SAN JOSE, Calif. & ST. ALBANS, England–(EMWNews)–ARC International (LSE:ARK), a leading provider of consumer intellectual

property (IP) to manufacturers of electronics devices (OEMs) and

semiconductor companies, today announced its unaudited interim results

for the six months ended June 30, 2008.

Highlights from the Six Months Ended June 30, 2008 (Compared to 1H 2007)
		$		£		% Increase 1
Total Revenue		$18.3 million		£9.3 million		32%
Licensing Revenue		$8.4 million		£4.3 million		33%
Royalty Revenue		$8.3 million		£4.2 million		53%
Bookings		$18.5 million		£9.3 million		(30)%
Total Backlog		$17.2 million		£8.6 million		(17)%
1 On a constant dollar basis

•		Solid growth in licensing and royalty revenues despite increasingly challenging market conditions
•		16 customer contracts completed, including two agreements delayed from the fourth quarter of 2007
•		Net loss without Sonic Focus acquisition remained flat at £1.5 million. Net loss with acquisition at £2.0 million
•		Closing cash and short term investment position at £16.6 million (December 31, 2007: £21.2 million) following the acquisition of Sonic Focus in February
•		Bookings and backlog remain healthy despite a year-on-year decrease that reflects a large agreement completed in the first half of 2007
•		Revenue from ARC’s multimedia subsystems continues to grow; in 1H 2008 ASPs were approximately twice that of ARC’s processor products
•		Completed strategic acquisition of Sonic Focus
	•	Sonic Focus adds a new, complementary class of customer and revenue channel through licensing its audio enhancement software directly to OEMs
	•	Strong industry interest in integrated ARC® and Sonic Focus multimedia solutions
	•	Hewlett Packard is first customer to ship Sonic Focus-ready products post acquisition
•		While the company performed well in the first half and we currently expect results for the full year to be in line with management’s expectations, we expect economic conditions to continue providing a level of uncertainty in the market

Commenting on the company’s performance, Carl

Schlachte, president and chief executive officer, said, “ARC

delivered solid results in the first half of 2008. Against a weakening

economic environment and fundamental shifts in the semiconductor market,

ARC’s performance highlights its ability to

meet evolving requirements of electronic companies creating devices that

enhance consumers’ multimedia experiences.

ARC acquired Sonic Focus in February to bolster ARC’s

multimedia subsystems with a new and complementary base of customers and

technologies. Moving forward management will look for ways to enhance

its strategic focus on the multimedia market while accelerating

profitability.”

Commenting on the financial results, Victor Young, chief financial

officer, said, “Despite difficult global

economic conditions, 16 licensing contracts were finalized and ARC’s

worldwide customer base now stands at 148 companies. With the completion

of the Sonic Focus acquisition, HP is our first customer to ship higher

value royalty-bearing products with Sonic Focus post-processing

technologies. We expect new Sonic Focus customer agreements to be

completed in the next six months. In the second half, we anticipate

additional cost-effective ways of capitalizing on the synergies

presented by our acquisitions and changes in the marketplace.”

Statement from the President and Chief Executive Officer Addressing

Fundamental Market Changes

OEM and semiconductor companies increasingly offer consumers unique

products that address the needs of their “digital

lifestyle.” A key tenet of these customers’

strategies is enabling multimedia content to be captured and shared,

then played back anytime, anywhere on any device. Consumers worldwide

continue to adopt these devices in increasing numbers, helping double

unit volumes for semiconductor companies in the past decade. However,

chip average selling prices (ASPs) have declined by close to 30 percent

in the same period and the Semiconductor IP (SIP) industry also is being

impacted by price compression.

One cause of this downward ASP trend is the inability of standalone

products to differentiate consumer electronic devices in a

cost-effective manner. OEM and chip companies now require technologies

that are uniquely tailored to the needs of specific applications, such

as portable media players, music phones, digital TVs, and entertainment

PCs. This is a fundamental shift in the way consumer electronic products

are designed, and these companies are increasingly adopting

differentiated solutions in order to provide a competitive advantage for

their multimedia products.

These trends have been growing over the last few years and have formed

the basis for ARC’s current strategic

direction. By identifying these trends early, ARC posted a solid

financial performance in the first half despite the changing market and

challenging economic conditions. ARC’s

vertically integrated subsystems solve a greater portion of customers’

chip design challenges and offer differentiated solutions. Bolstered by

recent strategic acquisitions, ARC’s

multimedia solutions command higher value compared to its standalone

legacy processors.

Management expects these market trends to continue throughout the second

half of 2008 and into next year. Moving forward, ARC will look for

opportunities to increase its focus on offering integrated multimedia

subsystems and post-processing technologies to continue the company’s

growth and accelerate profitability.

Acquisition and Integration of Sonic Focus

In February ARC acquired Sonic Focus, a privately held company based in

Northern California that provides award-winning audio enhancement

software. Sonic Focus products enable studio quality sound to be heard

from digitally compressed audio, bringing the consumer closer to the

artist’s original performance. Sonic Focus

post-processing technology is a key differentiator that has been

incorporated into millions of consumer electronic devices shipping to

market by OEM companies annually.

