Download pdf - ARC 2008 Annual Report

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ANNUAL REPORT AND ACCOUNTS 2008

Enabling the Multimedia Revolution

Improving the Multimedia ExperienceConsumers around the globe are using a growing numberof electronic products to capture, share, and play high-qualitymultimedia content. Improving the multimedia experience –regardless of the electronic device – presents a significantmarket opportunity and is a key part of ARC’s strategy.

ARCWho We Are

Overview

01ARC International plc Annual Report and Accounts 2008

ARC International is fuelling the multimediarevolution by licensing multimedia solutionsand intellectual property (IP) to OEM andsemiconductor companies globally.The company’s award-winning solutions enablethese customers to significantly enhance the audioand video experience at lower development costs.ARC’s 150+ customers collectively ship hundredsof millions of ARC-Based™ chips annually in a widerange of products.

ARC International maintains a worldwide presencewith corporate and research and development officesin San Jose and Lake Tahoe, California, US; St Albans,England; St Petersburg, Russia; and Hyderabad, India.

Overview01 Who We Are02 2008 Highlights03 ARC’s Markets04 ARC’s Sound-to-Silicon Solutions

Breathe Life into Digital Audio05 Chairman’s Statement

Operational Review07 Chief Executive Officer’s Review

of Operations09 Chief Financial Officer’s Review11 Corporate Social Responsibility

Management andGovernance13 Board of Directors14 Directors’ Report20 Remuneration Report25 Corporate Governance28 Statement of Directors’

Responsibilities29 Independent Auditors’ Report

Financial Statementsand Notes30 Income Statement

Statements of Recognised Incomeand Expense

31 Balance Sheets32 Cash Flow Statements33 Notes to the Accounts71 Five Year Summary

Additional Information72 Shareholder Information73 Advisers and Corporate Information

2008 Contents

“We use ARC becauseit’s an industrystandard and its lowpower profile.”Intel, an ARC customer

“A collaborationbetween industryleaders in media-oriented applications.”Toshiba, an ARC customer

“We are pleased tostandardise a keyelement of ourtechnology strategyon ARC.”Broadcom, an ARC customer

Royalty revenue US$000*

08

07

06

05

04

14,334

9,726

6,288

3,913

5,408

2008 HighlightsOverview

02 ARC International plc Annual Report and Accounts 2008

Strategic direction is strengthened

Acquisitions strengthened product offerings

New “Sound-to-Silicon” solutions were introduced

Entered new market segments

New wins with OEM and chip customers

Strengthened management team

Restructuring

Generates annual cost savings in excess of 25%

Significantly lowers ARC’s cost base whilemaintaining development programmes

Enhances ability to deploy multimedia solutions

Revenue by year US$000*

31,188

28,930

24,754

19,007

22,265

08

07

06

05

04

* based on an average exchange rate for the respective year 1 Includes short-term investments

Revenues and royalties increased

Total revenue up 18% at £17.0 million

Royalty revenue up 61% at £7.9 million

Licensing revenue flat at £7.3 million

Net loss increased to £7.3 million

Cash balance1 at £12.7 million

Royalties drove revenue growth

Increase in post-2003 contracts contributingroyalty revenues

Recognised new higher value royalties fromOEM customers

Increase in ARC-Based™ shipments

Operational Financial

Total bookings US$000*

08

07

06

05

04

29,291

37,256

30,531

22,003

22,0580.0

Growth of ARC’s worldwide customer base

08

07

06

05

04

152

144

137

112

96

ARC’s Markets

Overview


ARC’s technology is driving an increasing number of high growth marketsrelating to how multimedia content is captured, shared, and played. Whetherit’s audio or video players, digital or mobile TVs, media-enabled cell phones,portable storage cards, or PCs and laptops, ARC-Based™ electronic devices arehelping consumers around the world experience high-quality multimedia content.

PCs and laptops

Media enabledcell phones

Digital TVs

Flash devices Portable media players

Set-top boxes

ARC is focusing on increasing licensing and royalty revenues from OEM andchip companies in regions driving the design and development of consumerelectronics devices.

North Americarepresented

55%of revenue

Europerepresented

20%of revenue

Asiarepresented

25%of revenue

Today’s music, movies and games suffer from degraded audiofidelity. Because of digital compression, much of the clarity, warmth,and realism of the original recording or live performance are lost.The result is a significant market opportunity to restore these“emotions” to a wide range of home and portable consumerelectronics devices.

ARC’s “Sound-to-Silicon” solutions take the audio performanceof today’s consumer products to a completely different experiencelevel. Using technology created by artisans and engineers fromthe music industry, they can help customers gain a competitiveadvantage by delivering more compelling experiences atsignificantly lower costs.

ARC’s Sound-to-Silicon SolutionsBreathe Life into Digital Audio

Overview


ARC’s “Sound-to-Silicon” MultimediaStudio in Truckee, California.

Chairman’sStatement

Overview


In 2008 ARC traded against the backdrop of an increasingly challengingeconomic environment that worsened in the second half of the year.Despite this ARC was able to grow top line revenues driven by higher valueroyalty payments from new customers. Going forward into 2009, we remaincautious as visibility is limited and uncertainty in the semiconductor industrywith lengthening sales cycles may affect the timing of new licence revenuesand royalty volumes.

However, a rapid transition to profitability and positive cash flow continues to be ouroverriding goal, and in response to the challenging semiconductor market and globaleconomic conditions we have taken swift and decisive action to further enhance ourability to achieve this goal within planned timescales. To accelerate growth in ourrevenues and customer base, we have strengthened our product portfolio throughthe acquisition of Sonic Focus, transformed our ability to deploy integrated multimediasolutions, broadened our target market to include the higher royalty OEM andconsumer electronics sectors, strengthened our worldwide sales and marketingorganisations and made significant new appointments to the senior managementteam. In addition, the company-wide restructuring announced in September 2008has been substantially completed, and already is delivering improved operationalefficiencies, a rationalised and streamlined management structure and productportfolio, and a significantly lower cost base. We will continue to assess industryconditions throughout 2009 to ensure that the company’s cost structure is alignedwith revenue opportunities.

Over the medium to long term we expect consumer demand for devices deliveringincreasingly higher quality multimedia content to continue to grow, driving OEM andsemiconductor companies to create innovative next-generation products with betterperformance and lower development costs. Feedback from ARC’s worldwide customersand partners underpins our confidence that our integrated solutions and more efficientorganisation can continue to provide compelling value. We remain confident in ourstrategy and our ability to execute.

Richard BarfieldChairmanARC International plc11 March 2009

“A rapid transition to profitabilityand positive cash flow continuesto be our overriding goal.”

“To accelerate growth in ourrevenues and customer base,we have strengthened ourproduct portfolio ofmultimediasolutions, broadened our targetmarket to includemore lucrativeconsumer electronics sectors,and strengthened ourworldwideorganisation.”

“Going forward into 2009we will continue to assessindustry conditions to ensurethat ARC is best positionedto take advantage of revenueopportunities in the consumerelectronics industry.”

OperationalReview


High Quality Audio ExperienceARC’s solutions create a home entertainment centre listening experience onPCs and laptops.

A leading consumer electronics company was able to achieve real competitivedifferentiation for their device by providing a high-quality audio experience.The ARC customer also was able to reduce the number of speakers and eliminatecostly audio components thus saving millions of dollars in development costs.

Chief Executive Officer’sReview of Operations

OperationalReview


ARC’s strategy is to monetise the increasing trend of consumers to capture,share, and play high-quality multimedia content on a variety of electronicsdevices. By developing and delivering integrated “Sound-to-Silicon” solutionsto OEM and semiconductor companies globally, ARC is helping these customerscreate new types of devices at lower development costs that deliver a betterexperience to consumers.

In 2008 ARC grew revenues and strengthened its competitive position in an increasinglychallenging economic environment. The acquisition of Sonic Focus, a leading providerof audio enrichment technology, was completed in February and brings to ARC acomplementary class of customers and markets. This is helping stimulate new revenueopportunities in an uncertain economic climate from new companies as well as ARC’shistorical base of more than 150 customers worldwide.

Today ARC’s Sound-to-Silicon solutions are receiving strong interest from OEM andsemiconductor companies. An industry first, they offer a complete solution for anumber of high growth consumer electronics markets:

• ARC® Portable Media Device SolutionImplemented on a portable media device, the ARC PMD Solution enables consumersto enjoy music, movies, and games anywhere and anytime with a home entertainmentcentre listening experience and extended playback time.

• ARC® Digital TV and Home Theater SolutionThe ARC Digital TV and Home Theater Solution creates a compelling homeentertainment centre listening experience that provides for the ear what high-definition video provides for the eye. The ARC solution eliminates costlycomponents, such as centre channel speakers and woofers. It also enables ARCcustomers to create a single device that addresses numerous market opportunities,such as set-top boxes, digital TVs, and home theaters.

• ARC® PC and Laptop SolutionThe ARC Personal Computer and Laptop Audio Solution provides a homeentertainment centre listening experience using existing speakers or headphones.The solution refines the sound so it resembles the original studio performance.

To ensure ARC is best positioned to deliver on its strategy in the current economicuncertainty, management undertook a strategic review of the business. The resultwas a company-wide restructuring that lowered ARC’s cost base and brought visibleimprovements to ARC’s planning and execution by creating:

• A new integrated worldwide sales team and field organisation to accelerateengagements with OEM and semiconductor customers globally.

“Audio on the HPTouchSmart PC issimply amazing.”HP, an ARC customer

“Sound for an ultrathin notebook that’sastounding.”Lenovo, an ARC customer

ARC’s “Sound-to-Silicon” MultimediaStudio in San Jose,California.

Chief Executive Officer’sReview of Operations

OperationalReview


• An enhanced global product development organisation to ensure ARC’s integratedsolutions meet the needs of customers creating products for high-volumemultimedia markets.

• A worldwide marketing team under new leadership with in-depth experience andunderstanding of the consumer electronics industry and OEM customers. These skillswill assist ARC to continue its focus on delivering integrated multimedia solutions.

The industry adoption of ARC’s products continued throughout 2008. OEM andsemiconductor companies worldwide announced they have taken licenses for,or are shipping products containing, an ARC solution. They included:

• PC and Laptop applications• Hewlett Packard – introduced its new TouchSmart PC computer, which has

been heralded as “redefining personal computing” and includes ARC’s SonicFocus technology.

• Lenovo – launched the x300 laptop computer running the Microsoft Vistaoperating system with ARC’s Sonic Focus technology.

• N-Trig – has signed a multi-year license agreement for ARC’s processor productsfor use in N-trig’s DuoSense™ technology for PCs.

• Digital televisions• A leading mobile digital TV company signed a multi-use agreement for ARC

solutions to provide high-quality digital TV reception in nearly every globalgeographic region.

• Abilis announced it has standardised its mobile DTV product developmenton ARC technology.

• Fujitsu extended its long-term relationship with ARC and took a new licensefor use in its next-generation HDTV products.

• ViXS has taken a license for ARC’s multimedia solutions for use in its XCode™chipset family, which enables the processing of multiple HD video streams.

• Other electronic market applications• A leading flash company took an ARC license for flash applications because

of ARC’s recognised leadership in the industry.• A top ten Taiwan chip company is incorporating ARC’s low power solution into

cellular design that is targeting the worldwide handset market.• A leading smart card provider signed a new license enabling the existing ARC

customer to create new ARC-Based™ solutions for high volume smartcard-related devices.

• Toshiba extended its collaboration with ARC by taking a new license fordevelopment of leading-edge processor technology.

For the year, these developments helped ARC grow the top line despite a deterioratingindustry climate. ARC enters 2009 with a strengthened product portfolio and Sound-to-Silicon solutions that are helping drive new revenue opportunities and deliver higher valueroyalties. The restructuring plan has lowered ARC’s cost base and strengthened themanagement team. For the year, management remains cautious as visibility is limiteddue to the ongoing economic uncertainty. However, we have confidence in ARC’sstrategy, strengthening position in the industry, and attractiveness of our solutions thathelp customers increase competitiveness in the growing consumer electronics market.

Carl SchlachtePresident and Chief Executive Officer11 March 2009

“ARC’s technology hasplayed a significantrole in the successof our product.”SanDisk, an ARC customer

“ARC’s technologyenhances ourcompetitivedifferentiation.”Infineon, an ARC customer

Chief FinancialOfficer’s Review

OperationalReview


Strong revenue growth in 1H was offset by deteriorating confidence of certaincustomers in 2H. Net loss was greater than planned due to the acquisition of andincremental costs from Sonic Focus, the restructuring charges, and the delayedrevenue from two licensing contracts. Without these incremental expenses andcharges, operating costs were in line with management’s plan for 2008.

RevenueTotal revenue in 2008 in US dollars was up 8% to $31.2 million (2007: $28.9 million).Total revenue in sterling was £17.0 million, up 18% over the same period last year(2007: £14.4 million). License and engineering revenue in US dollars was down 11%to $13.4 million (2007: $15.0 million). In sterling, license and engineering revenue wasflat at £7.3 million compared to 2007 (2007: £7.4 million). Maintenance and servicerevenue in US dollars was down 17% to $3.5 million (2007: $4.2 million). In sterling,maintenance and service revenue was down 14% at £1.8 million (2007: £2.1 million).In US dollars, royalty revenue was up by 47% to $14.3 million (2007: $9.7 million).In sterling, royalty revenue increased 61% to £7.9 million (2007: £4.9 million).

Sales in Europe were 20% (2007: 20%) of total sales, North America 55% (2007: 65%)and Asia 25% (2007: 15%).

Cost of sales and operating expensesCost of sales decreased 7% to £1.3 million (2007: £1.4 million). Gross margin increasedto 92% (2007: 90%). Without the restructuring effects, net operating expensesincreased by 25% to £22.8 million (2007: £18.3 million).

The company had 163 employees at 31 December 2008 compared with 196 at31 December 2007. The 17% decrease in headcount was due to a company-widerestructuring to be completed in Q1 of 2009, and was offset by increase in headcountfrom the Sonic Focus acquisition. Excluding the effects of the restructuring, researchand development costs increased 30% to £9.6 million (2007: £7.4 million). Salesand marketing cost was essentially flat at £5.5 million compared to 2007 (2007:£5.5 million). General and administration costs increased 22% to £4.5 million (2007:£3.7 million). Other expenses, comprised of depreciation and amortisation, increasedto £3.1 million (2007: £1.7 million) due to additional amortisation of intangiblesincluded in the acquisitions. The incremental operating expenses excluding amortisationas a result of the acquisition during the year was £1.2 million in 2008. Incrementalamortisation expenses associated with technologies and intangible assets acquiredin 2008 was £0.3 million in 2008. Restructuring costs for 2008 were £2.3 million(2007: £nil).

Finance incomeInterest income was down 40% to £0.9 million (2007: £1.5 million) due to the decreasein average cash balance and decrease in interest rates earned on investments.

Loss for the periodNet loss was £7.3 million (2007: £2.5 million). The charge for the reorganisationof £2.3 million, and the incremental expenses from the acquisition of Sonic Focus gaverise to the increase in the net loss. Loss per share increased to 4.93p (2007: 1.69p).

+18%Total revenue up 18% to£17.0 million

£7.9millionRoyalty revenue in 2008

Chief FinancialOfficer’s Review

OperationalReview


Cash flow and balance sheetThe net cash outflow from operations before restructuring costs decreased to£4.8 million (2007: £5.1 million). Capital expenditure, including payments madefor acquisitions and investments in associate, was £4.6 million (2007: £8.1 million).Net cash outflow in connection with the reorganisation was £1.6 million, includingthe share repurchases. The movement in cash and short-term investments during theyear was an outflow of £8.5 million (2007: £10.4 million). Net assets at 31 December2008 were £21.5 million (31 December 2007: £30.3 million), including cash andshort-term investments of £12.7 million (31 December 2007: £21.2 million).

DividendNo interim dividend payment was made and no dividend has been proposed forthe year ended 31 December 2008 (2007: £nil).

AcquisitionsDuring the period ARC acquired Sonic Focus, Inc. for a total consideration of£2.8 million. See note 31 for details.

Treasury policyThe group’s treasury policy seeks to ensure that adequate financial resources areavailable for the development of the group’s businesses whilst managing its currency,interest rate and counterparty risks. Group treasury operates within clearly definedguidelines that are approved by the Board. The group’s policy is not to engage inspeculative transactions. The group’s policy in respect of major areas of treasury isset out below.

Currency transactionThe currency gains and losses arise where actual sales and purchases are madeby a business unit in a currency other than its own functional currency (2008: gain£108,000, 2007: gain £133,000). Most of the group’s sales are in US dollars whichprovides a natural hedge against US dollar purchases made within the group. Thegroup’s policy is to use forward contracts as a hedge against exchange rate movementsto cover net US dollar exposures for customer receivables where collection dates arecertain. The group maintains the majority of its cash and short-term investmentbalances in sterling and is therefore not subject to currency exchange risk.

Funding and depositsThe group ended the year with net funds of £12.7 million (2007: £21.2 million).The majority of the funds have been placed with a leading UK clearing bank to manageon behalf of the group under guidelines provided by the Board. The balance continuesto be managed in house.

The group expects that future funding requirements will be met by the funds availablecurrently as at 31 December and revenue from existing licensees (royalty, support,license renewals) and future operating activities. While losses made in 2008 reducedthe liquidity position of the group between 31 December 2007 and 31 December 2008,the group restructure has been undertaken to reduce ongoing costs in 2009 onwardsand therefore reduce cash outflow.

Counterparty riskThe group monitors the investment of its funds against pre-determined limits so asto control exposure to any territory or institution.

Victor YoungChief Financial Officer11 March 2009

£12.7millionNet funds

Corporate SocialResponsibility

OperationalReview


In addition to the needs of the group’s shareholders, thegroup recognises the interests of employees, customers,suppliers and the local communities and environmentsin which we operate. The Board accepts that it must bemindful of the needs of all of its stakeholders and seeksto enhance all relationships with the differing groupsconcerned. The following policies reflect the Board’scommitment to corporate social responsibility (“CSR”).

Employee relations policyThe group values its employees and believes they are oneof its best assets. Policies and practices are in place to attract,motivate, retain and develop the group’s employees. As anintellectual property (IP) development group with over 70%of the employees working within research and development,continual professional development and training is paramount.In order to retain and integrate the new employees from therecent acquisitions the group has reviewed the working practicesand culture within the group. This has enabled the newemployees to understand the group’s operations and movesmoothly into its processes.

During 2008 the group undertook a restructure programmethat reduced the number of employees. The restructure andsubsequent employee reductions were handled in accordancewith local customs and laws. As part of the process the groupundertook to assist those employees leaving the group throughprogrammes of outplacement assistance, as well as liaising withrecruitment companies or other local companies. The group hasalso undertaken a programme of measures to ensure that thoseemployees remaining are fully engaged with the group and thestrategic objectives for the future.

The group seeks to benchmark the salary and total remunerationof the employees to the industry best practice. To that endthe group partakes in various salary surveys to enable themanagement to understand the remuneration currently on offerwithin the group’s operational sectors. Employees are given theopportunity, where legally possible, to share in the rewards of itsfuture success through the group’s operation of a share optionscheme. Other benefits such as pension contributions to eitherstate sponsored or defined contribution schemes and healthinsurance programmes are available to employees.

The group communicates regularly with the employees throughthe use of regular “all employee” meetings and conferencecalls chaired by the Chief Executive Officer (CEO). These covera wide range of topics that allow each employee easy accessto the senior management to ask questions and quiz them onrecent activities and/or general strategy. These meetings aresupplemented by site level meetings where information is spreadacross departments and managers can receive feedback on anytopic or development. The CEO has also implemented an e-mailupdate system and web-blog of recent activities. This has provedpopular in spreading news quickly throughout the group.

