Half Yearly Report

14 Dec 2010

Imagination Technologies Group plc

Adjusted pre-tax profit* jumps 131% to £10.1m; driven by doubling of chip unit volume and strong licensing

Imagination Technologies Group plc (LSE: IMG, "Imagination", "the Group"), a leading multimedia, communications and embedded processor technology company, today announces results for the six months to 31 October 2010.

Financial highlights

·; Group half-year revenue up 16% to £44.1m (2009: £38.2m)

o Technology revenues increased 48% to £30.3m (2009: £20.4m)

§ Royalty revenue up 69%

§ Licensing revenues up 24%; high level of activity

o PURE £13.8m (2009: £17.8m)

§ Tougher short-term environment

·; Adjusted Group operating profit* up 131% to £10.0m (2009: £4.4m)

o Technology - adjusted operating profit* up 186% to £11.4m (2009: £4.0m)

o PURE - adjusted operating loss** £1.4m (2009: £0.4m profit)

·; Adjusted Group pre-tax profit* up 131% to £10.1m (2009: £4.4m)

·; Group pre-tax profit £7.7m (2009: £3.9m)

·; Adjusted earnings per share jumped 104% to 5.7p (2009: 2.8p)

·; Cash balance increased to £35.0m at 31 Oct 2010 (30 April 2010: £29.4m)

* Adjusted before share-based remuneration expenses, acquisition costs and profit and loss on investments

** Adjusted before share-based remuneration expenses

Business highlights

Technology business

Royalties and design wins

·; Partner chips shipped almost doubled to 107m units (2009: 54m)

·; Significant volume shipments in mobile phone, TV/STB, personal computing/tablets, digital radio and automotive markets

·; 98 active partner chip designs (2009: 85); 42 in production (2009: 36)

Licensing

·; Eight important agreements involving over 14 silicon IP cores and several new customers

·; Significant number of smaller deals, software licenses and upgrades driving further technology adoption and spread

·; Licences in all key markets - mobile phone, digital TV/STB (set top boxes)/thin-clients, Personal Media Player (PMP), mobile computing/tablets/netbooks and in-car navigation/dashboard

·; Active and increased pipeline of prospects

Acquisitions

·; Following half year end, two strategic acquisitions announced in connectivity and graphics areas to contribute further to Group's next phase of development

PURE business

·; Tight economic environment: cautious retailers in the UK and elsewhere and some product timings impacted revenues

·; Some improvement since October

o Signs of growth in many international markets

o Initial Christmas UK sales curve looking encouraging

·; Major product launched

o FlowSongs launched - more services to follows. Major enhancements to www.thelounge.com and platform

o Launched iPhone app for 'thelounge'

o Shipped first connected radio using integrated DAB/Wi-Fi chip based on Imagination's technology

·; Expect further improvement in 2011 driven by export business in new countries and major new products

Hossein Yassaie, Chief Executive, commented:

"The continued strong volume ramp of devices, using our technologies, and active licensing engagements have again resulted in record half-year revenues and profits.

"Our technologies have been and continue to be instrumental in many of the key recent market trends and are powering many scene-setting end-user products with well over 400m devices across numerous categories having shipped to date.

"Despite some short-term slow-down driven by the consumer spending and timing of some new products, PURE continues to effectively showcase and drive some of our key technologies and is expected to see improvement over medium term.

"Whilst acknowledging the tight consumer market condition, we remain confident of our continued good progress in the current financial year given the active and growing pipeline of prospects for licensing, growth in design wins and the momentum in our chip volume ramp up, together with PURE's leading position and product line-up."

The Group has also has signed a definitive agreement to acquire Caustic Graphics Inc. ('Caustic'), a developer of innovative and state-of-the-art real-time interactive ray tracing graphics technology for a cash consideration of $27m (c.£17.1m) - see separate announcement.

