11th January 2001

Strategy and Trading Update

Imagination Technologies (LSE:IMG) continues to make significant progress in executing its stated strategy of exploiting its widening graphics, video, audio and DSP technologies across multiple platforms through world-class partners.

ARM – the recently announced partnership with ARM is a significant event for Imagination Technologies giving the company a powerful lever to accelerate penetration of PowerVR technologies into mobile computing and communication devices as well as consumer systems such as Internet appliances and set-top boxes. The mobile market was over 400m units in 2000 and is forecast to exceed 1 billion units in 2004. Personal computing devices are steadily increasing their capabilities and requiring more advanced graphic interfaces. Mobile phones also need enhanced graphical user interfaces as next generation systems are launched and ever increasing capabilities are required to drive existing users to replace their phones with next generation devices. Discussions with end customers are underway and development of PowerVR cores for these markets are at an advanced stage. The goal is to become the standard architecture for these platforms.

Arcade & Slot Machines – PowerVR is establishing itself as a standard technology throughout these markets and is being adopted for a wide variety of applications. Further to the success of Sega’s industry leading Naomi/Naomi2 platforms, PowerVR is now in use by leading players such as Aristocrat, Gaelco, Bell Fruit, and Jesler.

PC Market – The first Kyro device from STMicroelectronics (ST) constitutes the initial step for targeting this market. Kyro has clearly demonstrated the capabilities of PowerVR for this market and has secured initial design wins with add-in board companies. Follow-on chips will increasingly show the advantage of the PowerVR architecture. We are developing further products in the family with ST which will help to secure additional PC market penetration. While the recent slow down in the PC market has delayed the full take up of Kyro, we remain confident of success in this 50+ million unit market through our partnership with ST, particularly as the competitive landscape is becoming more favourable.

Dreamcast – Sega has announced its intention to focus on exploitation of its world leading content through multiple platforms. In future, Sega will license the Dreamcast architecture to third parties for use in a wide range of devices such as set-top boxes, PCs and consumer appliances. Manufacturing of standalone consoles by Sega will cease although Dreamcast will continue to be supported by the release of over 100 software titles through to March 2002. The first Dreamcast chipset licensing deal was announced by Sega on Monday with Sega and Pace jointly launching a Dreamcast compatible set-top box incorporating PowerVR technology. As Sega looks to broaden the applications for its content to new platforms, Imagination Technologies’ intention is to leverage this to broaden the use of PowerVR technology.

STB – the company is in an increasingly strong position to exploit this emerging market through the existing partnership with ST as well as initiatives such as the Pace and Sega partnership, which is incorporating the Dreamcast architecture into a set top box.

DSP – Our novel and revolutionary multi-threaded DSP/processor core development is progressing well and has generated considerable initial interest. Combined with our Ensigma Technologies division’s algorithm and software expertise, we are executing our strategy to offer market-leading technologies for solid-audio and digital radio in the first instance and for general base-band communication and consumer audio in due course.

Trading Update
In the light of Sega’s decision to cease manufacture of the Dreamcast console along with delays in exploiting the PC market, the Board has assessed the impact of this on the company’s financial expectations and has concluded that earnings in the second half of the current financial year and in 2001/2 will fall short of market expectations. It is difficult, at this stage, to quantify the outcome for the current year although the company will remain profitable and cash positive for the year.

In spite of the impact on short-term earnings the Board believes that from a strategic perspective Imagination Technologies is now in a significantly stronger position to exploit its widening base of technologies through world-class partners. The business will continue to invest in developing and building its IP base.

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