Expansion in Asia

Asia represents one of the fastest growing markets for ARC's patented configurable subsystems and processors. Throughout 2006, ARC strengthened its position in this region through strategic sales and marketing investments, and design wins with industry leaders and high-growth start-up companies. As a result, revenue from companies in Asia represented close to 30 percent of revenue for the first half, a record high and up from less than five percent in the same period of 2005. Companies in Asia that announced they have taken licenses for ARC's solutions during the first six months of 2006 included:

-- AVID Electronics Corporation -- has taken a license for the ARC Video Subsystem, which will enable AVID's design team to create leading-edge multimedia solutions that offer single- to high-definition audio and video functionality. This will help AVID expand into complementary markets with highly differentiated devices using a single ARC subsystem, thereby lowering their overall development cost.

-- Oki Electric Industry Co., Ltd. -- has taken a license for the new ARC Sound Advanced Subsystem. Oki plans to incorporate the ARC Sound Advanced Subsystem into an ASSP targeting next generation in-car audio applications.

-- Skymedi Corporation -- has taken a license for the ARC Video Subsystem to create a fully integrated SoC targeting the burgeoning multimedia player market. The new ARC-Based SoC will complement Skymedi's growing portfolio of flash memory products, and will enable system OEMs and ODMs to develop handheld multimedia players rapidly and inexpensively using Skymedi's solution.

-- Taifatech -- has taken a license for a configurable ARC 700 core to develop ARC-Based SoCs for next-generation consumer devices. Taifatech's pioneering design will leverage ARC's configurable 700 CPU family to eliminate inflexible hardwired logic and consume less power in their SoC than is possible using fixed architecture processors.

-- Toshiba Corporation -- has entered into a strategic collaboration with ARC that is intended to grow the worldwide semiconductor industry's adoption of configurable technology. Under the terms of the agreement, Toshiba Corporation has taken a multiyear license for ARC's ARChitect(TM) processor configurator, which offers a comprehensive set of design tools and resources. The companies will also collaborate on development of a next generation version of ARChitect that is more closely suited to the Media embedded Processor (MeP), Toshiba's proprietary configurable core.

-- VXIS Technology Corporation -- has taken a license for the ARC Video Subsystem, which VXIS will use to create SoCs for the high-growth portable digital TV market.

Investing for ARC's Future

To help drive future growth in ARC's licensing business, the company is making strategic investments that will foster continued expansion of our licensee base and provide new, high value configurable solutions that complement our existing patented subsystems and processors.

-- ConfigCon(TM) Developers Conference Series -- With industry leaders and DigiTimes Publications of Taiwan, ARC International launched the industry's first-ever developers conference dedicated to educating the semiconductor industry on configurability. Entitled "ConfigCon," the series will take place in some of the hottest markets for ARC's patented configurable solutions: Hsinchu, Taiwan, Shanghai, China, and Silicon Valley, United States. The first event in Taiwan "How Configurable SoC Technology is Enabling the Multimedia Market" received an overwhelmingly positive response. Close to 400 attendees listened to over 20 product and technology presentations from ARC and our partners. ConfigCon Shanghai will take place September 19, and ConfigCon Silicon Valley will take place October 31 and November 1.

-- ARC's Taiwan Training Center -- ARC International has opened the industry's first comprehensive training center for configurable processor technology. Based in Hsinchu, Taiwan the training center features senior instructors from ARC and partner companies who will guide licensees and prospects in Greater China on the development of lower cost, highly differentiated chips using ARC's patented configurable products and third party technologies.

-- ARC's Multimedia Subsystem Family -- To ensure ARC continues to meet the demand of licensees developing products for next-generation consumer applications, we are accelerating the development of the next two in ARC's multimedia subsystem family. The ARC Video Advanced and ARC Video HD (high definition) Subsystems are now under development by our UK-based engineering team and will be introduced over the next twelve to eighteen months. They will complement ARC's existing subsystem offerings and help maintain our leadership in the field of configurable platform solutions.

Outlook for the Second Half of 2006

The management team is pleased with ARC's results for the first half of 2006. The company delivered a good financial performance, increased its licensee base, and continued to experience rapid adoption of our patented configurable subsystems and processors. ARC has a strong financial foundation that will support the company's continued growth into the future.

For the second half of 2006, ARC will focus on winning more tier 1 licensees while making strategic investments to boost our ongoing sales and marketing efforts in key regions. We are optimistic about the prospects for the company and confident about trading in the second half of this year.

CHIEF FINANCIAL OFFICER'S REVIEW

Six months ended 30 June 2006

Revenue

Total revenue in 1H 2006 was GBP 6.0 million, up 10% over the same period last year (1H 2005: GBP 5.4 million). Prior to currency translation, with virtually all sales in US dollars, revenue was up 6%. License and engineering income was up 2% at GBP 3.5 million (1H 2005: GBP 3.4 million). Maintenance and service income was up 15% at GBP 1.0 million (1H 2005: GBP 0.8 million). Royalty income increased 32% to GBP 1.5 million (1H 2005: GBP 1.2 million). Royalty income in 1H 2005 includes an advance non-refundable payment which represented 46% of the total royalties for the period.

Sales in Europe were 18% of total sales, North America 55% and Asia 27%. From a product line perspective, 80% of revenue was from the SoC products with the remaining 20% delivered by the embedded software products.

Costs