About Imagination Technologies

Imagination Technologies Group plc (LSE: IMG) - a global leader in multimedia, communication and embedded processing silicon technologies - creates and licenses market-leading processor cores for graphics, video, multi-threaded embedded processing/DSP and multi-standard communications applications. These silicon intellectual property (IP) solutions for systems-on-chip (SoC) are complemented by strong array of software tools and drivers as well as extensive developer and middleware ecosystems.

Target markets include mobile phone, handheld multimedia, home consumer entertainment, mobile and low-power computing, and in-car electronics. Its licensees include many of the leading semiconductor and consumer electronics companies. Imagination has corporate headquarters in the United Kingdom, with sales and R&D offices worldwide. See: www.imgtec.com.

Financial and Business Review

The continued strong growth in our technology licensing business, despite the global economic challenges, reflects the importance and alignment of the Group's technologies to the key market trends.

The half-year saw good financial and strategic progress for the Technology business, with very strong chip volume and royalty growth and a period of strong licensing engagements. The Group successfully closed a number of important licensing deals as well as securing several new partners. This resulted in a significant jump in operating profit for the Technology business.

The PURE business, in the short-term, has been subject to the uncertain outlook for consumer spending. Revenues saw a modest year on year decline for the first half. However it is expected to return to growth as the environment improves.

The acquisitions announced on 17 November 2010 of HelloSoft and today of Caustic in the areas of connectivity and graphics respectively will in due course enable the Group to offer stronger product lines in key areas whilst also opening up new channels to the key markets.

In terms of HelloSoft, the delivery of media (audio, video, voice and graphics) to connected devices is increasingly becoming a key aspect of many modern service providers whether targeting mobile, home or enterprise markets.

The acquisition of Caustic provides Imagination with access to unique and patented technology which enables real-time ray traced and cinema quality 3D graphics to be implemented in a novel and highly cost-effective manner. The capability can be efficiently added to Group's highly successful POWERVR Graphics Processing Units (GPUs).

Financial Review

Group revenues for the six months to 31 October 2010 increased by 16% to £44.1m (2009: £38.2m).

The strong growth from both licensing and royalties increased Technology revenues by 48% to £30.3m (2009: £20.4m); 39% on a US dollar basis.

The high level of licensing activity resulted in licensing revenues increasing by 24% to £11.6m (2009: £9.3m); 16% on a US dollar basis.

Royalty revenues were £18.7m, up 69% (2009: £11.1m); 58% on a US dollar basis. The volume of partner chips shipping with Imagination's IP has nearly doubled to 107m (2009: 54m) as volumes of existing chips continue to gain momentum and an increasing number of partners' chips begin to ship.

As previously announced, PURE has been impacted by the tougher economic conditions with revenues at £13.8m (2009: £17.8m). This slow down has affected both UK and international revenues.

Driven by the strong progress in the very high margin Technology business, Group gross profit rose 35% to £34.1m (2009: £25.2m) with overall gross margin up to 77% (2009: 66%).

Underlying Group expenses increased by 14% to £23.3m (2009: £20.4m). Underlying expenses excluded an exchange loss of £0.8m (2009: loss £0.4m), £0.3m of HelloSoft acquisition costs, a non-cash share-based incentives charge of £2.0m (2009: £1.0m) and the prior year gain on investments of £0.5m. The Group has continued to invest in supporting its growing customer base and developing next generation technologies.

Adjusted operating profit for the Technology business increased 186% to £11.4m (2009: £4.0m), before share-based incentive costs of £1.6m (2009: £0.8m), acquisition costs of £0.3m (2009: nil) and the prior year gain on investment of £0.5m.

Impacted by the reduction of revenues, the PURE business had an adjusted loss of £1.4m (2009: profit £0.4m), before share-based incentive costs of £0.4m (2009: £0.2m).

