ARC International plc Announces Results For the Six Months Ended 30 June 2005

• 17 New Processor Contracts Signed
• 25 Percent Increase in Processor and Embedded Systems License Income

– ARC International (LSE: ARK), the world leader in configurable CPU/DSP processor cores and application subsystems, today announced its unaudited financial results for the six months ended 30 June 2005.

Highlights:

• Revenue for the underlying business*: £5.4 million: up 10% year over year (1H 2004: £4.9 million) and down 13% including revenue from the Peripherals business that was sold (1H 2004: £6.2 million)
• License and engineering income for the underlying business £3.4 million: up 25% year over year (1H 2004: £2.7 million)
• Operating costs before share based award expense, goodwill impairment, amortisation and depreciation £7.6 million: reduced by 25% over 1H 2004 (1H 2004: £10.2 million)
• Net operating expenses £8.7 million: reduced by 18% over 1H 2004 (1H 2004: £10.7 million)
• Net loss for the period of £1.4 million, improved 52% over 1H 2004 (1H 2004: £2.9 million)
• Operating cash outflow of £2.6 million: reduced 48% year over year (1H 2004: £5.1 million); year end cash and short-term investments at £33.0 million (2H 2004: £33.5 million)
• 17 new processor licenses signed; 10 from the ARC™ 600 and 700 core families and ARCsound™ subsystem
• Four patent awards, including the grant of a fundamental patent relating to configurability by the United States Patent and Trademark Office (USPTO)

*Underlying business excludes Peripherals business sold in June 2004.

Commenting on operations for the first six months, Carl Schlachte, president and CEO, said:
“In the first half of 2005, ARC passed the 100 customer milestone with 17 new processor contracts, a 55 percent year-on-year gain from the 11 licenses signed in the first half 2004. Many of these companies are driving high-growth embedded markets, including smart cards and biometrics applications. Seven of these customers were new licensees.

Management continues to be confident in the strategy and optimistic about the future of the company. Although the financial results were below our expectations, achievements over the past six months, such as our growing patent portfolio and the launch of our Early Adopter Program for ARC’s multimedia subsystem, underscore ARC’s increasing strength in the embedded IP market.”

Commenting on the financial results, Monica Johnson, CFO, added:
“Strong demand for our SoC products grew license and engineering income by 25 percent compared with the same period and underlying business in 2004. Despite a slow first quarter, business strengthened considerably in the last few months, and we remain optimistic for the second half of 2005. Revenue growth, cash usage and expenses for the second half of 2005 remain inline with projected levels. Our newer products continue to be broadly adopted and are helping increase overall average selling prices.”

Statement from the President and Chief Executive Officer:
Overview
Both license revenue and signed contracts for our patented configurable processors were up significantly year-on-year. ARC passed the 100 customer milestone and continued to deepen its penetration of key high-volume embedded applications.

Net operating expenses declined further by 18% as our net loss narrowed to £1.4 million. Cash usage in the first half of 2005 decreased to £0.5 million resulting in a strong cash and short-term investments position at £33.0 million.

Patent Awards
During the first half of 2005, ARC International received four additional patent grants covering broad aspects of the company’s products. Chief among the recent awards was the grant by the United States Patent and Trademark Office (USPTO) of patent number 6,862,563, which ARC believes is fundamental to the design of a System-on-Chip (SoC) using configurable CPU technology. ARC’s growing portfolio of patents underscores our position as the leading provider of configurability to the embedded market.

SoC Solutions
In January, ARC announced a new roadmap of configurable CPU and DSP cores. Now licensees have access to 11 state-of-the-art processors that meet the disparate market requirements of applications ranging from deeply embedded microcontrollers to high-end, OS-aware devices such as advanced digital televisions. Today the ARC 600 and 700 families are the foundation of ARC’s CPU and DSP offerings. Generally, ARC’s CPUs are smaller, consume less power and offer the ability to develop highly differentiated end products – key elements to designing successful devices for high-volume applications.

