The following apology was printed in the Guardian's Corrections and Clarifications column, Saturday December 13 2003

The report below wrongly listed Core Design as one of the British game developers to have failed in 2003. In fact, the company continues to trade. Apologies.

The games industry is approaching Christmas with all the wide-eyed enthusiasm of a six year old. This month, around £500m worth of games will be sold in the UK alone - providing a golden end to a remarkable year for the industry.

"We're expecting 2003 to be another record year in volume and value terms," says Nick Parker, managing director of industry analysts Parker Consulting. "About 30% of the year's games sale will take place in December."

Games publishers and developers have strained every sinew to finish their biggest blockbusters in time for the festive season. As with pop music, the Christmas number one games slot is the most coveted of the year.

And this year is no different even if - for gaming aficionados - 2003 will not be held up as an example of a vintage year. Too many of the most anticipated titles have seen their release dates slip to next year.

The likes of Half-Life 2, Doom II, Gran Turismo 4 and Fable appear likely to hit the shops in March or April, which will trigger a pseudo-Christmas surge in sales in spring. But this year has been an interesting (for some, in Chinese curse terms) year for a young industry moving towards maturity.

The year saw online gaming - touted as the next big thing for at least five years - finally come of age, with Microsoft and Sony launching online services for the Xbox and PlayStation 2, and vastly improved broadband penetration giving online PC gaming a new lease of life. Mobile phone gaming, too, began to generate serious revenues. Recent stories about so-called grey gamers illustrate how games are finding a wider audience than ever.

Figures for the overall size of the industry in 2003 will not emerge until March but, in 2002, the UK leisure software market value topped £1bn for the first time, compared with cinema box-office income of £755m and video/DVD rental worth £500m.

At £2.05bn and £2.02bn respectively, video/DVD retail and overall music sales comfortably eclipsed videogames, though. Roger Bennett, director-general of the European Leisure Software and Publishers Association (Elspa), says: "The volume and value of sales has been up slightly on the past year so far."

But in terms of the attention gaming is receiving, things have changed more profoundly. This Christmas, Ladbrokes has acknowledged the importance of the games industry by taking bets on the Christmas number one. Its book makes moderately depressing reading for the gaming purist: of the 13 titles on which Ladbrokes will take bets only three - Pop Idol, Manhunt and True Crime - are original titles rather than sequels.

The four most-fancied titles - Lord Of The Rings: Return Of The King, Fifa Football 04, Medal Of Honor: Rising Sun and The Sims: Busting Out, in descending order - are published by the mighty Electronic Arts. Clued-up punters who spotted Lord Of The Rings: Return Of The King offered at 14-1 in November will almost certainly thank Tolkien and Peter Jackson for a hefty Christmas bonus.

Return Of The King is now 2-1 favourite - shamefully, since although it looks good, it is not much fun to play. The fun but insubstantial Pop Idol has slipped from 1-2 favourite in November to a more tempting 6-1.

David McMorrow, Ladbrokes' marketing manager, is happy with the way in which the betting industry's first book focusing on videogames has progressed: "It has been quite popular - the odds keep changing even now," he says. "It was customer demand, more than anything, that encouraged us to run the book. Previously, aunties and uncles might have picked up things like train sets for kids at Christmas, but videogames are becoming a lot more mainstream.

"We wouldn't rule out running other videogames books at different times of the year."

The importance of marketing muscle is graphically illustrated by the presence of Fifa Football 04 as joint second-favourite: you cannot get odds on its superior (but PlayStation 2-only) rival Pro Evolution Soccer 3.

New versions of old stalwarts such as Tony Hawk's Underground, Championship Manager 02/03, Mario Kart: Double Dash and Eye Toy: Groove also feature. Arguably the most innovative mass-appeal game of 2003, Ubisoft's XIII, does not, nor does Microsoft's glorious Project Gotham Racing 2.

Elspa's Roger Bennett agrees that "sequel-itis" is a problem. "One area that does concern us is the lack of innovation following the inevitably risk-averse position of publishers. There is too much dependence on sequels and licences: one wonders where the new Tomb Raiders and the like will come from. It is an issue the industry does need to address."