The Group's adjusted pre-tax profit was up 131% to £10.1m (2009: £4.4m), before acquisition costs of £0.3m (2009: nil), share-based incentive costs of £2.0m (2009: £1.0m) and the prior year gain on investment of £0.5m. The reported pre-tax profit doubled to £7.7m (2009: £3.9m).

The net tax credit was £3.9m (2009: credit £2.2m); this comprised a credit of £4.3m (2009: credit £2.4m) offset by a charge of £0.4m (2009: charge £0.2m). The tax credit includes £1.3m (2009: nil) received in cash in respect of an R & D tax credit. The Group has increased its recognised tax losses held as deferred tax asset on the balance sheet to £14.0m (£11.0m at 30 April 2010).

The Group's adjusted earnings per share rose by 104% to 5.7p (2009: 2.8p), excludingshare-based incentive costs, acquisition costs and the prior year gain on investment. Reported earnings per share has risen to 4.8p (2009: 2.6p).

There was a net cash inflow from operating activities of £8.0m (2009: £3.9m). The cash outflow on capital expenditure increased to £2.2m (2009: £0.7m) with the majority invested in expanding facilities and new equipment for the engineering teams.

As a result of the net cash inflow, the cash balance at the end of October improved £5.6m to £35.0m (£29.4m at 30 April 2010).

Since the end of the half-year, the Group has acquired its facilities in Kings Langley in order to be able to redevelop the site provide the much-needed additional space in line with Group's growth and operational needs.

At the same time as the announcement of the acquisition of HelloSoft on 17 November 2010, the Group raised £37.1m by way of a placing to finance this acquisition and that of other complementary strategic technology businesses.

HelloSoft is being acquired for a maximum consideration of up to $47.1m (approximately £29.8m), of which $20.2m (£12.8m) is an upfront cash payment and up to $26.9m (£17.0m) is based on revenue and profit performance over the next three years.

Today, the Group has announced that it has agreed to acquire Caustic, a developer of innovative and state-of-the-art real-time interactive ray tracing graphics technology, for a cash consideration of $27.0m (approximately £17.1m).

Technology Business

The Technology business continued to make real progress in its three key metrics:-

·; New licensing deals, which generate short-term revenue and are the underlying driver behind future royalty generation

·; Growth of SoC design wins, which is a key measure of technology adoption

·; Partner chip volume ramp-up, which drives royalty revenues

Other important developments:-

·; Acquisition:- two key strategic acquisitions, HelloSoft and Caustic, designed to add strategic complementary technologies and provide further scale to our business, have been announced post October 2010.

Licensing

The continuing active pipeline of opportunities led to a number of strategically and/or financially significant licensing agreements or deal extensions including eight major licensing agreements and a number of smaller deals and upgrades.

Among the major agreements, there were new partner deals with Netlogic, Fujitsu, General Plus as well as significant extensions or continuations with Intel, Apple, and Renesas.

The Group also signed software licenses and upgrades with a number of existing partners including Sirf/CSR, MediaTek, Samsung and Trident as well as important software licensing and development agreements with a number of key OEMs deploying partner chips with Imagination IP.

The major license agreements involved 14 IP core licenses. The target markets for these include Mobile Phone, Digital TV/STB/Thin-clients, PMP, Mobile Computing/Tablets and in-car Navigation/Dashboard.

Significantly, the Group has seen continuing momentum in design-wins for its POWERVR graphics technology, which has so far achieved over 50 licenses, including many partners that are working on designs using the multi-processing (MP) core variants of the SGX543MP and SGX544MP family. The next generation technology codenamed "Rogue" which has already secured multiple tier one partners.

Additionally we are seeing a steady diversification of design wins and growing interest across our other key IP cores including:

·; Video - POWERVR VXD and VXE families supporting the latest and emerging video decode and encode formats. The growing demand for video is driven by both content delivery and increasingly content creation and two-way delivery of video. The trend is towards widespread use of internet content delivery including mobile video delivery, internet-protocol (IP) TV capability needed in video-on-demand and catch-up TV.

