our fundamental management philosophy is to maintain a shareholder-driven approach to management and sound relationships with all stakeholders, while fulfilling our obligations as a responsible corporate citizen. Open and transparent management practices are essential to operating in line with this philosophy. For this purpose, we began making revisions to our board of directors at an early stage. In May 1992, the first external director joined the board, making this body more active and effective. To speed up decision-making regarding management and business operations, the executive officer system was adopted in June 1999. In June 2001, the number of directors was reduced from 15 to 9. Currently, we have a structure in which three of the company’s eight directors are external directors, realizing a much stronger management supervisory system.

To support compliance, we have formulated and set forth basic principles in the KONAMI Group Conduct Charter and KONAMI Group Code of Business and Ethics. Compliance principles are made known to each and every employee to establish a shared understanding of this subject. To prevent problems from occurring, we have also established a system for employees to report ethical issues and other matters without fear of recrimination.

Our compliance structure consists of three internal committees: the Risk Management Committee, Compliance Committee and Disclosure Committee. These units take the lead in preventing problems from occurring and educating employees throughout the company.

Corporate Governance and Compliance at KONAMI

Noriaki Yamaguchi

CFO, Konami Group

We began reporting consolidated financial results based on U.S. GAAP upon listing on the New York Stock Exchange in September 2002. The listing made us subject to the U.S. Sarbanes-Oxley Act. In the process of implementing the provisions of this law, our disclosure system has become much stronger. By exposing ourselves to challenging circumstances, we have reinforced our system for internal control. As our businesses become increasingly global in scale, we would like to build an even more powerful group management structure.

In January 2000, we became the first Japanese company to obtain a license from the State of Nevada for the manufacture and sale of casino gaming machines. As of April 2004, we had obtained licenses in 22 states and provinces in North America. We must remain in strict compliance with laws and regulations at all times to maintain these licenses.

To maintain our listing on the New York Stock Exchange and licenses to manufacture casino gaming machines, it is essential that we work to educate all group employees on the importance of compliance issues. This process will help to earn the trust of all stakeholder groups. Our organization will continue to be managed to the highest global standard.

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Risk Management Committee

Formed in April 2000, this committee’s primary role is enacting preventive measures with regard to the different kinds of risks to which the company is exposed.

Compliance Committee

Formed in September 2001, this committee is responsible for ensuring that each and every individual at KONAMI strictly complies with all applicable laws and regulations.

Disclosure Committee

Formed in April 2003, this committee is charged with determining if the company is releasing information in conformity with the disclosure provisions of the U.S. Sarbanes-Oxley Act. We are subject to this law, as our shares have been traded on the New York Stock Exchange since September 2002. The listing has prompted us to tighten internal controls throughout the group and ensure the highest standard of fair disclosure.

THE NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE LISTING STANDARDS

The amendment to the New York Stock Exchange Listed Company Manual 303A, effective November 2003, requires foreign private issuers to disclose material differences between the regulations followed by those foreign private issuers in their own countries. KONAMI discloses such differences on our website at www.konami.com.

Toshiro Tateno

Group Corporate Planning

As part of corporate governance measures, a Group Corporate Officers Framework was formulated and announced in May 2004, to clarify responsibility for business execution. This move was guided by the thinking that as our businesses become diversified and global, it is important to demonstrate, both internally and externally, that the KONAMI Group is managed under a set of common principles. The members of this framework are responsible for business execution.

On the other hand, management supervision is the responsibility of the Board of Directors, which has eight members, including three external directors, and four corporate auditors. External directors and corporate auditors, all of whom are prominent in their respective fields, contribute many opinions and advice to every meeting of the Board of Directors. Therefore, I believe that we have a board of directors that can fulfill its obligations to oversee our management. During the past few years, there have been many revisions to Japan’s Commercial Code that give companies more options regarding management systems. We have ourselves conducted a series of reforms to establish our own style of corporate governance. We will continue to work on preserving sound relationships with our stakeholders while building a distinctive, KONAMI model for management.

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KONAMI Group’s Social Contribution

KONAMI has made contributing to society as a good corporate citizen a central tenet of its corporate philosophy.

Our activities cover the areas described below.

Environmental Conservation

Implementation of the Clean Campaign

Aiming to preserve beautiful beaches for future generations, Konami Sports regularly implements beach cleanup campaigns through its Diving Division. Members of Eg-zas Diving College and scuba diving members of the Argonaut Marine Club take part in these activities.

Academic & Cultural Activities

Support for Digital Media Education & Research

(Osaka Electro-Communication University)

We are supporting the development and enhancement of educational and research programs in the IT field at the Osaka Electro-Communication University. Our goal is to contribute to the advancement of the digital media culture of the 21st century.

In September 2001, we completed the Konami Hall on the university’s Shijounawate Campus. This 950-seat multipurpose lecture hall is equipped with the very latest IT and audio-visual equipment. Through such industry-academia partnerships, we will continue to help nurture personnel that will shoulder the next-generation IT society.

Industry-academia Alliance With Waseda University

In February 2004, KONAMI CORPORATION and Waseda University reached agreement to start an open curriculum and conduct joint research into state-of-the-art technologies to support advancement in entertainment fields. Many students applied to take part in a seminar that started in April 2004, demonstrating strong interest in the entertainment industry.

The entertainment industry, typified by digital video games, has grown into a key, globally competitive industry for Japan, in step with advancements in 3D computer graphics and networking technologies. This alliance will combine Waseda University’s advanced basic research strengths in science and technology with KONAMI’s expertise in developing applications. The overriding goal is to contribute to society by further enhancing the entertainment industry.

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Sponsorships

JOC Official Partnership

In January 2004, Konami Sports concluded an agreement with the Japanese Olympic Committee (JOC) to form an Official JOC Partnership (contract category: sports clubs and their management).

The agreement will give JOC-designated athletes and Japanese athletes competing in the Athens Olympics and other international sports events free access to all Konami sports clubs nationwide with the aim of helping them improve their competitiveness.

Social Contribution of Related Foundations

The Kozuki Foundation for Sports and Athletes, Kozuki Foundation for Advanced Information Technology, and Kozuki Foundation for Higher Education were established by Kagemasa Kozuki, a founder and current CEO of KONAMI CORPORATION.

These foundations provide support, subsidies and scholarships for the promotion and advancement of sports, education, including IT, and culture.

Kozuki Foundation for Sports and Athletes

The Kozuki Foundation for Sports and Athletes was established in March 2003 under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology. It carries out the following five programs aimed at the advancement of sports and enhancement of health: “Support for Sports Players and Coaches Program,” “Recognition of Sports Players and Coaches Program,” “Subsidy for Sports Research Program,” “Sports Training Research Program,” and “Subsidy for Sports Organizations and Games Program.”

Kozuki Foundation for Advanced Information Technology

The Kozuki Foundation for Advanced Information Technology is under the jurisdiction of the Ministry of Education, Culture, Sports, Science and Technology. It carries out the following programs aimed at the promotion of IT education: “Subsidy for IT Educational Research Program,” “Kozuki IT Education Award,” “Subsidy for Edutainment Research Program,” “Provision of IT Equipment Program,” and “Seminar Room Operation Program.” The Foundation also holds lectures and publishes materials for the promotion of IT education.

Kozuki Foundation for Higher Education

The Kozuki Foundation for Higher Education is under the jurisdiction of Hyogo Prefecture. It offers support to educators and scholarships to children and students and is carrying out the following programs aimed at the promotion of education and culture in Hyogo Prefecture: “Scholarship for Surviving Children Program,” “Support for Students’ Venture Business Program,” “Digital Game Creator Nurturing Program,” “Comic Artist Nurturing Program,” and “Kozuki Seminar Room Operation Program.”

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Operating and Financial Review and Prospects

Fiscal 2004 and 2003 indicate the years ended March 31, 2004 and 2003 respectively

A. Operating Results.

You should read the following discussion of our financial condition and results of operations together with our consolidated financial statements and information included in this annual report. Fiscal 2004 herein refers to the fiscal year ended March 31, 2004, and other fiscal years are referred to in a corresponding manner.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors.

