1st October 2001

IMAGINATION TECHNOLOGIES GROUP plc TRADING AND PROGRESS UPDATE


Following the close of our first-half, the Company provides the following trading and progress update:-

Trading Update
The tight market conditions that we highlighted in our AGM statement have continued throughout the first half. The general economic slow-down has meant that whilst we are continuing to build relationships with many prospective licensing partners the closure rate of such engagements has lengthened. This has resulted from tightening of capital expenditure in the industry coupled with the continued cautious attitude of many OEMs that are customers of our licensees. Despite these market conditions and due to higher than expected deferred revenues<b>*</b>, our balance sheet remains strong, with current cash balances in excess of the £12.4M level at the beginning of the year. However the tighter environment coupled with our continued planned increase in R&D investment has had an impact on our financial performance in the first-half result leading to an expected small loss.

*[These deferred revenues are advanced payments that will be recognised in the future as the associated deliverables/work are completed].

Notwithstanding these short-term issues and as evident from the growing number of prospective customer engagements, we are confident that our world-leading technologies are highly relevant to the many growing and developing markets and when the current industry and market conditions show improvement we will see faster and significant progress in broadening our partnership base. As we have stated before it is the revenue streams from these new partnerships, which we expect to lead to resumption in revenue growth.

Company Progress
The highlights of our progress in some of our key business areas are summarized below:-

PowerVR
PC:- The partnership with ST in the PC market continues strongly and with the launch of KYRO II earlier this year volumes are now approaching 1 million units cumulatively. Following ST’s licensing of PowerVR Series 4 and 5 earlier this year, projects are well advanced to deliver next generation PC chips which will critically enable ST to market a comprehensive family of PC chips. We are in addition seeing interest from chip-set manufacturers who wish to integrate PowerVR cores in the PC core-logic chip-sets.

Mobile:- The development of the PowerVR MBX core is on track and the partnership with ARM is progressing well. We have very recently begun to demonstrate a fully-featured prototype version of PowerVR MBX to leading customers including key ARM partners and mobile phone manufacturers. This IP core will shortly be available in its final form, suitable for SoC (System-on-Chip) integration. Significantly we are also close to announcing a new member of PowerVR MBX family that will reduce the size and power consumption even further and which allows the technology to target a wider range of devices including entry-level mobile devices of the future.

Arcade/Slot Machines:- We continue to see steady progress in this established market and have gained a new important design-win which we will announce in the very near future.

Set-Top Box (STB):- The timing of the launch of next generation STBs with enhanced graphics and video functionality is dependent on market dynamics. However with ST already having licensed and demonstrated PowerVR STB systems to prospective customers, and with real interest from a number of other significant semiconductor players in the STB market, we believe there is real potential for PowerVR in this market. While the timing of these opportunities, given current industry conditions, is difficult to predict, we believe this market will constitute an inevitable future revenue stream for our technologies.

Metagence and Ensigma
Digital Radio (DAB)/Audio:- We have made significant progress with our multi-threaded DSP processor core (META™) and related technologies provided by our Ensigma Technologies division. Specifically we have just, as part of our partnership with Digital One, released the first fully featured Meta-based DAB chip to manufacturing. Design-wins for this chip with a number of consumer electronics manufacturers are close to being secured and we expect to see volume shipments of META based systems during early part of the next calendar year. VideoLogic’s success in opening up the digital radio and home audio markets, further enhanced by the prestigious “”;What HI-FI? – Best Tuner for 2001″”; award for the DRX-601ES, has provided the springboard with which to exploit META. In addition to digital radio, META provides a highly integrated platform for a wide variety of audio applications.

Digital TV/DVB:- The transition of analogue to digital format TVs, in particular for the mass market free-to-air terrestrial applications, is a major market trend requiring a highly cost-effective and integrated solution. The multi-threaded nature of our META technology and Ensigma’s DSP know-how coupled with expanding Video IP cores available from our PowerVR Technologies division, has enabled us to engage in relationships where we are developing highly integrated and cost-optimised SoC (System-on-Chip) devices for the important Digital TV (DVB) and related applications that are entirely based on our IP. We hope to be able to announce further details of this advanced and important programme during the second half.

The Future
While the short-term industry and market conditions continue to be tight, our technologies are perfectly targeted to address large markets and our well-defined strategy to develop and exploit them further remains very sound. Given the increasing level of interest in our technologies from current and prospective partners and our solid cash position we will continue to execute our well-defined strategy and believe that as market conditions improve the current investments we are making will lead to significant partnerships for exploiting our technologies.


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