Also user generated content, video conferencing and telepresence, which require video encode and constitute new areas set to grow significantly making such a capability a standard feature of many connected devices. Already well over 30% of our annual unit shipment devices with our IP include our video cores.

·; Display - POWERVR I2P and FRC enabling the best image processing for TVs, STBs and other consumer devices. The convergence trends are increasingly requiring features reserved for TV market to migrate into other categories including mobile phones, personal computing and tablets and in car multimedia.

·; Connectivity/broadcast - ENSIGMA UCC Series2 and Series3 programmable radio processing units (RPU) support worldwide TV and radio reception as well as important connectivity standards such as Wi-Fi, all running on the same silicon engine in software. This technology is increasingly essential for delivery of broadcast and cloud content to home and also within the enterprise where several broadcast standards along side high performance wireless internet connectivity are needed for high definition video streaming and flexible home connectivity.

·; Embedded processor cores - META family of processors offering multi-threading, hard real-time and signal-processing capabilities are ideal for highly integrated, feature-rich and cost effective systems. With its extensive capabilities META technology is ideal for both modern real-time embedded systems and also as an application processor running the operating system whilst also offering the built-in multi-threading, real-time and signal processing capabilities to carry out other key tasks eliminating external hardware.

These features combined with our ENSIGMA technology offer a highly efficient connected processor. Many of our IP cores integrate META processing cores already. Over 40% of the annual volume of our IP shipments deploy META technology and we expect this trend to continue upwards. The emergence of open source operating systems including Android and the inevitable trend of internet connectivity will further drive deployment of higher-end META processors in application processors in a variety of markets.

Partner chip shipments and royalties

Partner chip unit shipments grew strongly and almost doubled to 107m units (2009: 54m units). Growth was driven by increasing sales of mobile phone, PMP, TVs, tablets/MIDs/netbooks, digital radio and car navigation/dashboard.

SoC design wins and pipeline

SoC design wins are the driver for future partner chip shipments and royalty revenue growth. Strong continuing momentum saw new partner SoC design wins increase to 98 (net of obsolescence) compared with 85 as at October 2009. Of these, 42 are shipping or beginning to ship, with the balance of 56 still in design. The latter will be the driver for significant further royalty revenue growth.

These committed devices are continuing to diversify across Imagination's partners and key market segments:

·; 35 for Mobile Phone Multimedia devices

·; Nine for Handheld Multimedia (PMP, mobile entertainment/gaming, camera, mobile TV)

·; 23 for Home Consumer Entertainment (TVs, STBs, DVDs, Digital Radio and Audio, Connected Audio, and Home Entertainment devices)

·; 12 in Mobile Computing (MID/UMPC/Netbook/Tablet)

·; 13 for In-car (Navigation, Dashboard, PNDs (Personal Navigation Devices))

·; Six for other markets covering Green Energy, Healthcare, Amusement and Toys

Acquisitions

HelloSoft

HelloSoft has been one of the world's leading providers of V.VoIP (Video & Voice over Internet Protocol) and wireless LAN technologies and has been supplying both software and semiconductor connectivity intellectual property to semiconductor manufacturers, and software intellectual property to major ODMs/OEMs and also to tier 1 service providers/operators who offer VoIP and Video over IP services.

Delivery of media (audio, video, voice and graphics) to connected devices is increasingly becoming a key aspect of many modern service providers whether targeting mobile, home or enterprise markets. Among the key technological changes in this area are:

·; the migration of many networks from circuit-switching (2G, 3G, traditional phone land lines) to packet switching, more commonly referred to as Internet Protocol based delivery, which include WiFi, LTE and all other modern communication standards.

·; the growing relevance of wireless WiFi to connectivity in the home, on the move (mobile devices and hotspots) and at work. This technology is set to evolve through further advancements and multi-antenna (MIMO) to address much higher data rates and become an even more important platform for connectivity in the future.