Overview

We are a global entertainment products and health products and services provider. We develop, publish and distribute video game software for home-use and handheld video game consoles, principally those manufactured by Sony and Nintendo. Since February 2001, we have also run the largest chain of sports clubs in Japan. We also produce toys, such as card games, including some that use characters from or are inspired by characters in our home video game software and other products. Finally, we produce and market a variety of entertainment and exercise machines and components, including amusement arcade games, token-operated games, LCD units for pachinko machines, gaming machines and fitness machines. We earn revenues and income and generate cash from sales of these products and services.

We divide our worldwide operations principally into five business segments for financial reporting purposes: Computer & Video Games, Toy & Hobby, Amusement, Gaming and Health & Fitness. The net revenue of these segments accounted for 33.8%, 21.0%, 13.0%, 4.0% and 28.9%, respectively, of our total net revenues, including intersegment revenues, in fiscal 2004. We have achieved constant growth in net revenues over the last nine years, with revenue growth of 7.8% in fiscal 2004. Our consolidated net revenue for fiscal 2004 was ¥273,412 million, which is the highest since our founding.

Due to the nature of the entertainment industry, our results of operations have largely been, and will be to a considerable extent remain, affected by individual products or a series of products that are hits with consumers, such as our Yu-Gi-Oh! card game and our Yu-Gi-Oh! game software. We have been working to reduce volatility in our results by building a solid and well-balanced business portfolio with multiple segments, each featuring a growing number and variety of products and services. In the year ended March 31, 2004, for the first time, we had three segments with over ¥10,000 million in operating income and our other two segments turned profitable. This success was due to our concerted efforts to strengthen and diversify each of our segments. We are also diversifying our revenue sources by expanding our businesses overseas. Our Computer & Video Games and Toy & Hobby segments have been active in North American and European markets and our Gaming segment has actively developed its operations in North American market, the biggest gaming market in the world.

The overall Japanese entertainment industry has been expanding, reflecting an increasing social recognition of the importance of developing intellectual property and the rapid advance of technology. Among all, the video game software industry in which our Computer & Video Games segment operates has become increasingly competitive and more hit products-oriented, with the size of the market fluctuating by hit products. The toy industry in Japan where our Toy & Hobby segment operates is holding firm without any sharp decline in demand, despite a declining birth rate, children growing out of toys at younger ages due to earlier maturity, falling disposable incomes due to the sluggish economy, and increases in spending for other entertainment purposes. The main reasons are that expenditure per child is increasing and toys targeting adults are stimulating demand, in step with the aging of society. The amusement arcade industry where our Amusement segment operates has also been sluggish, reflecting intensifying competition with other entertainment options but it has recovered recently due primarily to the development of large-size amusement arcades that attract new consumers. The Japanese health industry in which our Health & Fitness segment operates has been developing gradually with an increasing demand for health-related services among middle-aged and senior consumers.

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As a result of sluggish domestic markets in some of our business segments, we have been aggressively expanding overseas and increasingly dependent on our overseas business, taking advantage of opportunities for growth in foreign markets, such as North America and Europe. Our revenue growth in the past two fiscal years has been driven primarily by international growth. For example, sales of our Yu-Gi-Oh! card game and game software with Yu-Gi-Oh! contents increased substantially in North America in fiscal 2003 and in Europe in fiscal 2004. In the sports video game category, soccer titles such as the WINNING ELEVEN series, including WORLD SOCCER WINNING ELEVEN 7 and Pro Evolution Soccer 3 for PlayStation 2, gained popularity mainly in Japan and Europe and recorded sales of 4.6 million copies worldwide in fiscal 2004. We seek to continue expanding our business in these markets by introducing products which became hits in the Japanese market, however, new hit products may not be as successful abroad as in Japan due to different customers’ tastes and competition environment in each market. Accordingly, we aim to diversify our overseas operations by deploying our products in other markets including China, where we recently released our first video game software, WORLD SOCCER WINNING ELEVEN 7 INTERNATIONAL for PlayStation 2.

Our main business strategies for each segment are as follows:

Factors Affecting Our Results of Operations

Factors Affecting Combined Results of Operations

A number of factors affect revenues and expenses across several of our segments, and therefore have a substantial impact on our combined results of operations. These factors include the importance of “hit products” that respond to trends in popular culture, intellectual property licensing, seasonal fluctuations, investments and acquisitions.

Hit Products

Most of our non-fitness related revenues come from sales of interactive entertainment software and devices and are dependent on our ability to anticipate or influence the kinds of games and products that are popular with consumers. Revenues for our Computer & Video Games, Toy & Hobby, Amusement and Gaming segments are strongly affected by whether individual products or a series of products become “hits” with consumers. A single hit product can generate very substantial revenues, which can continue over an extended period through the release of sequel products and through extension of the concept or characters from a popular game from one business segment to another business segment.

For example, our Toy & Hobby net revenues, including intersegment revenues, increased 25.1% from ¥45,948 million in fiscal 2003 to ¥57,468 million in fiscal 2004 due mainly to robust sales of our Yu-Gi-Oh! card game in North America, as well as increased sales of the card game in Europe. Our Computer & Video Games net revenues, including intersegment revenues, increased 5.8% from ¥87,476 million in fiscal 2003 to ¥92,520 million in fiscal 2004 due primarily to favorable sales of the Yu-Gi-Oh! game software in North America and Europe and an increase in sales of the WINNING ELEVEN series, soccer title, in Japan and Europe.

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It is difficult to predict whether any particular product will become a hit. We seek to reduce the volatility of our net revenues by developing a large number of new titles each year in various categories and for various platforms. We have steadily increased the number of titles published by our home and handheld video game software business from 55 titles in fiscal 1999 to 120 titles in fiscal 2004. We have also decreased the volatility of our net revenues by entering the sports club business, which we believe will provide a more stable base of revenue.

Intellectual Property Licensing

One means we use to increase the likelihood that our products will succeed is licensing the right to utilize ideas and images from popular culture, such as comic book characters, sports and entertainment personalities and high visibility events. Thus, to some extent our revenues are dependent on successful identification and acquisition of rights to popular ideas and images. We have steadily increased the number of intellectual property licenses we hold from 13 licenses for 26 products in fiscal 1999 to 94 licenses for 154 products in fiscal 2004.

These licenses typically require a guarantee of minimum future royalties. We may experience losses if sales based on licensed intellectual property do not produce sufficient revenues to cover our royalties expenses. In addition, games that are based on licensed ideas have lower margins than games that we develop independently.

In recent years, the entertainment industry has seen an acceleration in crossovers with other industries such as toys, films, music, comics, publishing and communications. When we are able to use intellectual property licenses in multiple segments, we are able to produce higher revenues. For example, our Yu-Gi-Oh! card game originated from the popular Yu-Gi-Oh! comic in a prominent Japanese weekly magazine. Following our “media-mix strategy”, we made good use of the license for the game, making substantial sales of our Yu-Gi-Oh! card game for our Toy & Hobby segment and as a video game for our Computer & Video Games segment.

Seasonal Fluctuations

Many of our products are in the greatest demand in December and January, particularly at the end and beginning of the year and, to a lesser extent, in August (summer vacation) and in March (spring vacation), in decreasing order. These months correspond to the periods of children’s school holidays, and it is customary in Japan to buy toys as Christmas and New Year presents in December and January. However, our earnings may not necessarily reflect the seasonal patterns of the industry as a whole as a result of increased sales due to the occurrence of special events such as the Olympic Games, World Cup Soccer Tournament or the release of “hit” titles.

Investments and Acquisitions

In the last four years we have sought growth and diversification through investments and acquisitions in sectors that promise increased revenue stability and increased revenue growth. In particular, we have made investments in video game software development companies for our Computer & Video Games segment and we have acquired new consolidated subsidiaries for our Health & Fitness and Gaming segments. These investments and acquisitions have made substantial changes in the composition of our assets, in particular increasing the amount of goodwill and intangibles in our consolidated balance sheet for fiscal 2001 and fiscal 2002.