To enhance the attractiveness of our configurable CPUs for applications that require high-end math functionality, ARC introduced “FPX” floating point extensions. By using up to 90 percent less silicon area than floating point coprocessors with comparable performance, ARC’s FPX solution sets a new industry standard for die size efficiency and low power consumption.

Furthering ARC’s strategy of offering complete solutions for the high-growth digital consumer market, ARC announced the Early Adopter Program for its new multimedia subsystem. The program gives participants the ability to be the first to market with a highly optimized technology designed to offer the lowest power consumption and smallest silicon footprint of any in the industry. The EA Program announcement has received a tremendous response from OEM and semiconductor companies in ARC’s target sales regions, and we look forward to offering the new subsystem for general availability in the latter half of 2005.

Asia
Asia is a key driver of the consumer electronics industry, and one of the most active regions for SoC design. In Japan, ARC added new strategic business personnel who have extensive experience in the IP licensing business. They complement our existing resources and significantly increase our opportunities with Japan’s leading system and semiconductor companies.

To further the appeal of ARC’s configurable products to Japanese developers, ARC and MiSPO announced optimized microITRON support for the ARC 600 core family. The availability of the microITRON real-time operating system (RTOS) for ARC’s processors enhances the already strong value proposition our cores offer designers of embedded applications in Japan.

During the first half, ARC also added a senior sales director and a sales support manager to its Taiwan operations with responsibility for the Greater China region. Combined with Maojet, ARC’s regional sales agent, our growing capabilities in this area support our goal of bringing the benefits of configurable CPU technology and multimedia subsystems to Greater China’s system and fabless companies.

Customers
• Unnamed – In July, ARC International announced that it has reached a license agreement with a leading smart card technology provider. Valued at £900,000, the deal gives the undisclosed customer wide-ranging access to ARC’s patented configurable technology. The agreement underscores the growing adoption of ARC’s configurable CPU products in high-volume markets where data protection is critical to the market success of ARC-Based™ devices.

• Aarohi Communications – a leading provider of intelligent SAN components that are enabling a new generation of storage networking platforms, announced that they have extended their existing license for an ARC configurable processor. Aarohi, an ARC licensee since 2002, will use the core in its next-generation Intelligent SAN Component. Aarohi’s current ARC-Based AV150 Intelligent Storage Processor recently won the Network Storage Conference ‘Interconnect Product of the Year’ award and incorporates 11 configurable ARC cores.

• Altek International Investment Co., Ltd. – an ARC licensee since 2003, announced an extension of their license for a configurable ARC core for use in the design of their next-generation digital still camera chip. Their previous ARC-Based design is now shipping to market with multiple ARC cores.

• Chips & Media, Inc. – a Korean-based audio/video solutions provider, has taken a license for the configurable ARC 605 core to power a new MPEG-2 design for set-top box applications. The 605 is the world’s smallest, lowest power 32-bit processor and provides up to twice the MHz of competitive cores.

• IPWireless – a leader in the development of very high performance packet-based wireless networks, announced they have standardized on ARC’s patented configurable CPU technology for the company’s next generation 3G TD-CDMA broadband wireless devices. This will be the third in a series of successful ARC-Based designs from IPWireless.

• Skymedi – a Taiwan-based provider of multimedia flash memory controllers, has taken a license for the ARCsound audio subsystem for their next-generation controllers. After a thorough search of available audio solutions, Skymedi found the ARCsound subsystem and ARC’s comprehensive subsystem roadmap to be the industry’s superior multimedia solution.

• UPEK, Inc. – provides biometric fingerprint solutions for a broad range of commercial and consumer applications. The company is incorporating a configurable ARC processor in its line of TouchStrip™ fingerprint authentication solutions, which are shipping in notebook PCs, mobile phones and flash drives from leading OEMs and ODMs.

Embedded Systems Software
During the first half of 2005, the Embedded Systems software contributed 22% of total revenue. To more clearly differentiate itself within the marketplace, ARC established the identity of MQX Embedded.™ Under the new name, MQX Embedded will continue to license optimized software tools, operating systems and software platforms to ARC and non-ARC customers within the embedded industry.