Driven by the above industry dynamics, Imagination expects the revenue streams for HelloSoft's products, which provide leading edge solutions to enable such changes, to build progressively as markets emerge and grow.

Given Imagination's strong position in multimedia processing cores, its growing penetration in client devices using such technologies in markets across mobile, home and enterprise and its leading position in multi-standard programmable communication technology, the acquisition of HelloSoft will achieve a number of Imagination's objectives by:

·; Providing access to leading edge V.VoIP technology that, with the migration to internet protocol networks, is of increasing importance in all key markets Imagination addresses including mobile handsets, home TVs/STBs/connected terminals, and PC/Tablets/Netbooks

·; Combining HelloSoft's technology and Imagination's multimedia processing cores can offer an optimised end-to-end solution for media-over-internet protocol delivery which is becoming important to all connected devices

·; Opening up the path for wider and deeper engagement with other parts of the telecommunications, consumer and the general technology value chain including the handset OEMs and network/service operators which can take advantage of HelloSoft's market-leading software stack in media delivery and communications

·; In combination with Imagination's ENSIGMA Universal Communications Core Processor ("UCCP") Platforms, provide a comprehensive and market-leading WiFi technology solution, and complete a fundamental part of Imagination's "connected home" roadmap. The emergence of internet connected and smart TV's and set-top boxes is dependent on easy-to-deploy and high performance home connectivity which is strengthened through this acquisition

Caustic Graphics

Ray tracing is a technique for rendering three-dimensional graphics with complex and more natural lighting models to achieve cinema quality 3D and a level of near photographic realism that is impractical with traditional 3D graphics techniques. To date ray tracing has been used in specialised application such as special effects and computer animated movies, industrial design, mechanical and architectural modelling to create life-like and photorealistic imagery.

Caustic has developed unique and patented hardware and software technologies to lower radically the cost and dramatically increase the efficiency and performance of ray tracing, opening up the potential of highly photorealistic computer generated animated imagery to a host of new real-time applications and markets not possible previously. The ray tracing approach has the added benefit of substantially simplifying content creation and reducing associated cost. Caustic technology also allows coexistence of traditional polygon based rendered objects and inclusion of life-like ray-traced elements in the same scene.

The acquisition of Caustic will achieve a number of Imagination's objectives:

·; Imagination gains access to unique and patented technology which enables real-time ray traced and cinema quality 3D graphics to be implemented in a novel and highly cost-effective manner. The capability can be efficiently added to Group's highly successful POWERVR Graphics Processing Units (GPUs)

·; Caustic technology operates fully in conjunction with and complements Imagination's existing graphics processing IP. This helps ensure Imagination stays at technological forefront, driving major innovations in the growing 3D graphics market

·; Acquisition enables Imagination to bring further disruptive technologies, as part of its roadmap, to its mainstream graphics markets across mobile, embedded, console and computing segments

·; Acquisition provides access to professional and specialised markets that take advantage of Caustic's much more efficient photo-realistic and cinema quality graphics solution. The combined technologies form Imagination and Caustic will dramatically change the price-performance point of these solutions and enable real-time operation

·; Acquisition will enable Imagination to extend its ecosystem to include very advanced graphics content and tool developers, and ultimately bring such content and tools to mainstream markets

PURE Business

Within the UK the market environment further tightened post the World Cup. Industry data shows that during the July to September 2010 quarter the UK's general consumer electronics sales were down 13.5%.

Combined with similar recession driven softening in international market, historical overstocking in some markets, and the timing of certain new product introductions, this lead to PURE showing a 22% revenue reduction for the period. However, since October there are more positive signs on initial UK Christmas sell through. Also in the very recent weeks, all major export markets have returned to growth, which is encouraging. The later than planned new product introductions will provide a stronger springboard for 2011 sales.