We made the following investments in equity method affiliates in fiscal 2001 and fiscal 2002:

Our investments allow us to develop closer ties with companies doing business in areas that we consider growth areas for our business, including sales of Toy & Hobby products and mobile and on-line video game software. Because these companies are equity method affiliates, our financial results are affected by our pro rata share of their net income or losses. As a result of our fiscal 2003 year-end annual examination of these investments, we recognized a net-of-tax impairment charge of ¥2,438 million with respect to the investment in HUDSON SOFT CO., LTD., due to a significant decline in its share value in the market. For fiscal 2004, our income statement included ¥252 million in equity in net income of affiliated companies.

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We spent an aggregate of ¥76,664 million on the following acquisitions of consolidated subsidiaries in the last four fiscal years:

Toy & Hobby:

Gaming:

Health & Fitness:

In connection with our acquisition of majority ownership of new consolidated subsidiaries in fiscal 2001 through 2004, we recognized an aggregate amount of goodwill of ¥39,359 million and acquired an aggregate amount of intangibles of ¥64,809 million, mostly related to the trademarks and other intangible property associated with our sports club business. Our acquisition related goodwill and other intangible assets were originally amortized over various periods. However, a recent change in U.S. GAAP means that such amortization for goodwill and indefinite lived intangibles ceased beginning on April 1, 2002 and that the remaining balances will be tested for impairment at least on an annual basis. Following the impairment review for fiscal 2003, we recognized impairment losses of ¥47,599 million with respect to our investment in Konami Sports Corporation. Approximately ¥36,717 million of this impairment related to the write-off of goodwill and the remaining ¥10,882 million related to the impairment of identifiable intangible assets such as trademarks and franchise contracts. This impairment was recognized as a component of our operating loss during fiscal 2003. For further information regarding this impairment, see “ Critical Accounting Policies—Valuation of Intangible Assets and Goodwill ” on page 45. Intangibles with finite lives will continue to be amortized.

Foreign Currency Fluctuations

An increasing portion of our business is conducted in currencies other than yen — most significantly, U.S. dollars, as we increase our sales overseas. Our business is thus becoming sensitive to fluctuations in foreign currency exchange rates, especially the yen-U.S. dollar exchange rate. Our consolidated financial statements are increasingly becoming subject to both translation risk and transaction risk. Translation risk arises from the fact that our foreign subsidiaries have different functional currencies than we do. Changes in the value of the Japanese yen relative to the functional currencies of these subsidiaries create translation gains and losses on our equity investments in foreign subsidiaries which are recorded as foreign currency translation adjustments on our consolidated statements of shareholders’ equity and accumulated other comprehensive income until we dispose of, liquidate or take an impairment charge with respect to, the relevant subsidiaries.

Transaction risk arises when the currency structure of our costs and liabilities deviates from the currency structure of our sales proceeds and assets. A substantial portion of our overseas sales are made in U.S. dollars and Euros. Our sales denominated in U.S. dollars are, to a significant extent, offset by U.S. dollar denominated costs. Transaction risk remains for products sold in U.S. dollars to the extent that we must purchase parts for our products from Japan, the costs for which are denominated in yen.

We use foreign exchange forward contracts to manage foreign exchange exposure associated with short-term movements in exchange rates applicable to our payables commitments and receivables that we expect to pay or receive in foreign currencies. Changes in the fair values of our foreign exchange forward contracts are recognized as gains or losses on derivative instruments in our income statement. For a more detailed discussion of these instruments, you should read Note 17 to our consolidated financial statements included in this annual report.

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Factors Affecting Results of Business Segments

In addition to the factors affecting our combined results of operations through several segments, there are other factors that affect the results of each of our segments independently. The factors affecting results in each of our business segments are as follows:

Computer & Video Games

Net Revenues . We develop, publish and distribute video game software for home-use, handheld video game consoles, game content for mobile phones and, software or content for personal computers and on-line games. We refer to this segment as our “Computer & Video Games” segment. Our video game software is sold mainly in the form of DVD-ROMs or proprietary discs for home video game platforms such as Sony PlayStation 2, Nintendo GameCube and Microsoft Xbox and ROM-cartridges for handheld video game platforms such as the Game Boy Advance.

In fiscal 2004, net revenues from the Computer & Video Games segment, including intersegment revenues, were ¥92,520 million, accounting for 33.8% of consolidated net revenues excluding intersegment revenues. This was derived primarily from strong sales of soccer titles such as WORLD SOCCER WINNING ELEVEN 7 and WORLD SOCCER WINNING ELEVEN 7 INTERNATIONAL for PlayStation 2 in Japan and Pro Evolution Soccer 3 for PlayStation 2 in Europe. In North America and Europe, we achieved strong sales of Yu-Gi-Oh! titles, reflecting a synergy effect of the popularity of the Yu-Gi-Oh! Trading Card Game and the Yu-Gi-Oh! cartoon on television. In North America, the Yu-Gi-Oh! series, including Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined Duel and Yu-Gi-Oh! The Sacred Cards for Game Boy Advance, recorded sales of 2.45 million copies, and in Europe, the Yu-Gi-Oh! series, including Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined Duel for Game Boy Advance and Yu-Gi-Oh! THE DUELISTS OF THE ROSES for PlayStation 2, recorded sales of 2.24 million copies . As a result, the operating margin for the Computer & Video Games segment, including intersegment revenues, for fiscal 2004 was 17.4%.

Our sales of video game software are strongly influenced by our ability to develop or acquire popular game content. See “—Factors Affecting Combined Results of Operations – Factors Affecting Combined Results of Operations – Hit Products, Intellectual Property Licensing.” Sales of video game software are significantly affected by sales volumes of video game consoles. The potential market for a software product designed for a particular video game system is determined by the total number of such video game consoles purchased by consumers, a number which is sometimes referred to as the “installed base” of such video game consoles. When new hardware systems are introduced, we may experience a temporary decline in net sales attributable to video game software until we are able to produce one or more hit products that utilize the increased capabilities of the new hardware.

The home video game industry is characterized by rapid technological changes, which have resulted in successive introductions of increasingly advanced game consoles. As a result of the rapid technological shifts, no single game console has achieved long-term dominance in the home video game and computer games market. To correspond to these rapid shift in video game hardware technology, it is necessary for us to continually anticipate game console cycles, time our product pipeline so that we do not publish games for hardware that is no longer popular, and develop software programming tools necessary for emerging hardware systems.

Expenses . A majority of our software titles are developed by our development subsidiaries. Costs and expenses that we incur in the development of new video game software titles are expensed as research and development fees until such games reach technological feasibility, at which point we begin to capitalize the expenses. We expense capitalized costs to cost of revenues upon commercial release of the resulting game, as the commercial life of our consumer software is of short duration.

The rapid technological advances in game consoles have significantly changed the software development process. The process of developing software for the new 128-bit consoles is extremely complex and we expect the process to possibly become even more complex and expensive with the advent of more powerful future game consoles. According to our estimates, it currently takes between 6 and 24 months to develop a new title and the average development cost per title is generally between ¥100 million and ¥700 million, though the cost of our most technically complex titles may exceed ¥1,000 million.

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Our cost of revenues for video game software also includes the costs of licenses from contents licensors. While some of our contents licenses include prepaid or guaranteed royalties, most of the royalties we pay are on a sales basis. We amortize the cost of prepaid royalties based on the number the associated products sold. We evaluate the future recoverability of any prepaid royalties and capitalized software costs on a regular basis based on actual title performance. We expense as part of product development costs those capitalized costs that we deem unrecoverable.

Toy & Hobby

Net Revenues. In fiscal 2004, net revenues from the Toy & Hobby segment, including intersegment revenues, were ¥57,468 million, accounting for 21.0% of consolidated net revenues. This was derived primarily from robust sales of our popular Yu-Gi-Oh! trading card game series in North America and Europe. The operating margin for the Toy & Hobby segment, including intersegment revenues, for fiscal 2004 was 34.1%.