The group has a policy of helping employees achieve anappropriate work/life balance. This is accomplished through theuse of policies on maternity and paternity leave, flexible workingarrangements and part time working where appropriate. Thegroup believes that recent improvements in technology withinthe workplace should be implemented to assist employees.The group has policies that cover grievances and disciplinaryprocedures as well as recruitment processes.

The annual appraisal system has been reviewed during theyear to ensure that it is meeting the needs of both the groupand the employee. This review has reinforced the recognitionthat development of employees will lead to better designs andproducts from the group. The group will continue to invest inappraisals, training and development to assist employees in theirskills development, both professional and personal. The grouplikes to promote from within so all vacancies are advertisedinternally, and the group operates a system for employeesto refer people for advertised positions.

Environmental policyThe Board acknowledges that the group has a role to playin environmental issues. The group does not perform anymanufacturing activities and therefore has negligible impacton the environment. The group operates from offices with themain activity being the development of hardware and softwaredesigns by employees working on computers, which does notinvolve the use of hazardous substances or waste. The grouppolicy is to endeavour to minimise the impact of its activities onthe environment and to comply with all relevant environmentallaws and regulations. The group has a policy of recyclingas much as possible, ranging from paper waste to printercartridges, reducing energy usage through the use of efficientlighting products and computer equipment and reducing travelwherever possible. Under the Waste Electrical and ElectronicEquipment (WEEE) directive the group has a responsibilityto dispose of its computer equipment safely and responsibly.The group operates with several partners to ensure that all oldcomputer equipment is recycled or disposed of in a safe manner.

CommunityThe group aims to work appropriately with the local communityin which it operates. The group encourages its employees totake part in charitable activities and offers support wheneverpossible. The group has also worked with various educationalestablishments to provide training and work experience toyoung people. This involvement has ranged from one-weekwork experience projects to summer internships with thegroup. The group has an ongoing relationship with theUniversity of Edinburgh, whereby the group provides researchprojects to the students and the University provides researchservices to the group.

ManagementandGovernance


Extended Playback TimePortable media players containing ARC’s solutions can deliver a natural andrealistic experience with extended playback time.

ARC’s multimedia products provide an integrated solution to manufacturersand chip makers, cutting overall development costs and extending battery life.Consumers benefit by having a device that adds clarity to the audio spectrumwith a rich surround sound and reduced listener fatigue.

Board ofDirectors



From left:Richard BarfieldCarl SchlachteVictor YoungDr Geoff BristowSteven Gunders

Richard Barfield Chairman of the BoardRichard Barfield, 51, joined the Board as a non-executive directorand Chairman of the Audit Committee in September 2003,becoming Chairman in April 2007. Mr Barfield also chairs twoother private venture capital backed businesses in the IT staffingand IT reseller industries. Mr Barfield was previously ChiefExecutive Officer of Spring Group plc. Whilst at Spring, he wasalso Chairman of the Recruitment and Employment Confederation,the trade association of the UK recruitment sector. He previouslyserved as Group Finance Director of Northgate InformationSolutions plc and was President of Northgate's Glovia jointventure with Fujitsu and of the Group's application developmenttools business, PRO-IV. Prior to this he occupied senior financialpositions with Bellsouth Corporation and SmithKline Beecham.Mr Barfield is a Fellow of the Institute of Chartered Accountants,having qualified with KPMG in 1982.

Carl Schlachte Chief Executive OfficerCarl Schlachte, 45, is president and CEO of ARC Internationaland joined the Board in 2003. Carl has more than 20 years ofexperience in the semiconductor industry, including CEO rolesat global fabless semiconductor and IP companies, and executivepositions at Motorola and ARM Holdings plc. At ARM heestablished its North American operations and secured strategicrelationships with some of the largest chip and systemcompanies in the United States. Carl resides in the East Bayof Northern California with his wife and children, and is activein his local community and philanthropic causes. He is alsonon-executive Chairman of MOSAID Technologies Inc.

Victor Young Chief Financial OfficerVictor Young, 60, is Chief Financial Officer of ARC Internationaland joined the Board in 2007. Victor has over 35 years ofcorporate accounting and management experience withtechnology companies such as Selectica, Mobilitech, BOPS andTera Systems. Victor’s industry experience includes service withPricewaterhouseCoopers, and multinational venture capital,technology, manufacturing, telecommunications and servicecorporations. He is a graduate of San Francisco State University.

Dr Geoff Bristow Non-executive directorDr Geoff Bristow, 55, joined the Board as senior non-executivedirector in September 2003. After gaining a first class electronicsdegree from Imperial College, London, and a PhD in engineeringfrom Cambridge University, he spent five years at TexasInstruments’ semiconductor division where he was responsiblefor SoC (System-on-Chip) devices. Subsequently at ICL plc hewas director of Network Products before setting up OctagonIndustries, a management services company designed to assistundervalued hi-tech companies. Under Octagon's umbrella hewas attributed with a number of high profile rescues includingWordplex Information Systems plc (where he was CEO),Alphameric plc (Executive Chairman) and later in California,Poqet Computer Corp (Chief Operating Officer). He thenbecame an Executive Vice President for Fujitsu and hassubsequently been managing an investment portfolio ofyoung private companies.

Steven Gunders Non-executive directorSteven Gunders, 65, joined the Board as a non-executive directorin June 2007. Currently he is Chairman of the RemunerationCommittee and a member of the Audit Committee. StevenGunders has close to 40 years of industry experience andspecialises in corporate strategy, mergers and acquisitions,and operations. He is a qualified C.P.A. and holds an MBA fromthe University of Chicago. A former partner with Deloitte andTouche, Steven Gunders was the global lead consulting partnerat Deloitte Consulting with a particular focus on private equityclients’ buy and build strategies both in the United Statesand internationally.

Directors’Report



The directors present their report and the audited financialstatements for the year ended 31 December 2008.

Business review and principal activitiesThe Group licenses award-winning consumer electronics intellectualproperty (IP) in the form of vertically integrated solutions,multimedia subsystems, configurable processors, and relatedtechnologies to semiconductor and OEM companies worldwide.

The company is a public limited company quoted on theLondon Stock Exchange, registered in England and Walesand is domiciled in the UK. The address of the registeredoffice is Verulam Point, Station Way, St Albans, Hertfordshire.The company’s registered number is 3592130.

The group has principal operating activities in the UK, US,Russia and in India through the associate Adaptive Chips, Inc,.The addresses of the principal offices are set out on the backcover. A list of subsidiaries is given in note 16 to the accountson page 58, and the group also operates representative officesin Taiwan, Japan, Germany and the Netherlands.

A review of the operations and future developments is includedin the Chairman’s statement, Chief Executive’s review ofoperations and Chief Financial Officer’s review on pages 5 to10 and have been incorporated by reference. The group positionat the year end includes a net funds position (including cashand cash equivalents and short-term investments) of£12.7 million (2007: £21.2 million) and a net asset positionof £21.5 million (2007: net assets £30.3 million).

The key performance indicators used by the directors and management are summarised below:

Description Metrics Performance Comment

Revenue Revenue for the company Total revenue up 18% from 2007. With all sales made in US dollars the overallis made up of licencing increase was 8%. Royalties continued toand engineering revenue, Royalties up 61% from 2007. increase as unit shipments increased.maintenance revenue and During 2008 customers shipped increasingroyalties on units sold. units of new higher royalty bearing products.

Royalty revenues may fluctuate due to seasonalfluctuations in volume shipments by licencees,economic conditions in end markets, end oflife cycles or unforeseen delays in reportingroyalties by licencees.

Revenue per Monitoring revenue per £88,000 compared to During the year ARC has made oneaverage headcount headcount allows the £91,000 in 2007. acquisition but this headcount increase

directors to measure the has been offset by the restructuring thatefficiency of the group. the group undertook in September. The year

end headcount was 163 which will be carriedthrough to 2009. Therefore, the revenue peraverage headcount should improve.

LBITDA The monitoring of the £3.9 million* versus LBITDA has increased by 5% over 2007,loss before interest, £3.7 million in 2007. partially due to the delayed revenue fromtax, depreciation and two licencing contracts in 2008.amortisation allows thedirectors to understandthe operating resultsof the group. *Before restructuring costs.

New licences New licences signed will 27 new licences versus The group has been focusing on increasingduring year drive future royalties. 34 in 2007. the average deal revenue. Renewing

contracts for new products with existingcustomers confirms the customer valuationof the group’s products.

Net funds used The group is loss making, £8.6 million versus The group used £2.5 million cash for theso it monitors the cash £10.4 million in 2007. acquisition during the year. Cash outflowused to ensure that the from operations increased to £5.6 millioncash is put to best use from £5.1 million in 2007, due to changesfor the group. including, year end working capital

movements, one-off restructuring costs andabsorbing the acquisitions during the year.



The directors consider that licencing growth drives an IPlicencing business model. Therefore, revenue-based metricssuch as growth rates, revenue per head and new customers andlicence agreements are key to company growth. The directorsalso consider that the move to profitability is important. This ismeasured by review of LBITDA and net funds used.

Principal business risks and uncertaintiesThe Board has a process for identifying and managing businessrisks and reviews the major operational risks and uncertaintiesfor the ARC business at each Board meeting.

This Annual Report contains certain forward-looking statementsthat are ARC’s expectations and beliefs about our futurebusiness. These statements are made by the directors in goodfaith, based on information available to them at the time ofthe approval of the report. Undue reliance should not be placedon such statements, which are based on ARC’s current plans,estimates, projections and assumptions. By their nature,forward-looking statements involve known and unknown riskand uncertainty because they relate to events and depend oncircumstances which may occur in the future and which in some

cases are beyond ARC’s control. Actual results may differ fromthose expressed in such statements, depending on a variety offactors. These factors include, but are not limited to: consumerand market acceptance of the company’s products and theproducts that use the company’s products; decreases in thedemand for the company’s products; excess inventory levels atthe company’s customers; decline in average selling prices of thecompany’s products; cancellation of existing orders or the failureto secure new orders; the company’s failure to introduce newproducts and to implement new technologies on a timely basis;the company’s failure to anticipate changing customer productrequirements; the company’s failure to deliver products to itscustomers on a timely basis; the timing of significant orders;increased expenses associated with new product introductions;the commencement of, or developments with respect to, anyfuture litigation; the cyclicality of the semiconductor industry;and overall economic conditions.

Trends and factors likely to affect future development,performance and position of the groups businessThe major risks and uncertainties and how the Board triesto mitigate them are:

1 Its ability to produce new products that satisfy The company undertakes extensive market analysis and hasthe target markets. a close working relationship with potential customers, with

a view to identifying the correct product for the target market.The design cycle for the company’s products can take 12 to18 months to reach acceptance by its customer base. This longlead time can lead to difficulties with the timing and schedulingof product design as well as the potential to miss a marketopportunity for the products developed. Therefore, throughoutthe research and development cycle the company operates a tightproject management schedule to ensure that products are ontime and within specification. Product reviews are undertakenregularly to ensure that those being developed are in line withmarket expectations.

2 The company operates an intellectual property (“IP”) The use of the IP business model by companies has increasedbusiness model that relies on licencing IP to customers over the last years. Customers have seen the benefits of licencingfor integration into their own products. industry standard IP and adding to this to make their own

products different than competitors. However, customers couldrevert to using “in-house” development teams and cease licencingin product. The Company undertakes development work to ensurethat its products are ahead of the customers needs and availablewhen they need them. The company has the advantage in thatit licences to more than one supplier, its development costs shouldbe recouped over more than one customer, therefore having aprice advantage over in-house development teams.

3 Competitive pressures; ARC’s competitors include Through the use of market analysis the company has focusedmajor corporations that have a larger base of software on multimedia subsystems, which is a growing market.support for their product range and much larger The company endeavours to produce products that are compatibleinstalled customer base. with industry standards and other major players so as to appeal

to the widest customer base.

Directors’Report



Results and dividendsThe results for the year are set out on page 30. The financialstatements for the group show revenue for the year ended31 December 2008 of £17.0 million compared to £14.4 millionfor the year ended 31 December 2007. There was an operatingloss of £7.0 million (before restructuring charge) for the yearcompared with an operating loss of £5.3 million for the yearended 31 December 2007. The directors do not recommendthe payment of a dividend (2007: £nil).

Policy on payment to suppliers andfinancial instrumentsThe company is a holding company and as of 31 December2008 had no trade creditors. It is group policy that payment tosuppliers is made in accordance with suppliers’ agreed terms andin accordance with its contractual and other legal obligationsand this is expected to continue in 2009. The average numberof creditor days for the group during 2008 was 62 days (2007:40 days). The group policy in respect of financial instrumentsand financial risk management is contained within the financialreview on pages 9 to 10 and note 4 to these accounts.

Research and developmentThe group continues to undertake research and developmentactivities aimed at the ongoing improvement of its technology.Research and development costs charged to the income

statement were £9.6 million (2007: £7.4 million) and capitalised£0.25 million (2007: £0.27 million) as internally generateddevelopment costs.

The group has research and development centres in St Albansand Cambridge, UK; San Jose, US and St Petersburg, Russia.During 2008 the group has increased the amount ofdevelopment undertaken in India through its associate, AdaptiveChips Inc. Adaptive Chips provides outsourced developmentpersonnel to the group. It is the group‘s policy that all newintellectual property is owned in the UK. Intra-company transferagreements are in place where necessary to facilitate theownership in the UK.

Essential business arrangementsThe products that the company develops rely on the latesttechnological benefits. As such the company has arrangementsin place with the major electronic design automation companiesto licence their technology to assist in the group’s productdevelopment. These products allow the group to designmicroprocessor cores in software and then convert this intomicroprocessor chip designs. The group has also undertakenan increase in the development of processor design throughthe associate, Adaptive Chips Inc. Adaptive Chips performthe productisation and development of the core design workgenerated by the group.

4 Factors outside ARC’s control such as a downturn By focusing on the multimedia subsystems market, which is ain the semiconductor industry and adverse growing area, the company believes that this will help mitigateeconomic conditions. any effects of any potential downturn. However, market risks

will still exist.

5 Safeguarding and enforcing its intellectual property The company invests vigorously in its patent portfolio to ensurerights, and protecting against challenges by that all new inventions are patented and protected. The companythird parties. also has tight controls over the use of its technology through

the licensing process. Potential claims against the companywould affect the business as these are costly and take up adisproportionate amount of management time. The companyseeks to minimise this risk by following strict reviews of theproject objectives and how the products are intended to operate.

6 The departure of key personnel. The company has a competitive remuneration package forpersonnel. The company encourages a working environmentwhere communication between employees and managementis open and leads to a good working relationship.

7 Currency and hedging risks (a substantial proportion The company operates a treasury policy as detailedof ARC group revenues are in US dollars), interest rate on the Chief Financial Officer’s review on page 10risks and credit risks. to reduce these risks.

8 Integration of the new business. ARC has completed four business acquisitions during 2007and 2008 and there are risks and uncertainties regarding theintegration of these businesses into the ARC group.



As of the date of this report there have been no other changesto the above interests of the directors in the ordinary shares ofthe company.

The company operates a process of orderly rotation of thedirectors for re-election to the Board. Richard Barfield offershimself for re-election at the AGM. Richard Barfield is theChairman of the Board and has been with the company sinceSeptember 2003. Richard has 25 years of corporate accountingand management experience. Richard Barfield has a servicesagreement with no notice period specified. Geoffrey Bristow alsooffers himself for re-election at the AGM. Geoffrey Bristow is theSenior Non-Executive Director on the Board and has also beenwith the company since September 2003. Geoffrey has 25 yearsof electronic engineering and management experience andspecialises in working with technology companies. GeoffreyBristow has a services agreement with no notice period specified.

The company maintains a directors’ and officers’ insurance policyfor the benefit of all directors and management of the group.

Corporate governanceThe Board’s report on corporate governance is set out onpages 25 to 27.

DonationsDuring 2008 the group made £nil of charitable donations(2007: $200). No political contributions were made duringthe year (2007: £nil).

Substantial shareholdingsAt 20 February 2009 the company had been notified of thefollowing interests of over 3% in the issued ordinary sharecapital of the company:

Number of % ofordinary shares capital

Gartmore Investment Limited 26,902,498 17.62Axa Investment Managers 10,660,665 6.98GAM Fund Management 10,527,812 6.89Legal & General 9,659,001 6.32Aviva 8,853,682 5.80UBS Investment Bank 7,856,963 5.15River and MercantileAsset Management LLP 7,758,378 5.08Employee Benefit Trust 7,641,799 5.00

Additional information for shareholdersFollowing the implementation of the EU Takeover Directiveinto UK law, the following description provides the requiredinformation for shareholders where not already providedelsewhere in this report.

Information on the group’s employeesThe group operates over three continents in 11 countries,and as such is very aware of the local environments in whichits employees operate. The group is aware of the diverse localcustoms and takes these into account when dealing with itsemployees. Even with the diverse geographical locations thegroup minimises its environmental impact through using newmethods of communications rather than flights to meetings.The product ranges that the group develops are to allowthe end consumer products to be more power efficientand therefore more environmentally friendly also.

The group’s headcount has reduced from 196 in December 1997to 163 in December 2008. The average number of employeesduring 2008 was 193 (2007: 158) with 70% (2007: 72%)working in research and development. During 2008 the groupundertook a restructuring programme that reduced the numberof employees. Overall the group still has 72% of employeesworking in research and development but concentrated on newproduct research and initiatives, with development undertakenby the associate in India. The group recognises that the employeesplay an important part in the future success of the company, andseek to recruit and retain those people who possess the requisiteskills and knowledge as well as the personal commitment torespond to the challenges of working within a fast changingtechnology group. As part of the restructure, the group hasrefocused its employee skill base on multimedia based productofferings. The collaboration of the engineers within the groupand those of the associate in India, should allow the group toleverage the talented employee workforce and produce newproducts in a cost effective and efficient manner.

The restructure and subsequent employee reductions werehandled in accordance with local customs and laws. As partof the process the group undertook to assist those employeesleaving the group through programmes of outplacementassistance, as well as liaising with recruitment companiesor other local companies. The group has also undertakena programme of measures to ensure that those employeesremaining are fully engaged with the group and the strategicobjectives for the future.

Directors and their interestsThe directors in service at the end of the year, and their interests(which are all beneficial) in the ordinary share capital of thecompany, are shown below and details of options held are givenin the remuneration report on pages 23 and 24.

Offered for Shares SharesDate of re-election at 31 December 31 December

appointment next AGM 2008 2007

R Barfield 03.09.03 Yes 10,000 –G Bristow 03.09.03 Yes – –S Gunders 21.06.07 10,000 –C Schlachte 20.02.04 752,364 681,364V Young 13.02.07 – –

Share capitalAs at 28 February 2009, 152,703,048 (28 February 2008:152,703,048) ordinary shares of 0.1p each were in issue andlisted on the London Stock Exchange. All issued sharesare fully paid up and do not carry any special rights oradditional obligations.

At the AGM on 22 April 2008 (the “2008 AGM”), theshareholders authorised the company to make market purchases ofup to 5% of the ordinary shares capital and the maximum pricewhich could be paid was an amount equal to 105% of the averageof the middle market quotation for the five business dayspreceding the day of purchase. As at 11 March 2009, no purchaseshave been made and the company has an unexpired authority torepurchase shares up to a maximum of 7,544,698 ordinary shares.