With respect to overseas, it is clear that the transition from analogue to digital radio is underway on a global scale but the pace of progress depends on each region. Specifically, Italy is now transmitting DAB+ to around 50% of population and the coverage is growing. PURE have over 10 models shipping to Italian standard which requires L-band support and is currently the only approved manufacturer. Switzerland and Australia are fully committed to DAB+ and are showing first growth since the beginning of the year.

Germany already has regional DAB+ broadcast and a major decision on national multiplex is due this month. German and French decision timing will be a key driver for taking the international DAB market to a new level. Many other markets, including Hong Kong, Sweden and Netherlands, are also looking positive for DAB. Outside the DAB market, US shipments of connected PURE radios have now started.

Despite the tougher environment, in the UK and other markets, PURE retained its market-share leadership position in key product categories. Among the significant developments were the doubling of the FLOW family of connected products, the launch of FlowSongs enabling music purchase and streaming directly from the radio, launch of the iPhone App for the Lounge, extension of the range of audiophile quality iPod docks, a radio created with designer Orla Kiely, launch of 'Twilight' which combines the radio and lamp categories in an innovative 'dawn simulator' lifestyle product and finally the launch of the first connected radio using integrated DAB/Wi-Fi chip based on Imagination's own technology.

The last six months have seen a number of awards for PURE with top accolades in two leading UK Hi-Fi magazine annual as well as plaudits from consumer and international press. PURE has won 'What Hi-Fi? Sound and Vision' magazine's prestigious 'Radio Product of the Year' for the seventh time in nine years. PURE's AVANTI Flow won the title in October 2010 for the second year in a row and was also awarded 'Best Internet Radio'.

PURE's ONE Elite took the prize for 'Best Desktop DAB up to £100'. In the 2010 Hi-Fi Choice Awards PURE's Sensia took two top accolades, winning both 'Best Radio Tuner' and the coveted 'Best Innovation' title. Additionally, AVANTI Flow and EVOKE-3 have been awarded "Best Buy" status from the highly respected and stringent "Which?" magazine, while Sensia has been awarded Best Digital Radio for the second year in a row by SmartHouse in Australia.

The Group's investment in developing the internet and web services portal, thelounge.com, in support of its connected radio and multimedia platform with its first deployment in the form of the PURE Flow range, is enabling the next generation of the 'cloud-based' products and services.

These connected technologies and services are considered of significant strategic importance to Imagination as a whole; not only in the delivery of internet-based multimedia content but also for other connected services such as automation, security and remote health care. Over time we will be offering our Flow technology in its own right, bringing our portal, connectivity and processor IP together to address the many emerging connected application beyond the radio market,

It is important to note that PURE, in its own right, is making very valuable contributions to the development of fundamental intellectual property that are critical for key aspects of the Group's future strategies.

Outlook and way forward

Building on the momentum achieved in the first half and continued strong demand for its technologies, the Group is confident it will exceed the 200m partner chip shipment target for the full year and that it will also see continued growth in licensing revenues.

PURE continues to showcase effectively and drive some of our key technologies. The business is expected to see improvements for the second half and over the medium term, despite some short-term slow-down.

It is clear that our technologies in multimedia, connectivity/broadcast and embedded processing offer both significant advantages to our partners and provide a strong and highly scalable base for our growth. Despite the significant progress we have made to date, the exploitation of many of our key technologies is still at an early stage in many markets.

For example, the worldwide embedded graphics market alone has the potential to reach multi billion annual units over the next five or so years. Similarly the rapidly developing internet connectivity and cloud-based services trends will ultimately require almost all home consumer devices such as TVs, STBs and other home appliances to incorporate both connectivity and advanced user interfaces.

The recent acquisitions, which were announced after the end of the half year, are designed to complement our technologies and markets whilst also providing us with further capabilities and tools to launch disruptive technologies. We always look very carefully for market discontinuities or disruptive technologies to help us in developing and growing our business. These acquisitions are part of this process.