Net revenues for the Toy & Hobby segment are affected principally by our ability to identify and acquire the rights to popular comic book and television characters and apply them to creative games, as well as the population of children, timing of product introductions, competition within the market, product life cycles and general economic trends.

Our Toy & Hobby segment generates revenues principally from the sales of card games. As the extraordinary popularity of the Yu-Gi-Oh! official card game in the Japanese market has subsided, approximately 70% of our Toy & Hobby revenues were derived from sales of the Yu-Gi-Oh! trading card games in North America and Europe in fiscal 2004. We believe that sales of card games in these markets are principally affected by the popularity of the contents from comic or television cartoon, the timing of product introduction reflecting, for example, the television broadcasting schedule and other competitive products. In the European markets, sales are also affected by the recognition of card games in the toy market as card games are relatively new in Europe on the contrary to the United States where card game market existed already. We have been globally standardizing the cards through events such as Yu-Gi-Oh! World Championship in order to raise international recognition of and promote the Yu-Gi-Oh! card game.

The toy industry in Japan where our Toy & Hobby segment operates is holding firm without any sharp decline in demand, despite a declining birth rate, children growing out of toys at younger ages due to earlier maturity, falling disposable incomes due to the sluggish economy, and increases in spending for other entertainment purposes. The main reasons are that expenditure per child is increasing and toys targeting adults are stimulating demand, in step with the aging of society. Accordingly, we are diversifying the range of our products for the Japanese market, especially boy’s toy products, in order to balance our business portfolio and improve attractiveness of our product lineups. For example, we introduced a variety of action figures and other toys for boys using characters appeared in a popular SFX superhero TV program, The Gransazers, which were well received by the market. Also, for the first time, we are participating in the production of animated contents, a new robot hero animation television program, Get Ride! AMDRIVER, and developing boy’s toys products based on the contents at the same time.

Expenses . Our Toy & Hobby segment has been a comparatively high margin segment because the costs of producing some of the goods marketed by the segment are comparatively low. In particular, card games have historically shown a higher margin than other toy products due to their relatively low manufacturing expenses. Costs include raw material costs, manufacturing outsourcing, licensing, research and development and administrative costs. Furthermore, because the Toy & Hobby products are typically based on previously developed intellectual property, research and development costs for the segment are comparatively low.

Amusement

Net Revenues . In fiscal 2004, net revenues from the Amusement segment, including intersegment revenues, were ¥35,427 million, accounting for 13.0% of consolidated net revenues excluding intersegment revenues. Segment revenues were derived primarily from sales of popular video arcade games such as MAH-JONG FIGHT CLUB and QUIZ MAGIC ACADEMY and token-operated game machines such as Fantasic Fever and GI-TURFWILD as well as sales of LCD screen software for pachinko machines. The operating margin for the Amusement segment, including intersegment revenues, for fiscal 2004 was 33.3%.

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Although arcade game sales had been declining since the appearance of advanced interactive entertainment products, such as sophisticated video game consoles and mobile phones which offered competing entertainment options that one could only play in an amusement arcade about twenty years ago, sales of the Japanese amusement arcade industry increased in fiscal 2004 due primarily to an increase in the number of large-scale amusement arcades within multi-purpose commercial facilities involving cinema complexes, shopping centers and other commercial facilities that attract customers, especially families and women.

The majority of revenues for the Amusement segment are derived from the sales of amusement arcade games and token-operated game machines. In particular, we continued to benefit from the favorable market acceptance of e-AMUSEMENT products for amusement arcades, such as the MAH-JONG FIGHT CLUB series, which are video games that allow players to compete directly with players in other arcade game locations via an on-line amusement connection. Revenues for the Amusement segment are affected by market acceptance, introduction of hit titles and general economic trends. We have found that we are able to elongate the life-cycle of our arcade games and increase our Amusement segment margins by creating new software packages for our existing arcade games in addition to creating new games.

We derive sustained revenues from our token-operated machines in Japan. We recorded ¥11 billion in sales of token-operated machines in fiscal 2004 due primarily to robust sales of Fantasic Fever and FORTUNE ORB, and believe that we are one of the leading companies in the Japanese token-operated game machine industry. As the arcade operations industry in Japan has been consolidating, with the number of amusement arcades declining and the average size of each arcade increasing, large-size token-operated game machines such as Fantasic Fever that attract customers and are well suited to large-scale amusement arcades are gaining popularity.

The Amusement segment also generates revenues from the sale of software for LCD units in pachinko games machines. Revenues from pachinko LCDs are affected by the maturation of the market, consumer preference, regulatory standards, supply-demand balance of liquid crystal display units, competition within the market, product life cycles and general economic trends. In recognition that all software have a finite life-cycle, pachinko parlors regularly replace legacy machines experiencing declining pay levels with new machines incorporating enhanced entertainment value and improved player appeal generally every two months to one year. We recorded a decline in sales of LCD units in fiscal 2004, due primarily to our inability to introduce new products matching changing customers’ needs in a timely manner.

Also, the pachinko machine market has shown a slight decline due to the overall effects of recession in the past several years. The pachinko industry still remains highly regulated which restricts rapid development of our operations. All pachinko manufacturers in Japan are required to get approval from The Security Electronics and Communications Technology Association, supervised by National Police Agency, in order to engage in sales activities. The manufacturers of pachinko machines must also register with The Japan Crime Prevention Association. Licensing requirements can delay the development and release of new pachinko machine products. Changes in rules or regulations governing pachinko machines may adversely affect our sales of software for LCD units.

Expenses . Expenses for our Amusement segment are largely related to cost of parts and raw materials, particularly with respect to pachinko LCDs, which are sometimes scarce and priced accordingly, manufacturing costs and research and development expenses. As for amusement arcade games and token operated games, we incur more limited cost of parts and raw materials and therefore have higher margins when we provide new game software contents for existing machines rather than selling new machines. We are currently working on further improving margins in our Amusement segment through the introduction of less expensive Internet-linked amusement arcade games “ e-AMUSEMENT ” and other measures to decrease production costs.

Gaming

Net Revenues. In fiscal 2004, net revenues from the Gaming segment, including intersegment revenues, were ¥10,947 million, accounting for 4.0% of consolidated net revenues excluding intersegment revenues. The main revenue source for the Gaming segment is the sale of video slot machines and software contents in Australia and North America. Revenues for the Gaming segment are affected by the timing of product introductions, timing of regulatory approvals in various markets, ability to penetrate into foreign casino markets, number of casino players, casino gaming regulations in each market, our production capacity, competition within the market, normal product life cycles and general economic trends.

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Our sales of casino gaming machines are conducted overseas, primarily in North America and in Australia. Casinos are authorized to operate in more than 130 countries and the number of countries authorizing casinos has been increasing each year according to the Tokyo Metropolitan Government, Bureau of Industrial and Labor Affairs. We believe that the world-wide sales (including leasing and others) of casino gaming machines for the year 2005 will be over ¥300 billion and the market will grow continuously.

Konami Australia Pty Ltd, which has licenses for sales and manufacturing of gaming machines in all Australian states, marketed casino gaming machines, including our main product Egyptagon. Although the dominance of the largest player in the Australian gaming markets has made it difficult for us to become a market leader quickly, we have made substantial in-roads and believe we are one of the largest sellers of gaming machines in the Australian market. However, we believe the Australian gaming market is mature and has been leveling off, due in part to regulations limiting the maximum number of gaming machines allowed in each state, so we do not expect our sales of gaming machines in Australia to expand substantially in the future unless there is a major change in the nature or regulation of the market.

In North America, the largest casino gaming machines market in the world, we held licenses to manufacture and sell casino gaming machines in 22 states as of March 31, 2004. We participated in the world’s largest gaming show held in Las Vegas in September 2003 with 17 product titles, thereby showing that we improved our line-up of gaming machines both in quantity and quality.