At the 2008 AGM, the shareholders authorised the directorsto allot shares up to an aggregate nominal value of £50,901.Since the 2008 AGM no shares have been allotted.

The company is not aware of any agreements betweenshareholders that may result in the restriction on the transferof the company’s shares or of the voting rights attachingto the company’s shares.

Rights and obligations attaching to shares

VotingIn a general meeting of the company, subject to the provisionsof the Articles and to any special rights or restrictions as tovoting attached to any class of shares in the company (of whichthere are none):

on a show of hands, every member present in person shallhave one vote; andon a poll, every member who is present in person orby proxy shall have one vote for every share of whichhe or she is the holder.

No member shall be entitled to vote at any general meeting orclass meeting in respect of any shares held by him or her if anycall or other sum then payable by him or her in respect of thatshare remains unpaid. Currently, all issued shares are fully paid.

No member who is in default of a s.212 notice to provideinformation about his holding in shares of the company shallbe entitled to receive notice of or attend or vote at a generalmeeting of the company in respect of the shares in which heis in default.

Deadlines for voting rightsFor the purposes of determining which persons are entitled toattend or vote at a meeting and how many votes such personmay cast, the company may specify in the notice of the meetinga time, not more than 48 hours before the time fixed for themeeting, by which a person must be entered on the registerin order to have the right to attend or vote at the meeting.

Directors’Report



Dividends and distributionsSubject to the provisions of the Companies Act 1985 and theCompanies Act 2006 (the “Companies Acts”), the companymay, by ordinary resolution, declare a dividend to be paidto the members, but no dividend shall exceed the amountrecommended by the Board.

The Board may pay interim dividends, and also any fixed ratedividend, whenever the financial position of the company,in the opinion of the Board, justifies its payment. All dividendsshall be apportioned and paid pro rata according to the amountspaid up on the shares during any portion or portions of theperiod in respect of which the dividend is paid.

LiquidationUnder the current articles, if the company is in liquidation, theliquidator may, with the authority of an extraordinary resolutionof the company and any other authority required by the Statutes(as defined in the articles):

divide among the members in specie the whole or any partof the assets of the company; orvest the whole or any part of the assets in trustees uponsuch trusts for the benefit of members as the liquidator,with the like authority, shall think fit.

Transfer of sharesSubject to the articles, any member may transfer all or any ofhis or her certificated shares by an instrument of transfer in anyusual form or in any other form which the Board may approve.The Board may, in its absolute discretion and without givingany reason, decline to register any instrument of transfer ofa certificated share which is not a fully paid share or on whichthe company has a lien. The Board may also decline to registera transfer of a certificated share unless the instrument oftransfer is:i) left at the transfer office for registration; andii) accompanied by the certificate for the shares to be

transferred and such other evidence (if any) as the Boardmay reasonably require to prove the title of the intendingtransferor or his or her right to transfer the shares.

The Board may permit any class of shares in the companyto be held in uncertificated form and, subject to the currentarticles, title to uncertificated shares to be transferred bymeans of a relevant system.

The Board may refuse to register the transfer of shares in favourof more than four persons jointly.

Amendment of the company’s articles of associationAny amendments to the company’s articles of association maybe made in accordance with the provisions of the CompaniesAct 1985 by way of special resolution.

Appointment and replacement of directorsDirectors shall be no less than three and no more than15 in number.



Directors may be appointed by the company by ordinaryresolution or by the Board. A director appointed by the Boardholds office only until the next following Annual GeneralMeeting and is then eligible for election by the shareholders.The Board may from time to time appoint one or more directorsto hold employment or executive office for such period(subject to the Companies Acts) and on such terms as they maydetermine and may revoke or terminate any such appointment.

At every Annual General Meeting of the company, any directorin office who:a) has been appointed by the Board since the previous Annual

General Meeting; orb) was elected or last re-elected at or before the Annual General

Meeting held in the third calendar year before shall retirefrom office by rotation. A retiring director shall be eligiblefor re-election.

The Company may remove a director from office by passingan ordinary resolution of which special notice has been given.The Board may remove a director from office if they make arequest in writing signed by at least three quarters of the othermembers of the Board.

The office of director will also be vacated if:i) he or she resigns;ii) he or she is or may be suffering from a mental disorder;iii) he or she is absent without permission of the Board from

meetings of the Board for six consecutive months and theBoard resolves that his or her office is vacated;

iv) he or she becomes bankrupt or compounds with his orher creditors generally;

v) he or she is prohibited by law from being a director; orvi) he or she is removed from office pursuant to the articles.

Powers of the directorsThe business of the company will be managed by the Boardwho may exercise all the powers of the company, subject tothe provisions of the company’s memorandum of association,the articles, the Companies Acts and any ordinary resolution ofthe company. The directors may exercise all the powers of thecompany to borrow money but shall not at any time withoutthe prior sanction of an ordinary resolution of the companyexceed a sum equal to £20 million.

Shares held in the Employee Benefit TrustThe trustee of the ARC International plc Employee Benefit Trust(“EBT”) hold 7,641,799 ordinary shares in ARC International plc.If any offer is made to shareholders to acquire their shares thetrustee will not be obliged to accept or reject the offer in respectof any shares which are at that time subject to subsisting awards,but will have regard to the interests of the award holders and willhave power to consult them to obtain their views on the offer.Subject to the above the trustee may take the action with respectto the offer it thinks fair.

Change to the articles during 2008At the AGM in 2008 the shareholders approved a change to the

articles, as a result of new provisions under the Company’s Act2006, to allow the directors to authorise conflicts and potentialconflicts of interest in a similar way to the current law. No conflictshave had to be approved in the period.

Change of controlThere are no agreements between any group company and anyof its employees or any director of the company which providefor compensation to be paid to the employee or director fortermination of employment or for loss of office as a consequenceof a takeover of the company. Details of significant agreementsto which group companies are a party containing provisionswhich would be triggered as a consequence of a takeoverof the company, and details of the effect of such provisions,are set out below.

Significant agreements – change of controlThe group has significant agreements that contain terminationand other rights for our counterparties upon a change of controlof the company. The group is party to licensing agreements withmajor Electronic Design Automation software vendors, thatspecify that in the event of a change of control of the company,the company must obtain their written consent for the licences tobe assigned. This is a standard contract term in software licences.

The group operates a Performance Share Plan, detailed inthe remuneration report on page 23. On a change in control,the “default” position is that awards vest only subject toperformance and a pro rata reduction.

Annual General MeetingThe Annual General Meeting (AGM) will be held at 9.30amon 22 April 2009 at Verulam Point, Station Way, St Albans,Herts AL1 5HE.

AuditorsEach of the directors as of the date of this report confirmsthe following:

As far as the director is aware, there is no relevant auditinformation of which the company’s auditors areunaware; andHe has taken all the steps he ought to have taken asa director in order to make himself aware of any auditinformation and to establish that the company’s auditorsare aware of that information.

During the year PricewaterhouseCoopers LLP resigned asauditors and KPMG Audit Plc was appointed. KPMG Audit Plc,have indicated their willingness to continue in office, and aresolution concerning their reappointment will be proposedat the AGM.

By order of the Board

Charles RendellJoint Company Secretary11 March 2009

The emoluments of directors and their interests in executiveoptions over shares in the company and share-based awardsare the only auditable elements of the remuneration report.

Remuneration CommitteeThe members of the Remuneration Committee during theyear were:

Steven Gunders (Chairman)Richard BarfieldGeoff Bristow (Chairman until 22 April 2008)

All the members of the Committee are non-executive directorsand considered to be independent.

The principal function of the Remuneration Committee is todetermine the remuneration packages of all executive directorsand for monitoring the remuneration of senior management.This includes base salaries, pension contributions, bonuspayments, share-based incentives and service contracts.The Remuneration Committee prepares the Board’s AnnualReport to shareholders on the group’s policy on remunerationof the executive directors and the directors’ remuneration report.

The terms of reference are available on the group’s website:www.arc.com/upload/company/remuneration_committee_terms_of_reference_2008.pdf.

Advice provided to the Remuneration CommitteeDuring the year, the following were appointed by theCommittee to provide advice that materially assistedthe Committee:

New Bridge Street ConsultantsCharles Rendell (Joint Company Secretary)Thomas Huppuch (Joint Company Secretary)Sandy O’Gorman (Vice President Human Resources)

New Bridge Street Consultants were appointed by theCommittee (and provide no other services to the company)in respect of share-based incentive plans, to ensure that anynew plans fulfil the Committee’s long-term incentive criteria.

Remuneration policyIn determining the company’s policy on remuneration, theRemuneration Committee has regard to the following objectives:

i) Remuneration packages offered are designed to becompetitive, being comparable with packages availablewithin other groups operating in similar markets (i.e.internationally) and on a similar scale, including competitors.

RemunerationReport



ii) Remuneration packages are set so as to attract, retain andmotivate executives of the highest calibre, and at the sametime optimise the interests of shareholders. The Committeetakes into account that the company is striving towardsprofitability when reviewing the compensation that isawarded to directors and senior management.

iii) Consideration of environmental, social and governanceissues. The board reviews the environmental impact of thecompany as a whole, together with the social impact and thegovernance issues. Currently there are no plans to incorporatethese into the bonus plans or the variable elements to theremuneration packages. The Board will review this if theposition or operations of the group change.

The policy is designed to provide a mix of performance andnon-performance remuneration so as to align their objectivesto those of the shareholders. The remuneration mix for 2008has changed with an increased emphasis on the performancerelated pay. The percentage available by way of variablemeasurable bonus has increased to reward increased performance.

The policy on executive director and senior managementremuneration and appointments is set out below.

There have been no changes to policy, other than an increasedemphasis on variable performance related pay, from the precedingyear and no departures from this policy in the current year. The currentpolicy is expected to continue through the current financial year.

Elements of the policyi) Basic salaryIn assessing the level of basic salary, the Remuneration Committeetakes account of the pay practices of other companies, theresponsibilities of each director and senior manager, and payawards elsewhere in the group. Salaries are reviewed annuallyby the Remuneration Committee.

ii) Bonus paymentsBonus payments are paid to executive directors, of up to75% (2007: 50%) of base salary, and the senior management,of up to 55% (2007: 25%) of base salary, based on objectives,including revenue, operating profit and cash flow targets, setfor each individual. The Chief Executive Officer received a bonusfor 2008 of $61,384 or 15.3% of base salary (2007: $29,000).The bonus payment was for the first half performance.

iii) Share optionsShare option grants are a significant element of companyperformance-related remuneration. Share options are awardedon the commencement of employment and are granted by theRemuneration Committee at the next available meeting.Employees of the company participates in the executive shareoption programme, where appropriate, and the Board considersthis to be a significant employee motivator. The Committeereviews the number of share options that directors and



employees have been awarded and the exercise price to ensurethat they remain effective. The grants to individual employeesare limited under the scheme rules to normal market practiceof one times salary in any year. The company operates anInland Revenue approved scheme that vests after three years,an unapproved scheme and an incentive stock option plan thathave a vesting schedule of 25% on the first anniversary andthen monthly over 36 months. The company has a processwhereby each year the level of share options outstandingfor each employee is reviewed and where necessary an“evergreening” grant is made to ensure that they are stillreceiving the same incentive. The company uses shares withinthe Employee Benefit Trust as well as potential new issue sharesto satisfy these grants.

iv) Long-term incentive plans and interests of shareholdersThe Remuneration Committee reviews the level of option awardsto ensure that they are consistent with the industry. At the AGMin 2007 the Committee proposed and the shareholders approved,a new long-term incentive plan for executive directors and seniormanagement. The Committee feels that this performance-drivenplan will align directors’ performance remuneration with theinterests of shareholders generally. The grant to the directorsunder this policy are set out in the table on page 24.

v) PensionsPost-retirement benefits, which comprise only pensions, arebased on contributions to a defined contribution scheme ofup to 5% matched by the employee, paid into a UK personalpension plan. The contribution is based on salary and bonuspayments in line with company policy for all UK employees,and is a standard UK contract term. US employees participatein a 401k defined contribution pension plan that matchescontributions up to 5% of salary, with a maximum of $15,500.

vi) Duration and terminationIt is company policy for executive directors to have contracts withless than one year’s notice period. There are no other terminationpayments. Non-executive directors have service agreements fora period of three years with no contractual termination payments.Senior management have employment agreements with betweenthree and nine months’ notice periods.

Performance/non-performance pay ratiosIf the total shareholder return growth under the long-termincentive scheme is on target, and assuming that 100% of theshare options under the group’s share options scheme will vest,the composition of each executive director’s remuneration willbe as follows:

Non-performance- Performance-related related LTIP and

basic salary bonus share options

C Schlachte 80% 13% 7%V Young 86% 9% 5%

All non-executive directors have 100% non-performance-relatedremuneration.

External appointmentsDuring the year, C Schlachte served as non-executive Chairmanof MOSAID Inc, a Canadian quoted company. Mr Schlachte hasretained all of the proceeds from this appointment, $90,939(2007: $66,650).

Service agreementsNone of the executive directors’ service contracts have noticeperiods of over one year in line with group policy.

Non-executive directors are appointed for an initial periodof three years. It is group policy that they serve the three yearsand are then offered for re-election by the shareholders.

Notice TerminationContract date period payments

C Schlachte 19.02.04 Six months Contractualsalary

V Young 19.12.05 Six months Contractualsalary

R Barfield 03.09.03 None Specified NoneG Bristow 03.09.03 None Specified NoneS Gunders 21.06.07 None Specified None

There is no unexpired term for any of the directors listed above,except for Steven Gunders who has 15 months from the dateof this report.

Service contracts are available for inspection at the registeredoffice of the company and will be available at the AnnualGeneral Meeting.

Non-executive directors’ interestsNon-executive directors do not participate in the company’sexecutive share option scheme or pension schemes.

Details of individual directors’ emoluments and interests in shareoptions are shown in the tables on pages 22 and 23. For detailsof directors’ shareholdings in the company, please refer to thetable in the directors’ report on page 17.

Non-executive directors’ fees are arrived at by reference to feespaid by other companies of similar size and complexity andreflect the amount of time non-executive directors are expectedto devote to the group’s activities during the year. The non-executive directors have service contracts that set out their termsof appointment. Their remuneration is set by the Board (withindividual non-executive directors absenting themselves fromdiscussions regarding their own remuneration) and comprisesa fixed fee.

RemunerationReport



2005 2006 2007 20082004

ARC International total return FTSE all share technology hardware and equipment total return

Rebased total return index

Source: Thomson Datastream, monthly average

0

5

10

15

20

25

30

Emoluments of directors (audited)The emoluments of the directors of the company were as follows:

Salary Total Pension Total Pensionand fees Bonus Benefits2 2008 2008 2007 2007

Executive directorsC Schlachte1 4 265,039 42,398 11,396 318,833 7,942 173,598 7,072V Young1 4 (appointed 13 February 2007) 188,203 19,432 20,548 228,183 – 151,713 –

Non-executive directorsR Barfield 80,000 – – 80,000 – 86,875 –G Bristow3 60,000 – – 60,000 – 61,622 –S Gunders (appointed 21 June 2007) 30,000 – – 30,000 – 15,807 –P van Cuylenburg4 (resigned 3 April 2007) – – – – – 55,673 –

Total 623,242 61,830 31,944 717,016 7,942 545,288 7,072

The emoluments shown above are for the period when eachindividual was a director of the company. Details of dates arecontained in the directors’ report. No directors waived theirrights to emoluments.

1 Payments for 2008 made in US dollars converted at year-end rate of $1.4479 (2007: $1.9973).2 Benefits include provision of health benefits.3 The figure for Geoff Bristow includes £25,833 for time spent on strategic projects over and above time as a directorwhich was paid to Decision Curve Limited, a company controlled by Geoff Bristow (2007: £36,623).

4 Includes amounts paid by ARC International I.P. Inc.

Share price performanceARC International total return relative to FTSE all sharetechnology hardware and equipment.

In the opinion of the directors, this index is the most appropriateindex to measure the total shareholder return of the companyfor these purposes because this index comprise similar companiesto the company.



Options vest 25% on the anniversary of grant and then monthly overthree years.

Richard Barfield, Geoff Bristow and Steven Gunders haveno interest in executive options.

All executive share options are issued at market value. Themarket price of the company’s shares at the end of the yearwas 11.75p. The range of prices during the year was 11.00pto 34.50p. As of the date of this report, there have been nochanges in the interests of the directors in options over ordinaryshares of the company.

Long-term incentive plan (audited)The long-term incentive plan, the performance share plan (“PSP”),was approved by shareholders at the AGM in April 2007.

The Committee believes that a new long-term incentive policyreflects current market and best practice and ensures that share-based incentives are offered to the most senior executives inas efficient a manner as possible from an accounting cost anddilution perspective. The main features of the PSP are as follows:

Conditional awards over free shares are granted, as opposedto market value options. This move away from an option-focused incentive policy reflects recent emerging trendsin market and best practice.

In normal circumstances, awards over shares worth nomore than 125% of salary may be made each year. This limitbroadly reflects emerging market practice and allows theCommittee to offer competitive levels of performance-linkedlong-term incentive awards.

All awards to executive directors will be subject to challengingperformance conditions. To ensure that the PSP encouragesthe group’s senior executives to generate above market returnsfor its shareholders, initial awards will vest by reference to thegroup’s TSR performance over a three-year period comparedto the fully-listed Technology Hardware and Equipment sectorcompanies with current market capitalisations no less than£20 million. No portion of an award will vest if ARC is rankedbelow the median. If ARC is ranked at the median 25% of anaward will vest, with full vesting if ARC is ranked at or abovethe upper quartile. For the awards during 2008 this groupwas made up of the following companies:

Arm Holdings FiltronicCSR TrafficmasterSpirent Communications ZetexWolfson Microelectronics Danka Business SystemsImagination Technologies group CML MicrosystemsPsion PlasmonVislink Northamber

On a change in control, the “default” position is that awardsvest only subject to performance and a pro rata reduction.Again, this approach accords with best practice.

It is currently intended that no executive director will receivePSP awards and share option grants in the same year.

The charge to the income statement in respect of grants underthe Long Term Incentive Plan was £90,310 (2007: £62,000).

Interest in executive options over sharesin the company (audited)The interest in executive options over shares in the companyas at 31 December 2008 for the directors is as follows:

Number at Number at Exercise Date1 January Granted Exercised Lapsed 31 December price Date from which Expiry

2008 in year in year in year 2008 p of grant exercisable date

C Schlachte 2,500,000 – – – 2,500,000 20.75 23.02.04 23.02.05 23.02.14V Young 1,400,000 – – – 1,400,000 26.0 16.02.06 16.02.07 16.02.16

RemunerationReport



Share-based awards (audited)During 2008 there were no share-based awards under the planapproved by shareholders in 2004 and therefore no charge tothe income statement (2007: £2,964).

A resolution approving the remuneration report has beendrafted and will be put to the shareholders at the AGM.

This report has been prepared on behalf of the Board andapproved by the Board on 11 March 2009.


Steven GundersChairman of the Remuneration Committee11 March 2009

Share options awarded to directors under the Long TermIncentive Plan are:

Number at Number at Exercise31 December Granted Exercised Lapsed 31 December price Value Date Vesting

2007 in year in year in year 2008 p vested of award date

C Schlachte 236,842 – – – 236,842 0.1 – 15.05.07 15.05.10– 400,000 – – 400,000 0.1 – 14.05.08 14.05.11– 400,000 – – 400,000 0.1 – 29.09.08 29.09.11

V Young 105,263 – – – 105,263 0.1 – 15.05.07 15.05.10– 200,000 – – 200,000 0.1 – 14.05.08 14.05.11– 200,000 – – 200,000 0.1 – 29.09.08 29.09.11

CorporateGovernance



The directors subscribe to the principles of good governanceand the code of best practice on corporate governance.The company has embedded the principles into the processesused by the directors and the establishment of the variouscommittees of the directors.