Sonic Focus enables ARC to target a new class of customers and add new

sources of revenue. By obtaining royalties directly from the OEM rather

than semiconductor suppliers, Sonic Focus products can command a higher

per unit royalty revenue than SIP companies normally obtain.

Furthermore, the acquisition provides additional leverage for ARC’s

subsystem licensing business with chip designers. By having an OEM

select Sonic Focus audio software to semiconductor firms, those

semiconductor suppliers looking to win business with that OEM are more

motivated to adopt an ARC subsystem solution for their chip design.

Since announcing the Sonic Focus acquisition, ARC introduced its first

Sonic Focus-ready audio subsystem that sets new standards for sound

fidelity and power efficiency. New Sonic Focus products are in

development and ARC expects to introduce them starting in the second

half of 2008. Key Sonic Focus highlights in the first half of 2008

included:

• Hewlett Packard’s new line of TouchSmart

  all-in-one personal computers use Sonic Focus technology to enhance

  consumers’ listening experience

• Sonic Focus hailed in award-winning PC motherboard design

• First ARC Sound Subsystem is introduced that is Sonic Focus-ready

• New ARC Media Subsystem is launched, and is Sonic Focus-ready

New Customer Agreements

In the first half of 2008 ARC announced a number of new licensing

agreements with companies in North America, Asia, and Europe, and a

series of design wins between ARC customers and major electronic

companies:

Mobile and HD TV Applications

• Abilis Systems introduces the world’s

  smallest DVB-H/T receiver

• NextWave Wireless adopts ARC to deliver ubiquitous video access for

  mobile TV receivers

• Unnamed leading Mobile DTV company uses ARC to deliver high quality TV

  reception in nearly every geographical region

• ViXS announces partnership with ARC for HD TV applications

Flash Applications

• STEC enables rapid storage of HD multimedia content with ARC-Based^™

  solution

• TM Technology adopts ARC for multimedia storage applications

• Unnamed company adopts ARC for Flash market

Multimedia and Security Applications

• CopperGate uses ARC for home networking products

• Fujitsu adopts ARC for HD set-top boxes

• ITT builds secure communications devices using ARC

• NTrig honored for its ARC-Based DuoSense technology

• Sanyo ARC-Based digital camera wins “Editors

  Choice” award in MacLife Magazine

• Toshiba extends collaboration with ARC

• Unnamed leading smart card company adopts ARC for high security

  applications

New Product Introductions and Innovations

During the financial period ARC introduced a number of new solutions

that will enable consumers to capture, share, and play high quality

multimedia content on a variety of electronic devices. These complement

the aforementioned ARC Sound and ARC Media Subsystems which were

introduced during the trading period and are Sonic Focus-ready:

• ARC Video Subsystem family supports the popular RealVideo format

• New Energy PRO core family slashes power consumption by up to 75

  percent

• Annual library subscription model is introduced for multimedia codecs

International Electronics Industry Recognizes ARC

• ARC Video 417V Video Subsystem wins Portable Design Magazine’s

  “Editor’s Choice”

  award

• ARC VRaptor Multimedia Architecture is a finalist at the Elektra

  European Electronics awards

• ARC Video Subsystem is a finalist at the DesignVision award event

• ARC’s CEO is a finalist in the prestigious

  ACE Awards event, in the “Innovator of the

  Year” category

Appointment of KPMG as Auditors to the Company

ARC has appointed KPMG Audit Plc (KPMG) as the company’s

audit, tax and accounting advisory firm replacing PricewaterhouseCoopers

LLP (PWC). The company thanks PWC for its twelve years of service, and

looks forward to working with KPMG to serve ARC’s

needs as a high-growth international company.

Outlook

Management expects the market challenges identified in the first half of

2008 to continue into the second half and 2009. We will continue to look

for opportunities to strengthen ARC’s ability

to deliver higher value multimedia solutions to OEM and semiconductor

companies globally, and to do so more cost effectively.

While the company performed well in the first half and we currently

expect results for the full year to be in line with management’s

expectations, we expect economic conditions to continue providing a

level of uncertainty in the market. In order to take best advantage of

current conditions, management will evaluate ways in which synergies

between acquisitions can be rationalized, revenue growth can be

extended, and profitability accelerated.

CHIEF FINANCIAL OFFICER’S REVIEW

For the six months ended June 30, 2008

Revenue

Total revenue in 1H 2008 in U.S. dollars was up 32% to $18.3 million (1H

2007: $13.9 million). Total revenue in sterling was £9.3

million, up 32% over the same period last year (1H 2007: £7.0

million). License and engineering revenue in U.S. dollars was up 33% to

$8.4 million (1H 2007: $6.4 million). In sterling, license and

engineering revenue was up 33% at £4.3

million (1H 2007: £3.2 million). Maintenance

and service revenue in U.S. dollars was down 24% to $1.6 million (1H

2007: $2.0 million). In sterling, maintenance and service revenue was

down 26% at £0.8 million (1H 2007: £1.0

million). In U.S. dollars, royalty revenue was up by 53% to $8.3 million

(1H 2007: $5.4 million). In sterling, royalty revenue increased 52% to £4.2

million (1H 2007: £2.8 million). (Royalty

income in 1H 2008 includes advance non-refundable payments which

represented 55% of the total royalties for the period).