In contrast with Australia, we believe demand for casino gaming machines in North America has been increasing. Also, our application for license in New Jersey, one of the largest casino markets in North America, is currently being processed and, if we succeed in obtaining a New Jersey license, we expect to further expand our share in the market. In order to meet increasing demand, we are building a new gaming machine factory in Las Vegas, which is expected to double our current production capacity and is scheduled to commence its operation by the end of fiscal 2005.

Expenses . Expenses in our Gaming segment are largely related to cost of parts and raw materials, manufacturing costs and research and development expenses. In recent years, we have attempted to decrease our cost of revenues for our Gaming segment by acquiring parts and producing our machines sold abroad in the markets in which they are sold, thereby reducing shipping costs and foreign exchange risks.

Health & Fitness

Net Revenues. We are the largest sports club operator in Japan based on the Leisure Paper issued by JAPAN PRODUCTIVITY CENTER FOR SOCIO-ECONOMIC DEVELOPMENT. We also design, manufacture and sell fitness-related games and exercise machines. As of March 31, 2004, we operated 208 sports clubs that collectively served approximately 844,000 members. Our Health & Fitness segment had ¥78,899 million in net revenues, including intersegment revenues, in fiscal 2004.

The majority of our Health & Fitness revenues come from membership fees. Our membership fee structure generally includes virtually no initial membership fee. We do not have financing plans for new members. A lack of financing plans and the fact that almost all of our members pay their monthly dues by credit card mean that we have a comparatively low risk of losses from uncollectible receivables.

Our sports clubs also collect additional revenues from ancillary sales and services, sales of consumables including meals in our in-club restaurants and nutritional products in our in-club stores, and fees for services such as jazzercise and other fitness classes, massage, fitness counseling, diet programs and personal trainers.

Although we have not achieved expected growth due to unfavorable market conditions, we expect to continue to increase revenues through club and membership growth. We currently serve many, but not all, of the major cities in Japan. We plan to extend our reach into new geographic markets until we cover all of Japan. We believe that we are well positioned, being twice as large as the second largest operator according to the Leisure Paper, to identify opportunities to selectively acquire existing operators and facilities at attractive prices due to our dominant position in a fragmented market. During fiscal 2004, we increased the aggregate number of sports clubs we directly operate by four clubs.

Actions were taken to create a more powerful brand. To cement our position as No. 1 brand in the sports club industry, we unified our collection of brands, including eg-zas and People, into a single brand: Konami Sports Club, thereby strengthening brand recognition and providing more sophisticated facility services, as part of our continuous efforts to improve the retention rate of current customers. Improving the retention rate of customers of existing clubs is one of our major objectives as revenue growth of existing clubs is lower than newly opened clubs. In a move to improve customer convenience, we introduced new services and products such as a personal trainer system where an instructor with specialized knowledge provides individualized lessons for each customer. Finally, we launched the first official i-mode (internet enabled cellular phone) site in the fitness industry, which provides various club facility information and health related information.

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Also, we focus more on improving the quality of our services than on reducing our prices in order to compete efficiently. For example, we offer value-added services such as spa and massage in our sports clubs for extra charges. Also, we offer events and tours such as Honolulu Marathon tours and ski tours in which our members can participate. As a result of such efforts, the average amount spent per customer increased in fiscal 2004.

Our Health & Fitness segment develops fitness-oriented games to consumers and fitness machines with entertainment quality mainly for our Konami Sports fitness clubs. As of March 31, 2004, we have developed four Health & Fitness machines under EZ series brand and these machines are now introduced in our Konami Sports fitness clubs. We also have several new machines in various stages of the development pipeline.

In fiscal 2004, our fitness-related game and fitness equipment business launched Diet Channel, a fitness game software that enables dieting while enjoying exercising at home.

In fiscal 2003, our fitness-related games and exercise machines business released new home fitness products such as MARTIAL BEAT II , which is a popular martial arts fitness action game that uses video game software and can measure physical strength, and Aerobics Revolution , which allows players to enjoy realistic aerobics activity at home.

Expenses . Operating expenses for our Health & Fitness segment include, for our sports club business, leases for facilities, salaries for trainers and other club employees, costs of fitness machines and other equipment, utilities charges, marketing expenses, costs for maintaining the facilities and depreciation. Upon opening a new sports club, we often experience an initial period of club operating losses for the first 12 months, but this period can vary substantially depending on the individual club. Initial membership levels tend not to generate sufficient revenue for the club to generate positive earnings in its first full year of operation and substantially lower margins in its second full year of operations than a mature club. However, because most of our expenses are fixed, operating margins tend to improve with respect to each club as membership increases. Expenses for our fitness-related games and exercise machines business are largely related to cost of parts and raw materials, manufacturing costs and research and development expenses.

In fiscal 2003, we had substantial additional operating expenses in our Health & Fitness segment because we recognized impairment losses of ¥47,599 million with respect to our investment in Konami Sports Corporation. Under U.S. GAAP, impairment loss is treated as an operating expense. Approximately ¥36,717 million of this impairment related to the write-off of goodwill and the remaining ¥10,882 million related to identifiable intangible assets such as trademarks and franchise contracts. These impairment losses were attributed to the fact that the growth of this segment did not meet our expectations as a result of negative trends in general economic conditions in Japan. In fiscal 2004, we did not recognize any impairment losses.

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Comparison of Fiscal 2004 with Fiscal 2003

Net Revenues

Net revenues increased ¥19,755 million, or 7.8%, to ¥273,412 million in fiscal 2004 from ¥253,657 million in fiscal 2003 due primarily to increases in the sales of each segment, especially robust sales of the Yu-Gi-Oh card games in Europe and North America that recorded sales of ¥49.5 billion, continuous popularity of soccer game titles and the Yu-Gi-Oh! game titles that recorded worldwide sales of 4.6 million and 5.01 million copies, respectively, in the Computer & Video Games segment, and solid sales of our main casino gaming machines in North America.

Cost of Revenues

Cost of revenues increased ¥4,303 million, or 2.5%, to ¥179,182 million in fiscal 2004 from ¥174,879 million in fiscal 2003 due primarily to an increase in revenues, despite a decrease in cost of revenues for our amusement arcade game machines through strengthening our products line-up.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ¥468 million, or 0.9%, to ¥53,517 million in fiscal 2004 from ¥53,049 million in fiscal 2003. The increase in expenses was due primarily to a ¥1,673 million increase in advertising expenses.

Operating Income (Loss)

As a result of the foregoing, our operating income (loss) increased ¥62,583 million to ¥40,713 million in fiscal 2004 from ¥(21,870) million in fiscal 2003. As a percentage of net revenues, operating income increased 23.5% to 14.9% in fiscal 2004 from (8.6)% in fiscal 2003.

Other Income (Expenses), net

Other expenses, net increased ¥380 million to ¥606 million in fiscal 2004 from ¥226 million in fiscal 2003 due primarily to no gain from sales of subsidiaries shares in fiscal 2004 compared to ¥904 million in fiscal 2003.

Income (Loss) Before Income Taxes, Minority Interest and Equity in Net Income (Loss) of Affiliated Companies

As a result of the foregoing, our income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies increased ¥62,203 million to ¥40,107 million in fiscal 2004 from ¥(22,096) million in fiscal 2003.

Income Taxes

Income taxes increased by ¥11,849 million, or 191.5%, to ¥18,035 million in fiscal 2004 from ¥6,186 million in fiscal 2003. This increase in income taxes was due to an increase in the income before income taxes reflecting the recognition of an impairment charge for goodwill in 2003. As a result, the effective tax rate increased by 73.0% to 45.0% in fiscal 2004 from (28.0%) in fiscal 2003.

Minority Interest in Income (Loss) of Consolidated Subsidiaries

Minority interest in income (loss) of consolidated subsidiaries increased ¥3,271 million to ¥2,220 million in fiscal 2004 from ¥(1,051) million in fiscal 2003 due primarily to a ¥2,632 million minority interest in the impairment charge related to goodwill and identifiable intangible assets incurred by Konami Sports Corporation in fiscal 2003, which more than offset an overall increase in income of our consolidated subsidiaries.