Hardware-wise, 2003 was an unprecedented year, as three major consoles hit stages of maturity. The big loser was Nintendo which - despite lowering the price of its GameCube to a trifling £79.99 - could not overtake Microsoft's Xbox in total sales. Sony's PlayStation 2, however, towers above its rivals. Microsoft has sold around 10m Xboxes worldwide, against Sony's staggering 62m PlayStation 2s - including 5m in the UK alone.

Nintendo has shipped (rather than sold) 5.6m GameCubes - a figure that must be taken with a pinch of salt, as it stopped manufacturing the GameCube for a period, due to huge inventory build-ups.

Despite the disparity between the numbers of people using the platforms, online console gaming is proving to be a much more level playing field for Microsoft and Sony. Microsoft is claiming 500,000 subscribers worldwide to its Xbox Live service, while it is believed between 750,000 and 1m gamers subscribe to Sony's PlayStation 2 online service.

Bennett sees the rise of online gaming and mobile phone gaming as the year's biggest plus for the industry. "This year, new business models have begun to appear, with the take-up of mobile and online gaming accelerating among publishers, as well as activity in other areas, such as interactive television and handhelds," he says. "The traditional retail model has been tight on shelf space for the smaller publishers, but 2003 has seen them find new ways of attracting the public."

Next year looks set to be one of the most exciting years in the games industry's history. Microsoft and Sony have dropped broad hints that they will unveil the next-generation versions of the Xbox and PlayStation 2 next year. Indeed, Microsoft has already confirmed that its next console will use an IBM processor and an ATI graphics chip.

The big launches will probably come at the E3 Show in May, although it is unlikely either will go on sale until 2005. With Microsoft firmly established in the games industry, it will approach the next generation of consoles on a level playing field with Sony, and an almighty scrap between the two is guaranteed to ensue.

Sony's PlayStation Portable will also be unveiled next year, and may just squeeze into the shops in time for Christmas. Nintendo has said it will launch a new item of portable hardware at E3, too - perhaps incorporating mobile phone functionality along the lines of Nokia's flawed but interesting N-Gage.

It will be fascinating to see how quickly Nokia comes up with a (surely 3G-capable) replacement for the N-Gage - it has a history of upgrading its products on an 18-month cycle.

With Half-Life 2 - perhaps the most-anticipated game in the past five years - plus Halo 2 for the Xbox, Gran Turismo 4, Peter Molyneux's innovative role-playing game Fable and Doom III (from legendary first-person shoot-'em-up developer id Software) are all due to arrive in spring . Despite all the activity, however, the once-mighty UK developer industry saw an astounding litany of companies shuffling off to the code-shop in the sky in 2003. They included Kaboom, HotGen, Computer Artworks, developer/ publisher Rage, Runecraft, Lost Toys, Crawfish, Toys In The Attic, Software Creations and studios run by Infogrames in Sheffield and Vis Entertainment in London.

If next year sees a comparable amount of blood on the tracks, the UK will swiftly cease to be a world force in game development. Many developers blamed lack of adventurousness by publishers, but Bennett adds an explanation: "The increased level of investment involved in game development is bound to lead to contraction. But there is always room for niche publishers and niche developers. I would suggest that every talented person who worked for those defunct developers will find themselves a new job in the industry - the demand is still there."

Eidos, previously the standard-bearer of British games publishing, had an annus horribilis, fuelled by the poor performance of the buggy Tomb Raider: Angel Of Darkness. The innovative but over-complicated Republic flopped, and Championship Manager developer Sports Interactive parted company with the publisher (although Eidos retains the right to publish further Championship Managers). On the plus side, legendary old-skool publisher Mastertronic made a return (with a range of republished budget titles), and the first fruits of Microsoft's acquisition of Rare Software appeared.

The inaugural Edinburgh International Games Festival - an adjunct of the Edinburgh Festival - was a success, but videogame show shenanigans are on the agenda for the UK in 2004. GameStars, which initially took the form of a televised games awards ceremony, will be expanded into a show next year, taking on the ailing ECTS Show. The industry is in a ferment of indecision, as it tries to work out which of the rivals will prevail.

In general, though, says Bennett: "There is a great deal of confidence among the industry. On the cultural side, it is beginning to receive credibility through events like the Edinburgh International Games Festival and the way in which the likes of Sony have developed art exhibitions that relate to games. The UK games market remains the biggest in Europe and the third biggest in the world, and as far as games being accepted as a mass-market, enjoyable experience are concerned, the UK is way ahead of the game."

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