The company is in compliance with the provisions set outin Section 1 of the 2006 Combined Code on corporategovernance issued by the Financial Reporting Council, exceptthat the Chairman of the company is also Chairman of theAudit Committee.

The directors supervise the management of the business and theaffairs of the company and see their prime responsibility as beingto determine the broad strategy of the company. The directorshave embedded the principles of good corporate governanceand the process by which risks are identified and controlled andeffective accountability assured.

with information in a form and of a quality appropriate toenable it to discharge its duties.

In addition to the Board meeting as a whole during the year,the non-executive directors meet without the executive directorsbeing present.

All the directors have access to the advice and services of thejoint company secretaries and the provision of independentprofessional advice at the company’s expense. The companymaintained directors’ and officers’ liability insurance throughoutthe year.

Performance evaluationThe non-executive directors met during the year to appraisethe former Chairman’s performance and also take into accountthe executive directors’ view. The whole Board performs anevaluation of its performance by a process of self-assessmentquestionnaires. This process is an external system for evaluationsdesigned by Evalu8 Software. The Board performed an evaluationof the Board as a whole and the committees for 2008. Thereforethe company considers that it was in compliance with principleA.6, in that a rigorous and formal process for evaluating theBoard and committees was in place.

Board committeesThe Board has delegated responsibility in a number of areasto three sub committees with clearly defined terms of reference.The Terms of Reference for the Remuneration, Audit andNomination Committees are available on the company’s website,www.arc.com/company/directors.html.

Directors

Chairman Richard BarfieldSenior non-executive director Geoff BristowNon-executive director Steven GundersExecutive director –Chief Executive Officer Carl SchlachteExecutive director –Chief Financial Officer Victor Young

The Board considers Richard Barfield, Geoff Bristow and StevenGunders to be independent.

Richard Barfield is Chairman of the Board and Audit Committee.

The roles of the Chairman and Chief Executive Officer areseparated, with a clear division of responsibilities between them.The Chairman of the company is responsible for running theBoard, and the Chief Executive is responsible for running thecompany’s business. Each director is provided with sufficientinformation for him to discharge his duties and responsibilitiesas a director including training and access to independentprofessional advice. The Articles of Association require eachdirector to submit himself for re-election at least every three years.

Operation of the BoardThe Board meets on a regular basis throughout the year.The Board has reserved certain items for its review and approval,including the annual and interim results; annual business plan;significant capital expenditure which is not included in thecurrent business plan and is not in the ordinary course ofbusiness of the company; and senior management appointments.Other matters are delegated to Board committees includingthose detailed below. The Board is supplied, in a timely manner,

Audit Committee

Committee Chairman Richard BarfieldCommittee member Steven Gunders

The Board has established an Audit Committee comprisingtwo non-executive directors. The directors are responsible forensuring that a sound system of internal control to safeguardshareholders’ investments and the group’s assets is beingmaintained. The Committee assists with this process. TheCommittee meets at least twice a year and reviews the annualand half-yearly financial statements and the other documents tobe sent to shareholders before they are submitted to the Board.The Committee also meets with the auditors without thepresence of executive management. The Committee considersthe appointment of auditors, receives a report from them ateach meeting where financial statements are reviewed andensures that appropriate relationships are maintained withthe auditors (in respect of audit and non-audit fees). As partof ensuring that the appropriate relationship is maintained,the Committee recommends that different firms are invited

CorporateGovernance



to tender for non-audit work. The Audit Committee reviewsnon-audit services undertaken by the auditors to ensure thatauditor objectivity and independence are safeguarded. However,the group moved its UK taxation services to KPMG as it believedthat they would be able to provide an efficient and cost effectiveservice. The group continues to use independent companies fortaxation services outside of the UK.

* Attended Audit and Remuneration Committee meetings by invitation.( ) Those eligible to attend.

Operational managementThe executive directors are supported by a team of seniormanagers who are responsible for assisting in the developmentand achievement of the group’s corporate strategy. The seniormanagement includes the Chief Technology Officer – who assistsin the development of the product line.

Internal controlsThe directors have overall responsibility for establishing financialreporting procedures to provide them with a reasonable basisto make proper judgements as to the financial position andprospects of the group, and have responsibility for establishingthe group’s system of internal control and for monitoring itseffectiveness. Internal control systems are designed to meet theparticular needs of the group and the risks to which it is exposedand include financial, operational and compliance controls andrisk management.

The internal controls have been in place for the year underreview and up to the date of the approval of the accounts andare periodically reviewed by the Board and Audit Committee.During 2007 the Board put in place a process whereby the risksfacing the company were reviewed at each Board meeting andthis continued in 2008. This ensures that the review remainsup to date and accords with the guidance in the Turnbull report.The Board conducts an annual assessment of the internal controls.

Although no system of internal control can provide absoluteassurance that physical and financial assets are safeguarded,the system of control is designed in such a way that transactionsare authorised and properly recorded and material errors andirregularities are either prevented or detected with the minimumof delay.

The Board has considered the need for an internal audit functionand, given the scale and nature of the group’s operations,has concluded that one is not required at the present time.

Remuneration Committee

Committee Chairman Steven GundersCommittee member Richard BarfieldCommittee member Geoff Bristow (until April 2008)

The Board has established a Remuneration Committeecomprising two non-executive directors. The role of theCommittee is to set the company’s policy on the remunerationof the executive directors and senior management and todetermine their specific remuneration packages, includingbonus and share option arrangements. The report on directors’remuneration is set out on pages 20 to 24. The whole Boarddecides upon the remuneration of the non-executive directors,although no director is involved in deciding his own remuneration.

Nomination Committee

Committee Chairman Richard BarfieldCommittee member Geoff Bristow

The Nomination Committee is responsible for reviewingthe Board structure, size and composition and to makerecommendations to the Board with regard to any adjustmentsthat are deemed necessary; to be responsible for identifyingand nominating candidates for the approval of the Board; to fillBoard vacancies as and when they arise as well as put in placeplans for succession, in particular, of the Chairman and ChiefExecutive Officer; and to make recommendations to the Boardfor the continuation (or not) in the service of an executivedirector as an executive or non-executive director.

It is noted that the Board met as follows:

Remuneration Audit NominationBoard Committee Committee Committee

In person 5 1 2 –By teleconference 3 11 2 –In committee 1 – – –

And the directors’ attendance at Board and CommitteeMeetings was:

Remuneration Audit NominationBoard Committee Committee Committee

R Barfield 9 (9) 12 (12) 4 (4) –C Schlachte* 9 (9) 2 – 1 –V Young* 9 (9) 1 – 3 –G Bristow 8 (8) 5 (5) – –S Gunders 8 (8) 12 (12) 4 (4) –



Financial reporting and monitoring of operationsA detailed annual plan is collated from submissions by eachfunctional department. The plan is reviewed by executivedirectors and approved by the Board. The annual plan is usedto monitor and control actual performance. The process ofmaintaining a sound system of internal control includes theuse of financial reports both for weekly information and on amonthly basis. The group has a weekly management meetingthat discusses sales and software development schedules.Each site and function manager must prepare a weekly reportof activities for discussion. This is then followed by a monthlyreport of results, where these are compared with the annualplan and forecasted results. Monthly meetings discuss resultsand a report is prepared and sent to the Board for review.The Board meets each quarter to discuss the results and reviewthe future plans.

Treasury operationsThe group’s treasury function operates within clearly defined riskmanagement guidelines monitored by the Board. Its policies andprocedures are designed to set guidelines for the managementof interest rates on cash deposits and the exposure to foreignexchange movements. All these policies and positions areregularly monitored and conservatively managed. It is a grouppolicy not to undertake any speculative transactions whichcreate additional exposures over and above those arising fromnormal trading activity, and to manage the counterparty riskto protect the capital of the group.

Whistleblowing policyIn 2004 the Board established a “whistleblowing” hotlineoperated by a third party. Employees are encouraged to usethis to report possible improprieties directly to the Board throughthis anonymous process. The Chairman of the Audit Committeeis the nominated director to receive these calls and follow upwith appropriate action. To date, however, there has beennothing reported.

Annual ReportIn submitting this Annual Report and the financial statementsto the shareholders, the Board has sought to ensure that abalanced and understandable assessment of the group’s positionand prospects has been presented to the shareholders.

Auditor independenceThe company operates a policy that non-audit work is onlyundertaken by the external auditors when they are most suitedto undertake it. The company had appointed an independentfirm to advise on taxation matters in general and especially forspecific projects such as UK Research and Development taxcredits, however a review of taxation advisers in the UK wasundertaken and KPMG were appointed as taxation advisersin the UK. When KPMG were appointed auditors it was feltthat it was still appropriate to keep KPMG as taxation advisers.The company has also undertaken royalty audits of its licensees

and has used the previous auditors, PricewaterhouseCoopers,as well as a smaller more specialised audit firm. The amountpaid to the external auditors during the year for audit and otherservices are set out in note 7 on page 50. The Board considersthat the auditor independence is not compromised.

Relations with shareholdersIn addition to ensuring that sufficient information isdisseminated in order to maintain an orderly market in theshares of the company, the company maintains a regulardialogue with major institutional shareholders. The companyreports its financial results on a half-yearly basis to its shareholders.The management presents to shareholders and the analystcommunity and receives feedback from the company’s financialPR advisers and brokers who obtain feedback after the investorand analyst meetings.

The company operates an investor relations section on thecompany website. This is updated regularly with informationincluding the results of the AGM voting, any financial pressreleases and the ability to register to receive all press releasesthe company makes.

The company prides itself on the comprehensive businessinformation that is provided not only on itself but its productsand partners. The Chief Executive Officer and the Chief FinancialOfficer have met with shareholders, obtaining their views andreporting to the whole Board. The senior non-executive directorand Chairman of the Board have had extensive correspondencewith shareholders during the year.

The AGM of shareholders will be held on 22 April 2009.The company sees this as an opportunity to communicate withall shareholders, including private investors in the company.The AGM will be held at the company’s offices at St Albanswhich will enable not only employee shareholders to easilypartake in the meeting but investors to meet with localmanagement. The Chairmen of the Audit and RemunerationCommittees will be in attendance to respond to any queries,and it is expected that all directors will attend the AGM.

Going concernOn the basis of current financial projections and facilitiesavailable, the directors have a reasonable expectation that thegroup and the company has adequate resources to continue inoperational existence for the foreseeable future and, accordingly,consider that it is appropriate to adopt the going concern basisin preparing the financial statements.



Statement of Directors’ResponsibilitiesIn respect of the Annual Report, the directors’ remuneration report and the financial statements



The directors are responsible for preparing the Annual Report,the directors’ remuneration report and the group and parentcompany financial statements in accordance with applicablelaw and regulations.

Company law requires the directors to prepare the group andparent company financial statements for each financial year.Under that law the directors are required to prepare the groupfinancial statements in accordance with International FinancialReporting Standards (IFRSs) as adopted by the European Unionand have elected to prepare the parent company financialstatements on the same basis. The financial statements arerequired by law to give a true and fair view of the state of affairsof the company and the group and of the profit or loss of thegroup for that period.

In preparing those financial statements, the directors arerequired to:

select suitable accounting policies and then applythem consistently;

make judgements and estimates that are reasonableand prudent;

state that the financial statements comply with IFRSsas adopted by the European Union; and

prepare the financial statements on the going concernbasis, unless it is inappropriate to presume that the groupand parent company will continue in business.

The directors confirm that they have complied with the aboverequirements in preparing the financial statements.

The directors are responsible for keeping proper accountingrecords that disclose with reasonable accuracy at any time thefinancial position of the company and the group and enablethem to ensure that the financial statements and the directors’remuneration report comply with the Companies Act 1985.They are also responsible for safeguarding the assets of thecompany and the group and hence for taking reasonablesteps for the prevention and detection of fraud andother irregularities.

The directors are responsible for the maintenance and integrityof the company’s website and legislation in the United Kingdomgoverning the preparation and dissemination of financialstatements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

the financial statements, prepared in accordance with theaccounting standards referred to above, give a true and fairview of the assets, liabilities, financial position and profitand loss of the Company and the undertakings includedin the consolidation taken as a whole; and

the director’s report included a fair review of the developmentand performance of the Company and the undertakingsincluded in the consolidation taken as a whole, togetherwith a description of the principal risks and uncertaintiesthat they face.



IndependentAuditors’ ReportTo the members of ARC International plc



We have audited the group and parent company financialstatements (the ’’financial statements’’) of ARC International plcfor the year ended 31 December 2008 which comprise the groupincome statement, the group and parent company balancesheets, the group and parent company cash flow statements,the group and parent company statements of recognised incomeand expense and the related notes. These financial statementshave been prepared under the accounting policies set out therein.We have also audited the information in the directors’ remunerationreport that is described as having been audited.

This report is made solely to the company’s members, as a body,in accordance with section 235 of the Companies Act 1985. Ouraudit work has been undertaken so that we might state to thecompany’s members those matters we are required to state tothem in an auditor’s report and for no other purpose. To thefullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the company and thecompany’s members as a body, for our audit work, for thisreport, or for the opinions we have formed.

Respective responsibilities of directors and auditorsThe directors’ responsibilities for preparing the Annual Report,the directors’ remuneration report and the financial statementsin accordance with applicable law and International FinancialReporting Standards (IFRSs) as adopted by the European Union areset out in the statement of directors’ responsibilities on page 28.

Our responsibility is to audit the financial statements and thepart of the directors’ remuneration report to be audited inaccordance with relevant legal and regulatory requirementsand International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the financialstatements give a true and fair view and whether the financialstatements and the part of the directors’ remuneration reportto be audited have been properly prepared in accordance withthe Companies Act 1985 and, as regards the group financialstatements, Article 4 of the IAS Regulation. We also reportto you whether in our opinion the information given in thedirectors’ report is consistent with the financial statements.

In addition we report to you if, in our opinion, the company hasnot kept proper accounting records, if we have not received allthe information and explanations we require for our audit, or ifinformation specified by law regarding directors’ remunerationand other transactions is not disclosed.

We review whether the corporate governance statement reflectsthe company’s compliance with the nine provisions of the 2006Combined Code specified for our review by the Listing Rulesof the Financial Services Authority, and we report if it does not.We are not required to consider whether the Board’s statementson internal control cover all risks and controls, or form anopinion on the effectiveness of the group’s corporategovernance procedures or its risk and control procedures.

We read other information contained in the Annual Reportand consider whether it is consistent with the audited financialstatements. We consider the implications for our report ifwe become aware of any apparent misstatements or materialinconsistencies with the financial statements. Our responsibilitiesdo not extend to any other information.

Basis of audit opinionWe conducted our audit in accordance with InternationalStandards on Auditing (UK and Ireland) issued by the AuditingPractices Board. An audit includes examination, on a test basis,of evidence relevant to the amounts and disclosures in thefinancial statements and the part of the directors’ remunerationreport to be audited. It also includes an assessment of thesignificant estimates and judgements made by the directors inthe preparation of the financial statements, and of whether theaccounting policies are appropriate to the group’s and company’scircumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all theinformation and explanations which we considered necessaryin order to provide us with sufficient evidence to give reasonableassurance that the financial statements and the part of thedirectors’ remuneration report to be audited are free frommaterial misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluatedthe overall adequacy of the presentation of information in thefinancial statements and the part of the directors’ remunerationreport to be audited.

OpinionIn our opinion:

the group financial statements give a true and fair view,in accordance with IFRSs as adopted by the EU, of the stateof the group’s affairs as at 31 December 2008 and of its lossfor the year then ended;

the parent company financial statements give a true andfair view, in accordance with IFRSs as adopted by the EU asapplied in accordance with the provisions of the CompaniesAct 1985, of the state of the parent company’s affairs asat 31 December 2008;

the financial statements and the part of the directors’remuneration report to be audited have been properlyprepared in accordance with the Companies Act 1985 and,as regards the group financial statements, Article 4 of theIAS Regulation; and

the information given in the directors’ report is consistentwith the financial statements.

KPMG Audit PlcChartered Accountants and Registered Auditor, St Albans11 March 2009

2008 GroupBefore 2008 2008

restructure restructure Total 2007Notes £000 £000 £000 £000

Continuing operationsRevenue 5 17,047 – 17,047 14,401Cost of sales (1,294) – (1,294) (1,437)

Gross profit 15,753 – 15,753 12,964Operating expenses 6, 24 (22,791) (2,273) (25,064) (18,305)

Operating loss (7,038) (2,273) (9,311) (5,341)Finance income 10 897 – 897 1,470Finance expense 10 (14) – (14) –Share of post-tax loss of associate 17 (8) – (8) (22)

Loss before income tax (6,163) (2,273) (8,436) (3,893)

Income tax credit 11 1,135 – 1,135 1,389

Loss for the year attributable to equity shareholders 28 (5,028) (2,273) (7,301) (2,504)

Weighted average number of shares 13 147,965,359 148,031,270Basic and diluted loss per share – pence 13 (4.93) (1.69)

All activities relate to continuing operations.

The notes on pages 33 to 70 are an integral part of these consolidated financial statements.