We remain on course to achieve further significant growth as existing markets develop and new markets and applications emerge where our technology can make a significant difference to the consumer experience. It has been a feature of our strategy to both ride and drive key trends with new technologies.

PURE is an integral part of the Group's strategy and focuses on targeting emerging consumer markets that can benefit from a concerted drive and pathfinder approach. This has been successfully executed on digital radio in the UK with the focus now moving to international development. Connected devices and the opportunities they offer are another key area where PURE's efforts are directed, with a starting point that bridges the broadcast and internet arena and enables optimal delivery of both mass and individual targeted content. Our strategy will ultimately also lead to complementary areas involving home connectivity and the provision of useful remote services.

Despite the volatile macro economy, the Group remains well placed for further solid growth based on its active licensing pipeline, expected chip volume ramp and royalty growth, as well as the potential for PURE to exploit its strong product line-up and develop its new sales territories.

Hossein Yassaie

 14 December 2010

Condensed Consolidated Income Statement

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Financial Position

Condensed Consolidated Statement of Changes in Equity

Condensed Consolidated Statement of Cash Flows

Notes to the condensed consolidated interim financial statements

1. Reporting entity

Imagination Technologies Group plc (the 'Company') is a company incorporated and domiciled in the United Kingdom. The Condensed Consolidated Interim Financial Statements of the Company as at and for the six months ended 31 October 2010 comprise the Company and its subsidiaries (together referred to as the 'Group').

The Consolidated Financial Statements of the Group as at and for the year ended 30 April 2010, are

available upon request from the Company's registered office at Imagination House, Home Park Estate, Kings Langley, Hertfordshire WD4 8LZ. An electronic version is available from the Investors section of the Group website at www.imgtec.com.

2. Statement of compliance

These Condensed Consolidated Interim Financial Statements are prepared in accordance with IAS 34: Interim Financial Reporting as endorsed and adopted for use in the European Union and the Disclosure and Transparency Rules (DTR) of the Financial Services Authority. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the Consolidated Financial Statements of the Group as at and for the year ended 30 April 2010.

The comparative figures for the financial year ended 30 April 2010 are not the Company's statutory financial statements for that financial year. Those financial statements have been reported on by the Company's auditors and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

3. Significant accounting policies

These Condensed Consolidated Interim Financial Statements are unaudited and, except as described below, have been prepared on the basis of accounting policies consistent with those applied in the Consolidated Financial Statements for the year ended 30 April 2010.

The following standards are effective for the first time in the current financial period and have been adopted by the Group with no significant impact on its consolidated results or financial position:

• Amendments to IFRS 2 - Group cash settled share based payment transactions

• Revised IFRS 3 'Business Combinations'

• Amendments to IAS 39 'Reclassification of Financial Assets'

• Amendments to IAS 27 'Consolidated and Separate financial statements'

4. Risks and uncertainties

The Board continuously assesses and monitors the key risks of the business. Despite the current uncertainty in the global economy, the key risks that could affect the Group's medium term performance, and the factors which mitigate these risks, have not significantly changed from those set out in the Group's Annual Report for 2010, a copy of which is available from our website www.imgtec.com. The Financial and Business Review includes consideration of uncertainties affecting the Group in the remaining six months of the year. The Board has reviewed forecasts, including forecasts adjusted for significantly worse economic conditions, and remains satisfied with the Group's funding and liquidity position. On the basis of its forecasts, both base case and stressed, and available facilities, the Board has concluded that the going concern basis of preparation continues to be appropriate.

5. Estimates

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these Condensed Consolidated Interim Financial Statements, the nature of the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation were the same as those that were applied to the Consolidated Financial Statements as at and for the year ended 30 April 2010.

During the six months ended 31 October 2010 management reassessed its estimates in respect of previously unrecognised deferred tax assets related to the carry forward of unused tax losses (note 7).