Equity in Net Income (Loss) of Affiliated Companies

Equity in net income (loss) of affiliated companies increased ¥1,540 million to ¥252 million in fiscal 2004 from ¥(1,288) million in fiscal 2003 due primarily to a ¥2,438 million other-than-temporary decline in the value of our investment in Hudson Soft Co., Ltd in fiscal 2003.

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Net Income (Loss)

As a result of the foregoing, our net income (loss) increased ¥48,623 million to ¥20,104 million in fiscal 2004 from ¥ (28,519) million in fiscal 2003.

Comparison of Fiscal 2003 with Fiscal 2002

Net Revenues

Net revenues increased ¥28,077 million, or 12.4%, to ¥253,657 million in fiscal 2003 from ¥225,580 million in fiscal 2002 due primarily to robust sales of our Yu-Gi-Oh! Trading Card Game in North America and the addition of a full year of revenues from a subsidiary that operates sports club businesses, Konami Olympic Sports Club, which was acquired in February 2002, and subsequently merged into Konami Sports Corporation in October 2002.

Cost of Revenues

Cost of revenues increased ¥20,228 million, or 13.1%, to ¥174,879 million in fiscal 2003 from ¥154,651 million in fiscal 2002, mirroring the rise in sales, and the inclusion of a full year of cost of revenues from Konami Olympic Sports Club.

Impairment Charge for Goodwill and Other Intangible Assets

An impairment charge of ¥47,599 million for goodwill and other intangible assets was recorded in fiscal 2003 as a result of a significant decline in the value of goodwill and other intangible assets relating to our sports club business. These impairment losses were attributed to the fact that the growth of this business did not meet our expectations as a result of negative trends in general economic conditions in Japan.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased ¥207 million, or 0.4%, to ¥53,049 million in fiscal 2003 from ¥52,842 million in fiscal 2002. The increase in expenses was due primarily to the inclusion of a full year of such expenses incurred by the sports club business of Konami Olympic Sports Club and a ¥3,311 million increase in advertising expenses. However, the increase in such expenses was mostly offset by a ¥3,948 million decrease in bad debt expense and a ¥3,532 million decrease in amortization of goodwill and identifiable intangible assets due to the adoption of SFAS No. 142, which ended the amortization of goodwill and indefinite lived intangible assets.

Operating Income (Loss)

As a result of the foregoing, our operating income (loss) decreased ¥39,957 million to ¥(21,870) million in fiscal 2003 from ¥18,087 million in fiscal 2002. As a percentage of net revenues, operating income decreased 16.6% to (8.6)% in fiscal 2003 from 8.0% in fiscal 2002.

Other Income (Expenses), net

Other income (expenses), net decreased ¥4,817 million to ¥(226) million in fiscal 2003 from ¥4,591 million in fiscal 2002 due primarily to a ¥3,751 million decrease in gains on the sale of subsidiary shares. The decrease in gains resulted from the fact that we had a ¥3,526 million gain in connection with an initial public offering by Konami Computer Entertainment Japan, Inc. and a ¥1,129 million gain in connection with the sale of shares of Konami Computer Entertainment Tokyo, Inc. in the market during fiscal 2002, while we did not sell any shares of any of our public subsidiaries during fiscal 2003.

Income (Loss) Before Income Taxes, Minority Interest and Equity in Net Income (Loss) of Affiliated Companies

As a result of the foregoing, our income (loss) before income taxes, minority interest and equity in net income (loss) of affiliated companies decreased ¥44,774 million to ¥(22,096) million in fiscal 2003 from ¥22,678 million in fiscal 2002.

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Income Taxes

Income taxes decreased by ¥5,481 million, or 47.0%, to ¥6,186 million in fiscal 2003 from ¥11,667 million in fiscal 2002. This decrease in income taxes was primarily due to a decrease in the effective income tax rate. The effective tax rate decreased by 79.5% to (28.0%) in fiscal 2003 from 51.5% in fiscal 2002. This 79.5% decrease in the effective tax rate was attributable to the recognition of an impairment charge for goodwill, which provides no tax benefit. As a result, the effective tax rate was significantly different from the statutory tax rate of 42.0%.

Minority Interest in Income (Loss) of Consolidated Subsidiaries

Minority interest in income (loss) of consolidated subsidiaries decreased ¥1,415 million to ¥(1,051) million in fiscal 2003 from ¥364 million in fiscal 2002 due primarily to a ¥2,632 million minority interest in the impairment charge related to goodwill and identifiable intangible assets incurred by Konami Sports Corporation, which more than offset an overall increase in income of consolidated subsidiaries.

Equity in Net Income (Loss) of Affiliated Companies

Equity in net income (loss) of affiliated companies decreased ¥2,043 million to ¥(1,288) million in fiscal 2003 from ¥755 million in fiscal 2002 due primarily to a ¥2,438 million other-than-temporary decline in the value of our investment in Hudson Soft Co., Ltd.

Net Income (Loss)

As a result of the foregoing, our net income (loss) decreased ¥39,921 million to ¥(28,519) million in fiscal 2003 from ¥11,402 million in fiscal 2002.

Segment Information

Based on the applicable criteria set forth in Statement of Financial Accounting Standards No. 131, ”Disclosures about Segments of an Enterprise and Related Information” or SFAS No. 131, we have five reportable operating segments for which separate financial information is available and reported in our consolidated financial statements. Our chief operating decision maker regularly evaluates this data in deciding how to allocate resources and in assessing performance. The operating segments are managed separately as each segment represents a strategic business unit that offers different products and serves different markets. As required by SFAS No. 131, we present our business segment information in the accompanying consolidated financial statements as it is presented in reports to our management, derived from our U.S. GAAP financial statements.

Effective the second quarter ended September 30, 2003, Other segment is combined with Corporate and Eliminations. In accordance with this change, results for the year ended March 31, 2002 and 2003 have been reclassified to conform to the presentation of the year ended March 31, 2004.

During fiscal 2003, we renamed each of our business segments in order to clarify the operations of each segment. Former “Consumer Software” became “Computer & Video Games” former “Health and Fitness” became “Exercise Entertainment” former “Character Products” became “Toy & Hobby” former “Amusement Content” became “Amusement” and former “Gaming Content” became “Gaming”. In fiscal 2004, we again renamed the “Exercise Entertainment” segment, returning to the old name “Health & Fitness”.

In May 2002, Konami sold its amusement facility operation business, which was a part of the Other segment, to a third-party purchaser.

In the fourth quarter of fiscal 2003, Konami transferred its fitness-related games and fitness machines business from the Amusement segment to the Health & Fitness segment and its token-operated game machine business from the Gaming segment to the Amusement segment. In accordance with these changes, results for fiscal 2002 have been reclassified to conform to the presentation for fiscal 2003 and 2004.

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The following tables present net revenues, both including and excluding intersegment revenues, operating expenses and operating income (loss) for fiscal 2002, 2003 and 2004, by segment, which are the primary measures used by our chief operating decision makers to measure our operating results and to measure segment profitability and performance. The year-to-year comparisons following the tables discuss comparisons of net revenues, including intersegment revenues, operating expenses and operating income (loss) for each year.