Partnerships with Best-in-Class Companies
• Express Logic – a worldwide leader in royalty-free RTOS, has ported their ThreadX® technology to the ARC 700 family of configurable processors. The ThreadX RTOS is a small-footprint, fast, royalty-free, ìITRON 4.0-compatible real-time kernel, complemented by Express Logic’s NetX™ TCP/IP stack and its FileX™ MS-DOS compatible FAT file system. All Express Logic products now support the ARC 700 family of configurable processors.

• Fraunhofer – one of the leading organizations of applied research in Europe, will develop an ARC-Based companion chip for processors in mobile multimedia terminals for using the emerging DVB-H standard. The companion chip will be an accelerator for H.264 and will be based on an ARC 610DX core. Both ARC and Fraunhofer will have the opportunity to license the developed technology for applications in the burgeoning DVB-H market.

• Green Hills Software – announced an enhanced MULTI® Integrated Development Environment for ARC’s configurable processors. As the latest deliverable from the growing partnership between ARC and Green Hills, the optimized compiler and debug software lowers development times and speeds ARC customers’ time-to-market parameters.

• MiSPO – a leading supplier of microITRON-based technology, ported their NORTi® RTOS to ARC’s architecture. MiSPO demonstrated the new product running on a configurable ARC 605 processor at the eighth annual Embedded Systems Expo and Conference (ESEC) in Tokyo.

• Sonic Network, Inc. – provides embedded audio technology and content that enable high quality, engaging audio and multi-media playback. Its Embedded Audio Synthesis (EAS™) technology is now available for the ARCsound audio subsystem. Sonic’s EAS technology is ideal for designers of high volume mobile devices where low power consumption and a small memory footprint are critical to developing cost-effective applications.

• Tao Group – a fully Sun-certified supplier of Java™ technology, is renowned for delivering the fastest Java solution in the market and is fully compliant to Java Community Process standards. ARC announced that using Tao’s intent platform, an ARC 625D core achieved an out-of-the-box score of 104 CaffeineMarks/mW. This gives ARC licensees designing SoCs for portable consumer devices the ability to maximize Java efficiency while achieving the best performance-to-power ratio of any 32-bit processor core.

Outlook
Despite a slow first quarter, business strengthened considerably the last few months, and we remain optimistic for the second half of 2005. Revenue growth, cash usage and expenses remain inline with projected levels. Our newer products continue to be broadly adopted and are helping increase overall average selling prices. In the second half, our focus will be on top line growth as we continue to enhance our compelling product line to grow our share of high-volume embedded markets globally.

Financial Review
Six months ended 30 June 2005

International Financial Reporting Standards (IFRS)
The Company is required to report its consolidated financial statements under International Financial Reporting Standards (IFRS), as adopted by the European Union, for all accounting periods beginning on or after 1 January 2005. Previously, the group has applied United Kingdom generally accepted accounting principles (UK GAAP).

Revenue
Total revenue in 1H 2005 was £5.4 million, down 13% over the same period last year (1H 2004: £6.2 million) including revenue from the disposed peripherals business. Prior to currency translation, with virtually all sales in US dollars, revenue was down 11%. License and engineering income was down 10% at £3.4 million (1H 2004: £3.8 million). Maintenance and service income was down 3% at £0.8 million (1H 2004: £0.9 million). Royalty income declined by 25% to £1.2 million (1H 2004: £1.5 million). Royalty income in 1H 2005 includes an advance non-refundable payment which represented 46% of the total royalties for the period.

Revenue for underlying business: Total revenue excluding income from the disposal of the peripherals business (1H 2004: £1.3 million) was up 10% at £5.4 million (1H 2004: £4.9 million). License and engineering income was up 25% at £3.4 million (1H 2004: £2.7 million). Maintenance and service income was up 19% at £0.8 million (1H 2004: £0.7 million). Royalty income declined by 21% to £1.2 million (1H 2004: £1.5 million).