6. Operating segments 

The Group determines and presents operating segments based on the information that is provided internally to the Board of Directors, which is the Group's chief operating decision maker.

The Group is organised into two operating divisions which offer different services to different industries and are managed separately: the Technology business and the PURE Digital business. The costs of the corporate head office and other costs which are not controlled by the operating divisions are allocated to these divisions. These divisions are the operating segments that are reported to the chief operating decision maker and are the Group's reportable segments. There is no inter-segment trading and no significant seasonality in the Group's operations.

Principal activities are as follows:

Technology business - the development of embedded graphics, video, display and multi-threaded processor and multi-standard broadcast receiver and connectivity technologies for licensing to semiconductor companies for incorporation into silicon devices. 

PURE Digital business - the development and marketing of consumer products to showcase the technologies of the Technology business and to develop new and emerging markets for such technologies. 

Information regarding the operations of each reportable segment is included below. Performance is measured based on operating profit.

The net gain on investments of £495,000 in the 6 months to 31 October 2009, and £148,000 for the year ending 30 April 2010, relates to the Technology business.

Revenue is reported by geographical area of sales as follows:

All revenue originated from United Kingdom.

The operating profit and net assets of the Group materially relate to the United Kingdom.

7. Taxation

Income tax expense is recognised based on management's best estimate of the weighted average annual income tax rate expected for the full financial year applied to the pre-tax income of the interim period.

The net tax credit in the period comprises a tax credit of £4,308,000 (2009: £2,438,000), offset by tax deducted at source on overseas earnings not recoverable in the period of £371,000 (2009: £254,000). The tax credit includes £1,295,000 (2009: nil) received in cash in the period respect of an R & D tax credit, with the balance of £3,013,000 (2009: £2,438,000) representing a deferred tax asset recognised in the period.

8. Earnings per share

The basic earnings per share for the financial periods reported have been calculated on the weighted average number of shares in issue as shown in the table below.

9. Related Parties

The nature of related parties as disclosed in the consolidated financial statements for the Group as at and for the year ended 30 April 2010 has not changed. Further there have been no significant related party transactions in the six month period ended 31 October 2010.

10. Post Balance Sheet Events

On 17 November 2010, the Group announced that it had conditionally agreed to acquire HelloSoft Inc., one of the leading providers of Video and Voice over Internet Protocol and wireless LAN technologies. The total maximum consideration is $47.1m (approximately £29.8m), structured as approximately $20.2m (£12.8m) up front cash payment and up to $26.9m (£17.0m) additional consideration over the subsequent three years, mainly conditional on achievement of certain financial performance criteria. Completion of the acquisition, which is conditional on the satisfaction of certain conditions as set out in the acquisition documentation has not yet occurred.

Simultaneously, the Group carried out a share placing raising £37.1m for the purpose of funding the acquisition of HelloSoft and of other complementary technology businesses.

In November, the Group acquired its current and additional facilities in Kings Langley for a value of £9.0m in order to be able to redevelop the site and provide scope for further expansion. A mortgage of £5.2m has been taken out on these properties.

Today, the Group has announced that it has conditionally agreed to acquire Caustic Graphics Inc., a developer of real-time interactive ray tracing technology, for a maximum of consideration $27.0million (£17.1m). Ray tracing is a technique for rendering three-dimensional graphics with complex lighting to achieve a level of almost photographic realism, virtually impossible with traditional 3D graphics techniques. Completion of the acquisition, which is conditional on the satisfaction of certain conditions as set out in the acquisition documentation has not yet occurred.

11. Approval

The condensed Consolidated Interim Financial Statements were approved by the Board on 14 December 2010.

Responsibility statement of the directors in respect of the half-yearly financial report

This Interim Management report is the responsibility of, and has been approved by the directors of Imagination Technologies Group plc. Accordingly, the directors confirm that to the best of their 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.

By order of the Board

Geoff Shingles

Chairman

14 December 2010