The similarity between Tomb Raider's Lara Croft and Earthworm Jim is not immediately apparent. Lara Croft is a curvaceous heroine who shoots to kill with a semiautomatic. Earthworm Jim is a spacesuit-clad, bug-eyed invertebrate crawler who flushes his enemies down toilets.

Yet for their creators -- the London-based

Eidos

(EIDSY)

with Ms. Croft and Glasgow-based

VIS Interactive

with the anelid superhero -- both characters are money-spinners. It would be hard to emulate Tomb Raider's success. It helped lift Eidos' fiscal 1998 pretax profits 130% to $61.4 million. But it is expected that Earthworm Jim's new 3D incarnation on a PC,

Sony PlayStation

(SNE) - Get Report

and

Nintendo 64

this summer will push VIS Interactive into its most profitable period yet.

The Superheroes Impart Super Powers

The U.K. is one of the largest developers of games software in the world. According to the European leisure software industry group

ELSPA

, exports of games software by British firms in 1997 were worth about $675 million. Scottish developers are estimated to be responsible for about a tenth of Britain's total exports of games.

Games software and digital entertainment companies employ about 300 people in Scotland and this number is estimated to grow to over 1,000 people by the end of 2000.

This potential is attracting outside interest.

Absolute Quality

, a Maryland-based testing and technical support firm for multimedia software, last month chose Glasgow as its base for a European software testing and support center. And

Inner Workings

, another Scottish games developer, had the temerity to sue

Microsoft

(MSFT) - Get Report

over the intellectual property rights to one of its characters, Lemon Dog, a bright yellow canine. (The case was settled out of court this year.)

The reason Scotland, and indeed the whole of the U.K., is such a powerhouse in the game software industry remains a matter of debate. Everything from the wide home ownership of cheap games consoles such as Atari to the inclement weather to the success of the British music and film industries have been trotted out as reasons.

In 1997, the

Scottish Games Alliance

, an industry group, was set up with the aim of promoting Scotland's software games industry both abroad and at home. By most accounts it has done a good job. Absolute Quality's decision to locate its new center in Glasgow was in no small part down to lobbying by the Alliance, and Nick Gibson, games analyst at the investment and research firm

Durlacher

, says several Scottish software companies have received funding from the private sector on the back of support from the Alliance.

That faith in the industry is well placed. According to

Scottish Enterprise

, an economic development agency, six out of the top eight Scottish game software companies increased their number of employees by over 20% in 1998.

Visual Sciences

, developer of

Crazy

, which will be featured on PlayStation, doubled its revenue in 1998 to $1.94 million.

Digital Animations Group

, which has moved away from game development and into computer animation for films and television, increased its revenue by 86% to $1.86 million.

"Your Next Challenge Is..."

Yet for all the creativity and talent in Scotland, software games developers are still not making as much money as the sales of their products might suggest. This may seem strange when you consider that, according to

Paribas

, the world market grew in value 24% to $16.7 billion in 1998 and the European market alone is forecast to grow 35% per year through 2002.

The reason for the lack of revenue is the nature of the industry. A developer typically funds the costs associated with creating a game with an advance of the royalties from a publisher. Yet by the time the product is released and the royalties are supposed to be rolling in, the developers find the publisher's costs leave little in the way of extra money.

For example, Inner Workings received $400,000 in advance royalties from the Dutch publisher

Project Two Interactive

to develop its new game

Crazy

. How much extra money from royalties Inner Workings will get after the publisher's costs have been stripped out is anybody's guess.

The level of funding for Scottish software games companies, and for those in the U.K. as a whole, is also still a couple of blasters short of a full armory.

In the U.K., money from venture capitalists like

3i

, which is a shareholder in both VIS Interactive and Digital Animations, has not been matched by funds from the general investment community and lags far behind that of the U.S. and France.

According to Durlacher's Gibson, the U.K. is a more conservative investment environment than that of the U.S. After the spectacular failures of some multimedia companies on the Alternative Investment Market, or AIM, a London exchange for small companies, the games industry has been "damned by association," he says.

About a dozen U.K. companies are involved in one way or another with the games industry and are listed on either London's main market or AIM, yet trading has been plagued by illiquidity, particularly on AIM, and negative investor perception of the industry.

Compare the AIM-listed

SCi Entertainment Group

, which is trading at a miserable price-to-forward-earnings ratio of 8 times, with the U.S.'s

Electronics Arts

(ERTS)

, which is trading at 29 times, and France's

Infogrames

, which is trading at 39 times.

To counter this bad reputation, Gibson has set up the Internet

site to educate investors about the industry in the U.K.

Across the (James) Pond

One obvious solution to the lack of funding would be to list on exchanges such as the

Nasdaq

, where investors seem more willing to take on the risks associated with the hit-and-miss nature of the industry.

Alas, this alternative is open only to the largest few. Christiaan van der Kuyl, CEO of VIS Interactive, said listing on Nasdaq is one of a series of options available to it. However, VIS had revenue of over $2 million in 1998, while other Scottish games companies such as

Red Lemon Studios

and

Steel Monkeys

had revenue of under $1 million, far below the Nasdaq requirements.

Membership of the Scottish Games Alliance is also seen by some as no great help. Digital Animations CEO Mike Antliff says developers in the Alliance are too busy trying to sell their Scottishness instead of pounding the pavement in New York selling their products.

"My gut feeling is we want to keep our own identity. The Scottish Games Alliance had a combined stand at the

E3

interactive entertainment expo in Los Angeles but our brand is key to the growth of the company," says Antliff.

Consolidation of the notoriously cottage-like industry in Scotland is becoming a trend as the industry experiences one of its cyclical downturns. These downturns crop up as the old technology becomes obsolete and consumers hold off buying until the new consoles are released.

Sega's Dreamcast

is already out and Sony PlayStation 2 is due to arrive later this year.

Gremlin Group

, a games developer and publisher, is in the process of selling itself to Infogrames, and VIS Interactive is on the prowl to find a company that specializes in sports games or in the market for 9-year-olds and under, parts of the business in which it is not currently involved.

But what really has the games developers and publishers salivating at the mouth is the convergence of technology for television, the Internet and video games. The new generation of game consoles are powerful computers that will be able to offer all these services. "If you compare the games industry to the movies, we've not even got to the talkies yet," says Kuyl. Game on.