Sales in Europe were 34% of total sales, North America 63% and Asia 3%. From a product line perspective, 78% of revenue was from the SoC business with the remaining 22% delivered by the embedded software products.

Costs
Cost of sales of £0.7 million was down 25% year over year (1H 2004: £0.9 million). Gross margin in increased to 87% (1H 2004: 85%). Total operating expenses (excluding share based award expense, goodwill impairment, amortisation and depreciation) decreased by 25% year-over-year to £7.6 million (1H 2004: £10.2 million). Net operating expenses declined by 18% to £8.7 million (1H 2004: £10.7 million).

The Company had 129 employees at 30 June 2005 compared with 131 at 31 December 2004. Research and development costs decreased 29% to £3.2 million (1H 2004: £4.6 million). Sales and marketing costs decreased 19% to £2.1 million (1H 2004: £2.6 million). General and administration costs were down 24% year over year to £1.6 million (1H 2004: £2.1 million). Total share based award expense was comprised of deferred compensation charges of £0.1 million and an additional £0.1 million related to share based award expenses under IFRS.

Interest
Interest income was up 14% year over year at £0.8 million due to an increase in the average interest rate on investments.

Net loss
Net loss was £1.4 million (1H 2004: £2.9 million). Loss per share improved to £0.97p (1H 2004: £2.08p).

Net loss of £1.4 million includes goodwill impairment of £0.2 million, R&D tax credit received from the UK tax authority of £1.2 million, and gain on business disposal of £0.1 million. The gain represents the net cash proceeds received in 1H 2005 for a partial payment of the note due from TransDimension, Inc.

Cash flow and balance sheet
The net cash outflow from operations was £2.6 million (1H 2004: £5.1 million). Capital expenditure was £0.4 million. The movement in cash and short-term investments during the six months was an outflow of £0.5 million. Total assets at 30 June 2005 were £39.2 million, including cash and short-term investments of £33.0 million.

Dividend
No interim dividend payment will be made for the six months ended 30 June 2005.

Impact from IFRS
The current period interim results and the restated comparative results have been prepared on a basis consistent with the IFRS accounting policies as set out in the press release titled "Restatement of financial information under International Financial Reporting Standards" containing the impact of the adoption of IFRS on the group’s financial statements for the six and twelve months ended December 2004. Whilst the introduction of IFRS has no impact on the underlying cash flows of the business, the areas of accounting that will have the most significant impact on the group’s financial statements are employee share-based payment arrangements; development expenditure; the treatment of goodwill; and lease reclassification. Please see Note 2 under Notes to the Accounts for overview of impact.

Please visit the company's Website to view further details on the company's first half 2005 financial performance, including Consolidated Profit and Loss Account, Consolidated Balance Sheet, and Consolidated Cash Flow Statement. Also available on the company's Website is Notes to the Accounts, which includes Basis of Preparation, Overview of IFRS Impact in 2004, Summary of Net Operating Expenses, Cash Used in Operations, Statement of Changes in Equity, Provisions, and Gain on Business Disposal.

About ARC International plc
ARC International is the world leader in low-power, high-performance 32-bit configurable CPU/DSP processor cores, subsystems, real-time operating systems and development tools for embedded system design. ARC’s configurable and extendible cores assist customers in the development of next generation digital media, consumer and communications devices, resulting in lower cost, higher performance SoC products.

ARC International maintains a worldwide presence with corporate offices in San Jose, California, USA and Elstree, UK. The company has research and development offices located in England and the United States. For more information please visit the ARC website at: www.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE: ARK).

ARC, ARC-Based, ARCsound, MQX Embedded and the ARC logo are trademarks or registered trademarks of ARC International. All other brands or product names contained herein are the property of their respective owners. This press release may contain certain "forward-looking statements" that involve risks and uncertainties. For factors that could cause actual results to differ, visit the company’s Website as well as the listing particulars filed with the United Kingdom Listing Authority and the Registrar of Companies in England and Wales.