Statements of RecognisedIncome and ExpenseFor the year ended 31 December 2008

Group Company2008 2007 2008 2007

Notes £000 £000 £000 £000

Loss for the year 28 (7,301) (2,504) (8,252) (2,558)Currency translation differences 28 (951) (54) – –

Total recognised expense for the year (8,252) (2,558) (8,252) (2,558)

IncomeStatementFor the year ended 31 December 2008

FinancialStatem

entsandNotes


Group Company2008 2007 2008 2007

Notes £000 £000 £000 £000

AssetsNon-current assetsIntangible assets 14 11,600 7,506 – –Property, plant and equipment 15 1,970 1,537 – –Investment in associate 17 443 414 – –Investment in subsidiaries 16 – – 10,462 11,093Trade and other receivables 21 442 417 – –

14,455 9,874 10,462 11,093

Current assetsInventories 20 – 72 – –Trade and other receivables 21 4,060 4,241 191 193Current corporation tax receivable 931 1,368 – –Short-term investments 16 8,037 11,145 8,037 11,145Cash and cash equivalents 19 4,631 10,100 2,948 8,063

17,659 26,926 11,176 19,401

Total assets 32,114 36,800 21,638 30,494

LiabilitiesCurrent liabilitiesLoans and borrowings 22 78 – – –Trade and other payables 23 7,529 5,729 133 221Provisions for other liabilities and charges 24 871 163 – –

8,478 5,892 133 221

Net current assets 9,181 21,034 11,043 19,180

Non-current liabilitiesLoans and borrowings 22 99 – – –Trade and other payables 23 101 126 – –Deferred income tax liabilities 25 1,073 489 – –Provisions for other liabilities and charges 24 858 20 – –

2,131 635 – –

Net assets 21,505 30,273 21,505 30,273

Shareholders’ equityOrdinary shares 26 153 153 153 153Share premium 28 3,683 3,683 3,683 3,683Other reserves 28 61,289 61,037 60,825 60,573Cumulative translation adjustment 28 (1,462) (511) – –Retained earnings 28 (42,158) (34,089) (43,156) (34,136)

Total shareholders’ equity 21,505 30,273 21,505 30,273


The financial statements on pages 30 to 70 were approved by the Board of Directors on 11 March 2009 and were signed on its behalf by:


Carl SchlachteChief Executive Officer11 March 2009

BalanceSheetsAs at 31 December 2008

FinancialStatem

entsandNotes


Group Company2008 2007 2008 2007

Notes £000 £000 £000 £000

Net loss for the year (7,301) (2,504) (8,252) (2,558)Adjustments for:Impairment on investment in subsidiary – – 10,081 10,043(Gain)/loss on foreign exchange – – 2,381 277Interest receivable (883) (1,470) (834) (8,603)Tax credit (1,135) (1,389) – –Amortisation 2,268 1,211 – 1Depreciation 867 475 – 1Loss on disposal of property, plant and equipment 7 20 – –Provision for assets not used as part of reorganisation 218 – – –Share-based award expense 252 286 1 3Loss of share of associate 8 22 – –(Increase)/decrease in inventories 72 153 – –(Increase)/decrease in trade and other receivables (678) (477) (2) (36)Increase/(decrease) in trade and other payables (816) (1,224) (88) 46Increase/(decrease) in provisions 1,546 (161) – –

Net cash (used)/generated in operations (5,575) (5,058) 3,287 (826)

Interest received 894 1,636 842 1,497Taxes paid (31) (28) – –Tax credits received 1,368 701 – –

Net cash (used)/generated from/(in) operating activities (3,344) (2,749) 4,129 671

Cash flows from investing activitiesPurchase of property, plant and equipment (1,174) (1,502) – –Purchase of intangible assets (688) (196) – –Capitalisation of R&D assets (249) (271) – –Movements on short-term investments 16 3,108 2,355 3,108 2,355Investment in subsidiaries 16 – – (11,584) (9,214)Investment in associate 17 (37) (286) – –Acquisition of subsidiaries, net of cash acquired 31 (2,472) (5,847) – –

Net cash used in investing activities (1,512) (5,747) (8,476) (6,859)

Cash flows from financing activitiesProceeds from issue of ordinary shares and ESOP 28 – 504 – 504Purchase of shares by ESOP 28 (768) – (768) –

Net cash (used)/generated from financing activities (768) 504 (768) 504

Effects of exchange rate changes on cash and cash equivalents 155 (54) – –

Net decrease in cash and cash equivalents (5,469) (8,046) (5,115) (5,684)

Cash and cash equivalents at 1 January 19 10,100 18,146 8,063 13,747

Cash and cash equivalents at 31 December 19 4,631 10,100 2,948 8,063


Cash FlowStatementsFor the year ended 31 December 2008

FinancialStatem

entsandNotes


1 Reporting entity

ARC International plc (the “company”) is a company domiciled in England and Wales. The address of the Company is Verulam Point,Station Way, St Albans, Hertfordshire, AL1 5HE. These consolidated financial statements of the Company as at and for the year ended31 December 2008 comprise the Company and its subsidiaries (together referred to as the “group” and individually as “group entities”)and the group’s interest in associates. The group is primarily involved in the development and licensing of semiconductor intellectualproperty for the design of microprocessor cores and multimedia subsystems.

2 Basis of preparation

These consolidated financial statements were authorised for issue by the Board of directors on 11 March 2009. They are subject toapproval by the shareholders at the Annual General Meeting.

a) Basis of preparationThese consolidated financial statements have been prepared in accordance with EU-endorsed International Financial ReportingStandards (IFRS), IFRIC interpretations and the Companies Act, 1985 applicable to companies reporting under IFRS. The consolidatedfinancial statements have been prepared under the historical cost convention, except for the following:

derivative financial instruments are measured at fair value.

financial instruments at fair value through the profit and loss are measured at fair value.

Methods used to measure fair values are discussed further in note 4.

b) Functional and presentation currencyThese consolidated financial statements are presented in sterling, which is the company’s functional and presentation currency,and rounded to the nearest £1,000.

c) Use of estimates and judgementsThe preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requiresmanagement to exercise its judgement in the process of applying the group’s accounting policies. Although these estimates are basedon management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates.

Estimates and underlying assumptions are continually evaluated and are based on historical experience and other factors, includingexpectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates arerecognised in the period in which the estimates are revised and in any future period affected.

The group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldomequal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to thecarrying amounts of assets and liabilities within the next financial year are discussed below.

i) Revenue recognition The group frequently enters into contracts with multiple element arrangements. The calculation of fair valuesattributable to the separable elements requires the group to estimate the fair value of the various elements, such as post-contractmaintenance and support.

ii) Estimated impairment of goodwill The group tests annually whether goodwill has suffered any impairment, in accordancewith the accounting policy stated in (g) below. The recoverable amounts of the cash-generating unit has been determined basedon value-in-use calculations. These calculations require the use of estimates (note 14).

iii) Provisions The group makes provisions as noted in (m) below, and uses assumptions and judgements based on prior experienceand other market conditions.

Notes to theAccounts

FinancialStatem

entsandNotes


2 Basis of preparation continued

iv) Income taxes The group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining theworldwide provision for income tax. There are many transactions and calculations for which the ultimate tax determination is uncertainduring the ordinary course of business.

v) Business combination The group has made an acquisition in the year and the pre-acquisition carry amounts were determinedbased on applicable IFRS immediately before the acquisition. The values, liabilities and contingent liabilities recognised on acquisitionare their estimated fair values.

vi) Share-based payment expense The calculation of the share-based payment expense is subject to assumptions and judgementinvolved in the valuation models and expected dividend and lapse rates.

3 Accounting policies

The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policieshave been consistently applied to both years presented, unless otherwise stated.

a) Basis of consolidationThe financial statements comprise consolidated accounts for the company and all of its subsidiaries. The accounts of all subsidiariesare prepared annually to 31 December. Subsidiaries are all entities over which the group has the power to govern the financial andoperating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect ofpotential voting rights that are currently exercisable or convertible are considered when assessing whether the group controls anotherentity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated fromthe date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the group. The cost of an acquisition ismeasured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange,plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in abusiness combination are measured initially at their fair value at the acquisition date, irrespective of the extent of any minority interest.The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets acquired is recorded asgoodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recogniseddirectly in the income statement.

Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised lossesare also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have beenchanged where necessary to ensure consistency with the policies adopted by the group.

Associates are all entities over which the group has significant influence but not control, generally accompanying a shareholding ofbetween 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting andare initially recognised at cost. The group’s investment in associates includes goodwill identified on acquisition, net of any accumulatedimpairment loss (note (j)).

The group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against thecarrying amount of the investment. When the group’s share of losses in an associate equals or exceeds its interest in the associate,including any other unsecured receivables, the group does not recognise further losses, unless it has incurred obligations or madepayments on behalf of the associate.

Unrealised gains on transactions between the group and its associates are eliminated to the extent of the group’s interest in theassociates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the group.


FinancialStatem

entsandNotes


3 Accounting policies continued

b) Revenue recognitionRevenue represents amounts receivable for the sale of licences, royalties arising from the sale of licensees’ ARC-based products,revenue from support, maintenance and training, net of trade discounts.

Licence fees are recognised upon delivery to the customer, provided that persuasive evidence of an arrangement exists, fees are fixedand determinable and collectibility is reasonably assured. The group does not offer a right of return. Where there are extendedpayment terms, or management has doubt as to the recoverability of the licence fees, income is deferred until payment becomesdue and recoverable.

The group’s transactions frequently include the sale of software and services under multiple element arrangements. The group uses theresidual method for revenue recognition for multiple element arrangements. In accordance with this method, the total contract valueis attributed first to any undelivered elements, based on their fair values, equal to the fee charged when such services are sold separately.The remainder of the contract value is then attributed to the products, resulting in any discounts inherent in the total contract valueto be allocated to the products.

Where contracts contain an agreement to provide post-contract maintenance, the attributable income is recognised on a straight-linebasis over the period for which the maintenance has been agreed, or in the case of support sold by reference to time, as that supportis used.

Where contracts contain an agreement to provide custom engineering services, these are accounted for on a percentage of completionbasis (based on actual costs incurred and forecast costs to completion).

The excess of amounts invoiced for licence fees and maintenance and support and the amount recognised as revenue is recordedas deferred revenue within liabilities.

Royalty income is recognised by the group when the amounts are reported to the group and collection is probable.

Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the groupreduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effectiveinterest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans isrecognised using the original effective interest rate.

Dividend income is recognised when the right to receive payment is established.

c) Foreign currency translation1) Functional and presentation currency Items included in the financial statements of each of the group’s entities are measuredusing the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidatedfinancial statements are presented in sterling, which is the company’s functional and presentational currency, and rounded to thenearest £1,000.

2) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange ratesprevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions andfrom the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognisedin the income statement.

3) Group companies The results and financial position of all group entities (none of which has the currency of a hyper-inflationaryeconomy) that have a functional currency different from the presentation currency are translated into the presentation currencyas follows:

i) Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;ii) Income and expenses for each income statement are translated at average exchange rates; andiii) All resulting exchange differences are recognised as a separate component of equity (cumulative translation adjustment).

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c) Foreign currency translation continuedExchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currencyinstruments designated as hedges of such investments, are taken to shareholders’ equity on consolidation. When a foreign operationis sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.

Foreign exchange gains or losses arising from a monetary item receivable from or payable to a foreign operation, the settlement ofwhich is neither planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operationand are recognised directly in equity.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreignentity and translated at the closing rate.

d) Segmental reportingThe group provides intellectual property for multimedia subsystems and configurable CPU/DSP processors. The group has one type ofbusiness segment in providing the products to customers. The group is organised on a worldwide basis into three primary geographicalbusiness segments, North American, European and Asian. As such the group uses geography as the primary reporting segment.Intersegment revenue is based on intercompany agreements to reflect arm’s length pricing. The assets are recorded by location andthere is a cost allocation between segments based on intercompany agreements for group overheads.

e) Financial assetsThe group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, andavailable for sale. The classification depends on the purpose for which the financial assets were acquired. Management determinesthe classification of its financial assets at initial recognition.

1) Financial assets at fair value through profit and loss Financial assets at fair value through profit or loss are financial assets heldfor trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivativesare also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.

2) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that arenot quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balancesheet date. These are classified as non-current assets. The group’s loans and receivables comprise “trade and other receivables”and cash and cash equivalents in the balance sheets.

3) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this categoryor not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of theinvestment within 12 months of the balance sheet date.

Regular purchases and sales of financial assets are recognised on the trade date – the date on which the group commits to purchaseor sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair valuethrough profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transactioncosts are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from theinvestments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership.Available-for-sale financial assets and financial assets at fair value though profit or loss are subsequently carried at fair value.Loans and receivables are carried at amortised cost using the effective interest method.

Gains or losses arising from changes in the fair value of the “financial assets at fair value through profit or loss” category are presentedin the income statement within “other (losses)/gains – net” in the period in which they arise. Dividend income from financial assetsat fair value through profit or loss is recognised in the income statement as part of the other income when the group’s right to receivepayments is established.

Changes in the fair value of monetary securities denominated in a foreign currency and classified as available for sale are analysedbetween translation differences resulting from changes in amortised cost of the security and other changed in the carrying amountof security. The translation differences on monetary securities are recognised in profit or loss, while translation differences onnon-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary securities classifiedas available for sale are recognised in equity.


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e) Financial assets continuedWhen securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity areincluded in the income statement as “gains and losses from investment securities”.

Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as partof the other income. Dividends on available-for-sale equity instruments are recognised in the income statement as part of otherincome when the group’s right to receive payments is established.

The group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assetsis impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of thesecurity below its cost is considered as an indicator that the securities are impaired. If such evidence exists for available-for-salefinancial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less anyimpairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the incomestatement. Impairment losses recognised in the income statement on equity instruments are not reversed through the incomestatement. Trade receivables are tested for impairment and a provision is established when there is objective evidence that the groupwill not be able to collect all amounts due according to the original terms of the receivables.

f) Property, plant and equipmentItems of property, plant and equipment are measured at cost less accumulated depreciation. Cost is the initial purchase price plusany costs associated with bringing the asset to the current location and condition. The cost of self constructed assets includes the costof materials and any other costs directly attributable to bringing the asset to a working condition for their intended use. Purchasedsoftware that is integral to the functionality of the related equipment is capitalised as part of the equipment. Computer softwarethat is not integral to the operation of the computer hardware is classified as an intangible asset. Depreciation is provided at ratescalculated to write off the cost less estimated residual value of each asset over its expected useful economic life, as follows:

Leasehold improvements – over the period of the lease on a straight-line basisComputer hardware and integral software – three years on a straight-line basisFixtures, fittings and equipment – five to seven years on a straight-line basis

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than itsestimated recoverable amount. An annual review of the useful economic life and residual values is performed.

g) Intangible assetsIntangible assets arise from internally generated assets and other acquired intangible assets. Assets are stated at cost less accumulatedamortisation.

1) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the group’s share of the net identifiableassets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in “intangibleassets”. Goodwill on acquisition of associates is included in “investment in associates” and is tested for impairment as part of the overallbalance. Separately recognised goodwill is tested annually for impairment and carried at cost less accumulated impairment losses.Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwillrelating to the entity sold.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generatingunits or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.The company has one cash-generating unit.

2) Research and development Research expenditure is recognised as an expense as incurred. Costs incurred on development projects(relating to the design and testing of new products) are recognised as intangible assets when it is probable that the project will be asuccess, considering its commercial and technological feasibility, and costs can be measured reliably. Other development expendituresare recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset ina subsequent period.

Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses.

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g) Intangible assets continued3) Amortisation Amortisation is provided to write off the cost of the asset over its useful economic life on a straight-line basis as follows:

Internally generated development costs – useful life of asset, three to six yearsExternally purchased development costs – useful life of asset, three to six yearsComputer software and licences – over three yearsWebsite domain name – over three yearsCustomer relationships – over three to seven yearsTrade name – up to six yearsCustomer backlog – over 21 months

Provision is made against the carrying value of assets where impairment in value is deemed to have occurred.

h) LeasesAssets acquired under leases are reviewed to see if they are finance leases or operating leases, based on the following criteria:

If the leases transfer ownership of the asset at the end of the lease. If it has a bargain purchase option.If the lease term is for the major part of the economic life of the asset.If the present value of the lease obligations amounts to at least substantially all of the fair value of the asset.If the leased assets are specialised for the lessee only.

Leases are classified as a finance lease if the majority of the risks and rewards of ownership are transferred to the company.

Assets obtained under hire purchase contracts and finance leases are capitalised as tangible assets and depreciated over the shorterof the lease term and their useful lives. Obligations under such agreements are included in current/non-current liabilities net of thefinance charge allocated to future periods. The finance element of the rental payment is charged to the profit and loss account soas to produce a constant periodic rate of charge on the net obligation outstanding in each period.

Rents payable under operating leases are charged against income on a straight-line basis over the lease term, except for non-operationalproperty where full provision is made for future rental costs, less any rental income. Any rent-free incentive is amortised over the lengthof the lease.

i) InventoriesInventories are valued at the lower of purchase cost, using the FIFO method, and estimated net realisable value. Purchase cost isdefined as the initial cost to purchase the goods. Net realisable value, including a review of obsolete, slow moving and defectiveinventory, is based on the sales value of the inventory less any costs associated with selling the product.

j) Impairment1) Financial assetsA financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financialasset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimatedfuture cash flows of that asset.

An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carryingamount, and the present value of the estimated future cash flows discounted at the original effective interest rate. An impairmentloss in respect of an available-for-sale financial asset is calculated by reference to its fair value.

Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessedcollectively in groups that share similar credit risk characteristics.

All impairment losses are recognised in profit or loss

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised.For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities, the reversal is recognisedin profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognised directly in equity.


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j) Impairment continued2) Non-financial assetsAssets that have an indefinite useful life, for example goodwill, are not subject to amortisation and are tested annually for impairment.Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Therecoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment,assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financialassets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date.

k) Employee benefit costsContributions payable to personal defined contribution pension schemes are charged against profits during the period in which therelated services were performed.

l) Share-based paymentThe group regularly enters into equity-settled share-based payment transactions with employees.

The fair value of the employee services received in exchange for the grant of the options or shares is recognised as an expense over therelevant vesting period. The total amount to be expensed rateably over the vesting period is determined by reference to fair value ofthe options or shares determined at the grant date, excluding the impact of any non-market vesting conditions (for example, revenuetargets). Non-market vesting conditions are included in assumptions about the number of options that are expected to becomeexercisable or the number of shares that the employee will ultimately receive. This estimate is revised at each balance sheet date andthe difference is charged or credited to the income statement, with a corresponding adjustment to equity. The proceeds received onexercise of the options net of any directly attributable transaction costs are credited to equity.

The proceeds received net of any directly attributed transaction costs are credited to share capital (nominal value) and share premiumwhen the options are exercised.

The grant by the company of options over its equity instruments to the employees of subsidiary undertakings in the group is treatedas a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognisedover the investing period as an increase to investment in subsidiary undertakings, with corresponding credit to equity.

The company seeks to minimise the charge for employer’s National Insurance contributions by recovering employers’ National Insurancecontributions from employees as a condition of grant on new share options.

m) ProvisionsProvisions for liabilities are made on the basis that the business has a constructive or legal obligation due to a past event. Provisionis made for non-operational property where full provision is made for future rental costs, less any rental income. Before a provisionis established, the group recognises any impairment on the assets associated with that contract. Provision is also made for anydilapidations that might be necessary on the vacation of any leased property. Such dilapidations are based on the directors’ bestestimate of the future costs involved. Provision for restructuring is made where a decision to restructure has been made at and raiseda valid expectation in those affected or before the balance sheet date and can be quantified.

Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessmentsof the time value of money and the risks specific to the liability.

n) Finance income and expensesFinance income comprises interest income on funds invested, dividend income and changes in the fair value of financial assets at fairvalue through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividendincome is recognised in profit or loss on the date that the group’s right to receive payment is established, which in the case of quotedsecurities is the ex-dividend date.

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n) Finance income and expenses continuedFinance expenses comprise interest expense on borrowings and unwinding of the discount on provisions. All borrowing costs arerecognised in profit or loss using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

o) Taxation including deferred taxationThe charge for current tax is based on the results for the year as adjusted for items which are non-assessable or disallowed. It iscalculated using taxation rates that have been enacted or subsequently enacted by the balance sheet date. Research and developmenttax credits are accounted for in the period received or management believe there is certainty of the credit being received. Deferredincome tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and areexpected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred incometax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporarydifferences can be utilised.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assetsand liabilities and their carrying amounts in the consolidated financial statements.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of thereversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reversein the foreseeable future.

p) Discontinued operationsThe group accounts for discontinued operations separately to continuing operations on the face of the profit and loss account.All revenues and costs incurred by the discontinuing operations to the date of disposal are accounted for separately. Any revisionsto estimates or resolution of uncertainties that arise in the following period are also shown as discontinuing activities.

q) Earnings per shareThe group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profitor loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding duringthe period, excluding those held in the Employee Benefit Trust. Diluted EPS is determined by adjusting the profit or loss attributableto ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potentialordinary shares, which comprise share options granted to employees and shares to be issued as consideration for the acquisitions.

r) InvestmentsThe parent company’s investment in subsidiary undertakings is shown at cost less provision for any impairment in value.

s) Cash and cash equivalentsCash is defined as cash on hand, in transit where confirmation of despatch is received and on demand deposits. Cash equivalents areshort-term, highly liquid investments with original maturities of three months or less. Deposits with maturities of over three monthsare classified as short-term investments.

t) Trade receivablesTrade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method,less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that thegroup will not be able to collect all amounts due according to the original terms of the receivables. The amount of the provision isthe difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the originaleffective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of theloss is recognised in the income statement within “sales and marketing” costs. When a trade receivable is uncollectible, it is writtenoff against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against“sales and marketing” costs in the income statement.