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Comparison of Fiscal 2004 with Fiscal 2003

Computer & Video Games

Net revenues of our Computer & Video Games segment increased ¥5,044 million, or 5.8%, to ¥92,520 million in fiscal 2004 from ¥87,476 million in fiscal 2003 due primarily to an increase in sales of soccer titles in Japan and Europe and favorable sales of the Yu-Gi-Oh! series overseas. Soccer titles, including WORLD SOCCER WINNING ELEVEN 7 and WORLD SOCCER WINNING ELEVEN 7 INTERNATIONAL for PlayStation 2 in Japan and Pro Evolution Soccer 3 for PlayStation 2 in Europe, recorded sales of 4.6 million copies worldwide, including Asia and North America. Also the Yu-Gi-Oh! titles, including Yu-Gi-Oh! The Sacred Cards for Game Boy Advance and The Falsebound Kingdom for Game Cube, recorded total sales of 2.45 million copies in North America. In Europe, the Yu-Gi-Oh! titles, including Yu-Gi-Oh! The Sacred Cards and Yu-Gi-Oh! Worldwide Edition: Stairway to the Destined Duel, recorded total sales of 2.24 million copies. Worldwide sales of the Yu-Gi-Oh! titles, including Japan and Asia, amounted to 5.01 million copies. In addition, TEENAGE MUTANT NINJA TURTLES gained popularity as a result of synergy with broadcast of television cartoons mainly in the United States and the title for PlayStation 2, Game Cube, Xbox, Game Boy Advance and PC recorded total sales of 1.48 million copies worldwide. As a result, we recorded an increase in sales to 24.7 million copies in fiscal 2004, including 21.6 million copies of our titles and 3.1 million copies of titles from other third party companies, from 23.7 million copies in fiscal 2003, including 21.0 million copies of our titles and 2.7 million copies of titles from other third party companies.

Operating expenses increased ¥2,947 million, or 4.0%, to ¥76,436 million in fiscal 2004 from ¥73,489 million in fiscal 2003. Such increase includes a ¥1,893 million increase in cost of revenues and a ¥1,054 million increase in selling, general and administrative costs including advertising costs relating to the Yu-Gi-Oh! titles.

Operating income increased ¥2,097 million, or 15.0%, to ¥16,084 million in fiscal 2004 from ¥13,987 million in fiscal 2003, reflecting the fact that both revenues and costs increased.

Toy & Hobby

Net revenues of our Toy & Hobby segment increased ¥11,520 million, or 25.1%, to ¥57,468 million in fiscal 2004 from ¥45,948 million in fiscal 2003. This increase was due primarily to an increase in sales of the Yu-Gi-Oh! trading card games in Europe to ¥14,000 million from ¥500 million in the previous year. We commenced sales of the Yu-Gi-Oh! trading card game in the U.K. in December 2002, in France in March 2003 and in Germany, Italy and other European countries during fiscal 2004. Sales of the Yu-Gi-Oh! trading card game in Europe increased substantially from the beginning of fiscal 2004 until the Christmas season, reflecting the popularity of the Yu-Gi-Oh! cartoon broadcasted on television and the Yu-Gi-Oh! game software. We also recorded ¥26,000 million and ¥9,500 million sales of the Yu-Gi-Oh! card game in North America and in Asia including Japan, respectively. As a result, worldwide sales of the Yu-Gi-Oh! card game increased to ¥49,500 million in fiscal 2004 from ¥38,000 million in fiscal 2003. We also recorded solid sales of The Gransazers series, toys using characters appeared in popular television SFX The Gransazers .

Operating expenses increased ¥8,570 million, or 29.2%, to ¥37,889 million in fiscal 2004 from ¥29,319 million in fiscal 2003. The increase consists primarily of an increase in cost of revenues of ¥6,215 million due mainly to an increase in cost of revenues for the Yu-Gi-Oh! trading card games and an increase in selling, general and administrative costs due mainly to an increase in advertising costs in North America and Europe.

Operating income increased ¥2,950 million, or 17.7%, to ¥19,579 million in fiscal 2004 from ¥16,629 million in fiscal 2003, reflecting the fact that revenues increased more than costs.

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Amusement

Net revenues of our Amusement segment increased ¥1,122 million, or 3.3%, to ¥35,427 million in fiscal 2004 from ¥34,305 million in fiscal 2003. This increase was due primarily to the increase in sales of token-operated games to ¥11,000 million in fiscal 2004 from ¥7,400 million in fiscal 2003, resulting from the introduction of our new large-sized token-operated machines in a timely manner that are suitable for large-scale amusement arcades that attract customers. Sales of token-operated games include GI-WINNING SIRE and GI-TURFWILD , which have a realistic “right there in the midst of it” feel, and Fantasic Fever and FORTUNE ORB, large-sized “penny-falls” game machines popular for their entertaining stage effects. Also, sales of video game products recorded ¥18,400 million in fiscal 2004 due primarily to the favorable market acceptance of “ e-AMUSEMENT ” products for amusement arcades such as the MAH-JONG FIGHT CLUB series and the expansion of the line-up of music simulation games such as pop’n music , GUITARFREAKS and drummania and gun shooting games such as the WARTRAN TROOPERS . On the other hand, sales of pachinko LCD units decreased to ¥6,000 million in fiscal 2004 from ¥7,200 million in fiscal 2003, resulting from our inability to introduce new products meeting rapidly changing market needs in a timely manner.

Operating expenses decreased ¥3,405 million, or 12.6%, to ¥23,630 million in fiscal 2004 from ¥27,035 million in fiscal 2003.

Operating income increased ¥4,527 million, or 62.3%, to ¥11,797 million in fiscal 2004 from ¥7,270 million in fiscal 2003, reflecting a decrease in the rate of cost for amusement arcade games to 52.8% in fiscal 2004 from 63.6% in fiscal 2003 reflecting an increase in production, which lowerd unit costs.

Gaming

Net revenues of our Gaming segment increased ¥2,732 million, or 33.3%, to ¥10,947 million in fiscal 2004 from ¥8,215 million in fiscal 2003. This increase was due primarily to an increase in revenues from sales of casino gaming machines by our U.S. subsidiary, Konami Gaming, Inc., with robust sales of our main products, Mariachi Madness and Solstice Gold . Although sales of casino gaming machines through our Australian subsidiary, Konami Australia Pty Ltd decreased slightly in fiscal 2004, sales were maintained with our main product Egyptagon, while the Australian market has been leveling off.

Operating expenses increased ¥1,871 million, or 22.3%, to ¥10,255 million in fiscal 2004 from ¥8,384 million in fiscal 2003 due primarily to an increase in revenues.

Operating income was ¥692 million in fiscal 2004, an increase of ¥861 million from operating loss of ¥169 million in fiscal 2003, reflecting that revenues increased more than costs.

Health & Fitness

Net revenues of our Health & Fitness segment increased ¥374 million, or 0.5%, to ¥78,899 million in fiscal 2004 from ¥78,525 million in fiscal 2003. This increase was due primarily to the increase of membership fees per member by improving the quality of our services and offering a wide range of health-related value-added services.

Operating expenses decreased ¥51,810 million, or 40.5%, to ¥76,127 million in fiscal 2004 from ¥127,937 million in fiscal 2003 due primarily to a charge taken in connection with the impairment of goodwill and other intangible assets relating to this segment of ¥47,599 million in fiscal 2003 and a decrease in the amortization of membership lists to ¥339 million in fiscal 2004 from ¥2,533 million in fiscal 2003.

Operating income was ¥2,772 million in fiscal 2004, an increase of ¥52,184 million from operating loss of ¥49,412 million in fiscal 2003.

Comparison of Fiscal 2003 with Fiscal 2002

Computer & Video Games

Net revenues of our Computer & Video Games segment decreased ¥2,653 million, or 2.9%, to ¥87,476 million in fiscal 2003 from ¥90,129 million in fiscal 2002, despite a record year in terms of the number of copies sold. This decrease was due primarily to a shift in our product mix from products with higher unit prices such as the METAL GEAR SOLID 2: SONS OF LIBERTY game for PlayStation 2, which recorded sales of more than five million copies worldwide in fiscal 2002, to products with lower unit prices and an increase in unit sales to North America, which generated less revenues than a similar increase in the number of copies sold in Japan would have, due to different market conditions. WORLD SOCCER WINNING ELEVEN 6 and Pro Evolution Soccer 2 for PlayStation 2 each recorded over one million sales in Japan and Europe, respectively, reflecting worldwide popularity of soccer. Also, the Yu-Gi-Oh! titles including Yu-Gi-Oh! THE ETERNAL DUELIST SOUL for Game Boy Advance, Yu-Gi-Oh! FORBIDDEN MEMORIES for PlayStation and Yu-Gi-Oh! Dark Duel Stories for Game Boy Color, recorded total sales of 4.6 million copies in North America. As a result, we recorded an increase in sales to 23.7 million copies in fiscal 2003, including 21.0 million copies of our titles and 2.7 million copies of titles from other third party companies, from 22.8 million copies in fiscal 2002, including 20.3 million copies of our titles and 2.5 million copies of titles from other third party companies.