Sales in Europe were 16% (1H 2007: 14%) of total sales, North America

51% (1H 2007: 71%) and Asia 33% (1H 2007: 15%).

Cost of sales and operating expenses

Cost of sales decreased 6% to £0.7 million

(1H 2007: £0.7 million). Gross margin

increased to 92% (1H 2007: 90%). Net operating expenses increased by 31%

to £11.4 million (1H 2007: £8.7

million).

The company had 209 employees at June 30, 2008 compared with 149 at June

30, 2007. The 40% growth in headcount was due to the two acquisitions.

Research and development costs increased 33% to £4.5

million (1H 2007: £3.4 million). Sales and

marketing increased 12% to £3.1 million (1H

2007: £2.7 million). General and

administration costs increased 25% to £2.3

million (1H 2007: £1.8 million). Other

expenses, comprised of depreciation and amortization, increased to £1.6

million (1H 2007: £0.8 million) due to

additional amortization of intangibles purchased from the acquisitions.

The incremental operating expenses excluding amortization as a result of

the acquisition during the year was £0.4

million in 2008. Incremental amortization expenses associated with

acquired technologies and intangible assets was £0.1

million in 2008.

Finance income

Interest income was down 35% to £0.5 million

(1H 2007: £0.8 million) due to the decrease

in average cash balance which was offset by an increase in interest

rates earned on investments.

Loss for the period

Net loss was £2.0 million (1H 2007: £1.5

million). Loss per share increased to 1.35p (1H 2007: 1.05p).

Cash flow and balance sheet

The net cash outflow from operations increased to £3.0

million (1H 2007: £2.9 million). Capital

expenditure, including payments made for acquisitions and investments in

associate, was £3.5 million (1H 2007: £4.6

million). The movement in cash and short-term investments during the six

months was an outflow of £4.7 million (1H

2007: £5.6 million). Net assets at June 30,

2008 were £28.3 million (December 31, 2007: £30.3

million), including cash and short-term investments of £16.6

million (December 31, 2007: £21.2 million).

Dividend

No interim dividend payment will be made for the six months ended June

30, 2008 (1H 2007: £Nil).

Acquisitions

During the period ARC acquired Sonic Focus, Inc for a total

consideration of £2.8 million. See note 9

for details.

Responsibility statement of the directors in respect of the interim financial report

We confirm that to the best of our knowledge:

• The condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

• The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Carl Schlachte, President, CEO, and Director

August 5, 2008

Condensed consolidated income statement
For the six months ended June 30, 2008
		Six months		Six months
		ended		ended
		June 30		June 30
		2008		2007
		(unaudited)		(unaudited)
	Note	£ ‘000		£ ‘000
Revenue		9,251		7,029
Cost of sales		(694)		(738)
Gross profit		8,557		6,291
Operating expenses	3	(11,419)		(8,684)
Operating loss		(2,862)		(2,393)
Finance income		485		751
Share of post-tax loss of associate		(8)		–
Loss before income tax		(2,385)		(1,642)
Tax credit		373		99
Loss for the period attributable to equity shareholders		(2,012)		(1,543)
Basic and diluted loss per share (pence)		(1.35)		(1.05)

Condensed consolidated statement of recognized income and expense
For the six months ended June 30, 2008
		Six months		Six months
		ended		ended
		June 30		June 30
		2008		2007
		(unaudited)		(unaudited)
	Notes	£ ‘000		£ ‘000
Loss for the period		(2,012)		(1,543)
Currency translation difference	7	(147)		(54)
Proceeds from the sale of shares held in ESOP	7	–		76
Total recognized expense for the period attributable to equity shareholders		(2,159)		(1,521)

Condensed consolidated balance sheet
As at June 30, 2008
		June 30		December 31
		2008		2007
		(unaudited)		(a)
	Note	£ ‘000		£ ‘000
Assets
Non current assets
Intangible assets	6	11,294		7,506
Property, plant and equipment		1,830		1,537
Investment in associate		406		414
Other receivables		369		417
		13,899		9,874
Current assets
Inventory		2		72
Trade and other receivables		5,781		4,241
Current corporation tax receivable		300		1,368
Short term investments		10,695		ARC International Lee Garvin Flanagin, +1-408-437-3433 (Media) or Financial Dynamics Juliet Clarke/Matt Dixon, +44 20 7831 3113 (Investors) Major Newsire & Press Release Distribution with Basic Starting at only $19 and Complete OTCBB / Financial Distribution only $89 Get Unlimited Organic Website Traffic to your Website  TheNFG.com now offers Organic Lead Generation & Traffic Solutions