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u) Trade payablesTrade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

v) Employee Share Option TrustsThe group’s ESOP trust is a separately administered trust which is funded by a loan from the company. The assets of the trust compriseshares in the company. These shares, held through the ESOP trust, are valued at the initial purchase cost, and deducted in arrivingat shareholders’ funds. Where such shares are subsequently used to satisfy the exercise of share options, any consideration received(net of transaction costs) is included in equity attributable to the company’s equity holders.

w) Capitalisation of borrowing costs and interestThe group does not capitalise interest or other finance costs.

x) Share capital and share premiumThe company has ordinary shares with a nominal value of 0.1p. Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects.Any amount received for an ordinary share in excess of the nominal value is credited to the share premium account. Interim dividendsare accounted for within the period when they are paid, and final dividends when approved by shareholders.

y) Dividend distributionDividend distribution to the company’s shareholders is recognised as a liability in the group’s financial statements in the period in whichthe dividends are approved by the company’s shareholders.

z) New standards and interpretations not yet adoptedA number of new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December2008, and have not been applied in preparing these consolidated financial statements:

– IFRS 8 Operating Segments introduces the “management approach” to segment reporting. IFRS 8, which becomes mandatory forthe group’s 2009 consolidated financial statements, will require a change in the presentation and disclosure of segment informationbased on the internal reports regularly reviewed by the group’s Chief Operating Decision Maker in order to assess each segment’sperformance and to allocate resources to them. Currently the group presents segment information in respect of its geographicalsegments (see note 5). Under the management approach, the group will continue to present segment information in respect ofgeographical segments.

– Revised IAS 23 Borrowing Costs removes the option to expense borrowing costs and requires that an entity capitaliseborrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of thatasset. The revised IAS 23 will become mandatory for the group’s 2009 consolidated financial statements and will constitute a changein accounting policy for the group. In accordance with the transitional provisions, the group will apply the revised IAS 23 to qualifyingassets for which capitalisation of borrowing costs commences on or after the effective date. Therefore there will be no impact on priorperiods in the group’s 2009 consolidated financial statements.

– IFRIC 13 Customer Loyalty Programmes addresses the accounting by entities that operate, or otherwise participate in, customerloyalty programmes under which the customer can redeem credits for awards such as free or discounted goods or services. IFRIC 13,which becomes mandatory for the group’s 2009 consolidated financial statements, is not expected to have any impact on theconsolidated financial statements.

– Revised IAS 1 Presentation of Financial Statements (2007) introduces the term total comprehensive income, which representschanges in equity during a period other than those changes resulting from transactions with owners in their capacity as owners.Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both theincome statement and all non-owner changes in equity in a single statement), or in an income statement and a separate statementof comprehensive income. Revised IAS 1, which becomes mandatory for the group’s 2009 consolidated financial statements,is expected to have a significant impact on the presentation of the consolidated financial statements. The group plans to providetotal comprehensive income in a single statement of comprehensive income for its 2009 consolidated financial statements.

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z) New standards and interpretations not yet adopted continued– Amendments to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – PuttableFinancial Instruments and Obligations Arising on Liquidation requires puttable instruments, and instruments that impose onthe entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classifiedas equity if certain conditions are met. The amendments, which become mandatory for the group’s 2009 consolidated financialstatements, with retrospective application required, are not expected to have any impact on the consolidated financial statements.

– Revised IFRS 3 Business Combinations (2008) incorporates the following changes that are likely to be relevant to thegroup’s operations:

– The definition of a business has been broadened, which is likely to result in more acquisitions being treated asbusiness combinations.

– Contingent consideration will be measured at fair value, with subsequent changes therein recognised in profit or loss.– Transaction costs, other than share and debt issue costs, will be expensed as incurred.– Any pre-existing interest in the acquiree will be measured at fair value with the gain or loss recognised in profit or loss.– Any non-controlling (minority) interest will be measured at either fair value, or at its proportionate interest in the identifiableassets and liabilities of the acquiree, on a transaction-by-transaction basis.

Revised IFRS 3, which becomes mandatory for the group’s 2010 consolidated financial statements, will be applied prospectivelyand therefore there will be no impact on prior periods in the group’s 2010 consolidated financial statements (not yet endorsedfor use in the EU).

– Amended IAS 27 Consolidated and Separate Financial Statements (2008) requires accounting for changes in ownershipinterests by the group in a subsidiary, while maintaining control, to be recognised as an equity transaction. When the group losescontrol of a subsidiary, any interest retained in the former subsidiary will be measured at fair value with the gain or loss recognisedin profit or loss. The amendments to IAS 27, which become mandatory for the group’s 2010 consolidated financial statements,are not expected to have a significant impact on the consolidated financial statements (not yet endorsed for use in the EU).

– Amendment to IFRS 2 Share-based Payment – Vesting Conditions and Cancellations clarifies the definition of vestingconditions, introduces the concept of non-vesting conditions, requires non-vesting conditions to be reflected in grant-date fairvalue and provides the accounting treatment for non-vesting conditions and cancellations. The amendments to IFRS 2 will becomemandatory for the group’s 2009 consolidated financial statements, with retrospective application. The group has not yet determinedthe potential effect of the amendment.


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4 Financial risk management

Financial risk factorsThe group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flowinterest rate risk and price risk), credit risk and liquidity risk. The group’s overall risk management programme focuses on the unpredictabilityof technology markets and seeks to minimise potential adverse effects on the group’s financial performance.

Financial risk management is carried out by the group finance department under policies approved by the Board of directors.The Board provides written principles for overall risk management, as well as written policies covering specific areas, such asforeign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments,and investment of excess liquidity.

a) Market riski) Foreign exchange risk The group operates internationally and is exposed to foreign exchange risk arising from various currencyexposures, primarily with respect to the US dollar. Foreign exchange risk arises from future commercial transactions, recognised assetsand liabilities and net investments in foreign operations. Management has set up a policy to require group companies to manage theirforeign exchange risk against their functional currency.

Group finance reviews the group exposure on a regular basis. To manage their foreign exchange risk arising from commercialtransactions and recognised assets and liabilities, entities in the group may use forward contracts when collection and transactiondates are certain. Foreign exchange risk arises when future commercial transactions or recognised assets or liabilities are denominatedin a currency that is not the entity’s functional currency.

The following table sets out the net foreign currency monetary assets/(liabilities) of the group (including short-term trade debtorsand creditors).

2008 2007£000 £000

US dollars 681 2,636Other (160) (49)

Net foreign currency monetary assets 521 2,587

Sensitivity analysisA 10% strengthening of the pound against the US dollar with all other variables held constant, equity and post-tax loss for the yearwould have increased (decreased) by:

2008 2007£000 £000

Profit or loss 458 552Equity (542) (511)

ii) Price risk The group is not exposed to equity securities price risk. The group is not exposed to commodity price risk.

iii) Cash flow and fair value interest rate risk As the group has no significant interest-bearing borrowings, the group’s incomeand operating cash flows are substantially independent of changes in market interest rates. The group’s interest rate risk arises fromshort-term investments and cash deposits. Cash deposits expose the group to cash flow interest rate risk. Group policy is to maintainthe cash deposits on maturity periods of less than 12 months and to use cash deposits and certificates of deposits (CD). During 2008and 2007, the group’s cash deposits at variable rate were denominated in UK pounds.

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4 Financial risk management continued

Sensitivity analysis continuedThe interest rate profile of the group’s financial assets as at 31 December is summarised in the table below (excluding short-term tradedebtors and creditors):

2008 2007£000 £000

Financial assetsCash at bank and on hand– £ sterling 2,991 8,077– US dollar 1,487 1,941– other 153 82

– variable rate 4,631 10,100

Investments (term deposits)– £ sterling 8,037 11,145

– fixed rate 8,037 11,145

12,668 21,245

The group analyses its interest rate exposure by varying the length of the deposits within the 12-month period.

Fixed rate cash and short-term deposits in all currencies are for a period ranging from overnight to one year for interest rates between2.25% and 6.38% (2007: 3.814% and 5.17%). The book value of the financial instruments does not differ materially from the fairvalue. As at 31 December 2008 the group has no unrecognised losses in respect of financial instruments used as hedges (2007: £nil).

At 31 December 2008, if interest rates on UK pound-denominated cash deposits had been ten basis points higher/lower with all othervariables held constant, post-tax loss for the year would have been £4,000 (2007: £10,000) lower/greater, mainly as a result ofhigher/lower interest income.

b) Credit riskCredit risk is managed on a group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments anddeposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables andcommitted transactions.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reportingdate was:

31 December 31 December2008 2007£000 £000

Short-term investments 8,037 11,145Trade and other receivables 4,060 4,241Cash and cash equivalents 4,631 10,100

For banks and financial institutions, only independently rated parties with a minimum rating of “A” are accepted. For customers,if there is no independent rating, the finance department assesses the credit quality of the customer, taking into account their financialposition, past experience and other factors. Individual risk limits are set based on internal or external ratings. Management monitorsthe utilisation of credit limits regularly.


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Sensitivity analysis continuedThe tables below show the credit limit in respect of the major counterparties at the balance sheet date.

2008 2007Credit limit Balance Credit limit Balance

Counterparty Rating £000 £000 Rating £000 £000

Bank A A+ 5,000 4,523 AA 7,500 5,444Bank B A 5,000 2,815 A+ 5,000 5,000Bank C A+ 5,000 3,638 AA 5,000 3,928Bank D 5,000 – A 5,000 2,825Bank E 5,000 – A 5,000 2,001

2008 2007Balance Balance

Counterparty £000 £000

Customer A 622 560Customer B 518 426Customer C 324 261

No credit limits were exceeded during the reporting period and management does not expect any losses from non-performance bythese counterparties.

c) Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash and marketable securities. Due to the nature of the underlyingbusinesses, group finance aims to maintain flexibility in funding by keeping short-term cash deposits available.

Management monitors rolling forecasts of the group’s liquidity reserve on the basis of expected cash flow.

The table below analyses the group’s financial liabilities. The amounts disclosed in the table are the contractual undiscounted cashflows and excludes deferred revenue. These equal their carrying value as the impact of discounting is not significant.


Trade and other payables within one year 5,322 4,502Trade and other payables two to five years 101 126Finance lease liabilities within one year 78 –Finance lease liabilities two to five years 99 –

The following table analyses the provision for reorganisation, onerous leases and facilities:

Weighted averageperiod to maturity

2008 2007 2008 2007Year Year £000 £000

Financial liabilities– £ sterling 2 1 1,367 183– US dollar 2 – 362 –

2 1 1,729 183

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Capital risk managementThe group’s objectives when managing capital are to safeguard the group’s ability to continue as a going concern in order to providereturns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the group may adjust the amount of dividends paid to shareholders, return capitalto shareholders, issue new shares or consider raising debt.


Total equity 21,505 32,273Less cash and cash equivalents and short-term investments (12,668) (21,245)

8,837 9,028

This decrease is due to the losses that the group has made during the year.

Fair value estimationThe fair value of financial instruments that are not traded in an active market is determined by using valuation techniques.The group uses a variety of methods and makes assumptions that are based on market conditions existing at each balancesheet date. Techniques, such as estimated discounted cash flows, are used to determine fair value for the financial instruments.The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date.

The carrying value less impairment provision of trade receivables and payables are assumed to approximate their fair values dueto the short-term nature of trade receivables and payables. The fair value of financial liabilities for disclosure purposes is estimatedby discounting the future contractual cash flows at the current market interest rate that is available to the group for similarfinancial instruments.

GuaranteesThe group’s policy is to provide financial guarantees to wholly-owned subsidiaries and third parties to guarantee specific debtsfor wholly-owned subsidiaries. At 31 December 2008 a £140,000 guarantee was outstanding (2007: none).


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5 Segment information

GroupThe group provides intellectual property for multimedia subsystems and configurable CPU/DSP processors. The group has one type ofbusiness segment in providing the products to customers. The group is organised on a worldwide basis into three primary geographicalbusiness segments, North American, European and Asian. As such the group uses geography as the primary reporting segment.

The segment results for the year ended 31 December 2008 are as follows:North

Europe America Asia Eliminations GroupNote £000 £000 £000 £000 £000

Revenue – external 3,474 9,291 4,282 – 17,047

Revenue – internal 2,894 258 – (3,152) –

Segment result (5,655) (716) (664) – (7,038)Reorganisation (1,689) (1,566) (18) – (2,273)

Segment result after reorganisation (7,344) (1,282) (685) – (9,311)Finance income 10 864 33 – – 897Finance expense 10 (10) (4) – – (14)Share of post tax loss of associate 17 – (8) – – (8)

Loss before income tax (6,490) (1,261) (685) – (8,436)Income tax credit 942 193 – – 1,135

(Loss) attributable to equity shareholders (5,548) (1,068) (685) – (7,301)

Assets 21,571 10,055 45 – 31,671Associates – 443 – – 443

Total assets 21,571 10,498 45 – 32,114

Total liabilities 4,834 5,731 43 – 10,609

Other segment itemsCapital expenditure 1,274 837 – – 2,111Amortisation of intangible assets 14 1,463 804 – – 2,268Depreciation 15 671 193 3 – 867Share-based award expense 27 46 203 3 – 252

FinancialStatem

entsandNotes


5 Segment information continued

The segment results for the year ended 31 December 2007 are as follows:

Europe North America Asia Eliminations GroupNotes £000 £000 £000 £000 £000

Revenue – external 2,897 9,353 2,151 14,401

Revenue – internal 3,044 193 – (3,237) –

Segment result (1,585) (3,066) (690) (5,341)Finance income 10 1,410 60 – 1,470Share of post tax loss of associate 17 – (22) – (22)

Loss before income tax (175) (3,028) (690) (3,893)Income tax credit 1,369 20 – 1,389

Profit/(loss) attributable to equity shareholders 1,194 (3,008) (690) (2,504)

Assets 29,263 7,083 40 36,386Associates – 414 – 414

Total assets 29,263 7,497 40 36,800

Total liabilities (3,154) (3,360) (13) 6,527

Other segment itemsCapital expenditure 1,677 283 9 1,969Amortisation of intangible assets 14 1,023 188 – 1,211Depreciation 15 357 116 2 475Share-based award expense 27 80 199 7 286

The group only has a single business segment, and therefore, it does not have a secondary reporting format.

The group’s revenue has been analysed below:Group

2008 2007Analysis of revenue by category: £000 £000

Licence and engineering revenue 7,317 7,428Maintenance and service revenue 1,829 2,121Royalties 7,901 4,852

17,047 14,401


FinancialStatem

entsandNotes


6 Summary of operating expensesGroup

2008 2007£000 £000

Research and development (9,624) (7,423)Sales and marketing (5,539) (5,518)General and administrative (4,493) (3,678)Other expenses (3,135) (1,686)Restructure costs (note 24) (2,273) –

Operating expenses (25,064) (18,305)

Restructure costs have been allocated as follows: research and development of £513,000, sales and marketing of £226,000, andgeneral and administrative of £1,534,000.

7 Loss before taxation2008 2007

Cost Operating Cost Operatingof sales expenses of sales expenses

£000 £000 £000 £000

The following items have been charged/(credited) in arrivingat loss before taxation:Employee costs (note 8) 784 13,194 759 10,736Raw materials and consumables used – 136 145 194Inventory used during the year 23 – 9 –Depreciation of property, plant and equipment (note 15)(included within other expenses) – 867 – 475Amortisation of intangibles (note 14) (included within other expenses) – 2,268 – 1,211Loss on disposal of property, plant and equipment – 7 – 20Repairs and maintenance expenditure on property, plant and equipment – 264 – 382Operating lease rentals– Plant and machinery – 16 – 11– Property – 874 – 676Research and development costs (includes employee costs6,737,000: 2007 £5,181,000) – 9,624 – 7,423Foreign exchange (gain) losses – (108) – (133)

FinancialStatem

entsandNotes


7 Loss before taxation continued

Services provided by the Group’s auditor and network firmsDuring the year the group (including overseas subsidiaries) obtained the following services from its auditor at costs as detailed below:

Group Company2008 2007 2008 2007£000 £000 £000 £000

Audit services– Fees payable to the company’s auditor for the auditof the company’s annual accounts 118 103 61 46

Non-audit servicesFees payable to the company’s auditor and its associates for other services:– The audit of the company’s subsidiaries pursuant to legislation 30 21 – 9– Other services pursuant to legislation 19 35 7 –– Tax services 12 8 3 –– Services related to transactions entered into – 20 – 20– Other services 7 58 – –

186 245 71 75

The audit fees include fees paid to KPMG San Jose for the audit of the consolidation and work associated with the audit ofARC International plc.

8 Employee costs2008 2007£000 £000

Wages and salaries 12,363 10,082Social security costs 983 836Other pension costs (note 9) 380 291Share-based award expense 252 286

13,978 11,495

The average numbers of employees (including directors) during the period was:2008 2007

Number Number

Research and development 136 113Sales and marketing 24 23General and administration 33 22

193 158

Key management compensation2008 2007£000 £000

Salaries and short-term employee benefits 1,619 1,155Post-employment benefits 45 28Share-based payments 90 74

1,754 1,257


FinancialStatem

entsandNotes


8 Employee costs continued

Key management comprise executive and non-executive directors and certain managers. Executive directors and managers participatein the group share option schemes and the performance share plan. Non-executive directors do not. Post-employment benefits aresolely contributions to defined contribution pension schemes.

Aggregate directors’ emoluments (see also page 22)2008 2007£000 £000

Aggregate emoluments 717 545Aggregate gains made on the exercise of share option and share-based awards – 286Company contributions to money purchase pension schemes 8 7

725 838

The key management figures given above include directors. The company has no employees (2007: nil). The aggregate directors’emoluments for 2007 include those of Victor Young since his appointment as a director on 13 February 2007.

9 Pension costs

The group pays into defined contribution schemes for certain directors and employees.

The total pension costs for the periods were:Group

2008 2007£000 £000

Pension costs 380 291

Accruals include £32,000 relating to pension costs (2007: £29,000).

10 Finance income and expenseGroup

2008 2007£000 £000

Bank interest receivable 897 1,440Other interest receivable – 30

Finance income 897 1,470

Bank interest payable – –Other interest payable 14 –

Finance expense 14 –

Net finance income recognised in the income statement 883 1,470

FinancialStatem

entsandNotes


11 Taxation2008 2007£000 £000

UK– adjustment in respect of prior periods (research and development credit) (931) (1,673)Foreign tax– on profits for the year 35 14– irrecoverable withholding tax 17 –Release of deferred tax liability on acquisitions (256) (35)

(1,135) (1,389)

The research and development credit of £931,000 in 2008 includes the claims for 2007, (2007: £1,368,000 included the credit for2005 and 2006). These claims are included within amounts receivable when there is certainty around recoverability and as they wereoutstanding at 31 December 2008 (2007: £1,368,000).

Factors affecting the tax charge for the yearThe current tax assessed for the period is lower than the standard rate of corporation tax in the UK (28.5%).

2008 2007£000 £000

Loss on ordinary activities before tax (8,436) (3,893)

Loss on ordinary activities multiplied by the standard rate ofcorporation tax in the UK of 28.5% (2007: 30%) (2,404) (1,168)Expenses not deductible for tax purposes 184 433Deferred tax assets not recognised 1,965 714Variations arising from overseas tax rates not equal to UK rate 51 –Other (including research and development credit) (931) (1,368)

Current tax credit for the year (1,135) (1,389)

12 Loss attributable to members of the parent company2008 2007£000 £000

Loss in the accounts of the parent company (8,252) (2,558)

As permitted under Section 230 of the Companies Act 1985, the company has elected not to present the parent companyincome statement.


FinancialStatem

entsandNotes


13 Loss per ordinary share

Basic loss per share is calculated by dividing the loss attributable to ordinary shareholders by the weighted average number of ordinaryshares in issue during the year, excluding those held in the Employee Benefit Trust.

For diluted loss per share, the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potentialordinary shares. Diluted loss per share and the basic loss per share are the same for the years ended 31 December 2008 and31 December 2007 as in these loss-making periods the effect of potential dilutive ordinary shares would be anti-dilutive.

Loss per share2008 2007Basic Basic

weighted weightedaverage averagenumber Loss number Loss

Loss of shares per share Loss of shares per share£000 Number p £000 Number p

Loss per share (7,301) 147,965,359 (4.93) (2,504) 148,031,270 (1.69)

The company has issued 14,868,616 options over ordinary 0.1p shares, and 2,728,915 ordinary 0.1p shares for the acquisition ofSonic Focus that could potentially dilute basic earnings per share in the future, but were not included in the calculation of dilutedearnings per share because they are antidilutive for the periods presented.

2008 2007Number Number

Issued ordinary shares at 1 January 152,703,048 150,857,089Effect of own shares held in Employee Benefit Trust (4,737,689) (4,073,207)Effect of share options exercised – 1,247,388Weighted average number of ordinary shares at 31 December 147,965,359 148,031,270

FinancialStatem

entsandNotes


14 Intangible assetsDeveloped and Brand Intangible

Computer in process Customer name and assetsGoodwill software technology relationships other Total

Group £000 £000 £000 £000 £000 £000

CostAt 1 January 2007 13,580 6,046 668 – 78 20,372Additions – 644 271 – – 915Acquisitions 3,414 – 2,963 404 150 6,931Exchange difference 17 – (12) – – 5

At 31 December 2007 17,011 6,690 3,890 404 228 28,223

Additions – 2,036 249 – – 2,285Acquisitions (note 31) 2,042 7 1,275 317 445 4,086Exchange difference 96 – (6) – – 90

At 31 December 2008 19,149 8,733 5,408 721 673 34,684

Amortisation and impairment lossesAt 1 January 2007 (13,580) (5,322) (550) – (77) (19,529)Charge for the year – (610) (508) (76) (17) (1,211)Exchange difference – 19 4 – – 23

At 31 December 2007 (13,580) (5,913) (1,054) (76) (94) (20,717)

Charge for the year – (855) (1,127) (184) (102) (2,268)Exchange difference – (8) (90) (4) – (99)

At 31 December 2008 (13,580) (6,776) (2,271) (261) (196) (23,084)

Net book valueAt 1 January 2007 – 724 118 – 1 843At 31 December 2007 3,431 777 2,836 328 134 7,506

At 31 December 2008 5,569 1,957 3,137 460 477 11,600

Capitalised R&D, which is part of “developed and in process technology”, is the only internally-generated intangible asset, and representsstaff costs incurred on the specific products that meet the criteria detailed in note 3 (g).

Key method of estimating the fair value of intangible assetsThe key method of estimating the fair value of the intangible assets is the income approach. The income approach values an assetbased on the earnings capacity of the asset. This approach values an asset based on the future cash flows that could potentially begenerated by the asset over its estimated remaining life. The future cash flows are discounted to their present value utilising a discountrate which would provide sufficient return to a potential investor to estimate the value of the subject asset. The present value of thecash flows over the life of the asset is summed to equal the estimated value of the asset. The income approach was used to value allof the identified intangible assets.

The discount rate applied to the above cash flows for each of the intangible assets are given in the following table:

Sonic Teja Tenison AlarityFocus Technologies Automation Corporation

% % % %

Developed core technology 18 26 26 20In process technology 22 – 30 –Customer relationships 20 28 28 20Brand name 20 28 – 20


FinancialStatem

entsandNotes


14 Intangible assets continued

Review of the carrying value of goodwillManagement consider the group to have only one cash generating unit (“CGU”). The recoverable amount of the goodwill isdetermined based on a value-in-use calculation. This calculation uses a pre-tax cashflow projection based on financial forecastsapproved by management over a five-year period. Cash flows beyond the five-year period are calculated in perpetuity. Key assumptionsused are:

Revenue growth rate 20% per annum for five yearsOperating expenses growth rate 13.5% per annum for five yearsPre-tax discount rate 25%Perpetual growth rate 2% per annum

Management determined these growth rates based on past performance and expectations of future market growth.

Sensitivity analysis on the carrying value of goodwillIf the estimated growth rate applied to the revenue forecasts had been 7% lower than management estimates, i.e. 13% andnot 20%, the group would have recognised a £535,000 impairment charge.

If the estimated operating expenses growth rate applied to the forecast had been 8% higher than management estimates,i.e. 21.5% and not 13.5%, the group would have recognised a £325,000 impairment charge.

Domain Computername software Total

Company £000 £000 £000

CostAt 1 January 2007 and 31 December 2007 78 9 87

At 1 January 2008 and 31 December 2008 78 9 87

AmortisationAt 1 January 2007 (77) (9) (86)Charge for the year (1) – (1)

At 31 December 2007 (77) – (87)

Charge for the year – – (1)

At 31 December 2008 (78) (9) (87)

Net book valueAt 1 January 2007 1 – 1

At 31 December 2007 – – 1

At 1 January 2008 – – –

At 31 December 2008 – – –

FinancialStatem

entsandNotes


15 Property, plant and equipmentLeasehold Fixtures, fitting Computer

improvement and equipment hardware TotalGroup £000 £000 £000 £000

At 1 January 2007 81 471 2,030 2,582

Acquisitions 8 21 90 119Additions 570 5 927 1,502Disposal (44) (160) (194) (398)Exchange difference – 38 – 38

At 31 December 2007 615 375 2,853 3,843

Acquisitions 9 18 56 83Additions 72 43 1,059 1,174Disposal – – (158) (158)Disposal from reorganisation (295) – – (295)Exchange difference (9) (19) 320 292

At 31 December 2008 392 417 4,130 4,939

DepreciationAt 1 January 2007 (31) (458) (1,669) (2,158)Charge for the year (88) (26) (361) (475)Disposal 27 159 192 378Exchange difference (4) (2) (45) (51)

At 31 December 2007 (96) (327) (1,883) (2,306)

Charge for the year (149) (26) (692) (867)Disposal – – 165 165Disposal from reorganisation 74 – – 74Exchange difference 13 (2) (46) (35)

At 31 December 2008 (158) (355) (2,456) (2,969)

Net book valueAt 1 January 2007 50 13 361 424

At 31 December 2007 519 48 970 1,537

At 31 December 2008 234 62 1,674 1,970

The group leases some computer equipment under finance leases. At 31 December 2008 the net carrying amount of leasedequipment was £172,900 (2007: none). Deprecition charge during the year for equipment under finance lease was £65,000 (2007: nil).


FinancialStatem

entsandNotes


15 Property, plant and equipment continued

During the year the group carried out a restructure which resulted in the identification of excess office space at the St Albansand San Jose locations. As part of the review any leasehold improvements associated with that office space has been reviewed forimpairment provision. The company’s intention is to sub-let any excess space, however, given the current economic environmentmanagement has decided that these assets should be impaired to a coverable amount of £nil. As such an impairment charge of£146,930 has been taken in the provision set up during the year ended 31 December 2008 (2007: nil).

Fixtures, fitting Computerand equipment hardware Total

Company £000 £000 £000

CostAt 1 January 2007 and 31 December 2007 2 11 13

At 1 January 2008 and 31 December 2008 2 11 13

DepreciationAt 1 January 2007 (2) (10) (12)Charge for the year – (1) (1)

At 31 December 2007 (2) (11) (13)

At 31 December 2008 (2) (11) (13)

Net book valueAt 1 January 2007 – 1 1

At 31 December 2007 and 31 December 2008 – – –

FinancialStatem

entsandNotes


16 Investments

Non-current assetsGroup Company

2008 2007 2008 2007£000 £000 £000 £000

Shares in Group undertakingsAt 1 January – – 11,093 4,660Additions in year – – 9,450 16,476Impairment – – (10,081) (10,043)

At 31 December – – 10,462 11,093

The book value of investments in subsidiaries includes long-term funding balances treated as equity, which have subsequently beenadjusted to reflect the recoverable amount. All subsidiaries have been included in the consolidation.

Company fixed asset investments includes the following investments in subsidiary undertakings:

Nature of business % holding Country of incorporation

Direct holdingARC International Overseas Holdings Limited Holding company 100 United KingdomARC International (UK) Limited Trading 100 United Kingdom

Indirect holdingARC International US Holdings, Inc. Holding company 100 United StatesARC International Nova Scotia Holdings Limited Holding company 100 CanadaARC International Nova Scotia Limited Holding company 100 CanadaARC International Software Stacks, Inc. Trading 100 CanadaARC International I.P., Inc. Trading 100 United StatesARC International Intellectual Property, Inc. Trading 100 United StatesARC International Nashua, Inc. Trading 100 United StatesARC International Korea Limited Trading 100 KoreaARC International Cambridge Limited (formerly Tenison Technology Limited) Trading 100 United KingdomTenison Design Automation Inc. Trading 100 United StatesAlarity Corporation Inc. Trading 100 United StatesAlarity SPb Ltd. Trading 100 RussiaARC International Israel Limited Trading 100 IsraelSonic Focus Inc. Trading 100 United StatesARC Cores Limited Dormant 100 United Kingdom

On 14 December 2007 ARC International France SARL was dissolved. On 11 February 2008, the Company purchased Sonic Focus Inc.

Current assetsGroup Company

2008 2007 2008 2007£000 £000 £000 £000

Short-term investmentsAt 1 January 11,145 13,500 11,145 13,500Net movement in investments (3,108) (2,355) (3,108) (2,355)

At 31 December 8,037 11,145 8,037 11,145

Short-term investments, which comprise fixed term money market deposits with the banks, have interest rates of 2.25% to 6.38%(2007: 3.814% to 5.17%) and have an average maturity of 80 days (2007: 46 days).


FinancialStatem

entsandNotes


17 Investment in associateGroup Company

2008 2007 2008 2007£000 £000 £000 £000

1 January 414 – – –Investment in associate 37 436 – –Share of (loss) (8) (22) – –

31 December 443 414 – –

As at 31 December 2008, the group has made a cash investment of £472,000 in Adaptive Chips, Inc (2007:£286,000). The group hasno further equity commitments in the foreseeable future (2007:£150,000).

The results of Adaptive Chips, and its aggregated assets and liabilities are:

2007 Country of Assets Liabilities Revenues Loss InterestName incorporation £000 £000 £000 £000 %

Adaptive Chips Inc. United States 147 10 – 114 19.9

2008 Country of Assets Liabilities Revenues Loss InterestName incorporation £000 £000 £000 £000 %

Adaptive Chips Inc. United States 604 227 674 40 19.9

Adaptive Chips, Inc. is a privately owned company based in San Jose with principal activities in India, that was established in 2007.The business objective of Adaptive Chips is to provide custom engineering services to the semiconductor industry. During 2007and 2008 Adaptive Chips’ sole customer has been the group. As part of the group restructure the group has increased its financialrelationship with Adaptive Chips and as at the 31 December 2008 has 50 engineers working on ARC-based projects.

The group considers that the investment in Adaptive Chips be accounted for as an associate because the group has board representationwhich gives significant influence beyond the 19.9% shareholding.

18 Financial instruments by category

The accounting policies for financial instruments have been applied to the line items below:

Group CompanyLoans and Loans and Loans and Loans andreceivables receivables receivables receivables

2008 2007 2008 2007£000 £000 £000 £000

Assets as per balance sheetTrade and other receivables 4,132 4,010 132 –Short-term investments 8,037 11,145 8,037 11,145Cash and cash equivalents 4,639 10,100 2,948 8,063

16,808 25,255 11,117 19,208

All trade and other payables are held at amortised cost.

FinancialStatem

entsandNotes


19 Cash and cash equivalentsGroup Company

2008 2007 2008 2007£000 £000 £000 £000

Cash at bank and in hand 1,693 2,046 10 9Short-term bank deposits 2,938 8,054 2,938 8,054

4,631 10,100 2,948 8,063

The effective interest rate on short-term deposits was 6.28% (2006: 5.15%) and these deposits have an average maturity of five days(2006: six days).

20 InventoriesGroup Company

2008 2007 2008 2007£000 £000 £000 £000

Work in progress – 22 – –Finished goods – 50 – –

– 72 – –

The cost of inventories recognised as an expense and included in cost of sales amounted to £23,000 (2007: £9,000).Computer hardware with a value of £49,000 (2007:£122,000) was capitalised during the year.

21 Trade and other receivablesGroup Company

2008 2007 2008 2007Non-current assets £000 £000 £000 £000

Other receivables 442 417 – –

Group Company2008 2007 2008 2007

Current assets £000 £000 £000 £000

Trade receivables 3,253 3,246 – –Less provision for impairment of receivables (137) (55) – –

Trade receivables – net 3,116 3,191 – –Other receivables 437 347 132 –Prepayments and accrued income 507 703 59 193

4,060 4,241 191 193


FinancialStatem

entsandNotes


21 Trade and other receivables continued

Movements in the group provision for impairment of trade receivables are as follows:2008 2007£000 £000

At 1 January 55 113Provision for receivables impairment 82 44Receivables written-off during the year as uncollectible – (102)

At 31 December 137 55

All non-current receivables are due within five years from the balance sheet date. The carrying amounts of trade and other receivablesapproximates their fair value.

As of 31 December 2008, trade receivables can be analysed as follows:Group

2008 2007£000 £000

Current 2,946 2,696Past due but not impaired 170 495Individually impaired amounts 137 55

3,253 3,246

Based on historic default rates, the group believes that no impairment allowance is necessary in respect of trade receivables notpast due; 83% of the balance relates to customers that have a good payment record with the group.

22 Loans and borrowingsGroup Company

2008 2007 2008 2007Non-current liabilities £000 £000 £000 £000

Finance lease liabilities 99 – – –

Group Company2008 2007 2008 2007

Current liabilities £000 £000 £000 £000

Finance lease liabilities 78 – – –

Finance lease liabilities are payable as follows:2008 2007

Future Present value Future Present valueminimum of minimum minimum of minimum

lease payment Interest lease payments lease payment Interest lease paymentsExpiry date £000 £000 £000 £000 £000 £000

Not later than one year – – – – – –Later than one year but not more than five 190 13 177 – – –Over five years – – – – – –

190 13 177 – – –

FinancialStatem

entsandNotes


23 Trade and other payablesGroup Company

2008 2007 2008 2007Non-current liabilities £000 £000 £000 £000

Accruals 101 126 – –

Group Company2008 2007 2008 2007

Current liabilities £000 £000 £000 £000

Trade payables 768 743 – –Other taxes and social security costs 292 339 – –Accruals 4,262 3,420 133 221Other creditors 756 – – –Deferred revenue 1,451 1,227 – –

7,529 5,729 133 221

The carrying amount of trade and other payables approximates their fair value.

Other creditors of £756,000 represents the value of shares to be issued as consideration arising from the acquisition of Sonic Focus Inc.as described in note 31.

24 Provision for other liabilities and chargesOffice

Onerous restoration TotalRestructure leases costs provision

Group £000 £000 £000 £000

At 1 January 2008 – – 183 183Provisions made in the year 1,131 1,142 60 2,333Utilised (790) – (12) (802)Foreign exchange 15 – – 15

At 31 December 2008 356 1,142 231 1,729

Non-current – 778 80 858Current 356 364 151 871

RestructureIn September 2008 the group committed to a plan of restructuring of the group’s organisation. Following the announcement of theplan the group recognised a provision of £2,273,000 for expected restructuring costs, including onerous leases, contract terminationcosts, consulting fees and employee termination benefits. Estimated costs were based on the terms of the relevant contracts.£790,000 was charged against the provision in 2008. The restructuring is expected to be completed in early 2009.

Onerous leasesAs part of the restructuring above the group had non-cancellable leases for office space which the group had ceased to use.The lease on the office space in San Jose expires in 2011 and the lease on the office space in St Albans expires in 2012. The obligationfor the discounted future payments (at a risk free rate of 4.5%), net of expected rental income, has been provided for. In both casesthe company is seeking to sublet the space, but due to recent economic conditions, the expected rental income is nil.

Office restoration costsThe group has entered into property leases whereby the company is responsible for the restoration of the office space back to thecondition in which it was let. The company vacated a property in Elstree UK in July 2007, and had made a provision for these restorationcosts. There is currently uncertainty as to the timing and amount of the restoration payments. The company has established a provisionto cover the restoration costs for the office space in St Albans UK and provides a set amount each year so that at the end of the leasethe provision will cover the expected restoration costs.


FinancialStatem

entsandNotes


25 Deferred taxGroup Company

2008 2007 2008 2007Unrecognised deferred tax asset £000 £000 £000 £000

Fixed assets timing differences 1,569 2,236 2 2Tax loss carry forwards 22,717 17,548 – –Other timing differences 565 340 – –

Assets 24,851 20,124 2 2

Intangibleassets

Recognised deferred tax liabilities £000

As at 1 January 2007 –Arising on acquisition 524Credited to the income statement (35)

As at 31 December 2007 489

Arising on acquisition 564Credited to the income statement (256)Foreign exchange 276

As at 31 December 2008 1,073

Deferred tax liability is disclosed in:Non current liabilities 1,073

Deferred tax liability arises on the recognition of intangible assets at acquisition and is released through the income statement as theamortisation of the intangible assets is recognised.

The directors do not consider it appropriate to recognise a deferred tax asset at the balance sheet date due to uncertainty as to thespecific timing of suitable taxable profits against which the asset would crystallise. The losses set out above represent those reportedto the relevant taxation authorities in the countries within which the group operates. As these losses become available to offset againstfuture taxable profits, there remains a risk that they may be disallowable upon review and challenged by the relevant taxation authority.

Where the losses expire for tax purposes, they expire as follows:2008 2007

Year £000 £000

2021 16,129 9,2332022 10,094 7,3172023 10,962 7,9322025 630 1,1272026 147 912028 3,234 –

Total 41,196 25,700

Total of losses that do not expire 37,237 38,864

FinancialStatem

entsandNotes


26 Called-up share capital2008 2007

Group and company £000 £000

Authorised500,000,000 ordinary shares, nominal value 0.1p 500 500

2008 2007Shares £000 Shares £000

Allotted, called-up and fully paidAt 1 January 152,703,048 153 150,857,089 151Allotted under share option schemes – – 1,845,959 2

At 31 December 152,703,048 153 152,703,048 153

The company has issued the following to employees under the share option scheme:2008 2007

Number of shares – 1,845,959Nominal value – £1,846Consideration received – £429,330

Potential issue of ordinary sharesThe company has issued options to subscribe for shares in the company at prices ranging from 0.1p to 190p under the share optionschemes and performance share plan (LTIP). All share options are granted at the market value on date of grant (except the the LTIP,as noted in the remuneration report).

The number of shares subject to options, the periods in which they were granted and the periods in which they may be exercisedare given below:

Weighted Weightedaverage average

exercise price 2008 exercise price 2007Year of grant p Exercise period Numbers Year of grant p Exercise period Numbers

1999 23.22 2000-2009 3,413,332 1999 23.22 2000-2009 3,413,3322000 67.54 2001-2010 356,946 2000 75.09 2001-2010 440,5362001 53.00 2002-2011 312,700 2001 52.54 2002-2011 392,7002002 30.66 2003-2012 2,049,800 2002 30.05 2003-2012 2,604,8002003 23.33 2004-2013 120,000 2003 23.34 2004-2013 158,0002004 21.79 2005-2014 3,185,308 2004 22.48 2005-2014 3,803,1622005 41.97 2006-2015 964,507 2005 41.32 2006-2015 1,732,0162006 26.17 2007-2016 2,166,000 2006 26.20 2007-2016 2,602,0002007 39.10 2008-2017 2,085,605 2007 38.21 2008-2017 2,748,0782008 15.90 2009-2018 4,218,500

18,872,698 17,894,624

In addition shares will be issued to statisfy part of the consideration on the acquisition of Sonic Focus Inc (see note 31).


FinancialStatem

entsandNotes


27 Share-based payments

The company operates a share option programme for all permanent employees of the group. The company has the following plans:

Executive Share Option Plans (ESOPs) Long Term Incentive Plan (LTIP)Inland Revenue Approved Executive Share Option Scheme (approved) Performance Share PlanUnapproved Executive Share Option Scheme (unapproved)Incentive Stock Option sub plan (ISO)

Other option plansSharesave schemeShare incentive plan (formerly All Employee Share Ownership Plan)Non-Employee Stock Option plan

There have been no grants in 2008 (2007: nil) under the “other option plans”. Details of the Performance Share Plan are contained inthe Remuneration Committee Report on page 23. There were two grants during the year and the details are shown in the table below.

Options are granted under the ESOPs with a fixed exercise price equal to the market price of the shares under option at the dateof grant. The contractual life is ten years. The company makes an initial grant to employees when they first join the company andoperates an “evergreening” process where employees’ options are reviewed each year to ensure that they are at the appropriate levelfor their position and experience. The grants are usually within one times salary. Options become exercisable after three years for theapproved scheme and 25% after the first year and then monthly over the next 36 months for the unapproved and ISO. Exercise ofan option is subject to continued employment. Options were valued using the Black-Scholes option-pricing model. The fair value peroption granted and the assumptions used in the calculation are as follows:

Grant date 25/2/08 25/2/08 31/3/08 31/3/08 14/5/08 14/5/08 14/5/08 11/8/08 11/8/08 29/9/08 29/9/08 29/9/08 08/12/08 08/12/08

Share price at grant 27.25p 27.25p 22.5p 22.5p 23.5p 23.5p 23.5p 18p 18p 19.5p 19.5p 19.5p 12.75p 12.75p

Exercise price 27.25p 27.25p 22.5p 22.5p 23.5p 0.1p 23.5p 18p 18p 19.5p 0.1p 19.5p 12.75p 12.75p

number of employees 16 7 1 1 1 3 1 3 1 17 2 7 2 2

Share under option 907,743 198,091 15,000 9,000 72,341 700,000 127,659 30,000 21,000 1,471,154 600,000 394,846 100,000 70,000

Vesting period (years) 1-4 3 1-4 3 1-4 3 3 1-4 3 1-4 3 3 1-4 3

Expected volatility 27% 27% 27% 27% 27% 27% 27% 28% 28% 29% 29% 29% 34% 34%

Option life (years) 10 10 10 10 10 10 10 10 10 10 10 10 10 10

Expected life (years) 3-6 5 3-6 5 3-6 3 5 3-6 5 3-6 3 5 3-6 5

Risk free rate 4.24%- 4.41% 3.81%- 4.41% 4.58%- 4.61% 4.61% 5.25%- 5.31% 5.11%- 5.14% 5.14% 2.67%- 3.23%4.49% 4.05% 4.65% 5.43% 5.25% 3.41%

Expected dividends 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Expected lapse rate 11 20 11 0 0 0 20 11 0 0 0 0 0 0

Fair value of option 6.51p- 8.85p 5.24p- 7.08p 5.66p- 23.5p 7.66p 4.75p- 6.35p 5.20p- 19.5p 6.96p 3.33p- 4.48p9.88p 7.92p 8.55p 7.04p 7.70p 4.98p

Grant date 16/2/07 16/2/07 3/4/07 3/4/07 15/5/07 3/8/07 3/8/07 7/9/07 27/9/07 27/9/07

Share price at grant 46.75p 46.75p 46p 46p 57.50p 47.5p 47.5p 44.75p 48.25p 48.25p

Exercise price 46.75p 46.75p 46p 46p 0.1p 47.5p 47.5p 44.75p 48.25p 48.25p

Number of employees 5 6 22 1 3 14 14 1 4 1

Share under option 88,000 67,000 1,090,000 7,500 506,578 423,500 247,000 10,000 310,000 28,500

Vesting period (years) 1-4 3 1-4 3 3 1-4 3 1-4 1-4 3

Expected volatility 26% 26% 25% 25% 25% 26% 26% 26% 26% 26%

Option life (years) 10 10 10 10 10 10 10 10 10 10

Expected life (years) 3-6 5 3-6 5 5 3-6 5 3-6 3-6 5

Risk-free rate 4.96%- 5.03% 5.13%- 5.18% 5.18% 5.30%- 5.35% 5.68%- 5.53%- 5.56%

5.16% 5.31% 5.47% 5.9% 5.64%

Expected dividends 0 0 0 0 0 0 0 0 0 0

Expected lapse rate 11% 20% 6% 0% 0% 11% 20% 0% 0% 0%

Fair value of option 11.35p- 11.16p- 11.76p- 11.37p- 12.20p- 16.56p

17.01p 15.33 16.79p 15.10p 57.50p 17.70p 15.93p 17.12p 18.43p

FinancialStatem

entsandNotes


27 Share-based payments continued

The expected volatility is based on the historical volatility over the previous four years (2007: three years) before the grant concerned.The expected life is the expected average period to exercise. The risk-free rate of return is the yield on zero-coupon UK governmentbonds of a term consistent with the assumed option life.

2008 2007Weighted Weightedaverage averageexercise exercise

price priceNumber pence Number pence

Options outstanding at 1 January 17,894,624 30.47 18,305,226 28.27Options granted in the year 4,716,834 15.90 2,778,078 38.30Options exercised in the year – – (2,116,359) 23.83Options expired in the year (2,186,268) 35.42 (28,999) 35.85Options forfeited in the year (1,552,492) 30.07 (1,043,322) 25.43

Options outstanding at 31 December 18,872,698 26.53 17,894,624 30.47

Exercisable at 31 December 11,723,210 29.04 12,122,136 28.63

2008 2007Weighted Weightedaverage Weighted average Weighted

Range of exercise prices exercise price Number of average remaining life exercise price Number of average remaining lifepence pence shares Expected Contractual pence shares Expected Contractual

0.10-20.00 11.70 5,144,105 3.22 6.73 11.28 2,051,578 1.88 3.1520.01-30.00 24.37 7,846,608 1.80 5.76 24.55 8,479,462 2.51 6.3030.01-40.00 32.79 2,762,832 1.73 2.03 33.02 3,062,332 2.74 3.4440.01-60.00 45.92 2,930,207 2.66 7.15 45.71 4,038,716 3.56 8.0960.01-190.00 103.18 188,946 1.67 1.67 107.20 262,536 2.61 2.61

18,872,698 2.31 5.65 17,894,624 2.72 5.80

There were no share option exercises in the year, the weighted average share price during the year for options exercised during 2007was 44.56p.

The total charge for the year relating to employee share-based payments was £252,040 (2006: £286,438), all of which related toequity-settled share-based payment transactions.


FinancialStatem

entsandNotes


28 Movement in shareholders’ equityCumulative

Share Share Other translation Retainedcapital premium reserves adjustment earnings Total

Group £000 £000 £000 £000 £000 £000

At 1 January 2007 151 3,256 60,751 (457) (31,660) 32,041Shares issued 2 427 – – – 429Change in value of ESOP reserve – – – – 75 75Share-based award reserve – – 286 – – 286Exchange gain/(loss) – – – (54) – (54)(Loss) for the year – – – – (2,504) (2,504)

At 31 December 2007 153 3,683 61,037 (511) (34,089) 30,273

Shares issued – – – – – –Change in value of ESOP reserve – – – – (768) (768)Share-based award reserve – – 252 – – 252Exchange gain/(loss) – – – (951) – (951)(Loss) for the year – – – – (7,301) (7,301)

At 31 December 2008 153 3,683 61,289 (1,462) (42,158) 21,505

Company

At 1 January 2007 151 3,256 60,287 – (31,653) 32,041Shares issued 2 427 – – – 429Change in value of ESOP reserve – – – – 75 75Share-based award reserve – – 286 – – 286(Loss) for the year – – – – (2,558) (2,558)

At 31 December 2007 153 3,683 60,573 – (34,136) 30,273

Shares issued – – – – – –Change in value of ESOP reserve – – – – (768) (768)Share-based award reserve – – 252 – – 252(Loss) for the year – – – – (8,252) (8,252)

At 31 December 2008 153 3,683 60,825 – (43,156) 21,505

Other reserves comprise:Group Company

2008 2007 2008 2007£000 £000 £000 £000

Cancellation of share premium in 2003 arising from the capitalreduction set out in the court order approved on 2 April 2003– Distributable reserve 25,171 25,171 25,171 25,171– Non-distributable reserve 33,900 33,900 33,900 33,900

Fair value of options issued as consideration for the acquisitionof ARC International Nashua, Inc (formerly VAutomation Inc): 42 42 42 42Share-based awards reserve 1,907 1,655 1,443 1,191Merger reserve 107 107 107 107Capital redemption reserve 162 162 162 162

61,289 60,751 60,825 60,573

FinancialStatem

entsandNotes


29 Commitments

At the year end, the group had total commitments under non-cancellable operating leases as follows:

2008 2007Land and Land andbuildings Other buildings Other

Expiry date £000 £000 £000 £000

Not later than one year 981 16 690 11Later than one year but not more than five 2,030 – 2,165 –Over five years 960 – 1,281 –

3,971 16 4,136 11

The group leases a number of office properties under operating leases. The lease typically runs for a period of ten years, sometimeswith a break clause after five years. Some leases have rent reviews after five years and some have automatic review amounts built intothe lease payment profile.

The group currently has vacant office space available to sublet but, as of the balance sheet date, the group has not entered into anysublease arrangements.

The company had no financial commitments (2007: £nil). The group and the company have £nil and £nil capital commitmentsrespectively at the year end (2007: £200,000 and £nil respectively). The parent company acts as guarantor to the capital commitmentsof the group as at 31 December 2007.

30 Contingent liabilities

In 2008 two licencees independently contacted ARC to request assistance in responding to their customers who were contacted bypatent holders. The company has requested additional information and expressed a willingness to assist the licencees in respondingto these enquiries.

The directors are of the opinion and have been so advised that the risk to the company in relation to these matters is remote andno provision has been made in the accounts.


FinancialStatem

entsandNotes


31 Business combinations

The group purchased 100% of the voting shares of Sonic Focus Inc. on February 11, 2008 for a total consideration of £2,829,000.

All assets and liabilities were recognised at their respective fair values. The residual excess over the net assets acquired is recognisedas goodwill.

The initial accounting for the acquisition was determined provisionally. Any adjustments to the fair values of the acquired assetsand liabilities will be recorded within 12 months of the acquisition date.

From the date of acquisition to 31 December 2008, the acquisition contributed £428,000 to revenue, £1,236,000 to the operatingexpenses (excluding amortisation), £333,000 of amortisation of intangible assets, and £1,141,000 to net loss.

The results of operations, as if the acquisition had been made at the beginning of the period, would be as follows:£000

Revenue 17,129Net loss (7,310)

Carrying values Provisionalpre acquisition Fair values

£000 £000

Intangible fixed assets 22 2,037Property, plant and equipment 53 53Trade and other receivables 69 46Cash and cash equivalents 68 68Trade and other payables (780) (780)Deferred Tax – (564)

Net assets acquired (568) 860Goodwill 1,969

Consideration 2,829

Consideration satisfied by cash paid in the period 1,794Deferred consideration to be satisfied by issuing shares in the future 756Transaction costs 279

2,829

Part of the cost of the Sonic Focus acquisition will be satisfied in shares. 2,728,915 shares will be issued in two equal installments:15 months and 30 months after the date of acquisition. The fair value of these instruments is shown in the table above and has beencalculated by reference to the ten-day average closing share price prior to the completion of the acquisition on 11 February 2008 andconverted into US dollars using the average interbank exchange rate over the same ten-day period.

Goodwill represents the value of the assembled work force and other potential future economic benefit that is anticipated will bederived from the integration of the technology offered by Sonic Focus with the existing products of the group.

FinancialStatem

entsandNotes



31 Business combinations continued

The outflow of cash and cash equivalents in the period on the acquisition of Sonic Focus Inc is calculated as follows:£000

Cash consideration 1,794Transaction costs 279Cash acquired (68)

2,005

Total cash and cash equivalents paid during the period for acquisitions include £467,000 for deferred consideration in respect toAlarity Inc.

The intangible assets acquired as part of the acquisition of Sonic Focus Inc can be analysed as follows:£000

Developed and in-process technology 1,275Customer relationships 317Brand name and other 445

2,037

Goodwill on acquisitionsThe group purchased 100% of the voting shares of Tenison Technology EDA Limited on 14 June 2007 for a total consideration of£1,107,000, 100% of the voting shares of Alarity Corporation Inc on 21 September 2007 for a total consideration of £3,048,000 andcertain assets of Teja Technologies Inc on 30 March 2007 for £2,461,000. The goodwill arising from these acquisitions is shown below:

Sonic Tenison Teja AlarityFocus Design Technologies Corporation Total£000 £000 £000 £000 £000

As at 1 January 2007 – – – – –Acquired – 992 478 1,944 3,414Foreign exchange movement – – – 17 17

As at 31 December 2007 – 992 478 1,961 3,431Increase in 2008 1,969 – – 73 2,042Foreign exchange movement 48 – – 48 96

As at 31 December 2008 2,017 992 478 2,082 5,569

32 Related party transactions

Transactions related to directors and key management are shown in note 8.

The group has transactions with the associate company, Adaptive Chips Inc. Adaptive Chips provides engineering services on an arm’slength basis amounting to £865,000 (2007: £nil) to the group. As at 31 December 2008 the group has £183,000 payable outstandingto Adaptive Chips.


FinancialStatem

entsandNotes

FinancialStatem

entsandNotes


Year ended Year ended Year ended Year ended Year ended31 December* 31 December* 31 December* 31 December* 31 December

2008 2007 2006 2005 2004£000 £000 £000 £000 £000

Revenue 17,047 14,401 13,411 10,494 12,162Cost of sales (1,294) (1,437) (1,591) (1,638) (1,661)

Gross profit 15,753 12,964 11,820 8,856 10,501Operating expenses (25,064) (18,305) (16,045) (15,804) (20,394)

Operating loss (9,311) (5,341) (4,225) (6,948) (9,893)Exceptional gain on business disposal – – – – 2,578Finance income 897 1,470 1,509 1,530 1,443Finance expenses (14) – – – –Share of loss of associate (8) (22) – – –

Loss before income tax (8,436) (3,893) (2,716) (5,418) (5,872)Tax credit 1,135 1,389 1,583 1,077 790

Loss for the year attributable to equity shareholders (7,301) (2,504) (1,133) (4,341) (5,082)

Basic and diluted loss per share (p) (4.93) (1.69) (0.78) (3.05) (3.67)

* under IFRS

Five YearSummary

Financial calendar

Annual General Meeting 22 April 2009Announcement of results for the six months to 30 June August 2009

Analysis of ordinary shareholders as of 31 December 2008Shareholdinganalysis

Number Holders HoldingDescription of holders % Holding %

Private shareholders 1,206 79.66 5,009,736 3.28Nominee companies 267 17.64 144,873,135 94.87Limited companies 23 1.52 793,480 0.52Bank and bank nominees 9 0.59 1,522,038 0.99Other 9 0.59 504,654 0.33

Total 1,514 152,703,048

Range of holdingsShareholdinganalysis

Number Holders HoldingRange (up to) of holders % Holding %

100 58 3.83 4,099 0.01200 106 7.00 17,133 0.01500 279 18.43 99,528 0.071,000 266 17.57 231,123 0.152,000 234 15.46 377,345 0.255,000 250 16.51 794,316 0.5210,000 91 6.01 699,040 0.4650,000 135 8.92 3,379,058 2.21100,000 31 2.05 2,129,835 1.39500,000 28 1.85 5,972,310 3.911,000,000 8 0.53 5,990,710 3.925,000,000 17 1.12 44,702,201 29.2710,000,000 9 0.59 65,413,050 42.8450,000,000 2 0.13 22,893,300 14.99

Total 1,514 152,703,048


ShareholderInformation

AdditionalInformation

Joint company secretariesTom Huppuch, Charles Rendell

Registered officeVerulam PointStation WaySt AlbansHertfordshire AL1 5HE

The company is a public limited company, plc,Registered in England and Wales No. 3592130.The company is listed on the main market ofthe London Stock Exchange.

www.ARC.com

RegistrarCapita RegistrarsThe Registry, Beckenham RoadBeckenham, Kent BR3 4TUTel +44 (0)20 8639 2000Fax +44 (0)20 8658 3430

Shareholders should contact the Registrarin connection with changes of name andaddress, lost share certificates and thetransfer of shares.

Principal bankersLloyds TSB Bank plc25 Gresham StreetLondon EC2V 7HN

Royal Bank of Scotland plc135 BishopsgateLondon EC2M 3UR

BrokersJefferiesVintners Place68 Upper Thames StreetLondon EC4V 3BJ

Legal adviserMacfarlanes10 Norwich StreetLondon EC4A 1BD

Registered auditorsKPMG Audit Plc31 Fishpool StreetSt AlbansHerts AL3 4RF

Designed and produced by 85FOUR. Printed in England by Cousin ISO 14001 environmentally accredited printers.

This report is printed on Megamatt paper, which is produced from pulp which is 50% chlorine free and 50% recycled fibre,from a sustainable and renewable forest source, and is therefore an ecologically sound use of raw and recycled resources.

About ARC International plcARC International is a world-leading provider of consumer IP to OEM and semiconductor companies globally. ARC’s award-winning, vertically integrated audio and video solutions enable high quality multimedia content to be captured, shared, andplayed on a wide range of electronics devices. ARC’s 150+ customers collectively ship hundreds of millions of ARC-Based™ chipsannually in products such as PCs and laptops, digital and mobile TVs, portable media players, flash storage, digital cameras,network appliances, and medical and government systems.

ARC International maintains a worldwide presence with corporate and research and development offices in San Jose andLake Tahoe, California, St. Albans, England, St. Petersburg, Russia, and Hyderabad, India. For more information visitwww.ARC.com. ARC International is listed on the London Stock Exchange as ARC International plc (LSE: ARK).

ARC, ARC-Based and Sonic Focus are trademarks or registered trademarks of ARC International with the US Patent and Trademark Office and other internationaltrademark organisations. 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, including the development, implementation, and release of features described herein. Theseare at the sole discretion of ARC International. Licences from third parties for certain software and essential patents may be required depending on licensees’use/implementation. For other factors that could cause actual results to differ, visit the company’s website as well as the listing particulars filed with the UnitedKingdom Listing Authority and the Registrar of Companies in England and Wales.

Advisers andCorporateInformation

AdditionalInformation


EuropeARC International (UK) LimitedVerulam Point, Station WaySt Albans, Hertfordshire AL1 5HEUnited Kingdom

Tel +44 (0) 1727 891 400Fax +44 (0) 1727 891 401

North AmericaARC International I.P., Inc3590 N. First Street, Suite 200San Jose CA 95134USA

Tel +1 408 437 3400Fax +1 408 437 3401

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