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Operating expenses increased ¥1,712 million, or 2.4%, to ¥73,489 million in fiscal 2003 from ¥71,777 million in fiscal 2002. Such increase includes a ¥269 million decrease in cost of revenues and a ¥1,981 million increase in selling, general and administrative costs including advertising costs relating to the Yu-Gi-Oh! titles.

Operating income decreased ¥4,365 million, or 23.8%, to ¥13,987 million in fiscal 2003 from ¥18,352 million in fiscal 2002, reflecting the fact that revenues decreased while costs increased.

Toy & Hobby

Net revenues of our Toy & Hobby segment increased ¥20,347 million, or 79.5%, to ¥45,948 million in fiscal 2003 from ¥25,601 million in fiscal 2002. This increase was due primarily to an increase in sales of the Yu-Gi-Oh! trading card game series in North America to ¥24,000 million in fiscal 2003 from ¥300 million in fiscal 2002. Since its release in North America in March 2002, sales of the Yu-Gi-Oh! trading card game series grew dramatically from summer vacation until the Christmas season, reflecting the popularity of the Yu-Gi-Oh! children’s cartoon on television and the Yu-Gi-Oh! video game series. A new series of the Yu-Gi-Oh! official card game also maintained high levels of sales in Japan and other Asian countries of ¥13,500 million. As a result, worldwide total sales of Yu-Gi-Oh! card games were ¥38,000 million in fiscal 2003, increased from ¥19,200 million in fiscal 2002. We also recorded stable sales in MICROiR series products.

Operating expenses increased ¥10,919 million, or 59.3%, to ¥29,319 million in fiscal 2003 from ¥18,400 million in fiscal 2002. The increase consists primarily of an increase in cost of revenues of ¥9,124 million due mainly to an increase in cost of revenues for the Yu-Gi-Oh! trading card games and an increase in selling, general and administrative costs due mainly to an increase in advertising costs in North America.

Operating income increased ¥9,428 million, or 130.9%, to ¥16,629 million in fiscal 2003 from ¥7,201 million in fiscal 2002, reflecting the fact that revenues increased more than costs.

Amusement

Net revenues of our Amusement segment decreased ¥3,613 million, or 9.5%, to ¥34,305 million in fiscal 2003 from ¥37,918 million in fiscal 2002. This decrease was due primarily to the decline in sales of pachinko LCD units to ¥7,200 million in fiscal 2003 from ¥15,400 million in fiscal 2002, resulting from our inability to introduce new products meeting rapidly changing market needs in a timely manner. On the other hand, sales of amusement arcade game products increased to ¥17,900 million in fiscal 2003 from ¥11,800 million in fiscal 2002, reflecting the favorable market acceptance of e-AMUSEMENT products for amusement arcades such as the MAH-JONG FIGHT CLUB series and the expansion of the line-up of simulation games that can be played by more than one person such as WORLDCOMBAT , a gun shooting game, as well as music simulation games such as pop’n music , GUITARFREAKS and drummania . Token-operated products also contributed ¥7,400 million to revenues for fiscal 2003. Token-operated game sales were led by the continuously popular GI-WINNING SIRE and GI-TURFWILD , the latest large-scale token-operated horse racing games in the GI series, which have a realistic “right there in the midst of it” feel, FORTUNE ORB , a large-sized “penny-falls” game machine popular for its entertaining stage effects and OVALARENA , a new large-scale token-operated bingo game machine with a player match-up function.

Operating expenses decreased ¥2,283 million, or 7.8%, to ¥27,035 million in fiscal 2003 from ¥29,318 million in fiscal 2002 due primarily to the decrease in cost of revenues and selling, general and administrative expenses accompanying the decrease in revenues.

Operating income decreased ¥1,330 million, or 15.5%, to ¥7,270 million in fiscal 2003 from ¥8,600 million in fiscal 2002, reflecting the fact that revenue decreased more quickly than costs.

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Gaming

Net revenues of our Gaming segment increased ¥5,152 million, or 168.2%, to ¥8,215 million in fiscal 2003 from ¥3,063 million in fiscal 2002. This increase was due primarily to an increase in revenues from sales of casino gaming machines by our Australian subsidiary, Konami Australia Pty Ltd, reflecting both growth in sales by Konami Australia Pty Ltd and an additional six months of revenues from Konami Australia Pty Ltd in fiscal 2003, since it was acquired in October 2001. Revenue growth also reflects an increase in sales of casino gaming machines through our U.S. subsidiary, Konami Gaming, Inc.

Operating expenses increased ¥2,595 million, or 44.8%, to ¥8,384 million in fiscal 2003 from ¥5,789 million in fiscal 2002 due primarily to an increase in revenues and the fact that we recognized only six months of operating expenses of Konami Australia Pty Ltd. in fiscal 2002.

Operating loss decreased ¥2,557 million to ¥169 million in fiscal 2003 from ¥2,726 million in fiscal 2002, reflecting the fact that revenues increased more than costs.

Health & Fitness

Net revenues of our Health & Fitness segment increased ¥12,875 million, or 19.6%, to ¥78,525 million in fiscal 2003 from ¥65,650 million in fiscal 2002. This increase was due primarily to the expansion of our network of sports clubs by acquiring our competitors, the opening of 16 new sports clubs and entering into new franchise relationships, and the addition of a full year of revenues from Konami Olympic Sports Club Corporation, which was acquired in February 2002 and subsequently merged into Konami Sports Corporation in October 2002. In addition, we added five new directly-managed club facilities by the acquisition of all of the outstanding shares of Konami Athletics Inc. in March 2003.

Operating expenses increased ¥57,664 million, or 82.1%, to ¥127,937 million in fiscal 2003 from ¥70,273 million in fiscal 2002 due primarily to a charge taken in connection with the impairment of goodwill and other intangible assets relating to this segment of ¥47,599 million, the inclusion of a full year of operating expenses incurred by Konami Olympic Sports Club Corporation and costs of opening 16 new sports clubs.

Operating loss increased ¥44,789 million to ¥49,412 million in fiscal 2003 from ¥4,623 million in fiscal 2002, reflecting the impairment of goodwill and other intangible assets.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make assumptions and estimates about expected future cash flows and other matters that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Note 1 of the notes to our consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our consolidated financial statements. We consider some of our significant accounting policies to be critical to our reported results because they require our management to make complex judgments in making assumptions and estimates about the effects of matters that are inherently uncertain and therefore subject to change. Changes in such assumptions and estimates could have a material effect on the amounts reported in our financial statements. We believe that among our significant accounting policies, the following policies may involve a higher degree of judgment or complexity.

Acquisitions

In the past three fiscal years, we have made a number of business acquisitions, which have been accounted for using the purchase method of accounting. The purchase method requires that the net assets—tangible and identifiable intangible assets less liabilities—of the acquired company be recorded at fair value, with the difference between the cost of an acquired company and the fair value of the acquired net assets recorded as goodwill. Application of the purchase method requires us to make complex judgments about the allocation of the purchase price to the fair value of the net assets we acquired, and estimated useful lives of such assets.

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With respect to intangible assets acquired in the course of our acquisitions, we have estimated the useful lives of various intangible assets based on our internal expertise as well as assistance from independent valuation experts. We determined that our acquired intangible assets related to trademarks, franchise contracts and gaming licenses have an indefinite useful life. Our intangible assets related to membership lists, existing technology and customer relationships are estimated to have useful lives of two to five years.

Valuation of Intangible Assets and Goodwill

As of April 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142, we are required to perform an initial impairment test of our indefinite-lived intangible assets and goodwill at the transition and an annual impairment test thereafter. We also assess the impairment of intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Factors we consider important which could trigger an impairment review include the following: