ARM 20-F 2007 FY Annual report (foreign)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________

FORM 20-F

o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE

SECURITIES EXCHANGE ACT OF 1934

OR

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2007

OR

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

OR

o  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from__________ to __________

Commission file number: 0-29644

ARM Holdings plc

(Exact Name of Registrant as Specified in Its Charter)

England

(Jurisdiction of Incorporation or Organization)

________________

110 Fulbourn Road

Cambridge CB1 9NJ, England

(Address of Principal Executive Offices)

________________

Tim Score, phone: +44 1223 400 400, fax: +44 1223 400 700, tim.score@arm.com, 110 Fulbourn Road, Cambridge CB1 9NJ, England

(Name, Telephone, E-mail and/or Facsimile number and Address of Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
American Depositary Shares, each representing 3 Ordinary Shares of 0.05p each	The Nasdaq Stock Market LLC
Ordinary Shares of 0.05p each	The Nasdaq Stock Market LLC*

____________________

* Not for trading, but only in connection with the registration of American Depositary Shares representing such Ordinary Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

________________

The number of outstanding shares in the capital of ARM Holdings plc as of December 31, 2007:

Ordinary Shares of 0.05p each 1,344,055,696

________________

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes   x       No  o

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   x       No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer  o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing.

x U.S. GAAP                   o International Financial Reporting Standards as issued by the International Accounting Standards Board                        o Other

If “Other” has been checked to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o            Item 18  o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   o             No  x

TABLE OF CONTENTS

Page

INTRODUCTION	1
Forward-looking Statements	1
Certain Information	1

PART I		2
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	2
ITEM 3.	KEY INFORMATION	2
	SELECTED FINANCIAL DATA	2
	RISK FACTORS	4
ITEM 4.	INFORMATION ON THE COMPANY	11
	HISTORY AND DEVELOPMENT OF ARM HOLDINGS PLC	11
	BUSINESS OVERVIEW	11
	ORGANIZATIONAL STRUCTURE	26
	PROPERTIES	27
ITEM 4A.	UNRESOLVED STAFF COMMENTS	27
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	28
	OPERATING RESULTS	28
	LIQUIDITY AND CAPITAL RESOURCES	47
	RESEARCH AND DEVELOPMENT	49
	OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS	49
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	49
	DIRECTORS AND SENIOR MANAGEMENT	49
	COMPENSATION	52
	BOARD PRACTICES	54
	EMPLOYEES	67
	SHARE OWNERSHIP	67
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	74
	MAJOR SHAREHOLDERS	74
	RELATED PARTY TRANSACTIONS	75
ITEM 8.	FINANCIAL INFORMATION	75
	CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION	75
	LEGAL PROCEEDINGS	75
	DIVIDEND DISTRIBUTION POLICY	76
	SIGNIFICANT CHANGES	76
ITEM 9.	LISTING DETAILS	76
	MARKET PRICE INFORMATION	76
ITEM 10.	ADDITIONAL INFORMATION	78
	CORPORATE GOVERNANCE	78
	MEMORANDUM AND ARTICLES OF ASSOCIATION	79
	MATERIAL CONTRACTS	86
	EXCHANGE CONTROLS	86
	TAXATION	86
	DOCUMENTS ON DISPLAY	89
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	89
	FOREIGN CURRENCY EXCHANGE RATE RISK	89
	INTEREST RATE RISK	90
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	90
PART II		90
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	90
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	91
ITEM 15.	CONTROLS AND PROCEDURES	91

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ITEM 16.	RESERVED	92
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	92
ITEM 16B.	CODE OF ETHICS	92
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	92
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	92
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	93
ITEM 17.	FINANCIAL STATEMENTS	93
PART III		93
ITEM 18.	FINANCIAL STATEMENTS	93
ITEM 19.	EXHIBITS	94

INTRODUCTION

Forward-looking Statements

This annual report contains forward-looking statements. These forward-looking statements are not historical facts, but rather are based on our current expectations, estimates and projections about our industry, our beliefs and assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties are described in “Item 3. Key Information—Risk Factors” and elsewhere in this annual report. We caution you not to place undue reliance on these forward-looking statements, which reflect our management’s view only as of the date of this annual report.

Certain Information

As used in this annual report, “we,” “us,” “our,” the “Company” and “ARM” refer to ARM Holdings plc and its subsidiaries, except where it is clear that such terms mean only ARM Holdings plc.

We publish our consolidated financial statements in pounds sterling. In this annual report, references to “pounds sterling,” “pounds,” “sterling,” “£,” “pence” and “p” are to the currency of the United Kingdom (“UK”) and references to “US dollars,” “dollars,” “$” or “c” are to the currency of the United States of America (“US”). See “Item 3. Key Information—Selected Financial Data—Exchange Rate Information” for historical information regarding the noon buying rates in The City of New York for cable transfers in pounds as certified for customs purposes by the Federal Reserve Bank of New York with respect to the pound. You should not construe these translations as representations that the pound amounts actually represent such US dollar amounts or could have been or could be converted into US dollars at the rates indicated or at any other rates.

In this report, the term “US GAAP” refers to generally accepted accounting principles (“GAAP”) in the US.

This annual report includes product names and other trade names, logos and trademarks, either registered or with respect to which applications are pending, of ARM and of other companies. ARM, ARM Powered, AMBA, ARM7TDMI, ARM9TDMI, Artisan, Artisan Components, Cortex, Embedded-ICE, Integrator, Jazelle, Mali, Move, Multi-ICE, Multi-TRACE, OptimoDE, PrimeCell, PrimeXsys, Process-Perfect, RealView, Securcore, StrongARM, Thumb, The Architecture for the Digital World, and TrustZone are registered trademarks of ARM Limited or its subsidiaries. Advantage, ARM Developer Suite, ARM7, ARM7EJ, ARM7EJ-S, ARM7TDMI-S, ARM720T, ARM9, ARM9TDMI-S, ARM9E, ARM9E-S, ARM9EJ-S, ARM920T, ARM922T, ARM926EJ-S, ARM940T, ARM946E-S, ARM966E-S, ARM10, ARM10E, ARM1020E, ARM1022E, ARM1026EJ-S, ARM11, ARM1136J-S, ARM1136JF-S, ARM1156T2F-S, ARM1156T2-S, ARM1176JZ-S, ARM1176JZF-S, CoreSight, ETM, Embedded Trace Macrocell, ETM10, ETM10RV, EmbeddedICE-RT, Keil, Microvision, Mali-55, Mali-200, Metro, MPCore, SAGE-X, SAGE-HS, SAGE-HD, SC100, SC110, SC200, SC210 and Velocity are trademarks of ARM Limited.  All other brands or product names are the property of their respective holders.  “ARM” is used to represent ARM Holdings plc (LSE: ARM and Nasdaq: ARMHY); its operating company, ARM Limited; and the regional subsidiaries, ARM, Inc., Soisic, Inc., Axys Design Automation, Inc., Keil Software, Inc., ARM Germany GmbH, Keil Elektronik GmbH, ARM Norway AS, ARM KK, ARM Korea Limited, ARM Taiwan Limited, ARM France SAS, ARM Consulting (Shanghai) Co. Limited., ARM Belgium N.V., ARM Embedded Technologies Pvt. Limited and ARM Physical IP Asia Pacific Pte Limited.

Various amounts and percentages set out in this annual report have been rounded and accordingly may not total.

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PART I

ITEM 1.         IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2.         OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3.         KEY INFORMATION

SELECTED FINANCIAL DATA

Our selected financial data at December 31, 2006 and 2007 and for the years ended December 31, 2005, 2006 and 2007 have been derived from our consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States and included in this annual report. Our consolidated financial statements have been audited by PricewaterhouseCoopers LLP, independent registered public accounting firm. Our summary financial data at and for the years ended December 31, 2003 and 2004 have been derived from our consolidated financial statements that are not included in this annual report. The following selected financial data should be read in conjunction with, and are qualified in their entirety by reference to, our consolidated financial statements and the notes thereto.

	Year ended December 31,
	2003			2004			2005			2006			2007
	(in thousands of pounds, except per share data, percentages, number of shares and employees)
		£			£			£			£			£
Revenues		128,070			152,897			232,439			263,254			259,160
Cost of revenues (1)		(11,022	)		(11,799	)		(27,847	)		(30,877	)		(27,958	)
Operating expenses (1)		(99,785	)		(109,587	)		(156,675	)		(187,357	)		(188,364	)
Income from operations		17,263			31,511			47,917			45,020			42,838
Interest		4,801			6,944			5,317			6,758			5,402
Profit on disposal of available-for-sale security		—			—			—			5,270			—
Minority interest		(105	)		—			—			—			—
Income before income tax and cumulative effect of change in accounting policy		21,959			38,455			53,234			57,048			48,240
Provision for income taxes		(8,943	)		(10,478	)		(11,354	)		(9,438	)		(11,398	)
Net income before cumulative effect of change in account policy		13,016			27,977			41,880			47,610			36,842
Cumulative effect of change in accounting policy, net of tax		—			—			—			(2,447	)		—
Net income		13,016			27,977			41,880			45,163			36,842
Basic earnings (before cumulative effect of change in accounting policy) per common share		1.3	p		2.7	p		3.1	p		3.5	p		2.8	p
Basic earnings (after cumulative effect of change in accounting policy) per common share		1.3	p		2.7	p		3.1	p		3.3	p		2.8	p
Diluted earnings (before cumulative effect of change in accounting policy) per common share		1.3	p		2.7	p		2.9	p		3.4	p		2.7	p
Diluted earnings (after cumulative effect of change in accounting policy) per common share		1.3	p		2.7	p		2.9	p		3.2	p		2.7	p
Dividends declared per common share (£)		0.60	p		0.70	p		0.84	p		1.00	p		2.00	p
Dividends declared per common share ($)		1.07	c		1.31	c		1.47	c		1.91	c		3.98	c
Weighted average number of common shares (000s)		1,016,484			1,026,890			1,369,335			1,366,816			1,321,860
Research and development as a percentage of revenues		37.6	%		33.0	%		26.5	%		28.7	%		28.1	%
Balance Sheet Data:
Capital expenditure		3,605			5,036			6,064			8,559			5,444
Cash and cash equivalents, short-term investments and marketable securities		159,786			142,817			160,902			128,494			51,323
Capital stock		512			675			693			695			672
Shareholders’ equity		188,075			552,327			649,050			574,647			493,740
Total assets		222,997			637,937			716,093			652,703			556,665
Net assets		188,075			552,327			649,050			574,647			493,740
Employees at year end (number)		740			1,171			1,324			1,659			1,728

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__________________

(1) The Company applied FAS 123R in 2006 and 2007, recording total non-cash share-based compensation charges of £15,979,000 in 2007 and £18,292,000 in 2006. These are split £959,000 (2006: £1,098,000) within Cost of revenues and £15,020,000 (2006: £17,194,000) within Operating expenses. In 2005, deferred share-based compensation was recorded in accordance with previously applicable standards totaling £9,727,000, split £2,489,000 in Cost of revenues and £7,238,000 in Operating expenses.

Exchange Rate Information

The following table sets forth, for the periods indicated, certain information concerning the exchange rate between pounds sterling and US dollars based on the noon buying rate (expressed as US dollars per pound sterling). Such rates are provided solely for the convenience of the reader and are not necessarily the exchange rates (if any) we used in the preparation of our consolidated financial statements included elsewhere in this annual report on Form 20-F. No representation is made that pounds sterling could have been, or could be, converted into US dollars at these rates or at any other rates.

Year Ended December 31,	Period Average(1)		Period End
2003		1.6359		1.7858
2004		1.8300		1.9160
2005		1.8207		1.7168
2006		1.8452		1.9572
2007		2.0018		1.9906
2008 (through March 28)		1.9776		1.9892

__________________

(1) The average of the noon buying rates on the last day of each full month during the relevant period.

Month	High		Low
October 2007		2.0703		2.0245
November 2007		2.1161		2.0353
December 2007		2.0700		1.9749
January 2008		2.0102		1.9336
February 2008		1.9972		1.9361
March 2008 (through March 28)		2.0397		1.9715

On March 28, 2008 the noon buying rate was $1.9892 to £1.00.

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RISK FACTORS

You should carefully consider the risks described below as well as the other information contained in this annual report in evaluating us and our business. If any of the following risks actually occurs, our business, financial condition or results of future operations could be significantly harmed. In that case, the trading price of our shares and ADSs could decline and you may lose all or part of your investment. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described below and elsewhere in this annual report. You should also refer to the other information in this annual report, including our consolidated financial statements and the related notes.

Our Quarterly Results May Fluctuate Significantly and Be Unpredictable – This Could Adversely Affect the Market Price of Our Shares

We have experienced, and may in the future experience, significant quarterly fluctuations in our results of operations. Our quarterly results may fluctuate because of a variety of factors. Such factors include:

· the timing of entering into agreements with new licensees;

· the mixture of license fees, royalties, revenues from the sale of development systems and fees from services;

· the introduction of new technology by us, our licensees or our competition;

· the timing of orders from and shipments to systems companies of ARM-based microprocessors from our semiconductor partners;

· sudden technological or other changes in the microprocessor industry; and

· new litigation or developments in current litigation.

In future periods, our operating results may not meet the expectations of public market analysts or investors. In such an event the market price of our shares could be materially adversely affected. A more detailed description of how we earn revenues from license fees and royalties is set forth in the sections entitled “Item 18. Financial Statements—Notes to the Consolidated Financial Statements—Revenue recognition” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Policies and Estimates.”

We are Dependent on Both Our Semiconductor Partners and Major Physical IP Licensees

We rely on our semiconductor partners to manufacture and market microprocessors based on our architecture in order to receive royalties in the future. We also depend on them to add value to our licensed architecture by providing complete ARM-based microprocessor solutions to meet the specific application needs of systems companies. However, the semiconductor partners are not contractually obliged to manufacture, distribute or sell microprocessors based on our technology or to market our microprocessor architecture on an exclusive basis. Some of our existing semiconductor partners design, develop and/or manufacture and market microprocessors based on competing architectures, including their own, and others may do so in the future.

We also rely on our major physical IP licensees to manufacture and market physical IP based on our libraries. We anticipate that our revenue will continue to depend on these major customers for the foreseeable future, although the companies considered to be major customers and the percentage of revenue represented by each major customer may vary from period to period depending on the addition of new contracts, the timing of work performed by us and the number of designs utilizing our products. None of our major physical IP licensees are contractually obliged to license future generations of physical IP components or additional physical IP components from us, and we cannot be certain that any customer will license physical IP components from us in the future. Our revenue from these customers may be comprised of license fees and royalties. In addition, we cannot be certain that any of the integrated circuit manufacturers will produce products incorporating our physical IP components or that, if production occurs, they will generate significant royalty revenue for us. If one or more of our semiconductor partners or major physical IP licensees stops licensing our microprocessors or physical IP components, reduces its orders, fails to pay license or royalty fees due or does not produce

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products containing our microprocessors or physical IP components, our operating results could be materially and negatively affected.

We cannot assure you that our semiconductor partners or our major physical IP licensees will dedicate the resources necessary to promote and further develop our architecture and physical IP libraries respectively, that they will manufacture microprocessors or physical IP libraries based on our architecture in quantities sufficient to meet demand, that we will be successful in maintaining our relationships with our semiconductor partners and major physical IP licensees or that we will be able to develop relationships with new semiconductor partners or major physical IP licensees. Although we believe that our strategy of selecting multiple semiconductor partners and major physical IP licensees will expand the market for our architecture and physical IP libraries respectively and lead to more rapid acceptance of our architecture and physical IP libraries by assuring multiple reliable sources of microprocessors and physical IP libraries at competitive prices, such a strategy may also result in distribution channel conflicts. This could create disincentives to market our architecture aggressively and make it more difficult to retain our existing semiconductor partners and major physical IP licensees and to attract new partners and licensees.

Accurate prediction of the timing of inception of new licenses is difficult because the development of a business relationship with a potential licensee may frequently span a year or more. The fiscal period in which a new license agreement will be entered into, if at all, is difficult to predict, as are the financial terms of any such agreement. Engineering services are dependent upon the varying level of assistance desired by licensees and, therefore, the timing of revenue from these services is also difficult to predict.

The royalties we receive on ARM-based microprocessors are based on the volumes and prices of microprocessors manufactured and sold by our semiconductor partners and the royalties we receive on physical IP libraries are based on volumes and prices of wafers, manufactured and sold by our major physical IP licensees. Our royalties are therefore influenced by many of the risks faced by the semiconductor market in general. These risks include reductions in demand for microprocessors and physical IP libraries and reduced average selling prices. The semiconductor market is intensely competitive. It is also generally characterized by declining average selling prices over the life of a generation of microprocessors and physical IP libraries. The effect of these price decreases is compounded by the fact that royalty rates decrease as a function of volume. We cannot assure you that delays in licensing, poor demand for services, decreases in prices or in our royalty rates will not materially adversely affect our business, results of operations and financial condition.

Our Success Depends Substantially on Systems Companies

Our success depends substantially on the acceptance of our technology by systems companies, particularly those which develop and market high-volume electronic products in the wireless, consumer electronics and networking markets where demand may be highly cyclical. The reason for this dependence is that sales of ARM-based microprocessors by our semiconductor partners to systems companies directly affect the amount of royalties we receive. We are subject to many risks beyond our control that may influence the success or failure of a particular systems company. These risks include:

· competition faced by the systems company in its particular industry;

· the engineering and marketing capabilities of the systems company;

· market acceptance of the systems company’s products;

· technical challenges unrelated to our technology faced by the systems company in developing its products; and

· the financial and other resources of the systems company.

It can take a long time to persuade systems companies to accept our technology and, even if accepted, we cannot assure you that our technology will be used in a product that is ultimately brought to market. Furthermore, even if our technology is used in a product brought to market, we cannot assure you that such product will be commercially accepted or result in significant royalties to us. Demand for our intellectual property may also be affected by consolidation in the integrated circuit and related industries, which may reduce the aggregate level of purchases of our intellectual property components and services by the combined companies.

The revenue we generate from licensing activities depends in large part on the rate at which systems companies adopt new product generations, which, in turn, is affected by the level of demand for their integrated circuits and other products.

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With increasing complexity in each successive generation of integrated circuit products, we face the risk that the rate of adoption of smaller process geometries for integrated circuit manufacturing may slow. We also face the risk that licensing revenue may suffer if current or former customers collaborate with each other regarding design standards for particular generations of integrated circuit products.

The Availability of Development Tools, Systems Software, EDA Software and Operating Systems Is Crucial to the Market Acceptance of Our Products

We believe that it is crucial for the market acceptance of our products that development tools, systems software, electronic design automation (EDA) software and operating systems compatible with our architecture be available. We currently work with systems software, EDA software and tools and development partners to offer development tools, systems software, EDA software and operating systems for our architecture. However, we cannot assure you that:

· we will be able to attract additional tools and development, systems software and EDA software partners;

· our existing partners will continue to offer development tools, systems software, EDA software and operating systems compatible with our architecture; or

· the available development tools, systems software, EDA software and operating systems will be sufficient to support customers’ needs.

We Depend Largely on a Small Number of Customers and Products – This May Adversely Affect Our Revenues

Our revenues depend largely on a small number of licensees and products. As regards revenues from licensees, our revenues in a particular period are generally concentrated in a small number of licensees. If we fail to achieve the performance required under a single license contract or if a single customer fails to make its milestone payments, our business, financial condition and results of operations could be materially adversely affected. In addition, any failure to develop successor products which offer significant competitive advantages to these customers in a timely manner or any decrease in demand for ARM microprocessors or for ARM’s range of physical IP libraries could materially adversely affect us.

Rapid Technological Changes in Our Industry Are Difficult to Predict – Our Business May Be Adversely Affected if We Cannot Develop New Products on a Timely Basis

The market for our architecture is characterized by rapidly changing technology and end user needs. Our business, reputation and relationships with our partners could be adversely affected if we cannot develop technological improvements or adapt our architecture and physical IP libraries to technological changes on a timely basis. Whether we will be able to compete in the future will substantially depend on our ability to advance our technology to meet these changing market and user needs and to anticipate successfully or respond to technological changes in hardware, software and architecture standards on a cost-effective and timely basis. We will have to make significant expenditures to develop our products. The long lead time from the initial design of our technology until it is incorporated into new end user applications will place significant strain on our research and development resources. Certain of our products have suffered delays in the past. We cannot assure you that the design of future products will be completed as scheduled, that we will be successful in developing and licensing new products, that we will not experience difficulties that delay or prevent the successful development, introduction and marketing of new products or that any new products that we may introduce will achieve market acceptance.

Our Business and Future Operating Results May Be Adversely Affected by General Economic Conditions and other Events Outside of Our Control

We are subject to risks arising from adverse changes in global economic conditions. Due to economic uncertainties in many of our key markets, many industries may delay or reduce technology purchases and investments. The impact of this on us is difficult to predict, but if businesses defer licensing our technology, require less services or development tools, or if consumers defer purchases of new products which incorporate our technology, our revenue could decline. A decline in revenue would have an adverse effect on our results of operations and could have an adverse effect on our financial condition.

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Our business and operating results will also be vulnerable to interruption by other events outside of our control, such as earthquakes, fire, power loss, telecommunications failures, political instability, military conflict and uncertainties arising out of terrorist attacks, including a global economic slowdown, the economic consequences of additional military action or additional terrorist activities and associated political instability, and the effect of heightened security concerns on domestic and international travel and commerce.

We May Incur Unanticipated Costs Because of Products that Could Have Technical Difficulties or Undetected Design Errors

Our products or technology could have a substantial technical difficulty or an undetected design error. This could result in unanticipated costs, including product liability litigation. The discovery of any design defect or any ensuing litigation could damage our results and reputation and our relationships with partners could be adversely affected.

Our Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market

There are competing microprocessor architectures in the market. We cannot assure you that the market will continue to accept our architecture. Market acceptance of our architecture by semiconductor and systems companies for use in a variety of embedded applications is critical for our success. While our microprocessor architecture has already been licensed by many semiconductor and systems companies for use in a variety of high volume applications in the wireless, consumer electronics and networking markets, other microprocessor architectures have a larger installed base of embedded applications and are supported by a broad base of related software and development tools. A more detailed description of these competing architectures is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition” below. It may be difficult for our architecture to succeed against incumbent architectures as systems companies that have used other microprocessor architectures would need to invest in additional training and development tools and convert software for existing embedded applications in order to change to a new architecture. Moreover, some competing microprocessor architectures have been developed by firms, including some of our semiconductor partners, that have substantially greater financial, technical and marketing resources than we do.

Our physical IP library products also face significant competition from the internal design groups of integrated circuit manufacturers that have expanded their manufacturing capabilities and portfolio of intellectual property components to participate in the system-on-a-chip market. Our physical IP library products also face competition from integrated circuit designers that have expanded their internal design capabilities and portfolio of intellectual property components to meet their internal design needs. Integrated circuit manufacturers and designers that license our physical IP components have historically had their own internal physical IP component design groups. These design groups continue to compete with ARM for access to the integrated circuit manufacturers’ or designers’ physical IP component requisitions and, in some cases, compete with ARM to supply physical IP components to third parties. Physical IP components developed by internal design groups of integrated circuit manufacturers are designed to utilize the qualities of their own manufacturing process, and may therefore benefit from capacity, informational, cost and technical advantages.

Foundry partners may be reluctant to rely on a single vendor for a broad array of IP components and RISC microprocessors and could select another vendor to provide them with products formerly supplied by us. Alternatively, PIPD Foundry partners could also name another vendor as their vendor of choice to their customers.

Our development systems tools business faces significant competitors from both the open source community and third party tools and software suppliers. In the event that market share is lost to such competitors there could be a material adverse effect on our revenues.

Our Architecture and Physical IP Libraries may Face Strong Competition from Well Resourced Competitors

Some semiconductor companies have developed their own proprietary architecture for specific markets or applications.  These companies may reuse their proprietary architecture to penetrate markets where ARM is currently the architecture of choice, or where ARM may be used in the future making it harder for ARM to penetrate.  For example, Intel Corporation has developed the X86 architecture for use in PCs and laptops.  With mobile phones becoming smarter, Intel is trying to capture the high-end smartphone market with a family of chips based on the X86 architecture.  This could limit ARM’s market share in mobile phones and could prevent any further growth into mobile computing devices.  Other semiconductor companies have proprietary architectures in other applications including, but not limited to,

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automotive, networking, digital television, electronic storage and mobile communications.  These companies may have much larger engineering, marketing and sales resources than ARM, and if successful in displacing or impeding ARM could reduce licensing opportunities and royalties, negatively affecting operating results.

Taiwan Semiconductor Manufacturing Company (“TSMC”), one of the largest integrated circuit manufacturing customers of ARM's Physical IP Division (“PIPD”), has historically produced intellectual property components for use by third parties in designs to be manufactured at TSMC’s foundry. These components are designed to serve the same purpose as components produced by PIPD. The intellectual property components developed by TSMC have competed and are expected to continue to compete with PIPD’s products. We believe that TSMC is more aggressively developing and distributing these products to encourage its customers to use TSMC-developed IP rather than products containing ARM IP. TSMC has substantially greater financial, manufacturing and other resources, name recognition and market presence than the PIPD business and the internal design group at TSMC has greater access to technical information about TSMC’s manufacturing processes. Distribution partners selected by TSMC include Cadence Design Systems, Inc. (“Cadence”), Magma Design Automation, Inc., Synopsys, Inc. (“Synopsys”) and Virage Logic Corporation. Some of TSMC’s distribution partners, such as Cadence, may have greater resources, name recognition and distribution networks than we do. If TSMC is successful in its strategy, then we would lose TSMC license revenue and TSMC royalties, negatively affecting operating results.

The High Cost of Building Advanced Semiconductor Manufacturing Facilities May Limit the Number of Foundries as Potential Customers for our Physical IP Libraries

The cost of developing manufacturing facilities for advanced process geometries is rising. Some of ARM’s current foundry customers may delay or cancel plans for developing new manufacturing processes.   Without a new process, ARM will not have an opportunity to develop and sell Physical IP libraries for that process.  This would reduce the licensing opportunity that ARM could expect to bid for.  In addition, the bargaining power of the remaining foundries with advanced manufacturing facilities would be increased.  This could make it harder for ARM to win profitable licensing deals with these foundries, further reducing both licensing and royalty revenue.

There May Be Risks Associated With any Strategic Investments or Acquisitions We May Make

We envisage making strategic investments or acquisitions where there is an opportunity to further the establishment of the ARM architecture and physical IP libraries. Exploring and implementing any investments or acquisitions may place strain upon our ability to manage our future growth and may divert management attention from our core design and licensing business. There are also other risks associated with this strategy. We cannot assure you that we will be able to make investments or acquire businesses on satisfactory terms or that any business acquired by us or in which we invest will be integrated successfully into our operations or be able to operate profitably.

We May Not Be Able to Compete Successfully in the Future

The markets for our products are intensely competitive and characterized by rapid technological change. For example, sales of development systems have continued to be affected by increased competition in the debug tools marketplace. We cannot assure you that we will have the financial resources, technical expertise or marketing or support capabilities to compete successfully in the future. Competition is based on a variety of factors including price, performance, features, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given our reliance on our semiconductor partners, our competitive position is dependent on their competitive position. In addition, our semiconductor partners do not license our architecture exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architecture. A more detailed description of the competition we face from new technologies or products is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Competition.”

We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Qualified Engineers

If we lose the services of any of our senior management personnel or a significant number of our engineers, it could be disruptive to our development efforts or business relationships and could have a material adverse effect on our business, financial condition and results of operations. As our future success depends on whether we can continue to enhance and introduce new generations of our technology, we are particularly dependent upon our ability to identify, attract, motivate

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and retain qualified engineers with the requisite educational background and industry experience. Competition for qualified engineers, particularly those with significant industry experience, is intense. We are also dependent upon our senior management personnel. In addition, whether we can successfully expand geographically will depend on our ability to attract and retain sales and marketing personnel. In certain geographic regions, there is fierce competition for such personnel.

Our International Operations Expose Us to Risks

We currently have operations in various jurisdictions around the world and may in the future expand our operations either within these jurisdictions or to new jurisdictions. Some risks associated with these international operations are exposure to exchange rate fluctuations, political, economic and financial conditions and unexpected changes in regulatory environments. Another risk we face is that, particularly with respect to intellectual property, we are exposed to different legal jurisdictions. In addition, we could face potentially adverse tax consequences and difficulties in staffing and managing operations. With respect to foreign exchange, a large proportion of our revenues are in US dollars while our costs reflect the geographic spread of our operations with in excess of 50% of our costs being in pounds sterling. This mismatch will result in gains or losses with respect to movements in foreign exchange rates and may be material. To mitigate this effect, we engage in currency hedging transactions. A more detailed description of these hedging transactions is set forth in the section entitled “Item 5. Operating and Financial Review and Prospects— Operating Results—Foreign Currency Fluctuations.” Although we have not to date experienced any material adverse effects with respect to our foreign operations arising from such factors, we cannot assure you that such problems will not arise in the future. Finally, managing operations in multiple jurisdictions will place further strain on our ability to manage overall growth.

Claims May Be Made For Which We Do Not Have Adequate Insurance

Since 2001, the insurance industry has faced unprecedented and escalating global events compounded by international economic uncertainty. As a result of these and other pressures, many insurers have withdrawn from certain market sectors. We have continued with our philosophy of only placing cover with secure underwriters with programs arranged individually to suit our needs. We currently have global insurance policies including cover for the following significant risks: business interruption, public and products liability, directors and officers liability, errors and omissions liability. We do not insure against claims concerning patent litigation, because we are of the view that any limited cover that could be obtained is prohibitively expensive. Our results of operations could be materially adversely affected by the occurrence of a catastrophic event, to the extent that any resulting loss or claim is not covered under the terms of our then existing insurance policies.

We May Be Unable to Protect and Enforce Our Proprietary Rights and We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights

Our ability to compete may be affected by whether we can protect and enforce our proprietary rights. We take great care to protect our technology and innovations with patents, agreements with licensees, employees and consultants and other security measures. We also rely on copyright, trademarks and trade secret laws to protect our technology and innovations.

However, despite our efforts, we cannot assure you that others will not gain access to our trade secrets, or that we can meaningfully protect our technology and innovations. In addition, effective trade secret protection may be unavailable or limited in certain countries. Although we intend to protect our technology and innovations vigorously, there can be no assurance that such measures will be successful.

A more detailed description of how we protect our intellectual property is set forth in the section entitled “Item 4. Information on the Company—Business Overview—Patent and Intellectual Property Protection.”

We take great care to establish and maintain the proprietary integrity of our products. We focus on designing and implementing our products in a “cleanroom” fashion, without the use of intellectual property belonging to other third parties, except under strictly maintained procedures and express license rights. In the event that we discover that a third party has intellectual property rights covering a product that we are interested in developing, we will take steps to either purchase a license to use the technology or work around the technology by developing our own solution so as to avoid infringement of that third party’s intellectual property rights. Notwithstanding such efforts, third parties may yet make claims that we have infringed their proprietary rights.

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An Infringement Claim or a Significant Damage Award Would Adversely Impact Our Operating Results

Substantial litigation and threats of litigation regarding intellectual property rights exist in the industries in which we operate. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to our business. We cannot be certain that we would ultimately prevail in any dispute or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Any infringement claim brought against us, regardless of the duration, outcome or size of damage award, could:

· result in substantial cost to us;

· divert management’s attention and resources;

· be time consuming to defend;

· result in substantial damage awards;

· cause product shipment delays; or

· require us to seek to enter into royalty or other licensing agreements.

Any infringement claim or other litigation against or by us could have a material negative affect on our business.

In any potential dispute involving our intellectual property, our customers and strategic partners could also become the target of litigation. This could trigger our indemnification obligations in our license agreements, which could result in substantial expense to us. In addition to the time and expense required for us to supply support or indemnification to our customers and strategic partners, any litigation could severely disrupt or shut down the business of our customers and strategic partners, which in turn would hurt our relations with them and harm our operating results.

From time to time, we may be subject to claims by our customers or customers of the companies we have acquired that our intellectual property components or products of acquired companies that have been incorporated into electronic products infringe the intellectual property rights of others.

Our Future Capital Needs May Require Us to Seek Debt Financing or Additional Equity Funding Which, if not Available, Could Cause Our Business to Suffer

From time to time, we may be required to raise additional funds for our future capital needs through public or private financing, strategic relationships or other arrangements. There can be no assurance that the funding, if needed, will be available on attractive terms, or at all. Furthermore, any additional financing arrangements may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require us to relinquish our rights to certain of our technologies or products. Our failure to raise capital when needed could have a material adverse effect on our business.

We May Not Realize the Anticipated Benefits (including Synergy benefits) of the Artisan (now PIPD) Acquisition

The acquisition of Artisan involved the integration of two companies that previously operated independently. There can be no assurance, however, regarding when or the extent to which the combined company will be able to fully realize the benefits anticipated to result from the acquisition, including increased revenues or other benefits.

Our Business Will be Adversely Affected if We Cannot Manage the Significant Changes in the Number of Our Employees and the Size of Our Operations

Over the past few years, we have significantly increased the number of our employees and the size of our operations, particularly in the United States and India. These changes in headcount may place a significant strain on our management and other resources. We will face challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs in different jurisdictions.

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If we are unable to manage growth in our headcount, expenses, technological integration and the scope of operations effectively, the cost and quality of our products may suffer and we may be unable to attract and retain key personnel and develop and market new products. Further, the inability to successfully manage the substantially larger and geographically more diverse organization could have a material adverse effect on the Company and, as a result, on the market prices of our ADSs and our ordinary shares.

We May Not Continue to Operate and Develop Systems Which Comply Fully With the Requirements of the Sarbanes-Oxley Act

Attestation under section 404 of the Sarbanes-Oxley Act as at December 31, 2007 has been successfully completed. Full details appear in “Item 15. Controls and Procedures.” There can be no guarantee, however, that in the future the detailed testing of internal controls required as part of the attestation process will not identify significant control deficiencies or material weaknesses that impact on management’s or the auditors’ opinions on internal controls over financial reporting and/or require disclosure, which could result in damage to our reputation, diversion of management’s attention and resources and a material adverse effect on the market prices of our ADSs and our ordinary shares.

We May Not Operate Disaster Recovery Plans Which Adequately Mitigate the Effects of an Event Over Which We Do Not Have Direct Control

Our business depends on the efficient and uninterrupted operation of our computer and communications software and hardware systems and other information technology. If such systems were to fail for any reason or if we were to experience any unscheduled down times, even for only a short period, our operations and financial results could be adversely affected. Our systems could be damaged or interrupted by fire, flood, hurricanes, power loss, telecommunications failure, break-ins or similar events. We have formal disaster recovery plans in place. However, these plans may not be entirely successful in preventing delays or other complications that could arise from information systems failure, and, if they are not successful, our business interruption insurance may not adequately compensate us for losses that may occur, negatively affecting operating results.

ITEM 4.         INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF ARM HOLDINGS PLC

History

ARM Holdings plc is a public limited company incorporated under the laws of England and Wales. The Company was formed on October 16, 1990 as a joint venture between Apple Computer (UK) Limited, Acorn Computers Limited and VLSI Technology, Inc. and operated under the name Advanced RISC Machines Holdings Limited.

In 1998, the Company re-registered as a public company under the name ARM Holdings plc when it completed its initial public offering of shares and listed its shares for trading on the London Stock Exchange and for quotation on the Nasdaq National Market. In 2004, ARM Holdings plc acquired Artisan Components, Inc., a publicly held physical IP company based in Sunnyvale, California.

Our principal executive offices are at 110 Fulbourn Road, Cambridge, CB1 9NJ, UK, and our telephone number is +44 (0)1223 400400. ARM, Inc., our US subsidiary which includes the acquired Artisan business, is located at 141 Caspian Court, Sunnyvale, California, 94089-1013, USA and its telephone number is +1 408 734 5600.

Capital Expenditures

For a discussion of the Company’s capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

BUSINESS OVERVIEW

ARM designs reduced instruction set computing (“RISC”) microprocessors, physical IP and related technology and software, and sells development tools to enhance the performance, cost-effectiveness and power-efficiency of high-volume

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embedded applications. ARM licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (“ASICs”) and application-specific standard processors (“ASSPs”) based on ARM’s technology to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilize ARM’s technology, ARM is establishing its RISC processor architecture and physical IP for use in many high-volume embedded microprocessor applications, including digital cellular phones, modems and automotive functions and for potential use in many growing markets, including smart cards and digital video. ARM also licenses and sells development tools direct to systems companies and provides consulting and support services to its licensees, systems companies and other systems designers. ARM’s principal geographic markets are Europe, the US and Asia Pacific.

Industry Background

The semiconductor market is an industry that has been in place for many decades and provides the world’s digital electronics market with a growing variety of products. Over the life of the semiconductor industry, continuous technology developments have enabled miniaturization and given rise to an increasing level of design complexity. This increased complexity has had the effect of increasing structural costs, thus the semiconductor industry has had to find ways to mitigate this. To this end, the industry has transitioned from being highly vertically-integrated to being an industry that looks for horizontal specialization to alleviate structural cost. This in turn has given way to the creation of a sub-sector, semiconductor IP, which serves the need of semiconductor companies by allowing them to outsource the cost of technology development where there is an inequality between the economic benefit of the development versus the differentiation that the company can achieve for the development. Specific areas where this outsourcing has occurred in a significant manner are in embedded microprocessors and physical IP.

Microprocessors are embedded in a wide variety of high volume electronic products, ranging from video games to automotive control systems to digital cellular phones. While most of these microprocessors are invisible and inaccessible to the end user, product designers use the computational capabilities of these embedded microprocessors to implement the operating features of electronic products and control systems. “Embedded microprocessor” is a general term that refers to microprocessors other than the central processing unit (“CPU”) in traditional desktop personal computers (“PCs”).

The embedded microprocessor market has grown to support new electronic products as well as new capabilities and features in existing products. New products with easier user interfaces such as mobile phones and audio players all depend on embedded microprocessors. At the same time, new capabilities and features also drive the need for new and more powerful embedded microprocessors in products such as smartphones and digital set top boxes (“STBs”). As consumers demand electronic products and control systems with more features, capabilities and portability, systems companies which manufacture these products and control systems are demanding embedded microprocessors that support increasingly complex functions at low cost, that use power efficiently, that can be rapidly implemented to shorten time to market and that are available in volume from multiple sources.

In order to shorten time to market and lower development costs, system designers need technology solutions that can be rapidly implemented, both from a hardware and software standpoint, to meet varying design needs for performance, power consumption and cost. Typically, a system designer will create a system-on-chip (“SoC”) integrating one or more microprocessor cores with other processing engines and peripherals. Product designers need an open microprocessor architecture that can be rapidly implemented, used in a variety of hardware formats and easily combined with differentiating technology suited to different applications.

These designs are highly complex, containing, in some cases, hundreds of millions of transistors. SoC designers incorporate functional blocks in the form of standard physical IP libraries that translate the circuit design of the SoC into the physical layout of transistors on a silicon wafer. The SoC will typically be fabricated either at the in-house facility of the designer’s semiconductor company or at one of the industry’s foundry manufacturing companies. As process node geometries continue to shrink, the increasing complexity of developing physical IP libraries is rendering the in-house development of such technology increasingly expensive and economically unattractive as compared to the product differentiation derived from the optimization to the designer’s semiconductor manufacturing process. The Company believes that over the long term, there will be an ever increasing need for companies to outsource this activity in order to meet the demand of increased functionality within digital devices while remaining at a reasonable price.

As electronic products and control systems have grown more complex, the software used to implement these products and systems has also grown in complexity, forming an increasingly important component of the overall embedded

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microprocessor solution and contributing a significant portion of the overall development time and cost. In addition, to implement embedded microprocessor solutions efficiently, effective hardware and software development tools must be available to product designers. Using the industry-leading embedded microprocessor architecture permits a common set of software development tools to be used for application development and preserves software investments by permitting developers to reuse software across a variety of hardware implementations of the same architecture, saving considerable development resources for each new product.

ARM Solution

ARM addresses the needs of the semiconductor industry by designing and licensing RISC microprocessors, physical IP, system components and software and development tools which enable the rapid design of embedded microprocessor solutions for use across a wide variety of applications. ARM offers systems designers a family of powerful, low-cost, power-efficient, 32-bit RISC microprocessor “cores” based on a common architecture and spanning a wide performance range. The design of these microprocessor cores (the “IP”) is then incorporated by ARM partners with other functional and computational blocks to develop semiconductor chips which are then incorporated into digital electronics products.

ARM also offers high-performance and low-power physical library solutions (“physical IP”) on a variety of processes that can be used independently for designs that may or may not contain ARM microprocessor cores. By using physical library components from ARM, users are able to design their systems around standard libraries and then have those designs fabricated at both internal and independent semiconductor manufacturing facilities.

In addition, the Company provides the necessary development boards, software development toolkits and software debug tools, which facilitate system design and rapid development of system solutions. Finally, to further support the Company’s architecture, the Company continues to grow its on-chip fabric IP, graphics IP, data engines and embedded software business units and also provides training, support and consulting services.

ARM believes that worldwide support from its semiconductor, software, design and tools partners provides systems companies with a microprocessor architecture and physical library components which are available from multiple sources and which, due to the flexibility offered by a common architecture, enables semiconductor partners and systems designers rapidly to design ASICs based on the ARM architecture and facilitates ongoing design and maintenance efforts at cost-competitive prices.

The Company Believes that Key Benefits of the ARM Solution are:

Maximum flexibility of performance, cost and power. The Company offers a wide range of high performance, low cost solutions which enable systems designers to make the appropriate performance/price trade-offs for use in a particular application. The ARM architecture offers designers the flexibility to select an ARM processor with performance, die area (chip size) and power consumption characteristics appropriate for a specific application. ARM believes that its microprocessor architecture offers designers the opportunity to design 32-bit RISC embedded microprocessors at leading price/performance ratios. ARM believes that incorporating the ARM physical IP libraries for high performance or low power gives the designer a further advantage in using the ARM solution. By minimizing the die size of ARM cores and microprocessors, maximizing the power-efficiency, and maximizing the performance through the combination of the microprocessor core and physical IP system, designers receive an unparalleled advantage by usage of the ARM portfolio of products.

Standards, re-use, and broad support enable rapid system design. As systems become more complex, use and re-use of proven hardware and software intellectual property is essential to achieve time to market and cost goals. ARM provides a set of IP that enables system designers to standardize portions of their semiconductor chip design and development which enables significant reductions in development time and costs. In addition, ARM offers a means of creating flexible system designs through its range of fabric IP based on the AMBA standard and through the use of its Electronic System Level (“ESL”) design tools. This allows the designer to concentrate on application specific portions of the system design, where they add real value. By deploying standard solutions across its range of cores and platforms, and making them widely available via its partnership business model, ARM attracts strong third-party support in the form of EDA modeling tools, software development tools, debug tools, operating system and real-time operating system ports, software intellectual property, and peripherals.

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Global Partner network.  ARM’s global network of partners assures systems companies of sufficient availability for high volume products and, together with ARM’s international presence, gives systems designers global support for their design development.  At December 31, 2007, ARM’s technology has been licensed to 210 semiconductor companies, including the majority of leading semiconductor companies worldwide.  ARM’s broad semiconductor partner base provides systems companies with a wide range of suppliers, thus reducing the dependence of systems companies on any one supplier and producing price competition helping to contain costs of ARM-based microprocessors.  ARM’s various partners build their own solutions using ARM technology; there are a growing number of ARM-based ASSPs and microcontrollers available for use by systems companies, thus facilitating their use of the ARM architecture.  The Company works with numerous, industry leading software systems and tools and development partners, including WindRiver, Symbian, Microsoft Corporation, Google, Mozilla, Sun Microsystems, and many others who provide the third-party support needed to facilitate the use of ARM technology in a wide variety of applications.

Development of software tools, platforms and embedded system level tools.ARM designs and manufactures its own RealView family of tools that span the complete development process from concept to final product deployment. Each member of the RealView portfolio has been developed closely alongside ARM cores ensuring it maximizes the cores’ performance. The RealView DEVELOP family of embedded software tools and hardware platforms enables validated support for device development. The RealView CREATE family of ESL tools enables faster time to market through early software development on virtual platforms. The collaboration of the ARM core designers and the Systems Design team solve the problems of the system designer in designing an ARM-based system. Support for ARM cores is provided in the RealView Development Suite and RealView SoC Designer at an early stage when lead partners are just starting to develop designs incorporating new ARM cores. The new cores are prototyped in the platforms to validate the design prior to manufacturing. For ARM partners producing microcontrollers, ARM has a single solution for their end-users with the RealView Microcontroller Development Kit, based on the industry leading Keil microcontroller tools, that facilitates end-users migration from 8- to 32-bit MCUs.

ARM Strategy and Business Model

ARM’s strategy is to create technology that resides at the heart of advanced digital products. It is ARM’s strategy for its IP to be used by the world’s leading semiconductor providers to create these digital products. Therefore, ARM has taken the approach of designing and licensing its IP for which it receives an initial license fee and an ongoing royalty each time ARM’s IP is incorporated into a semiconductor chip. This type of arrangement represents the manner in which the majority of ARM revenue is generated. There is typically a delay of two to four years between the licensing of ARM technology and the time at which royalties are received. ARM’s royalties are generally based on a percentage of the revenues received by licensees on their sales of chips based on ARM technology and are normally payable by a licensee on sales occurring during the life of the ARM technology being licensed. Accordingly, ARM could continue to receive royalties in relation to specific technology even if such technology is no longer licensed to new customers. The Company believes that as ARM technology becomes more widely accepted, the revenues from royalties, as a percentage of total revenues, will increase.

The Company also intends to generate a diversified revenue base beyond license fees and royalties through support and maintenance, training and design consulting fees, and revenues from sales and licensing of toolkits, development boards and systems software. In addition, the Company believes that revenues from support and maintenance, the sale and licensing of development tools and system and physical IP will increase as the ARM architecture continues to become more established across a broader range of markets.

To help designers to design systems based on ARM technology and develop software for the microprocessors, ARM also provides compilers, debuggers, boards and embedded system level design tools. These tools enable optimal software to be created and improve productivity for system and software developers. These products are sold as a one-time cost to the customer and do not typically include a royalty.

Leverage Partner Alliances. ARM’s semiconductor partners help grow the total ARM market by integrating their own intellectual property in conjunction with  ARM technology, thus combining their own particular strengths with those of ARM to provide an extensive array of ARM-based solutions. ARM’s business model also enables the Company to capitalize on the extensive manufacturing, marketing and distribution networks of its semiconductor partners. The marketing and direct selling of semiconductors to systems companies is undertaken by ARM’s Partners. ARM’s ability to manage its partnerships effectively has been and will continue to be a major challenge and a key factor in its success. See

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“Item 3. Key Information—Risk Factors—We Are Dependent on Both Our Semiconductor Partners and Major Physical IP Licensees.”

Increased Availability of Third-Party Support of ARM Technology. ARM has established partnerships to develop software, tools, operating systems and designs to maximize the level of support for ARM’s technology and provide an efficient environment for system designers. Increasing acceptance and implementation of ARM technology has led to various third parties adapting software programs and development tools to ARM’s architecture. To the extent that such acceptance continues, it should drive even broader acceptance of the ARM technology by systems companies and end users. See “Item 3. Key Information—Risk Factors—The Availability of Development Tools, Systems Software, EDA Software and Operating Systems Is Crucial to the Market Acceptance of Our Products” for a discussion of the Company’s reliance on the availability of systems software and development tools compatible with the ARM architecture.

Focus on Needs of Systems Companies. ARM is committed to providing technology solutions responsive to the requirements of end users in a variety of markets. The Company works with systems companies either directly or in tandem with its semiconductor partners to aid the systems companies’ customization of the ARM architecture to perceived market needs. ARM also aims to simplify and shorten the design process for systems companies. See “Item 3. Key Information—Risk Factors—Our Success Depends Substantially on Systems Companies.”

Strategic Involvement in Related Products and Services.  ARM will continue to analyze its market and communicate with its partner network to identify opportunities for product innovation and new product creation, including with respect to features such as low power, high performance media and graphics, security, the creation of efficient code and platform execution environments.  ARM will also continue to develop products and encourage and support industry standardization efforts to address the challenges that result from shrinking semiconductor process geometries and the increasing cost and complexity of semiconductor chip design.  ARM maintains an ongoing five year strategy plan for the development and growth of the business and constantly monitors its market place and evaluates new business, investment and acquisition opportunities.

Target Markets

ARM is continuing to see the convergence of the consumer electronics and telecommunications IT markets. This is being driven by a need for low-power, high performance, secure components which need to be easy to both design and use. The Company’s five market segments (Home Solutions, Mobile Solutions, Enterprise Solutions, Embedded Solutions and Emerging Applications) each demonstrate some or all of these requirements but differ in their applications. The Company continues to evolve from focusing on digital products to focusing on the way people use digital products and also on the solutions the Company provides to meet this demand worldwide.

Home Solutions. In the home solutions market, the management and display of audio-visual content are the foremost concerns for consumers. Within this market, applications like digital TVs, STBs, digital still cameras and gaming devices deliver visual content to the home. ARM is well placed in this market with its scalable architecture performance up to 1 GHz, application-accelerating features for security (TrustZone) and Java (Jazelle) and Metro and Advantage physical IP libraries.

Mobile Solutions. The mobile market comprises a wide variety of mobile communication and portable computing devices, each with their own characteristics and needs. The applications include wireless handsets, portable media players and bluetooth devices. For each of these products, mobility (being able to use them while on the go) is the key concern to consumers. With ARM’s high performance/low power architecture, ARM’s customers can balance performance and power with cost, so that ARM ultimately provides the best solution to end users. With the acceleration of applications and the security of content becoming critical, TrustZone and Jazelle are well placed to meet the demands of this market. As low-power is critical in mobile devices in order to extend battery life, products such as AudioDE and physical IP libraries such as Metro are well positioned.

Enterprise Solutions. In today’s world, having the data you need at your fingertips is key. In the Enterprise Solutions market ARM focuses on the way data is handled through devices such as storage devices, printers and wireless and wired networking. ARM’s range of microprocessor performance, development systems and data efficient architecture give ARM a competitive advantage in this market space.

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Embedded Solutions. The world of embedded processors is growing in multiple areas, including anti-lock braking systems, smartcards and industrial control applications. This market has the potential to grow substantially, especially as existing 8- and 16-bit applications need to migrate to 32-bit processors. The reliability and software reusability of the ARM architecture positions ARM to penetrate this market. In addition, the introduction of products such as the Cortex-M3, with its low gate count, small size and capabilities for high code density, together with Keil’s complementary MCU tools, position ARM for taking design slots once owned by 8- and 16-bit processors.

Emerging Applications. As innovative products are designed, they face fleeting windows of market opportunity that only reward rapidly developed solutions with leading functionality and cost characteristics. With ARM’s proven technology and innovative feature set, ARM is well positioned to take advantage of these opportunities, as emerging applications such as medical devices and mesh networks become available.

For a breakdown of total revenues by geographic market, see Note 14 to the Consolidated Financial Statements.

ARM’s Products and Services

ARM’s comprehensive product offering includes the following:

· Processor Cores: 16/32-bit RISC microprocessors cores, including specific functions such as configurable digital signal processing (DSP) IP (“Data Engines”), graphics IP,  and on-chip fabric IP;

· Embedded software;

· Physical IP;

· Development tools; and

· Consulting, support and maintenance services.

Processor Cores

Traditionally, microprocessor designers concentrated on maximizing performance, with cost and size as secondary concerns. Anticipating the growth in portable and embedded markets, ARM has always focused on producing low-cost 32-bit RISC microprocessor cores that offer the higher performance that increasingly complex applications demand, yet operate within the power constraints of portable devices. This emphasis on low power consumption and low chip and system cost has made ARM’s products suitable for a broad range of applications.

Low power consumption has wider benefits in a broad range of markets. In addition to its clear advantage for battery operated devices, it enables the use of lower cost packaging, lower cost power supply components, and it allows more electronics to be packed into a small space without requiring the expense of cooling by a fan or air-conditioning.

ARM microprocessors are designed to allow high performance at a low total system cost. Two key features that help achieve this are small die area (chip size), and high code density. Code density is a measure of the amount of memory required to hold program code. High code density reduces the system cost by reducing the size of the main memory and bandwidth it must deliver.

ARM Architecture

The foundation of the ARM family of processors is its efficient RISC instruction set. The design of the instruction set has two aims: high code density and easy instruction decoding. Older CISC processors use complex instructions to reduce the number of instructions necessary to code a program, resulting in high code density, but also in complex, power-hungry processor designs. RISC processors, on the other hand, use simple instruction sets but usually code less densely than CISC processors. Code compiled for ARM RISC processors, however – particularly when using the Thumb or Thumb-2 instruction sets – is generally more dense than code for 32-bit CISC processors, delivering the memory cost advantages of high code density, with the performance, power, and die size advantages of RISC processors.

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Architectural Extensions

ARM’s strategy is to develop products incorporating additional features and instruction set enhancements appropriate to application needs, while maintaining a common, general purpose RISC instruction set which provides code compatibility. Architectural extensions are introduced in subsequent versions of the ARM architecture, building on the previous architectures, thus adding backwards code compatibility of new processor cores with older generations. This section describes these Architectural Extensions in more detail.

Thumb. The Thumb instruction set is a subset of the most commonly used 32-bit ARM instructions which have been compressed into 16-bit wide instructions, reducing memory use by up to one-third and thereby minimizing system cost. Software designers can use both 16-bit Thumb and 32-bit ARM instruction sets, and therefore have the flexibility to emphasize performance or code size at a subroutine level as their applications require. The “Thumb-aware” core is a standard ARM decode/decompression processor in the instruction pipeline, offering the underlying power of the 32-bit ARM architecture and the high code density of the Thumb architecture from an 8/16-bit system. The Thumb architecture is well-suited for use in digital cellular telephones, hard disk drives, and any high-volume consumer product where memory cost considerations are paramount.

Thumb-2.  The Thumb-2 instruction, introduced in 2003, is a second generation of the Thumb instruction set.  It is a blended 32-bit and 16-bit instruction set that gives the designer more performance than the Thumb instruction set but achieves similar code density.  This instruction set is supported in the ARM1156T2F-S, ARM1156T2-S and the Cortex-family of processors.

EmbeddedICE.  EmbeddedICE is a software debug capability, which allows a programmer to debug code running on an ARM processor deeply embedded within a larger system-on-chip or ASIC. The ARM software development toolkit running on a PC communicates with EmbeddedICE logic within the processor core via a JTAG interface.  This capability was developed by ARM specifically to address debugging issues unique to integrated processor cores.  The Multi-ICE interface extends the capability of EmbeddedICE to allow debugging of multiple processor cores.

Embedded Trace.  ARM has developed Trace products for real-time observation of software running on its cores.  Trace products provide the capability to visualize the software execution and data modifications within the core in real-time and at maximum processor speed.  The data is compressed and passed directly off-chip for further processing or retained in a local embedded trace buffer for subsequent retrieval.

DSP Extensions. ARM cores are frequently used with a separate DSP in markets where the integration of DSP functionality with microprocessor control functionality is critical such as: disk drives, DVD drives, modems, digital audio equipment, pagers and other communications products. Currently, most solutions use separate, incompatible development tool chains for the microprocessor and the DSP. In response to customer demand for DSP functionality with general purpose control capability in one integrated processor, and with a unified development environment, ARM introduced the “E” extensions to the ARM9 family to provide enhanced performance in fixed point DSP applications. These extensions further enhance the multiply-accumulate capability, and add efficient support for saturating arithmetic. This gives a single combined micro-processor and signal processor engine, offering a simpler system design, lower cost, and improved time to market. The extensions are incorporated in the ARM9E-S, ARM10 and ARM11 families of processors.

VFP. Vector Floating Point coprocessors have been developed for the ARM9, ARM10 and ARM11 families of processors. Capable of operating on single and double precision floating point values, combined with a small amount of software, they provide complete support for the IEEE754 floating point standard.

Jazelle.  ARM Jazelle technology is incorporated into a range of products including the ARM7EJ, ARM926EJ-S, ARM1026EJ-S, ARM1136JF-S, ARM1136J-S, ARM1176JZF-S and ARM1176JZ-S cores and the ARM JTEK software for enabling application developers to build Java compatible products offering high efficiency and low cost.  ARM Jazelle technology allows a single microprocessor to execute applications written in Java, and in conventional languages such as ANSI C and C++ without requiring an additional coprocessor – thus reducing system complexity and time-to-market.  For a typical application, a Jazelle enabled processor will execute most Java byte codes directly, speeding Java program execution and delivering significant performance acceleration for applications written in Java programming language.  Systems enabled with ARM Jazelle Technology achieve significantly higher performance than software emulation systems and do not suffer from the high memory requirements associated with just-in-time compilation techniques.

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TrustZone. The TrustZone architectural extension has been developed to address the growing security concerns of the consumer and wireless markets. This feature adds a new secure mode to the ARM processors that allows a system developer to better separate secure and sensitive data from the OS and software applications. TrustZone architecture can also be used to add hardware security support into the rest of the system within an SoC. This technology was introduced in the ARM1176JZ-S and ARM1176JZF-S processors.

IEM. Intelligent Energy Management (“IEM”) enables ARM processors to better conserve battery energy. IEM allows a microprocessor to scale its performance and therefore energy consumption to the tasks it needs to perform. The IEM solution is made up of two main components, the IEM software that monitors and predicts a system’s performance requirements and the IEM controller that is able to take that prediction and set the SoCs voltage and frequency to achieve a given task. This technology was introduced in the ARM1176JZ-S and ARM1176JZF-S processors.

NEON. The NEON technology is an extension developed to address the increasing media and digital signal processing requirements of future products. The NEON technology is able to efficiently process audio, video, signal processing and floating point algorithms and it will be implemented in selected members of the ARM Cortex family of processors. It has been designed to ensure that the engine is a good target for software compiler technology. Our aim is to reduce the time taken to develop complex software algorithms.

The ARM Microprocessor Families

ARM architecture processors offer a wide range of performance options in the ARM7 family, ARM9 family, ARM10 family, ARM11 family, ARM Cortex family, ARM SecurCore family, Intel-based products, Marvell Feroceon and Qualcomm Scorpion processor cores.  Scalability, the ability to match processing power to the application, is an important consideration when designers select a microprocessor family.  The ARM architecture gives systems designers a wide choice of processor cores at different performance/price points, yet all ARM microprocessors use substantially the same instruction set and are capable of running the same software.  This protects the investments ARM’s customers make in software development, software tools and staff training.  The ARM product roadmap offers customers a proven RISC architecture and intends to deliver innovative, powerful and cost-effective solutions to industry needs in future generations, while maintaining a high degree of compatibility.

ARM offers a range of processor cores integrated with memory system solutions such as Cache Memories, Memory Protection Units, and Memory Management Units. Many ARM processor cores can be extended using the coprocessor interface and coprocessor instruction set space to add additional functionality, or by adding memory mapped peripherals.

ARM7TDMI. The ARM7TDMI microprocessor core is ARM’s most widely licensed product. It is a low power, general purpose 32-bit RISC microprocessor core particularly suitable where strict die area and power constraints must be satisfied while maintaining reasonably high performance, as in portable telecommunications. It uses the ARMv4T instruction set with Thumb extension, enhanced Multiply, and EmbeddedICE extensions integrated within the core. See “—Architectural Extensions” above. The ARM7TDMI offers 32-bit architecture capable of operating from 8/16-bit memory on an 8/16-bit bus for low system cost through the implementation of the Thumb instruction set. It is used in cost-sensitive embedded control applications and has been highly successful in the digital cellular telephone market.

ARM Securcore family. The Securcore family of cores is specifically targeted at the security and smart card market.  The smart card market is a very high volume market, and has been identified by ARM as an important growth area for the Company.

ARM9 family.  The ARM9 family comprises a range of microprocessors in the 150-250MHz range.  Each processor has been designed for a specific application or function, such as an application processor for a feature phone or running a WiFi protocol stack. Therefore each has differentiating features appropriate for that application, such as support for real-time or complex operating systems, direct DMA access to memory, and additional DSP instructions for faster mathematical calculations.

ARM11 family.    The ARM11 family comprises a range of microprocessors in the 300-600MHz range. Each processor has been designed for a specific application or function such as an application processor for a smart phone or controlling the engine management system in a car.  Therefore each has differentiating features appropriate for that application, such as support for fast interrupt response time, multiprocessing support and additional instructions for decoding video streams.

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ARM Cortex Family.  This is ARM’s newest family of processor cores based on version 7 of the ARM Architecture.  The family is split into three series:

· A Series targeting applications processors running complex operating systems;

· R Series targeting realtime deeply embedded markets and running Real Time Operating Systems (“RTOSs”); and

· M Series addressing the needs of the low cost microcontroller markets.

By ensuring software compatibility across the three series, ARM has enabled the re-use of software, tools and engineering knowledge.

Graphics IP

In May 2006, ARM acquired Falanx Microsystems AS, a Norwegian 3D Graphics IP company. Falanx develops graphics accelerator IP and software for semiconductor system-on-chip (“SoC”) vendors that deliver high-quality multimedia images without compromising performance, power consumption or system cost. The acquisition enhances ARM’s ability to enable industry-leading 3D graphics solutions on mobile phones, portable media players, set-top boxes, handheld gaming devices and infotainment systems (including automotive), providing us with full control over the development of our future 3D graphics solutions.

On-Chip Fabric IP

To facilitate the development of highly integrated embedded microcontrollers, or systems-on-chip, containing multiple processors and peripherals, ARM was primarily responsible for developing the Advanced Microcontroller Bus Architecture (“AMBA”). AMBA is a specification for a series of on-chip interconnect protocols to enable macrocells (such as a microprocessor, DSP, peripherals, memory controllers) to be connected together to form a system-on-chip. The specification aims to enhance the reusability of peripheral and system macrocells across a wide range of integrated circuit processes and to facilitate the development of a chip family roadmap with reduced time-to-market by encouraging modular design and processor-independence. AMBA is an open specification available from ARM, and ARM partners have access on commercial terms to models, development boards and other tools that support AMBA.

ARM is also developing and marketing a number of AMBA-compatible PrimeCell IP cores to shorten design time of high integration systems-on-chip. These are compatible with the AMBA specification and are offered in a synthesizable form. To facilitate the deployment and integration of the PrimeCells within systems-on-chip, ARM has developed a design automation tool called AMBA Designer.

Embedded Software

As digital devices become more complex in response to consumer demand for higher performance devices, software plays an increasingly important role in the development of advanced digital devices. Through the development of optimized embedded software, ARM seeks to enable its customers to bring these devices to market faster and with enhanced performance and functionality. This enables ARM to gain design wins in new technology and at the same time to establish new revenue streams for software IP. ARM’s innovation in embedded software covers strategic technologies such as Java acceleration (Jazelle), security (TrustZone), intelligent energy management (“IEM”) and the partnership with Superscape in the development and promotion of the Swerve 3D graphics engine. ARM has licensed technology from Superscape Group plc (“Superscape”) to broaden its offering in the area of 3D technology for wireless services.

In addition to internal development activities, ARM continues to invest in the ARM Connected Community program, which embraces more than 400 partners from across the technology spectrum and has resulted in ARM’s architecture being supported by the broadest range of operating systems (“OS”) in the market, including leading OS vendors such as Microsoft and Symbian. ARM’s embedded software, combined with that of its partners, enhances the full performance potential of ARM compute engines for advanced digital products.

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Physical IP

Acquisition of Artisan Components

In December 2004, ARM acquired the entire share capital of Artisan Components, Inc. (“Artisan”), a leading provider of physical IP components for the design and manufacture of complex SoC integrated circuits (“ICs”). In January 2005, Artisan became ARM’s Physical IP Division (“PIPD”) and was merged into ARM, Inc. on January 1, 2007.

Management believes that the acquisition represents an excellent strategic combination by:

· Enabling ARM to deliver one of the industry’s broadest portfolios of SoC IP to their extensive, combined customer base;

· Better positioning ARM to take advantage of growth opportunities across multiple industries as system design complexity increases in the sub-micron age;

· Combining highly complementary sales channels, aligning ARM’s channel to silicon manufacturers with PIPD’s channel to more than 2,000 companies; and

· Strengthening the links between key aspects of SoC development, enabling ARM to deliver solutions that are further optimized for power and performance.

PIPD

Following the acquisition of Artisan, ARM has become a leading provider of physical IP components for the design and manufacture of integrated circuits, including SoCs. ARM’s products include embedded memory, standard cell, input/output components and analog and mixed-signal products, which are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process. ARM’s physical IP components are developed for a variety of process geometries ranging from 45nm – 250nm design and are tested by producing them in silicon to ensure that they perform to specification reducing the risk of design failure and gaining valuable time to market. ARM licenses its products to customers for the design and manufacture of integrated circuits used in complex, high-volume applications, such as portable computing devices, communication systems, cellular phones, consumer multimedia products, automotive electronics, personal computers and workstations.

ARM’s physical IP components are developed and delivered using a proprietary methodology called “Process-Perfect™” that includes a set of commercial and proprietary electronic design automation tools and techniques. This methodology ensures that ARM’s intellectual property components are designed to achieve the best combination of performance, density, power and yield for a given manufacturing process in the shortest period of time possible. These components and ARM’s methodology are its core technology and are easily integrated into a variety of customer design methodologies and support industry standard IC design tools, including those from EDA tool vendors such as Cadence, Magma, Mentor Graphics and Synopsys, as well as customers’ proprietary IC design tools. To support these various IC design tool environments, each of ARM’s products includes a comprehensive set of verified tool models.

Physical IP Products

Memory products. ARM’s embedded memory components include random access memories, read only memories and register files. ARM’s high-speed, high-density and low-power components include single- and dual-port random access memories, read only memories, and single- and two-port register files. ARM’s embedded memory components are configurable and vary in size to meet the customer’s specification. For example, ARM’s memory components will support sizes from 2- to 128-bits wide and from 8 to 16,384 words. All of ARM’s memory components include features such as a power-down mode, low voltage data retention and fully static operation. In addition, ARM’s memory components may include built-in test interfaces that support popular test methodologies. ARM offers an additional feature for its memory components, known as Flex-Repair™ that includes redundant storage elements which may help increase the manufacturing yield of integrated circuit designs containing large memories.

ARM’s memory components are designed to enable the chip designer maximum flexibility to achieve the optimum power, performance, and density trade-off. ARM’s high-density memory components are designed for applications where achieving the lowest possible manufacturing cost is critical. These are typically consumer applications with high

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manufacturing volumes. To achieve the lowest possible manufacturing cost for these products, ARM utilizes proprietary circuit and layout techniques to reduce the overall area of the memories. In addition, ARM uses specific design and analysis techniques to enhance production yield. ARM’s low-power memory components are designed to prolong battery life when used in battery-powered electronic systems. These physical IP components achieve low power through a combination of proprietary design innovations that include latch-based sense amplifiers, a power efficient banked memory architecture, precise core cell balancing and unique address decoder and driver circuitry.

Standard cell products. Standard cells map the logic functions of a design to the physical functions of the design, an essential function for all integrated circuits. ARM’s standard cell products are optimized for each customer’s preferred manufacturing process and integrated circuit design tool environment, resulting in greater density as compared to competitive standard cell components. ARM offers standard cell components that are optimized for high performance, high density or low power to meet the needs of different markets.

Input/output products. ARM offers a wide variety of specialized input/output components that are compatible with industry standard PCI, GTL, AGP, USB, SSTL2 and LVDS interfaces. In addition, ARM offers input/output components for many additional industry standard interfaces. Every input/output component utilizes each integrated circuit manufacturer’s proprietary manufacturing process rules, pad pitch and electrostatic discharge requirements, resulting in superior performance, reliability and manufacturability.

Analog products. Analog components are important elements in today’s SoC designs because such designs often require, as part of their application, the ability to take real world inputs, such as sound and images, and process them in a digital format. ARM offers a wide variety of analog components, from analog timing functions to converter products. An example of ARM’s analog component offerings is its phase locked loops, which can be used in a variety of communications, consumer, computing and graphics applications.

Mixed-signal products. Mixed-signal products are used to process analog signals digitally. ARM’s mixed-signal product offering includes its serializer/de-serializers, which are used for high-speed switching; its PCI-Express™ PHY, which is used for high-speed bus interfaces, and its DDRI/DDRII/GDDRIII Interface, which is used for high-speed memory interfacing.

Silicon on Insulator (“SOI”) products. ARM’s line of SOI physical IP products have been derived from the acquisitions of Soisic SA (“Soisic”) in October 2006. SOI is an alternative methodology to traditional semiconductor fabrication techniques that enables higher performance and lower power designs than today’s more common bulk silicon process. It is ARM’s belief that SOI will become an increasing proportion of the substrate market over time. The acquisition of Soisic will enable ARM to provide SOI technology to the ARM customer base, and will facilitate the development of the necessary ecosystem of tool and technology providers to enable further adoption of the technology.

Systems Design

The Systems Design business unit designs, manufactures and sells Electronic System Level Design (“ESL”) tools and software development tools (commonly called development systems products) that help ARM’s partners and customers to reduce their time to market.  Both product lines are sold under the “RealView” brand.

RealView ESL tools allow system architects to create and validate their hardware design ideas in a virtual environment. Processor design engineers use the RealView ESL tools to create detailed processor models and the tools required to generate and debug code on them. System architects use executable specifications of a design, run benchmarks and simulate different architectures very early in the design cycle.

RealView software development tools help a software design engineer deliver proven products right first time. Engineers use these tools in the design and deployment of code, from applications running on open operating systems right through to low-level firmware.

The RealView Development Suite is complemented by hardware components that allow the software designer to connect to a real target system and control the system for the purposes of finding errors in the software. The RealView ICE unit allows the software developer to control the software running on the prototype product and examine the internal state of the prototype product, which is an essential part of debugging software. The RealView Trace unit allows the software developer to capture the way that the software executes on the product in real-time and provides feedback on the prototype product performance.

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RealView® Hardware Platforms are ideal systems for prototyping ARM-based products. This enables the function of the product to be confirmed in advance of building a silicon chip with a foundry or with a silicon partner. Building a silicon chip is an expensive process which requires a high degree of certainty in the prototype product function. There are three families of boards within the RealView Hardware Platforms: IntegratorTM, Versatile and Soft Macrocell Models. The RealView Integrator product family allows prototypes of the product to be built with a range of ARM cores provided as part of the system. The RealView Versatile family, which includes the RealView Versatile Platform Baseboard, allows software to be executed at a higher speed to check the interaction of the software and the hardware at speeds close to those that are used in the final product. RealView Hardware Platforms are ideal systems for prototyping ARM-based products. They are suitable for architecture and CPU evaluation, hardware and software design, and ASIC emulation.

Following the acquisition of Keil Elektronik GmbH and Keil Software, Inc. in October 2005, ARM has introduced the RealView Microcontroller Development Kit for the ARM microcontroller family which supports ARM based microcontrollers and 8051 based microcontrollers from companies such as Analog Devices, Atmel, Philips, Samsung, Sharp, and STMicroelectronics. The RealView Microcontroller Development Kit is used by developers who are building products and writing software using standard off-the-shelf microcontrollers.

The RealView CREATE family of tools allows system architects to create and validate their hardware design ideas in a virtual environment. Processor design engineers will use the RealView CREATE family of tools for creating detailed core models and the tools required to generate and debug code on them. System architects can then create executable specifications of a design, run benchmarks and simulate different architectures very early in the design cycle. The RealView CREATE family of tools creates confidence in the final product much earlier in the design cycle, therefore lowering risk and increasing delivery of products that are right first time.

Consulting, Support and Maintenance Services

Consulting. ARM has a unique knowledge base relating to all aspects of ARM technology and products. ARM consulting services tap into this accumulated experience and expertise to understand a customer’s needs and provide innovative ARM-based solutions. ARM offers services to assist customers to select and implement the ARM microprocessor cores, platform peripherals and other ARM products required to create the most competitive systems with the shortest time-to-market.

ARM is particularly well placed to offer services to migrate ARM hard-macro microprocessor cores to the silicon process of a customer’s choice. ARM can provide highly skilled engineering resources for optimal implementation of ARM’s soft CPU cores to the latest very deep sub-micron silicon processors to enhance customer’s time-to-market for ARM-based devices.

ARM consulting services also work alongside ARM Approved Design Centers, members of the ARM Approved Design Center Program, to ensure customers have access to leading system-on-chip design outsourcing providers.

Support, Maintenance and Training. ARM provides support and maintenance services under its license agreements to its semiconductor partners as well as ARM product related training. See “—License Agreements” and “Item 5. Operating and Financial Review and Prospects—Operating Results—Overview—Service Revenues—Support and Maintenance.” In order to serve its partners better, ARM plans to expand the range of support, maintenance and training services currently offered and to extend the availability of such services from its overseas offices. To this end ARM has Technical Support staff in its Bangalore, India and China offices. See “Item 3. Key Information—Risk Factors—Our International Operations Expose Us to Risks” for a discussion of certain risks inherent in our international operations.

ARM Partner Network

Semiconductor Partners. ARM licenses its technology on a worldwide and non-exclusive basis to semiconductor partners that manufacture and sell ARM-based chip solutions to systems companies. At December 31, 2007, ARM’s technology has been licensed to 210 semiconductor companies, including many of the leading semiconductor companies worldwide. ARM serves this geographically diverse base from offices in the UK, P.R. China, France, Germany, Belgium, Israel, Japan, South Korea, Taiwan, India, Singapore and the United States.

Tools and Development Partners. ARM enables its tools and development partners to design tools that help ARM’s semiconductor partners and customers design ARM based systems. ARM provides IP and support to these tools and development partners to give end customers of the ARM architecture the widest possible range of tools support.

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Design Partners.  There are many design companies who develop ARM-based solutions for specific customer needs.  Tasks for the system designers range from developing World Wide Web browser software for ARM-based platforms and interfacing ARM and Intel x86 processors to offering turnkey product design services.  The Company has also introduced the ARM Approved Design Center Program whereby design houses, which pass our strict qualification process, are able to access ARM technologies to enable them to undertake ARM-based designs for third parties.

License Agreements

ARM is the owner of IP in the field of microprocessor architecture and implementation, data engine architecture and tools for embedded signal processing, graphics IP, system platforms, peripherals, system software and electronic system level design, software development and debug tools and physical IP components. ARM creates innovative technology which incorporates such IP. ARM grants licenses to such technology to semiconductor manufacturers, IDMs and fabless companies, original equipment manufacturers and ASIC design houses to enable such licensees to design, manufacture and distribute silicon chips which combine such technology with licensees’ own differentiating proprietary technology. The licenses are granted under written agreements which contain contractual terms and conditions to protect the technology and the intellectual property embodied therein and to limit ARM’s liability in respect of licensees’ use of the technology. There are a number of different forms of license offered by ARM which are structured to address different licensee requirements and different intellectual property protection issues. In all forms of license ARM strictly controls the modification rights which it grants to its technology and mandates, in order to protect the integrity of the ARM architecture, that the technology is verified by reference to ARM specified tests prior to distribution in licensee products.

Fees and Royalties. With regard to microprocessors, ARM typically charges a license fee for access to its technology and a royalty for each unit of silicon which incorporates ARM’s technology and is distributed by the licensee. ARM licenses its physical IP components on a non-exclusive, worldwide basis to major IC manufacturers and IC design teams that are customers of such manufacturers.

License fees are invoiced in accordance with an agreed set of milestones. Revenue generated in the form of license fees is recognized in accordance with US GAAP. Royalties are invoiced quarterly in arrears.

License Programs in respect of the Processor Division

The Processor Division’s licenses generally fall under three broad programs: Architecture, Implementation and Foundry. The Architecture License Program is associated with Architecture Licenses. The Implementation License Program encompasses the Implementation License, the Term License, the Per-Use License and the Subscription License. The Foundry License Program is made up of Foundry Licenses and Single Use Design Licenses. Each of these licenses is described below.

The Architecture License provides the licensee with the flexibility to differentiate their ARM-based products by creating alternative implementations of the licensed architecture, while retaining instruction set compatibility.

The Implementation License is a license with the objective of producing a specific ARM-based end product. The licensee has perpetual design and manufacturing rights for the licensed product.

The Term License has the same objectives as the Implementation License. The difference is in the design right license grant, as the design rights are only granted for a limited period of generally three years for the licensed product.

The Per-Use License has the same objectives as the Implementation License. The difference is in the design rights, as these are granted for design of one ARM-based end product.

The Subscription License allows a partner access to a selected set of ARM products, including unspecified future products, over a defined time period for a set annual fee. Design rights are granted for the subscription period and manufacturing rights are perpetual for ARM-based products designed during that period.

The Foundry Program effectively splits an Implementation License into two parts. The Foundry License is a manufacturing license held by the foundry, which gives the foundry the right to manufacture ARM products but only for a partner who has the corresponding Single Use Design License. The Single Use Design License is held by the partner and gives it the right to design products using the specified ARM product. The Single Use Design Licensee only has access to a design kit and does not get access to the layout of the core. The Single Use Design Licensee will ship the design of the

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ARM compliant product to the foundry quoting a design identification and the foundry will only accept the design if the correct design identification is quoted. At the foundry, the full layout of the ARM product is merged into the ARM compliant product prior to manufacture. All royalties are payable by the Single Use Design Licensee.

License Programs in respect of Physical IP

ARM charges manufacturers a license fee that gives them the right to manufacture ICs containing physical IP components ARM has developed for their manufacturing process. Manufacturers also agree to pay ARM royalties based on the selling prices of ICs or wafers that contain ARM’s physical IP components. Generally, ARM credits a small portion of the royalty payments to the manufacturer’s account to be applied against license fees for any future orders placed with ARM within a certain time period, if any, payable by the manufacturer. The portion of the royalty payment that is credited to a manufacturer’s account to be applied against future license fees, if any, is based on negotiations at the time the license arrangement is signed.

ARM provides the design rights to use ARM’s physical IP from the majority of libraries developed for the manufacturing facilities free of charge. This enables small fabless design companies to easily gain access to the ARM physical IP technology and have their design manufactured at a variety of foundry companies. In some cases, ARM will charge a license fee to the design company for optimized libraries for specific process technologies and process variants. The royalties for these designs are then subsequently collected from the facility where they were manufactured.

Competition

The markets for the Company’s products are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased product capabilities typically representing significant price/performance improvements. Competition is based on a variety of factors including price, performance, product quality, software availability, marketing and distribution capability, customer support, name recognition and financial strength. Further, given the Company’s reliance on its semiconductor partners, the Company’s competitive position is dependent on its partners’ competitive positions. In addition, ARM’s semiconductor partners do not license ARM technology exclusively, and several of them also design, develop, manufacture and market microprocessors based on their own architectures or on other non-ARM architectures and develop their own physical IP in-house. They often compete with each other and with ARM in various applications. Competition with the Company’s partners may become more acute as ARM moves beyond the design and license of its architecture into related businesses, such as design services and system-on-chip integration, in which its partners are currently involved.

Many of the Company’s direct and indirect competitors, including some of ARM’s semiconductor partners, are major corporations with substantially greater technical, financial and marketing resources and name recognition than ARM. Many of these competitors have a much larger base of application software and have a much larger installed customer base than ARM. There can be no assurance that ARM will have the financial resources, technical expertise, marketing or support capabilities to compete successfully in the future.

The Company believes that the ARM architecture is the leading independent microprocessor technology openly licensed to other companies and that the broad presence afforded to the Company through its established worldwide network of partners gives it an advantage over other companies which license microprocessor related technology. The Company believes that its products offer high performance at competitive prices, and compete favorably in the embedded market by providing an open compatible architecture that is scalable from high performance multimedia applications to small battery operated devices. However, there can be no assurance that the Company will be successful in the face of increasing competition from new technologies or products introduced by existing competitors and by new companies entering the market. See “Item 3. Key Information—Risk Factors—Competition—We  May Not Be Able to Compete Successfully in the Future” and “Item 3. Key Information—Risk Factors—Our Architecture, Physical IP Libraries and Development Systems Tools May Not Continue to Be Accepted by the Market.”

Patent and Intellectual Property Protection

The Company has an active program to protect its proprietary technology through the filing of patents. The Company currently holds 373 US patents on various aspects of its technology, and 659 non-US patents with expiration dates ranging from 2012 to 2028. In addition, the Company has 394 patent applications pending in the United States and an additional 659 patent applications pending in the United Kingdom and various other jurisdictions. The Company’s US

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patents do not prevent the manufacture or sale of ARM-based products outside of the United States. There can be no assurance that the Company’s pending patent applications or any future patent applications will be approved or will not be challenged successfully by third parties, that any issued patents will protect the Company’s technology or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company’s ability to do business. Furthermore, there can be no assurance that others will not independently develop similar or competing technology or design around any patents that have been or may be issued to the Company.

The Company attempts to protect its trade secrets and other proprietary information through agreements with licensees and systems companies, proprietary information agreements with employees and consultants and other security measures. The Company also relies on trademarks, copyright and trade secret laws to protect its technology. Despite these efforts, there can be no assurance that others will not gain access to the Company’s trade secrets, or that the Company can meaningfully protect its technology. In addition, effective trademark, copyright and trade secret protection may be unavailable or limited in certain foreign countries. Although the Company intends to protect its rights vigorously, there can be no assurance that such measures will be successful.

Certain of the Company’s license agreements require licensees to grant back to ARM a royalty-free non-exclusive license to patented licensee modifications to implementations of ARM technology. Such licenses permit ARM to sublicense to other licensees.

The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. See “Item 8. Financial Information—Legal Proceedings” for details of current litigation. Further litigation may be necessary in the future to enforce the Company’s patents and other intellectual property rights, to protect the Company’s trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and there can be no assurance that other parties in any such litigation would not be able to devote substantially greater financial resources to such litigation proceedings or that the Company would prevail in any future litigation. Any such litigation, whether or not determined in the Company’s favor or settled by the Company, would be costly and would divert the efforts and attention of the Company’s management and technical personnel from normal business operations, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

Adverse determinations in litigation could result in the loss of the Company’s proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from licensing its technology, any of which could have a material adverse effect on the Company’s business, financial condition and results of operations. Moreover, the laws of certain countries in which the Company’s technology is or may in the future be licensed may not protect the Company’s intellectual property rights to the same extent as laws in the United Kingdom or the United States, thus reducing the enforceability of the Company’s intellectual property in those countries.

In any potential dispute involving the Company’s patents or other intellectual property, the Company’s licensees could also become the target of litigation. The Company is generally bound to indemnify licensees under the terms of its license agreements. Although ARM’s indemnification obligations are generally subject to a maximum amount, such obligations could nevertheless result in substantial expenses to the Company. In addition to the time and expense required for the Company to indemnify its licensees, a licensee’s development, marketing and sales of ARM architecture based products could be severely disrupted or discontinued as a result of litigation, which in turn could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Item 3. Key Information—Risk Factors—We May Be Unable to Protect and Enforce Our Proprietary Rights and We May Have to Defend Ourselves Against Third Parties Who Claim That We Have Infringed Their Proprietary Rights.”

Marketing and Distribution

In order to speed global acceptance of ARM technology, ARM seeks partners with diverse geographic locations and a broad base of systems company relationships.  The Company markets its architecture and technology directly to its semiconductor partners and other customers from its offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom and also from offices in Japan, South Korea, France, Germany, Norway, Taiwan, P.R. China, Israel, Belgium, Slovenia, India, Singapore, and in California, Texas, Massachusetts, North Carolina and Michigan in the United States.  The Company’s architecture and technology are marketed on the basis of a number of factors including high performance/low power and price/performance, rapid time-to-market and the availability of third-party support.  ARM also capitalizes on the extensive marketing and distribution networks of its semiconductor partners who market and

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distribute ARM core-based products directly to systems companies.  As part of the Company’s strategy to increase ARM’s visibility, the Company’s license agreements generally require its partners to display an ARM logo on the ARM core-based products that they distribute.  The Company believes that to the extent ARM technology becomes more widely accepted, the ARM “brand” will become increasingly important to potential partners and will drive the Company’s expansion into related software, development tools and system design.  ARM believes that the availability of its marketing, sales and support services to all of its partners worldwide is critical to the success of the ARM architecture.

Research and Development

The ability of the Company to compete in the future will be substantially dependent on its ability to advance its technology in order to meet changing market needs. To this end, Company engineers are involved in researching and developing new versions of ARM microprocessor cores and physical IP technology as well as related software and tools applications. The Company is also involved in collaborative research with selected universities to leverage the technological expertise available at those universities. The Company has acquired certain patents from these collaborations.

As of December 31, 2007, ARM had 1,195 full-time research and development staff located at offices in Cambridge, Maidenhead, Sheffield and Blackburn in the United Kingdom, Sophia Antipolis and Grenoble, France, Leuven-Heverlee, Belgium, Aachen and Grasbrunn, Germany, Trondheim, Norway, Sentjernej, Slovenia, Austin, Texas, USA, Cary, North Carolina, USA, Sunnyvale, Irvine and San Diego, California, USA, Olympia, Washington, USA and Bangalore, India. In 2005, 2006 and 2007, research and development costs were approximately £61.6 million, £75.5 million and £72.7 million, respectively. Costs in 2006 and 2007 included £10.6 million and £9.3 million, respectively, of share-based payments charges in accordance with FAS 123R and in 2005 included £1.6 million of deferred stock-based compensation, in accordance with previously applicable standards. Excluding these charges, R&D costs were 26%, 25% and 24% of total revenues in 2005, 2006 and 2007 respectively, reflecting the operating leverage in the business.  Continued investment in research and development remains an essential part of the Company’s strategy since the development of new products to license is key to its ongoing success.

Acquisitions

The Group made no acquisitions during the year ended December 31, 2007.

ORGANIZATIONAL STRUCTURE

ARM Holdings plc is the holding company for a number of subsidiaries. The following is a list of our significant subsidiaries at December 31, 2007. Not all subsidiaries are included as the list would be excessive in length. Unless stated otherwise, each subsidiary is wholly owned by us.

Company Jurisdiction of Incorporation

ARM, Inc	United States
Soisic, Inc.	United States
Axys Design Automation, Inc.	United States
Keil Software, Inc	United States
ARM Germany GmbH	Germany
Keil Elektronik GmbH	Germany
ARM KK	Japan
ARM Korea Limited	South Korea
ARM Limited	England and Wales
ARM Taiwan Limited (99.9% owned)	Taiwan
ARM France SAS	France

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Company Jurisdiction of Incorporation

ARM Consulting (Shanghai) Co. Ltd.	P.R. China
ARM Belgium N.V.	Belgium
ARM Norway AS	Norway
ARM Embedded Technologies Pvt. Ltd.	India
ARM Physical IP Asia Pacific Pte Ltd.	Singapore

PROPERTIES

The Company leases land and buildings for its executive offices, engineering, marketing, administrative and support operations and design centers. The following table summarizes certain information with respect to the principal facilities leased by the Company:

Location	Freehold/Leasehold	Lease Term and Commencement Date	Approximate Area (square feet)	Principal Use
Cambridge, UK    (110 Fulbourn Road)	Leasehold	20 years September 20, 1999	45,000	Executive offices and engineering, marketing and administrative operations
Cambridge, UK    (130 Fulbourn Road)	Leasehold	20 years March 25, 2002	35,000	Executive offices and engineering, marketing and administrative operations
Cambridge, UK    (90 Fulbourn Road)	Leasehold	20 years December 25, 1993	13,000	Executive offices and engineering, marketing and administrative operations
Maidenhead, UK	Leasehold	25 years July 28, 1998	17,125	Design center
Sheffield, UK	Leasehold	10 years January 31, 2006	10,180	Engineering and administrative operations
Sunnyvale, California, USA	Leasehold	7 years September 1, 2001	54,489	Executive offices and engineering, marketing and administrative operations
Sunnyvale, California, USA	Leasehold	2.5 years March 1, 2006	24,000	Sales and administrative operations
Austin, Texas, USA	Leasehold	5 years August 1, 2004	33,644	Design center, marketing and support operations
Bangalore, India	Leasehold	5 years July 15, 2007	44,542	Executive offices and engineering, marketing and administrative operations
Bangalore, India	Leasehold	5 years January 13, 2006	50,239	Design center

In addition, the Company leases offices in Blackburn, England; Leuven-Heverlee, Belgium; Aachen and Grasbrunn, Germany; Trondheim, Norway; Sophia Antipolis and Grenoble, France; Sentjernej, Slovenia; Irvine, California, USA; Plano, Texas, USA; and Olympia, Washington, USA that are used for engineering and administrative purposes as well as in Shin-Yokohama, Japan; Taipei, Taiwan; and Seoul, South Korea which are used for marketing and support operations.  Company personnel based in Boston, Massachusetts, USA; Detroit, Michigan, USA; Salem, New Hampshire, USA; Cary,

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North Carolina, USA; San Diego, California, USA; Shanghai and Beijing, P.R. China; Munich, Germany; Paris, France; Singapore and Kfar Saba, Israel have office space available to them.

ITEM 4A.      UNRESOLVED STAFF COMMENTS

None.

ITEM 5.         OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OPERATING RESULTS

The following discussion should be read in conjunction with the consolidated financial statements of ARM Holdings plc and notes thereto included elsewhere in this document which have been prepared in accordance with US GAAP and with the discussion of certain risk factors set forth under “Item 3. Key Information—Risk Factors” that might materially affect the Company’s operating results and financial condition.

Overview

ARM designs the technology that lies at the heart of advanced digital products, from wireless, networking and consumer entertainment solutions to imaging, automotive, security and storage devices. ARM’s comprehensive product offering includes 16/32-bit RISC microprocessors, data engines, graphics processors, digital libraries, embedded memories, peripherals, software and development tools, as well as analog functions and high-speed connectivity products. The Company licenses this technology to semiconductor companies which, in turn, manufacture, market and sell microprocessors and related products. ARM has developed an innovative, intellectual property-centered and market-driven business model in which it neither manufactures nor sells the products incorporating ARM technology, but concentrates on the research and development, design and support of the ARM architecture and supporting development tools and software. Combined with the Company’s broad Partner community, they provide a total system solution that offers a fast, reliable path to market for leading electronics companies.

In fiscal year 2007 the semiconductor industry as a whole grew at about 3%.  This is lower than most years as industry growth was impacted by the inventory correction in the first half of the year.  The Company once again grew revenues at twice the rate of the semiconductor industry, achieving a growth rate in US dollar revenues of approximately 6%.  Looking into 2008, we see uncertain macro-economic conditions which may impede the growth of consumer electronics products that contain ARM-based chips.  However, we expect ARM revenue growth to continue to outperform the semiconductor industry. This is underpinned by a healthy technology portfolio of processor and physical IP, comprising both new and mature products.

The Company has remained both profitable and cash generative (before investing activities). On operating profits of £42.8 million, cash inflows from operating activities were £62.7 million, resulting in cash being returned to shareholders through dividends and share buybacks of £147.1 million and a year-end cash, cash equivalents, short-term investments and marketable securities balance of £51.3 million.

Revenues

The Company’s revenues are classified as either “Product Revenues,” consisting of license fees, sales of development systems and royalties, or “Service Revenues,” consisting of design consulting services and revenues from support, maintenance and training. The most significant component of ARM’s total revenues are license fees and royalty income which accounted for approximately 83% of total revenues in 2005, 2006 and 2007.

License fees as a percentage of total revenues will be affected by fluctuations in royalties and in demand for ARM’s development systems, design consulting and support and maintenance services. These products and services complement ARM’s basic licenses by supporting ARM’s traditional semiconductor partners in their efforts to reduce time to market. In addition, they provide ARM with a way to support systems companies who purchase finished ARM products from semiconductor companies as well as certain software vendors whose software runs on ARM microprocessors. Growth in

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these complementary products and services will depend on continued success in demonstrating to semiconductor companies, systems companies and software vendors the enhanced implementation possibilities which such products and services provide for ARM-technology based products and, more generally, on continued market acceptance of the ARM architecture. Growth in these complementary products and services will also depend on whether the Company can devote sufficient engineering staff to support growth in services, especially consulting. Revenues from development systems, design consulting and support and maintenance services was approximately 17% of total revenues in 2005, 2006 and 2007.

Revenues from royalties accounted for approximately 38%, 41% and 40% of total revenues in 2005, 2006 and 2007, respectively. The Company believes royalty revenue will continue to contribute a significant portion of total revenue going forward as the total number of partners and licenses increase.

As of December 31, 2007, the Company had 210 semiconductor licensees who in turn provide access to many other customers worldwide.

Product Revenues

License Fees  Most licenses are designed to meet the specific requirements of the particular customer and can vary from rights to embed ARM technology into a customer’s own application specific product to the complete design of a “system-on-chip.” See “Item 4. Information on the Company—Business Overview—License Agreements.” Over the term of a license, contractual payments can range from hundreds of thousands of dollars to several millions of dollars. The intellectual property licensed by the Company consists of software and related documentation which enable a customer to design and manufacture microprocessors and related technology and software. A license may be perpetual or time limited in its application. In general, the time between the signing of a license and final customer validation of the ARM technology is between 6 and 15 months with most time allocated to the period between delivery and validation of the technology. Delivery generally occurs within a short time period after the signing of a license. The licensee obtains license rights to the intellectual property at the time of signing. In addition, the licensee obtains ownership of the licensed rights to the in-process customization as well as the completed customization. License fees are invoiced according to an agreed schedule. Typically, the first invoice is on signing of the contract, the second is on delivery of the customized intellectual property (being the intellectual property and other technical information relating to the product licensed) and the third is a date-based milestone, usually within nine months of signature of the license. No upgrades or modifications to the licensed intellectual property are provided, except those updates and upgrades provided on a when-and-if-available basis under post-contract support (“PCS”). Following licensee validation of the ARM technology, the Company has no further obligations under the license agreement, except those under a valid PCS arrangement as mentioned above.

In addition to the license fees, contracts generally contain an agreement to provide post-contract support (support, maintenance and training) which consists of an identified customer contact at the Company and telephonic or e-mail support. Fees for post-contract support which take place after customer acceptance are specified in the contract. Revenues from post-contract support are shown within Service Revenues and are discussed further below under “—Service Revenues—Support and Maintenance.”

Development Systems  Dollar revenues from sales of development boards and toolkits have grown steadily with demand from licensees, systems companies and certain software vendors whose software runs on ARM microprocessors. Further revenue growth has arisen from the introduction of new ARM technology such as Electronic System Level (ESL) tools and MCU tools following the acquisitions of Axys and Keil respectively (See Note 6 to the Consolidated Financial Statements).

Royalties  Royalties are either set as a percentage of the licensee’s net sale price per chip or, less frequently, as a fixed amount per chip. In both cases, royalty rates decline as the total volume of ARM-compliant products shipped increases as the licensee moves through the volume-related price breaks. Royalty payment schedules in individual contracts vary depending on the nature of the license and the degree of market acceptance of ARM architecture prevailing at the contract date. Furthermore, average royalty rates in any period vary depending upon what stage the various licensees have reached in their royalty breaks per core. Royalties are payable by licensees when they have manufactured and sold the resulting ARM-compliant microprocessors and peripherals to systems companies. The license contracts provide for reports to be issued to ARM with details of such sales and, in certain cases, with forecasts of sales for periods in the near future.

Systems Software  The Company also achieves small amounts of additional product revenues with the sale of systems software. Revenue is recognized on customer acceptance.

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Service Revenues

Consulting  Consulting activities support the overall design win process and generate intellectual property for relicensing. Licensees of ARM technology frequently request consulting assistance for systems level design in order to enable them to launch their products more quickly.

Support and Maintenance  ARM generally requires its licensees to pay an annual fee for support and maintenance for a minimum of one year. The fair value of this post-contract support (“PCS”) is determined by reference to the consideration the customer is required to pay when it is sold separately, and the PCS portion is recognized ratably over the term of the PCS arrangement. ARM considers the fair value of contractual renewal rates or the rates actually achieved on renewal of licenses of the same or similar technology to provide vendor specific objective evidence (“VSOE”) of the fair value of such arrangements, meeting the criterion in paragraph 10 of SOP 97-2  “Software revenue recognition” relating to the separate sale of such elements. We therefore believe that we are able to demonstrate VSOE of the PCS arrangements which are bundled with initial license agreements. In a small number of cases, customers may decline to renew the PCS package which they were entitled to as part of the initial multiple element arrangement, but may, instead, opt for a different level of support in future years. Such arrangements are negotiated in the normal course of business. We do not consider that subsequently renegotiated support arrangements are equivalent to the PCS packages initially offered as part of the initial multiple element arrangement and do not, therefore, take such sales into account in determining the VSOE of support and maintenance services.

Costs of Revenues

Product Costs  Product costs are limited to variable costs of production such as the costs of manufacture of development systems, amortization of the Company’s third-party technology licenses, cross-license payments to collaborative parties and the time of engineers on PIPD projects.

Service Costs  Service costs include the costs of support and maintenance services to licensees of ARM technology as well as the costs directly attributable to consulting work performed for third parties.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements. We believe our most critical accounting policies include revenue recognition and cost estimation on certain contracts for which we use a percentage-of-completion method of accounting, accounting for share-based payments, impairment of purchased goodwill and intangible assets and loss provisions.

The impact and any associated risks related to these policies on our business operations are discussed throughout this section where such policies affect our reported and expected financial results. Note that our preparation of the financial statements included in this annual report on Form 20-F requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

Revenue consists of license fees received under the terms of license agreements with customers to enable them to use the Company’s intellectual property (“IP”), which is often customized to each customer’s manufacturing process. The Company receives royalties on sales by the Company’s customers of products containing ARM technology. It also supplies off-the-shelf software tools and IP, bought-in boards and toolkits, training and consultancy services.

The Company primarily earns revenues from licensing its IP to leading electronics companies which in turn manufacture, market and sell microprocessors, ASICs and ASSPs based on the Company’s architecture to systems companies for incorporation into a wide variety of end products. The Company’s IP consists of software and related documentation which enables a customer to design and manufacture microprocessors and related technology and software. Most licenses are designed to meet the specific requirements of each customer and are generally not time limited in their application. In general, the time between the signing of a license and final validation of the customer’s ARM technology-compliant product is between six and 15 months. Specified upgrades or modifications to the licensed IP are not provided.

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Following validation of the customer’s ARM-compliant product, the Company has no further obligations under the license agreement.

In accordance with SOP 81-1, “Accounting for performance of construction-type and certain production type contracts,” when license agreements include deliverables that require “significant production, modification or customization,” contract accounting is applied. Revenues from license fees are recognized based on the percentage-of-completion method over the period from signing of the license to validation of the customer’s ARM technology-compliant product and the completion of all outstanding obligations. The amount of revenue recognized is based on the total license fees under the license agreement, or that portion of the total license fees which is determined to be fixed or determinable in arrangements involving extended payment terms and the percentage-of-completion achieved. Those amounts that are not deemed fixed or determinable at the outset of the arrangement are recognized as the payments become due. Where an arrangement is for multiple elements, each requiring significant production, modification or customization, the Company evaluates whether the bifurcation criteria of SOP 81-1 are met, and if so, the total arrangement fee is allocated accordingly. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project, compared with the total estimated project requirement. Revenues are recognized only when collectability is probable. Estimates of total project requirements are based on prior experience of customization, delivery and validation of the same or similar technology and are reviewed and updated regularly by management. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined.

Agreements that include rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, revenue from the arrangement being recognized ratably over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.

In accordance with SOP 97-2, “Software revenue recognition,” where agreements involve elements that do not require “significant production, modification or customization,” the Company recognizes license revenue when a signed contract or other persuasive evidence of an arrangement exists, the product has been shipped or electronically delivered, the license fee is fixed or determinable and collection of the resulting receivable is probable. Where agreements include multiple elements, the revenue recognition criteria for each element are typically met within the same accounting period, i.e. on delivery of the elements. If an element that is essential to the functionality of the delivered elements is undelivered at a period end, the Company determines whether it has sufficient vendor specific objective evidence (“VSOE”) of fair value in order to make an allocation amongst the elements. For the majority of its products and services, with the exception of post-contract support (“PCS”), certain development systems products and certain services undertaken by the Company, the Company does not believe it has sufficient VSOE of fair value to make such allocations. Accordingly, no revenue is recognized on an arrangement where deliverables other than PCS and the aforementioned development systems products and services remain undelivered.

License fees are considered fixed or determinable if they are not dependent on customers completing specific milestones and they are not subject to extended payment terms, i.e. the payment terms do not extend over a substantial period when compared to the payment terms in similar license arrangements and when compared with the licensed products’ life cycle. If all the fees in an arrangement are deemed to be fixed or determinable, the Company recognizes revenue when all other revenue recognition criteria have been met. The excess of revenue recognized in respect of such fees over fees invoiced is recorded as an accrued revenue asset. Where an arrangement includes fees that are not deemed fixed or determinable, revenue from the arrangement is recognized as the payments become due and the excess of fees invoiced over revenue recognized in respect of such fees is recorded as a deferred revenue liability.

PCS consists of the right to receive services and/or unspecified product upgrades/enhancements that are offered on a when-and-if-available basis. PCS is generally priced separately from the initial licensing fee in a contract and revenue is allocated to PCS based on VSOE of fair value. VSOE of fair value is determined with reference to contractual renewal rates. If no renewal rates are specified, the entire fee under the arrangement is amortized and recognized ratably over the contractual PCS period. Where renewal rates are specified, PCS revenue is recognized ratably over the term of the PCS arrangement.

Certain products have been co-developed by the Company and a collaborative partner, with both parties retaining the right to sell licenses to the product. In those cases where the Company makes sales of these products and considers itself to

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be the principal under EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” the total value of the license is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales. Where the collaborative partner makes sales of these products, the Company records as revenue the commission it is due when informed by the collaborative partner that a sale has been made and cash has been collected.

Sales of boards and toolkits are recognized upon delivery. While some arrangements with distributors provide very limited rights of return, the Company’s history is that actual returns are negligible and accordingly no provisions are deemed necessary.

Services, such as consulting and training are typically sold in stand-alone arrangements. Where they are sold in conjunction with other deliverables and they are not considered essential to the functionality of those other deliverables, they are accounted for separately based on VSOE, if VSOE has been established. Revenue for these services is recognized as the services are performed and collectability is probable. If VSOE for the services does not exist or the services are deemed to be essential to the functionality of the other deliverables in the arrangement, the entire arrangement fee is recognized as the services are performed. The excess of fees invoiced over revenue recognized in respect of such fees is recorded as a deferred revenue liability.

Revenues from consulting projects, which are typically of a short duration, are recognized when the service has been provided and all obligations to the customer under the consulting agreement have been fulfilled. For longer term and more complex consulting projects, typically containing several project milestones, where significant modification to ARM core-based IP is required, revenues are recognized on a percentage-of-completion basis as milestones are achieved. This method approximates to percentage-of-completion based on labor inputs.

Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Revenues are recognized when the Company receives notification from the customer of product sales, or receives payment of any fixed royalties. Notification is typically received in the quarter following shipment of product by the customer.

Where the Company enters into more than one agreement with the same customer in the same, short time frame, an assessment is made to establish whether the group of agreements is so closely related that they effectively form a single multiple-element arrangement. The factors considered in making this assessment include, but are not limited to:

· Whether the different elements are closely interrelated or interdependent in terms of design, technology, or function;

· Whether the fee for one or more of the agreements is subject to a refund or forfeiture or other concession if one of the other contracts is not completed satisfactorily;

· Whether one or more elements in one agreement are essential to the functionality of an element in another agreement;

· Whether payment terms under one agreement coincide with performance criteria of another agreement; and

· Whether the negotiations are conducted jointly with two or more parties to do what in essence is a single project.

Accounting for Share-Based Payments

Since January 1, 2006, the Company has applied FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) in relation to accounting for share-based payments. Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period.  The fair value of these awards is calculated using appropriate valuation techniques.

Some awards made by the Company are liability-classified awards under FAS 123R as (i) there is an obligation to settle a fixed monetary amount in a variable number of shares; or (ii) the awards are indexed to a factor other than performance, market or service condition.  The fair value of these awards is re-measured at each period end until the award has vested.  Once the award has vested, or for (i) above when the number of shares becomes fixed, the award becomes equity-classified.  The transitional rules detailed in FAS 123R required the Company in 2006 to make a re-measurement adjustment for compensation cost for liability awards that had been recognized in that year as a cumulative effect of change in accounting policy in the income statement.

The Company adopted the provisions of FAS 123R using a modified prospective application. Accordingly, periods prior to adoption have not been revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date, which are subsequently modified or cancelled. Estimated

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compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”).

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company elected to adopt the alternative transition method provided in this FASB Staff  Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies which could be recognized subsequent to the adoption of FAS 123R.

The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based payments.  This model is consistent with that used for the Company’s pro forma information required under FAS 123.  The determination of the fair value using this model is affected by the share price at grant, as well as a number of other assumptions including expected volatility, expected life, risk-free interest rate and expected dividends.

Purchased Goodwill and Intangible Assets

Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified and liabilities acquired. Goodwill is not amortized but is instead tested for impairment at least annually.  Annual impairment reviews in 2006 and 2007 determined, primarily with reference to cash flow forecasts, that there was no indication of impairment with respect to goodwill.

Identifiable intangible assets acquired as part of a business combination are capitalized and amortized over a prudent estimate of the time that the Company is expected to benefit from them, with the exception of in-process research and development, which is written-off immediately. This is currently over periods of between one and six years.

We assess the impairment of long-lived assets and identifiable intangibles whenever a triggering event occurs. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Factors which could trigger an impairment review include the following: (i) significant negative industry or economic trends, (ii) exiting an activity in conjunction with a restructuring of operations, (iii) current or projected losses that demonstrate continuing losses associated with an asset, or (iv) a significant decline in our market capitalization, for an extended period of time, relative to net book value. When we determine that there is an indicator that the carrying value of long-lived assets, identifiable intangibles and related goodwill may not be recoverable, we measure impairment based on estimates of future conditions such as future revenues, gross margins and operating expenses, the fair values of certain assets based on appraisals, and industry trends.

The complexity of the estimation process and issues related to the assumptions, risks and uncertainties inherent with the application of our intangible and tangible fixed asset accounting policies affect the amounts reported in our financial statements, especially our estimates of the expected useful economic lives and the carrying values of those assets. If our business conditions were different, or if we used different assumptions, including discount rate assumptions, in the application of this and other accounting policies, it is likely that materially different amounts would be reported in our financial statements.

In accordance with SFAS 131 “Disclosures about segments of an enterprise and related information,” the Company has identified its operating segments based on the information used by the Chief Operating Decision Maker in monitoring the business. For the purposes of assessing the carrying value of goodwill for impairment, goodwill has been allocated to reporting units. Based on the nature and extent of discrete information available to management, the Company believes that, for ARM, each operating segment consists of a single reporting unit. For the allocation of goodwill by segment, see “—Segment Information” below and Note 14 to the Consolidated Financial Statements.

Uncertain tax positions

In July 2006 the FASB issued Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FAS109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date

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to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. Potential accrued interest and penalties related to unrecognized tax benefits within operations are recognized as an income tax expense. The cumulative effect of applying the provisions of FIN 48 has been reported as an adjustment to retained earnings as of January 1, 2007. Prior to 2007, tax contingencies were determined in accordance with FAS No. 5 “Accounting for contingencies” (“FAS 5”) and estimated tax liabilities were recorded to the extent the contingencies were probable and could be reasonably estimated.

Loss Provisions

Over recent years, as we have established an increasing number of partners, as our intellectual property has become more widely accepted and as our balance sheet has become stronger, we have become involved in more litigation and claims have been asserted against us more frequently.

The Company accrues an estimated loss contingency by a charge to income if both the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements (it is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss); and (ii) the amount of loss can be reasonably estimated.

Application of these accounting principles to potential losses that could arise from intellectual property disputes is inherently difficult given the complex nature of the facts and law involved. Deciding whether or not to provide for loss in connection with such disputes requires management to make determinations about various factual and legal matters beyond the Company’s control. To the extent management’s determinations at any time do not reflect subsequent developments or the eventual outcome of any dispute, future income statements and balance sheets may be materially affected with an adverse impact upon our results of operation and financial position. Among the factors that the Company considers in making decisions on provisions are the nature of the litigation, claim, or assessment, the progress of the case (including progress after the date of the financial statements but before those statements are issued), the opinions or views of legal counsel and other advisers, the experience of the Company in similar cases, and any decision of the Company’s management as to how the Company intends to respond to the litigation, claim, or assessment. The fact that legal counsel is unable to express an opinion that the outcome will be favorable to the Company does not necessarily mean that the above conditions for accrual of a loss are met.

Results of Operations

The following table sets forth, for the periods indicated, the percentage of total revenues represented by certain items reflected in the Company’s consolidated statements of operations.

	Year ended December 31,
	2005		2006		2007
	%		%		%
Revenues
Product revenues		93.7		93.9		93.7
Service revenues		6.3		6.1		6.3
Total revenues		100.0		100.0		100.0
Cost of revenues
Product costs		9.4		9.1		8.3
Service costs		2.6		2.6		2.5
Total cost of revenues		12.0		11.7		10.8
Gross profit		88.0		88.3		89.2
Operating expenses
Research and development		26.5		28.7		28.1
Sales and marketing		15.6		16.8		17.9
General and administrative		17.7		18.5		19.3
Restructuring costs		—		—		0.4
In-process research and development		0.1		0.2		—

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	Year ended December 31,
	2005	2006	2007
	%	%	%
Amortization of intangibles purchased through business combination	7.5	7.0	7.0
Total operating expenses	67.4	71.2	72.7
Income from operations	20.6	17.1	16.5
Interest, net	2.3	2.6	2.1
Profit on disposal of available-for-sale security	—	2.0	—
Income before income tax and cumulative effect of change in accounting policy	22.9	21.7	18.6
Provision for income taxes	4.9	3.6	4.4
Net income before cumulative effect of change in accounting policy	18.0	18.1	14.2
Cumulative effect of change in accounting policy, net of tax	—	0.9	—
Net income	18.0	17.2	14.2

Total revenues for the year ended December 31, 2007 were £259.2 million, a decrease of 1.6% from £263.3 million in 2006, which was an increase of 13% from £232.4 million in 2005. Dollar revenues were $514.3 million in 2007, an increase of 6% from $483.6 million in 2006, which was an increase of 16% from $418.7 million in 2005. The actual average dollar exchange rate in 2007 was $1.98 compared with $1.84 in 2006 and $1.80 in 2005. 2007 sterling revenues would have been £20.7 million higher had the Company's dollar revenues been translated at the 2006 average rate. 

Management analyzes product revenues in the categories of royalties, licenses and development systems. Service revenues consist of consultancy, support, maintenance and training income. The following table sets forth, for the periods indicated, the amount of total revenues represented by each component of revenue:

	Year ended December 31,
	2005		2006		2007
Product Revenues	(in thousands)
Royalties	£	87,849	£	107,814	£	104,150
Licenses		104,223		110,548		110,663
Development Systems		25,639		28,832		27,913
		217,711		247,194		242,726
Service Revenues
Consulting, Support, Maintenance and Training	£	14,728	£	16,060	£	16,434
Total Revenues		232,439		263,254		259,160

Product revenues  Product revenues consist of license fees, sales of development systems and royalties. Product revenues for 2005, 2006 and 2007 were £217.7 million, £247.2 million and £242.7 million, respectively, representing 94% of total revenues in each year.  Product revenues in US dollars, being the primary currency of revenues generated, grew from $392.2 million in 2005 to $454.5 million in 2006 and $482.3 million in 2007.

License revenues increased from £104.2 million in 2005 to £110.6 million in 2006 and were £110.7 million in 2007 representing approximately 45%, 42% and 42% of total revenues in 2005, 2006 and 2007 respectively.  License revenues in US dollars grew from $187.0 million in 2005 to $202.5 million in 2006 and $217.9 million in 2007.

Processor Division (PD) dollar license revenues have grown by 12% and 18% in 2006 and 2007 respectively. The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products and newer technology such as the Cortex family of products and the Mali 3D graphics processors.

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62 new licenses were signed in 2007 compared to 65 in 2006 and 71 in 2005. Revenues from Cortex family products accounted for 31% of PD license revenues in 2007, compared to 26% in 2006. Cortex products started generating revenue in 2005. ARM11 accounted for 23% of PD license revenues in 2007, compared to 22% in 2006 and 21% in 2005. 23 companies became new ARM Partners in 2007, bringing the total number of semiconductor partners to 210 at the end of 2007. This total number of semiconductor partners was net of those companies that have signed licenses with ARM in the past but have since been acquired by other companies or who no longer have access to ARM technology for other reasons.

During 2007, 14 Cortex family licenses were signed, including three lead partners for the next generation Cortex-A9 processor, bringing the accumulated total of Cortex family licenses to 37, signed by 28 semiconductor companies. Three licenses to ARM’s Mali 3D graphics processors were signed in 2007, bringing the accumulated total of Mali licenses to five. Nine semiconductor companies are now licensed to design products using ARM’s graphics technology.

In addition, 2007 saw four large semiconductor companies underline their long term commitment to ARM technology by signing subscription licenses, which allow them access to a broad range of ARM processor technology. The term of these licenses is fixed and ranges between three and five years.

License revenues from non-core products, covering items such as platforms, peripherals, embedded trace modules, embedded software, data engines, models and sub-systems were £10.8 million in 2007, compared to £10.9 million in 2006 and £11.1 million in 2005 representing approximately 13% of processor license revenues in 2007, 14% in 2006 and 16% in 2005.

In 2007, ARM maintained progress in achieving the long term strategic goal of providing ARM’s physical IP to leading Integrated Device Manufacturers (“IDM”) and Fabless semiconductor companies and continued to sign synergistic licenses that have been enabled by the combination of ARM and Artisan. Synergistic deals include, in management’s determination, both instances of physical IP being licensed to ARM Partners and instances of contracts being won against the competition due to both processor and physical IP being available from ARM.

Licensing momentum for ARM’s 65nm physical IP products continued to grow, with 10 new licenses signed in 2007. By the end of 2007, ARM had signed a total of 32 65nm licenses with 15 companies and had signed eight licenses for physical IP with four foundries at the most advanced process of 45nm. ARM’s Physical IP Division (PIPD) reported license revenues of £27.3 million in 2007, representing approximately 25% of total license revenues.

During 2007, the combination of ARM and Artisan has continued to provide benefits other than synergistic license revenues.  In addition to the benefits to the Cortex range of processors, including the development of the new 12 track Advantage libraries in 65nm enabling higher performance, and the high performance ARM1176JZF-S implementation, the combination has enabled the development of lower power processors with lower leakage, a new compact ARM11 MPCore dual processor delivering greater performance at lower power and development work on 45nm physical IP which will influence and optimize the design of future processors.  

Revenues from the sale of development systems increased from £25.6 million in 2005 to £28.8 million in 2006 and fell to £27.9 million in 2007 representing approximately 11% of total revenues in each year. Development systems revenues in US dollars grew from $46.5 million in 2005 to $53.0 million in 2006 and $55.6 million in 2007. This growth has been generated by working with customers on longer term relationships for the supply of RealView® Developer tools for software development, continued momentum behind the RealView Create tools for ESL customers and a healthy market place for tools to support the ever-broadening portfolio of ARM microprocessors. Development Systems has continued to enter into more multi-year contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which to drive new innovation.

Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) per chip or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year. As the penetration of ARM technology-based chips grows across a wide range of end-market applications, the range of ASPs gets wider. The average royalty rate (“ARR”) earned by ARM in any one reporting period is dependent on the mix of the ASPs of the chips shipped in that period. In 2007, significant unit volume growth was driven by products which incorporate chips with lower ASPs including ultra low cost handsets, smartcards, microcontrollers and Bluetooth chips. As a result, the ARR in 2007 was 6.1 cents compared to 6.7 cents in 2006 and 7.9 cents in 2005. Unit volume growth more than compensated for this reduction in ARR and dollar PD royalty revenues grew by 8% from 2006 to 2007.

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Royalties increased from £87.8 million in 2005 to £107.8 million in 2006 and fell to £104.1 million in 2007, representing 38%, 41% and 40% of total revenues in 2005, 2006 and 2007, respectively. US dollar royalty revenues grew from $158.7 million in 2005 to $199.0 million in 2006 and $208.8 million in 2007. Royalty revenues in 2007 comprised £88.0 million from PD and £16.1 million from PIPD. PD volume shipments increased from 1.7 billion units in 2005 to 2.5 billion in 2006, with the increase in volumes coming from all market segments. Total unit shipments in 2007 of 2.9 billion represented an increase of 18% compared to 2006. Unit shipments in the mobile segment grew by 19% year-on-year and in the non-mobile segments by 15%. Growth in the non-mobile segments was achieved across a broad range of product applications including smartcards, microcontrollers, automotive, connectivity devices, hard disk drives and many others.

The Company expects royalty revenues to grow year-on-year although they may be subject to significant fluctuations from quarter to quarter. The total number of partners shipping ARM technology-based products at the end of 2007 was 89 after taking into account corporate activity within the ARM partnership.  15 companies were paying meaningful royalties for physical IP products at the end of the year.

Service revenues  Service revenues consist of design consulting services and revenues from support, maintenance and training. Service revenues increased from £14.7 million in 2005 to £16.1 million in 2006, and further to £16.4 million in 2007, representing 6% of total revenues in each year. Service revenues in US dollars, being the primary currency of revenues generated, grew from $26.5 million in 2005 to $29.1 million in 2006 and further to $32.0 million in 2007.

Geographic analysis  Operating in a global environment, the geographic destinations of the Company’s revenues fluctuate from period to period depending upon the country in which its customers are located. The following table sets forth, for the periods indicated, revenue by geographic destination as a percentage of total revenue per the Company’s consolidated financial statements.

	Year ended December 31,
	2005		2006		2007
	%		%		%
Revenue by destination:
North America		43		42		42
Japan		18		16		16
Asia Pacific, excluding Japan		25		26		25
Europe		14		16		17
Total		100		100		100

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Product costs  Product costs are limited to variable costs of production such as the costs of manufacture of development systems, amortization of third-party technology licenses, cross-license payments to collaborative partners and time of engineers on PIPD projects. Product costs were £21.8 million in 2005, £24.2 million in 2006 and £21.5 million in 2007, representing 9%, 9% and 8% of total revenues in 2005, 2006 and 2007, respectively. In 2005 and 2006, the proportion of development systems costs was approximately a quarter, PIPD direct costs of approximately two-thirds and the balance third-party licenses and cross-license payments to collaborative partners. In 2007, development systems costs made up approximately 20% of total product costs, PIPD direct costs approximately 70% and the balance on third-party licenses and cross-license payments.  Product gross margin in 2007 was 91%, compared to 90% in both 2006 and 2005. Included within product costs in 2005 are £2.5 million of deferred stock-based compensation relating to options assumed on the Artisan acquisition (2006 and 2007: £ nil).

Service costs  Service costs include the costs of support and maintenance services to licensees of ARM technology as well as the costs directly attributable to consulting work performed for third parties. Cost of services increased from £6.1 million in 2005 to £6.7 million in 2006, and was £6.7 million in 2007. The gross margins earned on service revenues were approximately 59% in 2005, 58% in 2006 and 61% in 2007. Costs increased in 2006 as the business invested more in the engineering departments, a proportion of which is allocated to services costs.  This has continued into 2007 with a slight reduction in costs due to reduced stock-based compensation costs being allocated to service costs; included within service costs in 2006 and 2007 are FAS 123R stock-based compensation costs of £1.1 million and £1.0 million, respectively.

Key performance indicators  The Company’s management uses several key performance indicators in assessing the Company’s performance, of which revenues and earnings per share are the most important. Revenues are discussed in further detail in “—Results of Operations” above. Earnings per share are disclosed in our financial statements filed herewith. Another key performance indicator for the business is backlog, defined as the aggregate value of contracted business not yet recognized in the profit and loss account. Of our revenue streams, it excludes royalty revenue, which is recognized upon receipt of the royalty reports from our partners and consequently passes into backlog and is immediately released when invoiced. Consequently, backlog focuses on the health of our licensing and our services businesses.

The Company discloses the quarterly trend in backlog along with the maturity profile (how much will be recognized as revenue over the next two quarters, the subsequent two quarters, and over more than one year), and its composition is split between the main component parts.

	Year ended December 31,
Maturity profile of backlog	2006			2007
Next two quarters (Q1 2008 and Q2 2008)		41	%		34	%
Subsequent two quarters (Q3 2008 and Q4 2008)		36	%		30	%
Greater than twelve months		23	%		36	%
Total		100	%		100	%

	Year ended December 31,
Backlog composition	2006			2007
Processors		46	%		55	%
Physical IP		31	%		22	%
Support & Maintenance and Others		23	%		23	%
Total		100	%		100	%

At the end of 2007, backlog was 24% higher than at the beginning of the year and was at its highest ever level due to the fourth quarter of 2007 being a record bookings quarter for the Company, with several designs for new technology being licensed by our customers. Only a small portion of revenue has been recognized in respect of these licenses, thus building backlog.

The longer duration of the backlog in 2007 compared to 2006 reflects the signature of three large IP subscription agreements in the fourth quarter of 2007.  Revenue from these agreements will be recognized ratably over the terms of the licenses.

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Another key performance indicator is the number of patent applications submitted by ARM employees. ARM incentivizes its employees to submit patent applications by awarding patent bonuses. The number of proposed patent applications submitted by ARM employees was 193 in 2007, 178 in 2006 and 163 in 2005.

Research and development costs  Research and development costs increased from £61.6 million in 2005 to £75.5 million in 2006 and were £72.7 million in 2007, representing 27%, 29% and 28% of total revenues in 2005, 2006 and 2007, respectively. Costs in 2006 and 2007 included £10.6 million and £9.3 million, respectively, of share-based charges in accordance with FAS 123R and in 2005 included £1.6 million of deferred stock-based compensation in accordance with previously applicable standards. Excluding these charges, R&D costs were 26%, 25% and 24% of total revenues in 2005, 2006 and 2007, respectively, reflecting the operating leverage in the business. Continued investment in research and development remains an essential part of the Company’s strategy since the development of new products to license is key to its ongoing success.

Average engineering headcount increased from 783 in 2005 to 961 in 2006, with the increase coming from organic growth, predominantly in India, but also from the Falanx and Soisic acquisitions. Average engineering headcount increased further to 1,163 in 2007, mainly from the large number of hires towards the end of 2006 as well as measured growth in 2007. Again, the growth was predominantly in India, demonstrating ARM’s gradual shift of engineering resource to lower cost regions. Staff costs increased in line with headcount figures, but bonuses payable on the achievement of financial performance targets in 2006 were higher than those in 2005 and 2007.

Typically, when a new product is at a conceptual stage, the Company seeks to work with a potential customer interested in licensing the product. Once the customer is identified, further work is undertaken to complete the product’s fundamental design, after which it is transferred to the customer’s semiconductor process so that a series of test chips may be manufactured and validated. The Company cannot determine whether the product can be manufactured in accordance with its design specifications, including functions, features, and technical performance requirements, until the end of this process. Since all design, coding, and testing activities must be completed before technological feasibility is established, the Company does not capitalize any product development costs.

Sales and marketing  Sales and marketing expenditure increased from £36.2 million in 2005 to £44.2 million in 2006 and £46.4 million in 2007, representing 16%, 17% and 18% of total revenues in 2005, 2006 and 2007, respectively. Costs in 2006 and 2007 included £3.7 million and £3.2 million of FAS 123R compensation charges, respectively, and in 2005 included £2.1 million of deferred stock-based compensation.  The proportion of sales and marketing costs to revenue in 2005, 2006 and 2007 excluding these charges were 15%, 15% and 17%, respectively.  Average headcount in this area increased from 286 in 2005 to 302 in 2006 to 312 in 2007.  Overall sales and marketing costs have increased in 2007 as further investment is made in customer support as well as due to increased staff bonuses based on a record bookings year.

General and administrative General and administrative costs were £41.1 million in 2005, £48.6 million in 2006 and £50.0 million in 2007, representing 18%, 18% and 19% of total revenues, respectively. Excluding £3.5 million of deferred stock-based compensation in 2005 and £2.9 million and £2.6 million of FAS 123R compensation costs in 2006 and 2007, respectively, general and administrative costs were 16%, 17% and 18% of total revenues in 2005, 2006 and 2007, respectively.

General and administrative average headcount in 2007 was 226, up from 165 in 2005 and 209 in 2006. The increases year-on-year have partly come from the acquisitions but also organic growth to strengthen the infrastructure of the Company as it continually expands.

Unrealized future foreign exchange gains on certain committed but not yet invoiced future revenue streams of £1.4 million (2006: losses of £0.9 million; 2005: gains of £2.1 million) were recorded in 2007 in accordance with FAS 133, with other foreign exchange charges of £2.3 million in 2005 and gains of £3.6 million and £0.2 million in 2006 and 2007, respectively. The gain in 2006 was mainly as a result of the revaluation of an intra-group dollar loan. See “—Foreign Currency Fluctuations” below.  Furthermore, in 2007 there were write-downs in the carrying values of the Company’s investments in Superscape Group plc and Coware Inc. of £1.2 million in aggregate.  Other increases in the last few years include additional recruitment and training costs for the growth in number of employees in the Company, increased IT costs to continually develop the ARM internal network as the number of offices and people grow and increased administrative costs relating to Sarbanes-Oxley compliance work.

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Restructuring costs  During 2007, the Company closed one of its design centers in the US resulting in restructuring costs of £1.0 million, primarily related to accrued rents, write-off of leasehold improvements and staff severance costs.

In-process research and development  During 2004, the Company purchased Artisan Components, Inc. (now ARM, Inc.). Those intangible assets that were still in development (known as in-process research and development) were charged directly to the income statement, amounting to £3.2 million. A further £0.3 million of Artisan in-process research and development was charged to the income statement in 2005 as the final valuation of intangibles was completed. In 2006, the Company acquired the trade and certain assets of PowerEscape, Inc., resulting in £0.6 million of in-process research and development being charged to the income statement.  All acquired in-process research and development from the Artisan and PowerEscape acquisitions are progressing as expected.

Amortization of intangible assets Various licenses to use third party technology have been signed over the past several years, with their values being capitalized and amortized over the useful economic period that the Company is expected to gain benefit from them (generally between three and ten years). Licenses totaling £5.9 million were purchased during 2001 to 2005, with a further license for £2.5 million being purchased in 2007.  Amortization of these licenses amounted to £0.4 million in 2007 (2006: £0.4 million; 2005: £0.5 million).  At December 31, 2007, the net book value of these assets was £2.7 million which will be amortized over the next ten years.

Following the out-of-court settlement of the Company’s litigation against picoTurbo, Inc. in December 2001, picoTurbo assigned its intellectual property rights to the Company for a payment of £7.5 million. This has been amortized over four years and £1.5 million was charged to the income statement in 2002 and £2.0 million in 2003, 2004 and 2005. The asset was fully written-down in 2005 and thus there was no further amortization charge in 2006 or 2007.  The Company also purchased a patent for £0.7 million in 2002 which is being amortized over five years. The amortization charge was £0.1 million in 2005, 2006 and 2007 and was fully written-down by the end of 2007.

During 2003, the Company purchased Adelante Technologies NV (now ARM Belgium NV). Included with the assets purchased were £0.3 million of intangible assets comprising developed technology and customer relationships which are being amortized over five years and two years respectively. The amortization charge for the assets during 2005 and 2004 was £0.1 million in each year, but was less than £0.1 million in 2006 and 2007.  This will become fully written-down during 2008.

During 2004, the Company purchased Axys Design Automation, Inc. and Artisan Components, Inc. (now ARM, Inc.). Intangibles acquired and capitalized as part of these business combinations (including developed and core technology, customer relationships and trademarks) totaled £1.9 million and £70.9 million, respectively, and are being amortized over five years and between one and six years respectively (see Note 6 to the Consolidated Financial Statements for further details). The total charge during 2005 was £0.4 million and £16.5 million for Axys and Artisan, respectively, during 2006 was £0.4 million and £14.6 million, respectively, and during 2007 was £0.3 million and £13.3 million, respectively.

During 2005, the Company purchased Keil Elektronik GmbH and Keil Software, Inc. Intangibles acquired and capitalized consisted of developed technology, customer relationships and trade names and totaled £8.7 million. These are being amortized between two and five years and the amortization was £0.4 million in 2005, £2.5 million in 2006 and £2.4 million in 2007.

During 2006, the Company purchased Falanx Microsystems AS, a graphics IP company in Norway.  Intangibles acquired and capitalized consisted of developed technology and customer relationships and totaled £5.3 million.  These are being amortized over three to five years and the charge in 2006 was £0.7 million and in 2007 was £1.2 million.  The Company also purchased Soisic SA, an IP company based in France and the US.  Intangibles acquired and capitalized were all developed technology and totaled £4.3 million.  This is being amortized over five years with £0.1 million being charged in 2006 and £0.9 million in 2007.

Interest  Interest receivable increased from £5.3 million in 2005 to £6.8 million in 2006, but decreased in 2007 to £5.4 million. The growth in interest in 2006 was due to higher average cash balances and increasing interest rates. The fall in 2007 was a result of the increased cash outflow during the year on share buybacks and dividends, resulting in lower average cash balances. The Company invested cash balances over periods of up to one year during 2007, although typically were for periods of less than six months.

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Profit on disposal of available-for-sale security  In 2006, the Company disposed of its investment in CSR plc for cash proceeds of £5.6 million and realized a profit of £5.3 million.  The Company made no profit or loss on its disposal of a minority investment in Zeevo, Inc. in 2005.

Income before income tax and cumulative effect of change in accounting policy  Income before income tax was £53.2 million in 2005, £57.0 million in 2006 and £48.2 million in 2007, representing 23%, 22% and 19% of total revenues, respectively. The margin fell in 2006 due to increased intangible amortization relating to business combinations following the acquisitions of the two Keil businesses, increased investment throughout the business in additional headcount as well as the negative impact of foreign exchange with the weakening of the US dollar in the year.  This weakening of the dollar continued further in 2007 and was the primary reason for the drop in margin in 2007.

Tax charge  The Company’s effective tax rates were 21.3% in 2005, 16.5% in 2006 and 23.6% in 2007. The effective tax rate in 2005 was lower than the blended tax rates from the relevant tax jurisdictions due to additional costs being allowable for research and development tax credits, benefits arising from the structuring of the Artisan acquisition and additional deferred tax credits arising from employee share options. It fell further in 2006 due to a non-recurring tax credit arising from a tax-deductible foreign exchange loss and continued benefits from the structuring of the Artisan acquisition.  The rate returned to a higher level in 2007 (without the non-recurring foreign exchange loss in 2006) but was still benefiting from the aforementioned items.

Cumulative effect of change in accounting policy  On January 1, 2006, the Company adopted FAS 123R as detailed in the section “Accounting for share-based payments” in Note 1 to the Consolidated Financial Statements, the significant accounting policies. The transitional rules detailed in FAS 123R required the Company to make a remeasurement adjustment for compensation cost for liability awards that has been recognized in 2006 as a cumulative effect of change in accounting policy in the income statement.  The charge in 2006, net of tax, was £2,447,000.

Segment Information

At December 31, 2007, the Company was organized on a worldwide basis into three business segments, namely the Processor Division (“PD”), the Physical IP Division (“PIPD”) and the Systems Design Division (“SDD”). In 2004, the directors were of the opinion the Company only had one business segment, and then following the acquisition of Artisan in December 2004, the Company had two reportable segments in 2005 (namely PD and PIPD).

This was based upon the Company’s internal organization and management structure and was the primary way in which the Chief Operating Decision Maker (“CODM”) and the rest of the board were provided with financial information. Whilst revenues were reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets were only analyzed by the two segments.

In 2006, this structure and system of internal financial reporting to the CODM and board was changed resulting in a third division, namely SDD (called DevSys in 2006, now SDD), becoming a separate reportable segment. In previous years, the results of SDD were reported within PD, but for ease of comparability, have been separated out in the comparatives below. PIPD consists of the business stream previously undertaken by Artisan. PD primarily comprises the legacy ARM products and services. Recent acquisitions have been allocated to the various divisions as follows: KEG and KSI in 2005 to SDD, Falanx in 2006 to PD and Soisic in 2006 to PIPD. Goodwill on each acquisition has also been allocated into these divisions, except for Artisan whereby this has been allocated between PD and PIPD. See Note 14 to the Consolidated Financial Statements for the allocation of goodwill by segment.

Processor Division (PD)

The Processor Division encompasses those resources that are centered around microprocessor cores, including specific functions such as graphics IP, fabric IP, embedded software IP and configurable digital signal processing (“DSP”) IP.

Revenues  Total PD revenues for 2005, 2006 and 2007 were £156.6 million, £180.4 million and £187.8 million, respectively.

License revenues increased from £69.4 million in 2005, to £75.7 million in 2006, and increased further to £83.4 million in 2007, representing approximately 44%, 42% and 44% of total PD revenues in 2005, 2006 and 2007,

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respectively. License revenues in US dollars grew from $124.0 million in 2005 to $138.3 million in 2006 to $163.5 million in 2007. Dollar license revenues grew by 12% and 18% in 2006 and 2007, respectively. The portfolio of licensable products comprises a rich mix of proven ARM technology, such as the ARM7, ARM9 and ARM11 families of products, and newer technology such as the Cortex family of products and the Mali 3D graphics processors. See “— Results of Operations—Product Revenues” above for further details.

Royalties are either set as a percentage of the licensee’s average selling price (“ASP”) or, less frequently, as a fixed amount and are recognized when the Company receives notification from the customer of product sales. In effect, this means that it is normally in the quarter following the shipments that data is received and so royalty data for a year reflects actual shipments made from the beginning of October of the previous year to the end of September of the current year.

PD royalties increased from £72.5 million in 2005 to £88.7 million in 2006 and were £88.0 million in 2007, representing 46%, 49% and 47% of total PD revenues in 2005, 2006 and 2007, respectively. Royalty revenues in US dollars were $131.1 million, $164.1 million and $176.5 million in 2005, 2006 and 2007, respectively.  PD volume shipments increased from 1.7 billion units in 2005 to 2.5 billion units in 2006, and increased further to 2.9 billion units in 2007, representing an increase of 47% and 18% in 2006 and 2007, respectively.

Service revenues consist of design consulting services and revenues from support, maintenance and training. Service revenues increased from £14.7 million in 2005 to £16.1 million in 2006, and increased further to £16.4 million in 2007, representing 10%, 9% and 9% of total PD revenues in 2005, 2006 and 2007, respectively.  Service revenues in US dollars were $26.5 million in 2005, $29.1 million in 2006 and $32.0 million in 2007.

Operating costs  Operating costs for 2005, 2006 and 2007 were £87.4 million, £115.2 million and £112.6 million, respectively. Operating costs include cost of sales (comprising products costs and service costs), research and development costs, sales and marketing costs, general and administrative costs, and amortization of intangibles purchased through business combination (including the expensed in-process research and development).

The majority of PD product cost of sales comprise the amortization of third-party technology licenses and cross-license payments to collaborative partners. PD service costs include the costs of support and maintenance services to licensees of ARM technology as well as costs associated with consulting work performed for third parties. The total cost of sales in 2005, 2006 and 2007 were £6.1 million, £5.0 million and £4.7 million, respectively.

The total of research and development (R&D) costs, sales and marketing (S&M) costs and general and administrative (G&A) costs in 2005, 2006 and 2007 were £81.2 million, £109.4 million and £107.9 million, respectively. Total average PD headcount has increased from 703 in 2005 to 850 in 2006, and increased further to 962 in 2007 with increases coming from organic growth but also from acquisitions. Staff costs increased in line with these headcount figures, but bonuses payable on the achievement of financial performance targets were paid in 2006 and 2007, with only a negligible amount payable in 2005.

R&D costs in 2006 and 2007 include £6.1 million and £5.8 million, respectively, of share-based compensation charges in accordance with FAS 123R and in 2005 included £0.5 million of deferred share-based compensation, in accordance with previously applicable standards. Excluding these charges, R&D costs were 25%, 24% and 21% of PD’s revenues in 2005, 2006 and 2007, respectively.

PD’s S&M costs have increased sequentially in 2005 and 2006 and 2007 due mainly to organic growth boosted by acquisitions undertaken during 2006. S&M costs in 2006 and 2007 include £2.2 million and £2.0 million, respectively, of share-based compensation charges in accordance with FAS 123R and in 2005 included £0.7 million of deferred share-based compensation, in accordance with previously applicable standards. Excluding these charges, S&M costs were 13%, 15% and 15% of PD’s revenues in 2005, 2006 and 2007, respectively. Staff bonuses fluctuated in each year as shown above.

PD’s G&A costs increased in 2006, with a further marginal increase in 2007, due to acquisitions, increased staff bonuses and also organic growth to strengthen the infrastructure of the Company as it continually expands. G&A costs in 2006 and 2007 include £1.7 million and £1.6 million, respectively, of share-based compensation charges in accordance with FAS 123R and in 2005 included £1.2 million of deferred share-based compensation, in accordance with previously applicable standards. Excluding these charges, G&A costs were 12%, 16% and 16% of PD’s revenues in 2005, 2006 and 2007, respectively.

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The charges in respect of the amortization of intangibles purchased through business combination in 2005, 2006 and 2007 were £0.1 million, £0.7 million and £1.3 million, respectively. The charge in 2005 was in respect of the 2003 acquisition of Adelante Technologies N.V. (now ARM Belgium N.V.). The charges in 2006 and 2007 were in respect of the 2003 acquisition plus the acquisition of Falanx in 2006.

Income before income tax and cumulative effect of change in accounting policy  Income before income tax was £69.3 million in 2005, £65.2 million in 2006 and £75.2 million in 2007, representing 44%, 36% and 40% of total PD revenues, respectively. The 2007 margin increased due to growth in revenues (predominantly licensing), with costs being kept in line with 2006 and a reduction in the FAS 123R share-compensation charge. 2006 was a year of investment in the business and 2007 a year of consolidation and thus margins were expected to increase. The reduced margin in 2006 was primarily due to a £10.6 million stock-compensation charge being recorded in 2006, with only £2.4 million being recorded in 2005. Excluding stock-compensation charges and intangible amortization, margins in 2005, 2006 and 2007 would have been 46%, 42% and 45%, respectively.

Cumulative effect of change in account policy  On January 1, 2006, the Company adopted FAS 123R as detailed in the section “Accounting for share-based payments” in Note 1 to the Consolidated Financial Statements. The transitional rules detailed in FAS 123R required the Company to make a remeasurement adjustment for compensation cost for liability awards that was  recognized in 2006 as a cumulative effect of change in accounting policy in the income statement. PD’s share of the 2006 charge was £2.0 million.

Depreciation and amortization  Depreciation and amortization charges comprise depreciation of property and equipment, amortization of licenses and patents and amortization of intangibles purchased through business combinations. Depreciation in 2005, 2006 and 2007 was £3.9 million, £3.7 million and £3.8 million, respectively. Various licenses to use third-party technology and patents have been signed over the past several years, with their values being capitalized and amortized over their useful economic lives (generally between three and ten years). The associated amortization charges in 2005, 2006 and 2007 were £2.6 million, £0.3 million and £0.3 million, respectively. These charges reduced in 2006 as a specific license became fully amortized, and increased in 2007 as a new license was acquired. Charges in respect of the amortization of intangibles purchased through business combination in 2005 were £0.1 million, increasing to £0.7 million in 2006 and to £1.3 million in 2007.

Capital expenditure  Capital expenditure represents additions of property and equipment. In 2005, 2006 and 2007 such expenditure was £2.7 million, £4.1 million and £3.2 million, respectively.

Total assets, total liabilities and net assets  Total assets in 2005, 2006 and 2007 were £161.9 million, £171.1 million and £171.9 million, respectively. Total liabilities in 2005, 2006 and 2007 were £22.2 million, £37.3 million and £33.2 million, respectively, with accrued liabilities and deferred revenue contributing significantly to these balances. The decrease in 2007 is mainly due to reduced staff cost provisions. PD had net assets of £139.7 million, £133.8 million and £138.7 million in 2005, 2006 and 2007, respectively.

Goodwill  Management is of the opinion that a portion of the goodwill arising on the acquisition of Artisan in December 2004 is attributable to PD. The directors believe that revenue will accrue to the Processor Division as a result of the ownership of the Physical IP Division for the following reasons:

·   the development of faster and more power-efficient microprocessors as a result of collaboration between PD and PIPD engineering teams. This is expected to generate more PD licensing deals at higher prices;

·   the potential for PD to win more microprocessor licensing business as a result of ARM being able to offer both processor and physical IP in-house; and

·   the improvement in PD operating margins as a result of being able to transfer a number of engineering tasks to the Bangalore design centre acquired with Artisan.

Goodwill decreased from £113.4 million in 2005 to £109.1 million in 2006 and further to £107.5 million in 2007.  In 2006, ARM acquired Falanx, an innovative graphics IP company, resulting in goodwill of £9.4 million which has been fully allocated to PD.  This addition was offset by foreign exchange differences on PD’s share of the goodwill arising on the Artisan acquisition in 2006.  There were no acquisitions during 2007, with goodwill decreasing year-on-year due to further foreign exchange differences.

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Physical IP Division (PIPD)

Revenues  Total PIPD revenues in 2005, 2006 and 2007 were £50.2 million, £54.0 million and £43.4 million respectively. In 2005, 2006 and 2007, PIPD’s license revenues were £34.9 million, £34.9 million and £27.3 million, respectively; and its royalty revenue were £15.3 million, £19.1 million and £16.1 million, respectively. In US dollar terms, licensing revenue increased from $63.0 million in 2005 to $64.2 million in 2006 and was $54.4 million in 2007, and royalty revenue increased from $27.6 million in 2005 to $34.9 million in 2006 and was $32.3 million in 2007. The decrease in licensing revenue in 2007 is due in part to the strategic decision taken by the Company to prioritize the deployment of engineering resources on the development of the next generation of physical IP technology rather than converting existing backlog into short-term revenue. This decision has been taken in order to best position the Company to provide outsourced physical IP to leading semiconductor companies. Royalty revenue reduced from 2006 to 2007 due to lower utilization rates at the foundries earlier in the year.

Operating costs  Operating costs for 2005, 2006 and 2007 were £64.0 million, £66.6 million and £61.8 million, respectively. Operating costs include product cost of sales, service cost of sales, R&D costs, S&M costs, G&A costs, and amortization of intangibles purchased through business combination (including the expensed in-process research and development).

PIPD product costs represent the time of engineers on revenue-bearing projects. In 2005, 2006 and 2007, product cost of sales were £15.3 million, £17.5 million and £15.9 million, respectively, being 30%, 32% and 37% of revenues, respectively. In 2005, product cost of sales included £2.5 million of deferred stock-based compensation. Excluding this, product cost of sales in 2005 were 25% of revenues. Product costs in 2007 were lower than in 2006 due to the engineering focus on R&D as discussed above.

The total of R&D costs, S&M costs and G&A costs in 2005, 2006 and 2007 were £30.9 million, £33.3 million and £30.6 million respectively. Total average PIPD headcount was 360, 417 and 449 in 2005, 2006 and 2007, respectively, resulting from both organic growth and acquisitions (in 2006, the Company acquired Soisic which is now part of PIPD). The increase in costs in 2006 reflected the higher average headcount together with the post-acquisition costs related to Soisic. The decrease in costs in 2007, in the face of further headcount growth, can be explained by a reallocation of resources to lower cost regions in the world.  Whilst overall headcount in the division grew, the actual count in the US reduced with all the growth coming in our design center in India.  Furthermore, no bonuses were paid in 2007 within PIPD.

In 2007, the Company closed one of its smaller design centres in the US, in order to concentrate its engineering activities into fewer sites, resulting in restructuring charges of £1.0 million, primarily related to accrued rents, write-off of leasehold improvements and staff severance costs.

The charges in respect of the amortization of intangibles purchased through business combination, including expensed in-process research and development, in 2005, 2006 and 2007 were £16.8 million, £14.7 million and £14.2 million, respectively. The charge in 2005 represents a full year of amortization of the acquired intangibles plus a further write-off of in-process research and development of £0.3 million in respect of the completion of the final valuation. The charge in 2005 relates solely to the acquisition of Artisan with the 2006 and 2007 charges also including amortization in respect of the intangibles arising on the acquisition of Soisic.

Loss before income tax and cumulative effect of change in accounting policy  PIPD recorded a loss before income tax of £13.9 million, £12.6 million and £18.3 million in 2005, 2006 and 2007, respectively In 2005, 2006 and 2007, there were charges of £16.8 million, £14.7 million and £14.2 million, respectively, relating to the amortization of intangibles purchased through business combination and charges of £5.5 million, £5.2 million and £3.2 million, respectively, in respect of share-based compensation.  Excluding these items and the restructuring charge in 2007, PIPD recorded a profit before income tax of £8.4 million, £7.4 million and £0.1 million in 2005, 2006 and 2007, respectively.  This reduced profit in 2007 is mainly as a result of the reduced revenues in the year as explained above.  In line with the Company’s goodwill impairment review, margins are expected to improve in future periods.

Cumulative effect of change in account policy  On January 1, 2006, the Company adopted FAS 123R as detailed in the section “Accounting for share-based payments” in Note 1 to the Consolidated Financial Statements. The transitional rules detailed in FAS 123R required the  Company to make a remeasurement adjustment for compensation cost for liability awards that was recognized in 2006 as a cumulative effect of change in accounting policy in the income statement. PIPD’s share of the 2006 charge was £1.0 million.

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Depreciation and amortization  Depreciation and amortization charges comprise depreciation of property and equipment and amortization of intangibles purchased through business combination, including expensed in-process research and development. Depreciation in 2005 was £1.4 million, £1.7 million in 2006 and £2.1 million in 2007. As mentioned above, charges in respect of the amortization of intangibles purchased through business combination in 2005, 2006 and 2007 were £16.8 million, £14.7 million and £14.2 million, respectively.

Capital expenditure  Capital expenditure represents additions of property and equipment. In 2005, 2006 and 2007 such expenditure was £1.6 million, £2.4 million and £1.3 million, respectively.

Total assets, total liabilities and net assets  Total assets in 2005, 2006 and 2007 were £349.8 million, £300.9 million and £278.3 million, respectively, with the movements in 2006 and 2007 being largely attributable to foreign exchange differences on goodwill arising on the Artisan acquisition and amortization of intangibles.  Total liabilities in 2005, 2006 and 2007 were £20.1 million, £19.6 million and £13.3 million, respectively. PIPD had net assets of £329.7 million, £281.3 million and £265.0 million in 2005, 2006 and 2007, respectively.

Goodwill  Goodwill in 2005, 2006 and 2007 was £259.2 million, £227.4 million and £223.8 million, respectively. The decreases in 2006 and 2007 were due to foreign exchange. No goodwill was recognized in 2006 as part of the Soisic acquisition. Part of the goodwill in respect of the Artisan acquisition has been allocated to PD (see above).

Systems Design Division (SDD)

Revenues SDD revenues increased from £25.6 million in 2005 to £28.8 million in 2006 and were £27.9 million in 2007. US dollar revenues for the division were $46.5 million in 2005, $53.0 million in 2006 and $55.6 million in 2007. This growth has been generated by working with customers on longer-term relationships for the supply of RealView® Developer tools for software development, continued momentum behind the RealView Create tools for ESL customers and a healthy market place for tools to support the broad portfolio of ARM microprocessors. Systems Design has entered into more multi-year contracts for larger product volumes which improves the visibility of business going forward and builds a good customer base from which to drive new innovation.

Operating costs  Operating costs for 2005, 2006 and 2007 were £30.9 million, £41.0 million and £42.2 million, respectively. Operating costs include cost of sales (comprising product costs and service costs), R&D costs, S&M costs, G&A costs, and amortization of intangibles purchased through business combination (including the expensed in-process research and development).

The majority of SDD product cost of sales were made up of development boards costs in 2005, 2006 and 2007, with the balance comprising additional costs related to the costs of third-party licenses. SDD service costs include the costs of support and maintenance services to licensees of ARM technology as well as costs associated with consulting work performed for third parties. Total costs of sales were £5.5 million in 2005, £7.4 million in 2006 and £7.4 million in 2007. Cost of sales in 2006 and 2007 include £0.2 million of share-based compensation charges in accordance with FAS 123R with £nil deferred stock-based compensation costs being incurred in 2005. Excluding this charge, cost of sales were 21%, 25% and 26% of revenues in 2005, 2006 and 2007, respectively.

The total of R&D costs, S&M costs and G&A costs in 2005, 2006 and 2007 were £24.6 million, £30.1 million, and £32.1 million, respectively.  In 2006, R&D costs increased primarily due to KEG and KSI (both acquired during 2005) contributing a full-year’s charge. Staff bonuses fluctuated in each year as discussed above.  R&D costs in 2006 and 2007 include £1.5 million and £1.6 million, respectively, of share-based compensation charges in accordance with FAS 123R and in 2005 included £0.1 million of deferred share-based compensation, in accordance with previously applicable standards. Excluding these charges, R&D costs were 43%, 45% and 49% of revenue in 2005, 2006 and 2007, respectively.

S&M costs within SDD increased sequentially in 2005, 2006 and 2007. As detailed above, these increases are driven by both organic growth and through acquisitions. S&M costs in 2006 and 2007 include £0.5 million of share-based compensation charges in accordance with FAS 123R and in 2005 included £0.1 million of deferred share-based compensation, in accordance with previously applicable standards. Excluding these charges, S&M costs were 30%, 27% and 29% of revenue in 2005, 2006 and 2007, respectively.

G&A costs increased in 2006 due to KEG and KSI contributing a full-year’s charge with the further increases in 2007 being explained by additional acquisition-related charges based on achievement of Keil financial targets, as well as the

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division’s allocation of increased central costs. In 2005, 2006 and 2007 G&A costs included £0.4 million of share-based compensation charges. Excluding these charges, G&A costs were 21%, 24% and 28% of revenue in 2005, 2006 and 2007, respectively.

The charges in respect of the amortization of intangibles purchased through business combination, including expensed in-process research and development, in 2005, 2006 and 2007 were £0.8 million, £3.5 million and £2.7 million, respectively. The charge in 2005 represents a full year of amortization of the acquired intangibles relating to Axys plus £0.4 million relating to the intangibles arising on the acquisitions of KEG and KSI. The charge of £3.5 million in 2006 represents a full-year charge for the Axys, KEG and KSI acquisitions plus £0.6 million relating to the expensed in-process research and development arising on PowerEscape, of which certain assets were acquired during 2006.  The charge of £2.7 million in 2007 represents a full-year charge for the Axys, KEG and KSI acquisitions.

Loss before income tax and cumulative effect of change in accounting policy  SDD recorded a loss before income tax of £5.2 million, £12.1 million and £14.3 million in 2005, 2006 and 2007, respectively. Charges in respect of the amortization of intangibles purchased through business combination were £0.8 million, £3.5 million and £2.7 million in 2005, 2006 and 2007, respectively. SDD’s loss before income tax includes share-based compensation charge in 2005, 2006 and 2007 of £0.6 million, £2.6 million and £2.7 million, respectively.

Cumulative effect of change in account policy  On January 1, 2006, the Company adopted FAS 123R as detailed in the section “Accounting for share-based payments” in Note 1 to the Consolidated Financial Statements. The transitional rules detailed in FAS 123R required the Company to make a remeasurement adjustment for compensation cost for liability awards that was recognized in 2006 as a cumulative effect of change in accounting policy in the income statement. SDD’s allocation of the 2006 charge was £0.5 million.

Depreciation and amortization  Depreciation and amortization charges comprise depreciation of property and equipment and amortization of intangibles purchased through business combination, including expensed in-process research and development. Depreciation decreased from £2.4 million in 2005 to £1.7 million in 2006 and decreased further to £1.3 million in 2007. These decreases are due to older assets becoming fully-written down. Various licenses to use third-party technology and patents have been signed over the past several years, with their values being capitalized and amortized over their useful economic lives (generally between three and five years). The associated amortization charges in 2005, 2006 and 2007 were £0.3 million, £0.2 million and £0.2 million, respectively. As mentioned above, charges in respect of the amortization of intangibles purchased through business combination and expensed in-process research and development in 2005, 2006 and 2007 were £0.8 million, £3.5 million and £2.7 million, respectively.

Capital expenditure  Capital expenditure represents additions of property and equipment. In 2005, 2006 and 2007 such expenditure was £1.7 million, £2.1 million and £0.9 million, respectively.

Total assets, total liabilities and net assets  Total assets in 2005, 2006 and 2007 were £36.1 million, £33.6 million and £33.5 million, respectively. The decreases in 2006 and 2007 were primarily due to the amortization of the acquired intangibles together with foreign exchange differences on the goodwill and acquired intangibles. Total liabilities in 2005, 2006 and 2007 were £12.2 million, £10.8 million and £10.6 million, respectively. SDD had net assets of £23.9 million, £22.8 million and £22.9 million in 2005, 2006 and 2007, respectively.

Goodwill  Goodwill in 2005, 2006 and 2007 was £13.0 million, £12.8 million and £13.4 million, respectively. The decrease in 2006 was due to the impact of foreign exchange difference on the Axys and KSI goodwill which is denominated in dollars. The increase in 2007 is due to the Keil businesses achieving their earn-outs set at acquisition resulting in additional consideration being paid.

Foreign Currency Fluctuations

Foreign currency fluctuations  The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.

The Company reduces this US dollar/sterling risk where possible by currency hedging. Due to the high value and timing of receipts on individual licenses and the requirement to settle certain expenses in US dollars, the Company reviews its foreign exchange exposure on a transaction-by-transaction basis. It then hedges this exposure using forward contracts for the sale of US dollars, which are negotiated with major UK clearing banks. The average size of each forward contract

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was $4.3 million in 2005, $3.9 million in 2006 and $4.2 million in 2007. The Company also uses currency options as a further translation instrument for limited proportions of its dollar exposure. The fair values of the financial instruments outstanding at December 31, 2005, 2006 and 2007 are disclosed in Note 15 to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2007 was between January 8, 2008 and March 26, 2008. The settlement period of the option contracts outstanding at December 31, 2007 was between January 23, 2008 and January 5, 2009.

Contingencies and Loss Provisions

Our accounting policy with respect to loss provisions is described in “—Operating Results—Critical Accounting Policies and Estimates—Loss Provisions” above. Intellectual property disputes to which we are party are described in “Item 8. Financial Information—Legal Proceedings.” There was no provision for these disputes as of December 31, 2007 (2006: £nil) as, based on the facts and circumstances surrounding the disputes, the Company believes it will prevail in the disputes. At December 31, 2007, ARM had provided in aggregate £nil (2006: £1.1 million) in relation to other legal matters, being the expected future costs to be incurred.

Risk Factors

For a discussion of the risks faced by the Company, see “Item 3. Key Information—Risk Factors.”

Recently Issued Accounting Announcements

     US Accounting Standards and Pronouncements

For a description of newly adopted US accounting standards and recent US accounting pronouncements, see Note 1 to the Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through cash generated from operations. Over the previous three years we have received £50.7 million in cash from the issuance of shares and transfers of treasury shares to employees who have exercised options in the Company.

The Company’s operating activities provided net cash of £47.2 million, £66.1 million and £62.7 million in 2005, 2006 and 2007, respectively.

Accounts receivable increased by £21.2 million in 2005 and a further £19.0 million in 2006, but decreased by £0.3 million in 2007. The increase in 2005 and 2006 was partly due to growth in revenues, but largely to do with timing of invoicing in the respective periods.  In the final week of 2006, there was significantly more invoicing to customers than in the final week of 2005 resulting in a large increase in receivables. Invoicing in the corresponding period in 2007 was at a similar level to 2006.  Despite this, days’ sales outstanding improved from 54 at December 31, 2005 to 43 at December 31, 2006 and were 49 at December 31, 2007.  Included within accounts receivable are amounts recoverable on contracts as discussed within deferred revenue below.  Prepaid expenses fell by £1.4 million in 2005 and a further £0.5 million in 2006, but increased by £2.6 million in 2007. The fall in 2005 and 2006 reflected the amortization of a technology license agreement representing prepaid royalties to be released over several years.  The increase in 2007 was mainly due to a four-year agreement for EDA tools where, for commercial reasons, monies were paid upfront.   Inventory has increased to £2.3 million reflecting growth in the development systems business.   There have been no other significant movements in other current assets.

Accounts payable fell by £1.9 million in 2005 and a further £0.7 million in 2006, but increased by £0.4 million in 2007, reflecting the timing of receipt of supplier invoices in the respective years. Accrued liabilities fell by £5.6 million in 2005, increased by £2.1 million in 2006 and fell again by £8.4 million in 2007. These fell in 2005 as payments on a technology license agreement were made and accrued employee compensation was lower in 2005 than in 2004.  The main increase in 2006 was as a result of increased staff bonus and sales commission provisions following a then record bookings quarter in the final quarter of 2006.   The fall in 2007 was due to lower staff and sales bonuses in 2007 compared to 2006, reduced FAS 133 provision for embedded derivatives on uninvoiced but committed future billings, reduced

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accrued payables on acquisition consideration, as well as the timing of invoicing on some large EDA lease contracts resulting in lower accruals.

At December 31, 2007, the Company recorded approximately £27.5 million of deferred revenues which represented cash or receivables scheduled to be recognized as revenues in varying amounts after December 31, 2007. At December 31, 2006, the Company recorded approximately £31.5 million of deferred revenues. Deferred revenues are an element of customer backlog, and represent amounts invoiced to customers not yet recognized as revenues in the income statement.  Similarly, the Company recorded £24.5 million of amounts recoverable on contracts (“AROC”) at December 31, 2007, compared to £23.8 million at December 31, 2006.  AROC represents amounts that have been recognized as revenue in the income statement but are yet to be invoiced to customers.  Both deferred revenue and AROC fluctuate due to the maturity profile of ARM’s products, and invoicing milestones within contracts.

The Company believes that, given its current level of business, it has sufficient working capital for the foreseeable future.

Cash flow from operations has been used to fund the working capital requirements of the Company as well as capital expenditure. Cash outflow from capital expenditure in 2007 was £5.4 million, compared with £8.6 million in 2006 and £6.1 million in 2005. Capital expenditure increased in 2005 and 2006 with staff levels increasing and general operational assets being replaced.   In 2007, the Company purchased a technology license for £2.5 million, as noted above, which will be amortized over ten years.

In 2005, the Company made final payments relating to acquisition costs for Artisan of £14.4 million, as well as £1.7 million of contingent consideration in respect of the Axys acquisition as a result of performance conditions being achieved. A further £4.3 million (net of cash acquired) was paid for the acquisitions of Keil Elektronik GmbH and Keil Software, Inc.

In 2006, the Company acquired Falanx Microsystems AS and Soisic SA for cash consideration paid in the year of £13.4 million and £2.1 million, respectively.  Additionally in 2006, a further £1.1 million was paid for Keil (acquired in 2005) and £0.6 million for the trade and certain assets of PowerEscape, Inc.

In 2007, whilst no acquisitions were made, the Company did make additional payments for the Keil businesses of £1.8 million representing retentions and contingent consideration, as well as £1.5 million for Soisic relating to escrow payments and contingent consideration.  Further payments on both Keil and Soisic are expected in 2008.

The Company envisages making further strategic investments in the future, in situations where the Company can broaden its product portfolio, where it can obtain skilled engineering resources and where the potential for furthering ARM core-based design wins is improved significantly.

In 2005, £0.3 million was invested via convertible loan notes in Luminary Micro, Inc, an unlisted company.  A further £0.2 million was invested in Luminary in 2006.  In 2007, £2.5 million was invested via convertible loan notes in W&W Communications Inc., an unlisted US company.  This loan note earns interest at 10% per annum and will convert to a maximum holding of 14.99% upon further fundraising by the company.

The Company sold its investment in CSR plc in 2006 for £5.6 million.

During 2005, the Company initiated a share buyback program to supplement dividends in returning surplus funds to shareholders.  During 2005, the Company bought back over 13.9 million shares at a total cost of £16.2 million and during 2006, the Company bought back 63.6 million shares at a total cost of £76.5 million.  This was accelerated further in 2007 with 94.5 million shares being repurchased at a total cost of £128.6 million.  Dividends totaling £18.5 million were also paid to shareholders during the year (2006: £12.4 million; 2005: £10.4 million). In aggregate, the Company has returned over £270 million since 2004 through buybacks and dividends.  Share option exercises in 2007 gave rise to £18.9 million cash inflow to the Company compared to £17.9 million in 2006 and £13.9 million in 2005.

Cash, cash equivalents, short- and long-term investment and marketable securities balances at December 31, 2007 were £51.3 million compared to £128.5 million at December 31, 2006 and £160.9 million at December 31, 2005.

Our cash requirements depend on numerous factors, including: our ability to generate revenues from new and existing licensing and other agreements; expenditures in connection with ongoing research and development and acquisitions and

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disposals of and investments in complementary technologies and businesses; competing technological and market developments; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the purchase of additional capital equipment; fluctuations in foreign exchange rates; and capital expenditures required to expand our facilities. Changes in our research and development plans or other changes affecting our operating expenses may result in changes in the timing and amount of expenditures of our capital resources.

During the year, the Company entered into a £100 million revolving credit facility providing the Company access to funds for any corporate purpose. Whilst the Company did make various drawdowns totaling £30 million on this facility during the year, these had been fully repaid and the facility was undrawn at the balance sheet date. Any drawn amounts accrue interest at a LIBOR-plus rate whilst there is a nominal charge for the undrawn portion. Furthermore, the facility requires the Company to adhere to various financial covenants relating to EBITDA multiples and interest cover; the Company adhered to all covenants during the year.  We may make use of this facility in 2008. Furthermore, should we require significant additional capital in the future, we may seek to raise this through further public or private equity offerings, debt financing or collaborations and licensing arrangements. No assurance can be given that additional financing will be available when needed, or that if available, will be obtained on favorable terms.

RESEARCH AND DEVELOPMENT

Research and development is of major importance and, as part of its research activities, the Company collaborates closely with universities worldwide and plans to continue its successful engagement with the University of Michigan. Key areas of product development for 2008 include the development of further low-power, high-performance engines for both data and control applications and ARM processors based on symmetric multiprocessor and superscalar technology. The Company is investing in future physical IP development, including lower-power, low-leakage technologies and through its recent acquisition of SOI technology to ensure leadership in this market. In addition, the Company will deliver development tools, 3D graphics and fabric IP to enable its customers to design and program system-on-chip products.

The Company incurred research and development costs of £72.7 million in 2007, £75.5 million in 2006 and £61.6 million in 2005. See “Item 4. Information on the Company—Business Overview—Research and Development” and “—Results of Operations—Research and development costs” above.

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS

Our major outstanding contractual commitments relate to rental of office facilities and certain equipment under non-cancelable operating lease agreements which expire at various dates through 2018. Our contractual commitments as of December 31, 2007 were as follows:

	Payments due by period (£’000)
	Total		Less than 1 year		1-3 years		3-5 years		Thereafter
Operating leases		74,023		18,351		32,485		16,072		7,115
Capital purchase commitments		276		276		—		—		—
Total		74,299		18,627		32,485		16,072		7,115

The Company does not have any off-balance sheet arrangements with unconsolidated entities or other persons.

ITEM 6.                 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

DIRECTORS AND SENIOR MANAGEMENT

Directors

The directors of the Company (each, a “director,” together, the “directors”) at April 7, 2008 were as follows:

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Name(1)(2)	Age	Term Expires	Position
Doug Dunn OBE	63	2008*	Chairman

Warren East	46	2010	Chief Executive Officer; Director
Tim Score	47	2008*	Chief Financial Officer; Director
Tudor Brown	49	2008*	Chief Operating Officer; Director
Mike Inglis	48	2009	Executive Vice President, Sales and Marketing; Director
Mike Muller	49	2008*	Chief Technology Officer; Director
Simon Segars	40	2008*	General Manager – Physical IP Division; Director
Kathleen O’Donovan	50	2009	Independent Non-Executive Director, appointed December 7, 2006
Young Sohn	52	2010	Independent Non-Executive Director, appointed April 2, 2007
Lucio Lanza	63	2010	Independent Non-Executive Director
Philip Rowley	55	2008*	Independent Non-Executive Director
John Scarisbrick	55	2008*	Independent Non-Executive Director
Jeremy Scudamore	60	2008*	Senior Independent Director (Non-Executive)

(1) The address for each listed director is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, UK.

(2) Peter Cawdron retired as a Non-Executive Director on May 15, 2007.

* Term expected to be renewed at the Annual General Meeting held on May 13, 2008.

Doug Dunn,age 63, Chairman: Doug Dunn joined the board as an independent non-executive director in December 1998 and became non-executive Chairman on October 1, 2006. He was previously President and Chief Executive Officer of ASM Lithography Holding N.V. until his retirement in December 2004. Before joining ASML, he was Chairman and Chief Executive Officer of the Consumer Electronics Division of Royal Philips Electronics N.V. and a member of the board. He was previously Managing Director of the Semiconductor divisions of Plessey and GEC and held several engineering and management positions at Motorola. He was awarded an OBE in 1992. He is a non-executive director of ST Microelectronics N.V., Soitec S.A., LG. Philips LCD Co. Ltd and TomTom N.V.

Warren East,age 46, Chief Executive Officer: Warren East joined ARM in 1994 to set up ARM’s consulting business. He was Vice President, Business Operations from February 1998. In October 2000 he was appointed to the board as Chief Operating Officer and in October 2001 was appointed Chief Executive Officer. Before joining ARM he was with Texas Instruments. He is a chartered engineer, Fellow of the Institution of Engineering and Technology, Fellow of the Royal Academy of Engineering and a Companion of the Chartered Management Institute. He is a non-executive director of Reciva Limited and of De La Rue plc.

Tim Score,age 47, Chief Financial Officer: Tim Score joined ARM as Chief Financial Officer and director in March 2002. Before joining ARM, he was Finance Director of Rebus Group Limited. He was previously Group Finance Director of William Baird plc, Group Controller at LucasVarity plc and Group Financial Controller at BTR plc. He is a non-executive director and Chairman of the Audit Committee of National Express Group PLC.

Tudor Brown,age 49, Chief Operating Officer: Tudor Brown was one of the founders of ARM. Before joining the Company, he was Principal Engineer at Acorn Computers, where he worked on the ARM R&D program. At ARM, he was Engineering Director and Chief Technical Officer from 1993; in October 2000, he was appointed Executive Vice President, Global Development and in October 2001, he was appointed to the board as Chief Operating Officer. He is a non-executive director of ANT plc.

Mike Inglis,age 48, Executive Vice President, Sales and Marketing: Mike Inglis joined ARM as EVP, Marketing in June 2002, and was appointed to the board in August that year. He became EVP, Sales and Marketing in January 2007. Before joining ARM, he worked in management consultancy with A.T. Kearney and held a number of senior operational and marketing positions at Motorola. He previously worked in semiconductor sales, marketing, design and consultancy with Texas Instruments, Fairchild and BIS Macintosh and gained his initial industrial experience with GEC Telecommunications. He is a chartered engineer and a Member of the Chartered Institute of Marketing.

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Mike Muller,age 49, Chief Technology Officer: Mike Muller was one of the founders of ARM. Before joining the Company, he was responsible for hardware strategy and the development of portable products at Acorn Computers. He was previously at Orbis Computers. At ARM he was Vice President, Marketing from 1992 to 1996 and Executive Vice President, Business Development until October 2000 when he was appointed Chief Technology Officer. In October 2001, he was appointed to the board.

Simon Segars,age 40, General Manager – Physical IP Division: Simon Segars joined the board in January 2005 and was appointed General Manager of the Physical IP Division in September 2007. He has previously  been EVP of Engineering, EVP, Worldwide Sales and latterly EVP, Business Development. He joined ARM in early 1991 and has worked on most of the ARM CPU products since then. He led the development of the ARM7™ and ARM9™ Thumb® families. He holds a number of patents in the field of embedded CPU architectures. He is a non-executive director of Plastic Logic Limited.

Kathleen O’Donovan, age 50, Independent non-executive director: Kathleen O’Donovan joined the board in December 2006. She is a non-executive director and Chairman of the Audit Committees of Prudential plc, Great Portland Estates plc and Trinity Mirror plc and Chairman of the Invensys Pension Scheme. Previously, she was a non-executive director and Chairman of the Audit Committees of the Court of the Bank of England and EMI Group plc and a non-executive director of O2 plc. Prior to that, she was Chief Financial Officer of BTR and Invensys and before that she was a partner at Ernst & Young.

Young Sohn, age 52, Independent non-executive director: Young Sohn joined the board in April 2007. He has extensive experience in the semiconductor industry both in Silicon Valley and in Asia. He is CEO of Inphi Corporation, a director of Cymer, Inc. and Audium Semiconductor Limited and an adviser to Panorama Capital, a Silicon Valley based venture capital firm. Previously he was President of the semiconductor products group at Agilent Technology, Inc. and Chairman of Oak Technology, Inc. Prior to that he was President of the hard drive business of Quantum Corporation and, before that, Director of Marketing at Intel Corporation.

Lucio Lanza,age 63, Independent non-executive director: Lucio Lanza joined ARM as a non-executive director in December 2004 following ARM’s acquisition of Artisan. He was previously a director of Artisan, from 1996, becoming Chairman in 1997. He is currently Managing Director of Lanza techVentures, an early stage venture capital and investment firm, which he founded in January 2001. In 1990, he joined US Venture Partners, a venture capital firm, as a venture partner and was a general partner. From 1990 to 1995, he was an independent consultant to companies in the semiconductor, communications and computer-aided design industries, including Cadence Design Systems, Inc. and, from 1986 to 1989, was Chief Executive Officer of EDA Systems, Inc. He is also on the board of directors of PDF Solutions, Inc., a provider of technologies to improve semiconductor manufacturing yields. He holds a doctorate in electronic engineering from Politecnico of Milano.

Philip Rowley,age 55, Independent non-executive director: Philip Rowley joined the board in January 2005. He was Chairman and CEO of AOL Europe, the interactive services, web brands, internet technologies and e-commerce provider until February 2007. He is a qualified chartered accountant and was Group Finance Director of Kingfisher plc from 1998 to 2001. Prior to that his roles included Executive Vice President and Chief Financial Officer of EMI Music Worldwide.  He is a non-executive director of HMV Group plc and Skinkers Limited.

John Scarisbrick,age 55, Independent non-executive director: John Scarisbrick joined the board in August 2001. He was CEO of CSR plc from June 2004 until October 2007 and previously worked for 25 years at Texas Instruments (TI) in a variety of roles including as Senior Vice President responsible for TI’s $5 billion ASP chip business, President of TI Europe and leader of the team that created TI’s DSP business in Houston, Texas. Before joining TI, he worked in electronics systems design roles at Rank Radio International and Marconi Space and Defence Systems in the UK. He is a non-executive director of Intrinsity, Inc. and Netronome, Inc.

Jeremy Scudamore,age 60, Senior independent director (non-executive): Jeremy Scudamore joined the board in April 2004. He was Chief Executive Officer of Avecia Group (formerly the specialty chemicals business of Zeneca) until April 2006 and previously held senior management positions both in the UK and overseas with Zeneca and ICI. He has been a board member of the Chemical Industries Association and is Chairman of England’s North West Science Council. He was also a member of the DTI’s Innovation and Growth Team for the Chemical Industry and Chairman of the Innovation Team. He is  non-executive Chairman of SkyePharma PLC and Oxford Advanced Surfaces plc and a non-executive director of Oxford Catalysts Group plc.

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Election and re-election of Directors

In accordance with Article 79 of the Company’s Articles of Association, Doug Dunn, Tudor Brown, Mike Muller, Philip Rowley, John Scarisbrick, Jeremy Scudamore, Simon Segars and Tim Score will retire by rotation at the Company’s Annual General Meeting (AGM) and will seek re-election at that meeting. (see “—Directors” above for the directors’ biographies).

Executive Officers

Name(1)	Age	Position
Warren East	46	Chief Executive Officer; Director
Tim Score	47	Chief Financial Officer; Director
Tudor Brown	49	Chief Operating Officer; Director
Mike Inglis	48	Executive Vice President, Sales and Marketing; Director
Mike Muller	49	Chief Technology Officer; Director
Simon Segars	40	General Manager – Physical IP Division; Director

(1) The address for each listed executive officer is c/o ARM Holdings plc, 110 Fulbourn Road, Cambridge CB1 9NJ, UK.

COMPENSATION

The aggregate compensation (including pension contributions) paid by the Company to all persons who served in the capacity of director or executive officer in 2007 (14 persons) was approximately £5.0 million. This includes £2.0 million of share-based compensation. This does not include expenses reimbursed to officers (including business travel, professional and business association dues and expenses) but includes amounts expended by the Company for automobiles made available to its officers and other benefits commonly reimbursed or paid by companies in the UK. Each executive officer participates in the Company’s Deferred Annual Bonus Plan under which he may receive a bonus of up to 125% of the executive’s fixed salary 50% of which is compulsorily deferred into shares and an equity match of up to 2:1 if certain targets (determined by agreement between the executive and the Remuneration Committee) are exceeded. The aggregate amount accrued by the Company during 2007 to provide pension, retirement or similar benefits for directors and executive officers was approximately £171,000.

Directors’ emoluments

The emoluments of the executive directors of the Company in respect of services to the Company were paid through its wholly-owned subsidiary, ARM Limited, as were non-executive directors, with the exception of Lucio Lanza and Young Sohn who were paid through ARM, Inc., and were as follows:

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Director	Fees		Basic salary		Benefits (3)		Bonus payments(4)		Subtotal		Pension contributions		Share-based payments 2007 (5)		Total 2007		Subtotal 2006		Pension contributions 2006		Share-based payments 2006 (5)		Total 2006
		£		£		£		£		£		£		£		£		£		£		£		£
Executive
Warren East		—		395,000		14,418		152,602		562,020		39,500		444,585		1,046,105		670,530		31,140		779,395		1,481,065
Tim Score		—		335,000		19,641		129,422		484,063		33,500		386,418		903,981		574,764		26,640		644,653		1,246,057
Tudor Brown		—		275,000		14,418		101,815		391,233		27,500		313,112		731,845		462,552		22,140		577,314		1,062,006
Mike Inglis		—		240,000		14,418		90,788		345,206		24,000		273,019		642,225		401,891		19,515		521,420		942,826
Mike Muller		—		235,000		14,418		90,788		340,206		23,500		273,497		637,203		395,793		19,515		522,944		938,252
Simon Segars		—		230,000		41,607		88,857		360,464		23,000		280,999		664,463		369,735		18,390		392,356		780,481
Sir Robin Saxby (1)		—		—		—		—		—		—		—		—		121,448		25,350		1,289		148,087
Total		—		1,710,000		118,920		654,272		2,483,192		171,000		1,971,630		4,625,822		2,996,713		162,690		3,439,371		6,598,774
Non-executive
Doug Dunn		150,000		—		—		—		150,000		—		—		150,000		65,250		—		—		65,250
Peter Cawdron (2)		15,552		—		—		—		15,552		—		—		15,552		37,000		—		—		37,000
Lucio Lanza		36,000		—		—		—		36,000		—		—		36,000		33,000		—		—		33,000
Kathleen O’Donovan (2)		38,354		—		—		—		38,354		—		—		38,354		2,354		—		—		2,354
Philip Rowley		41,000		—		—		—		41,000		—		—		41,000		35,728		—		—		35,728
John Scarisbrick		36,000		—		—		—		36,000		—		—		36,000		33,000		—		—		33,000
Jeremy Scudamore		41,000		—		—		—		41,000		—		—		41,000		34,000		—		—		34,000
Young Sohn		27,000								27,000				—		27,000		—		—		—		—
Mark Templeton (2)		—		—		—		—		—		—		—		—		16,500		—		—		16,500
Total		—		—		—		—		384,906		—		—		384,906		256,832		—		—		256,832
Total		384,906		1,710,000		118,920		654,272		2,868,098		171,000		1,971,630		5,010,728		3,253,545		162,690		3,439,371		6,855,606

(1)   Sir Robin Saxby ceased to be a Chairman and a director on October 1, 2006. He was appointed as Chairman Emeritus for the year from October 1, 2006 to October 1, 2007 and in this capacity received a fee of £37,000.

(2)   Mark Templeton’s fees are for the period up to his date of resignation on July 25, 2006. Peter Cawdron’s fees are for the period up to his date of resignation on May 15, 2007. Kathleen O’Donovan’s fees are for the period from her appointment on December 7, 2006. Young Sohn’s fees are for the period from his appointment on April 2, 2007.

(3)   All the executive directors receive family healthcare and annual travel insurance as part of their benefits in kind. In addition, Tim Score has the use of a company car and Warren East, Tudor Brown, Mike Inglis, Mike Muller and Simon Segars receive a car and petrol allowance. Simon Segars also has £31,587 of disturbance payments resulting from his relocation to the US.

(4)   The bonus payments above represent the full bonus earned during 2007. According to the terms of the deferred annual bonus, 50% of this bonus is not paid in cash, but is deferred and becomes payable in shares after three years. Details of the awards made in February 2008 in respect of these deferrals are detailed above.

(5)   Share-based payments in 2007 represent each director’s individual compensation charge as calculated under FAS 123R, which the Company adopted from January 1, 2006 (further details of this are given in Note 1 of the Consolidated Financial Statements). The amounts in 2006 do not include an aggregate charge of £3,496,000, being the cumulative effect of change in accounting policy (see “Item 5. Operating and Financial Review and Prospects—Operating Results—Results of Operations”). Amounts in 2007 and 2006 for each director are purely accounting measures and do not represent in any way actual cash-paid benefits.

It is the Company’s policy to allow executive directors to hold non-executive positions at other companies and receive remuneration for their services. The board believes that experience of the operations of other companies and their boards and committees is valuable to the development of the executive directors. Details of executive’s roles within other companies and their remuneration are as follows:

Warren East is a non-executive director of Reciva Limited and of De La Rue plc. The Company holds 1.4% of the issued share capital of Reciva Limited. In relation to Reciva Limited, he was awarded options on February 17, 2006 which vested monthly in equal instalments as to 1,620 shares at an option price of £25.00 between January and October 2007 and as to 450 shares at an option price of £20.00 between November and December 2007 and received no other remuneration. In relation to De La Rue plc, he received remuneration totaling £36,247 up to December 31, 2007, following his appointment in January 2007.

Tudor Brown is a non-executive director of ANT plc. In this capacity he received remuneration totaling £26,250 up to December 31, 2007 (2006: £30,000). Mike Inglis was a non-executive director of Superscape Group plc until March 2008. During 2007 the Company held 8.1% of the issued share capital of Superscape Group plc more details about this investment are included in Note 7 to the Consolidated Financial Statements. In this capacity, Mike Inglis received remuneration totaling £22,000 up to December 31, 2007 (2006:  £17,019).  He also holds vested options over 13,333 shares in Superscape Group plc at an option price of 33 pence per share which will be cancelled following its acquisition by Glu Mobile, Inc. Tim Score is a non-executive director of National Express Group plc. In this capacity he received remuneration totaling £48,000 up to December 31, 2007 (2006:  £45,000). Simon Segars is a non-executive director of Plastic Logic Limited and in this capacity he received remuneration totaling £15,000 up to December 31, 2007 (2006: £15,000).

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All the executive directors are accruing benefits under a money purchase pension scheme as a result of their services to the Company, contributions for which were all paid during the year.

Directors’ Interests

Save as disclosed in “—Share Ownership” below none of the directors has any interest in the issued share capital of the Company which is required to be notified to the Company pursuant to Section 324 or 328 of the UK Companies Act 1985 (the “UK Companies Act”) or is required pursuant to Section 325 of the UK Companies Act to be entered into the register referred to therein; nor are there any such interests of any person connected with any director within the meaning of Section 346 of the UK Companies Act the existence of which is known to, or could with reasonable diligence be ascertained by, that director.

BOARD PRACTICES

Corporate Governance

Compliance with the UK Combined Code

The Company complies and complied throughout 2007 with the Combined Code, with the exception only that the board did not comprise a majority of independent non-executive directors throughout the year. The board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them. To increase the size of the board further to meet this particular provision is not considered appropriate.

Composition and operation of the board

At the date of this report, the board comprises six executive directors, six independent non-executive directors and the Chairman. The executive directors are the Chief Executive Officer, the Chief Operating Officer, the Chief Financial Officer, the Chief Technology Officer, the Executive Vice President, Sales and Marketing and the General Manager – Physical IP Division, all of whom play significant roles in the day-to-day management of the business. The board reviews the independence of non-executive directors on appointment and at appropriate intervals and considers that each of the six non-executive directors is independent in character, judgment and behavior based on both participation and performance at board and committee meetings. There are no relationships or circumstances which are likely to affect the judgment of any of them. The beneficial interests of the directors in the share capital of the Company are set out in “—Share Ownership” below. In the opinion of the board these shareholdings do not detract from the non-executive directors’ independent status.

Young Sohn joined the board as an independent non-executive director on April 2, 2007.  He has extensive experience in the semiconductor industry both in Silicon Valley and in Asia.  He was appointed to the audit and remuneration committees with effect from May 15, 2007. A more detailed biography is included in “—Directors and Senior Management” above.

As planned, Peter Cawdron retired from the board at the AGM on May 15, 2007, having served for nine years.  He was replaced as senior independent director by Jeremy Scudamore, who has a strong background in industry and commerce.  Lucio Lanza and John Scarisbrick both have a broad understanding of the Group’s technology and the practices of major US-based technology companies.  Philip Rowley and Kathleen O’Donovan are both financial experts with strong financial backgrounds.

The table below shows directors’ attendance at meetings which they were eligible to attend during the 2007 financial year:

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	Board		Audit Committee		Remuneration Committee		Nomination Committee
Total number of meetings		9		5		4		2
Doug Dunn		9/9C		–		–		1/1C
Warren East		9/9		–		–		–
Tudor Brown		9/9		–		–		–
Mike Inglis		8/9		–		–		–
Lucio Lanza		9/9		5/5		–		1/1
Mike Muller		9/9		–		–		–
Kathleen O’Donovan		8/9		4/5		3/4		–
Philip Rowley		7/9		4/5C		–		–
John Scarisbrick		7/9		–		–		1/1
Jeremy Scudamore		9/9		5/5		4/4C		–
Tim Score		9/9		–		–		–
Simon Segars		8/9		–		–		–
Young Sohn (1)		6/6		3/3		2/2		–
Peter Cawdron (2)		3/4		1/2		2/3		1/1

(1)            Young Sohn was appointed to the board on April 2, 2007 and to the audit and remuneration committees on May 15, 2007.

(2)            Peter Cawdron retired from the board on May 15, 2007.

C              Chairman

There is a procedure in place for additional meetings or conference calls on any pertinent issues to be organized as necessary during the year. In addition, the Chairman held at least two meetings with the non-executive directors without the executives present and the non-executive directors met on at least one occasion without the Chairman being present.

The directors have the benefit of directors’ and officers’ liability insurance and there is an established procedure for individual directors, who consider it necessary in the furtherance of their duties, to obtain independent professional advice at the Company’s expense. In addition all members of the board have access to the advice of the Company Secretary.

The board is committed to high standards of corporate governance and business integrity, which it believes are essential to maintaining the trust of investors and other stakeholders in the Company. The board is responsible for setting the Company’s strategic aims and standards of conduct, monitoring performance against the business plan and budget prepared by the executive directors and ensuring that the necessary financial and human resources are in place for it to meet its objectives.

The board and all employees are subject to a Code of Business Conduct and Ethics, a copy of which is published on the corporate website at www.arm.com. The board has a formal schedule of matters specifically reserved for its decision, which includes the approval of major business matters, policies and operating and capital expenditure budgets. The board is also responsible for sanctioning unusual commercial arrangements such as atypical license agreements and investments. The board delegates authority to various committees that are constituted within written terms of reference and chaired by independent non-executive directors where required by the Combined Code.

The board undertakes an annual board evaluation. During 2007, this exercise was conducted internally with each director completing a questionnaire and was facilitated by the Company Secretary. The evaluation covered board performance, processes, committees, composition, skills and director induction. The overall conclusion was that individual board members are satisfied that the board works well. They are also satisfied with the contribution made by their colleagues and that board committees operate properly and efficiently. Various recommendations resulted from the evaluation which have been discussed by the board and will be reviewed further and acted upon by the board in 2008, as appropriate. It is intended that there will be a further board evaluation each year, involving external consultants as and when the board deems appropriate. In particular, the non-executive directors now make a greater contribution to forward agenda setting.   It is intended that there will be a further board evaluation each year, involving external consultants as and when the board deems appropriate.

A full, formal induction program is arranged for new directors, tailored to their specific requirements, the aim of which is to introduce them to key executives across the business and to enhance their knowledge and understanding of the Company and its activities. The Company has a commitment to training and all directors, executive or non-executive, are

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encouraged to attend suitable training courses at the Company’s expense.  During the year a presentation was given to the board on the key provisions of the Companies Act 2006, including directors’ duties.

Before each meeting, the board is furnished with information concerning the state of the business and its performance in a form and of a quality appropriate for it to discharge its duties. The ultimate responsibility for reviewing and approving the annual report and accounts and the quarterly reports, and for ensuring that they present a balanced assessment of the Company’s position, lies with the board.

The board delegates day-to-day responsibility for managing the Company to the executive committee and has a number of other committees, details of which are set out below.

Executive committee

The executive committee is responsible for implementing the strategy approved by the board. Among other things, this committee is responsible for ensuring that the Company’s budget and forecasts are properly prepared, that targets are met, and generally managing and developing the business within the overall budget. Variations from the budget and changes in strategy require approval from the main board of the Company. The executive committee, which meets monthly, comprises the Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, EVP Sales & Marketing, the General Managers of the Processor and Physical IP Divisions, the EVP Human Resources, the General Counsel and the Company Secretary, and meetings are attended by other senior operational personnel, as appropriate.

Audit committee

The audit committee has written terms of reference which are published on the corporate website at www.arm.com. The committee has responsibility for, among other things, monitoring the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, and for reviewing any significant financial reporting judgments contained in them; reviewing the effectiveness of the Company’s internal controls over financial reporting and providing oversight of the Company’s risk management systems; making recommendations to the board in relation to the appointment, remuneration and resignation or dismissal of the Company’s external auditors; reviewing and monitoring the external auditors’ independence and objectivity and the effectiveness of the audit process; developing and implementing policy on the engagement of the external auditors to supply non-audit services; and considering compliance with legal requirements, accounting standards, the Listing Rules of the Financial Services Authority and the requirements of the SEC. There is a procedure in place for employees to report areas of concern to management in confidence and, if they prefer, anonymously through a third party telephone line. The committee receives any such confidential reports from the compliance committee. No whistleblowing incidents were reported in 2007. There has been one confidential report to date in 2008, which has been fully investigated and the committee is satisfied that there is no evidence of impropriety.

The committee also keeps under review the value for money of the audit and the nature, extent and cost-effectiveness of the non-audit services provided by the auditors. The committee has discussed with the external auditors their independence, and has received and reviewed written disclosures from the external auditors as required by the Auditing Practices Board’s International Standard on Auditing (ISA) (UK and Ireland) 260 “Communication of audit matters with those charged with governance”, as well as those required by the US Independence Standards Board’s Standard No. 1, “Independence discussions with audit committees”. To avoid the possibility of the auditors’ objectivity and independence being compromised, the Company’s tax consulting work is carried out by the auditors only in cases where they are best suited to perform the work. In other cases, the Company has engaged another independent firm of accountants to perform tax consulting work. The Company does not normally award general consulting work to the auditors. From time to time, however, the Company will engage the auditors to perform work on matters relating to human resources and royalty audits. The Company may also seek professional advice from another firm of independent consultants or its legal advisers.

The current audit committee comprises Philip Rowley (Chairman), Kathleen O’Donovan, Lucio Lanza, Jeremy Scudamore and Young Sohn. Philip Rowley is the financial expert as defined in the U.S. Sarbanes-Oxley Act 2002 (“SOX”) and Kathleen O’Donovan is also qualified to fulfill this role. The external auditors, Chief Executive Officer, Chief Financial Officer and the Company Secretary attend all meetings in order to ensure that all the information required by the audit committee for it to operate effectively is available. Representatives of the Company’s external auditors meet with the audit committee at least once a year without any executive directors being present.

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Remuneration committee

The remuneration committee has responsibility for determining and agreeing with the board, within agreed terms of reference, the Company’s policy for the remuneration of the executive directors and the individual remuneration packages for each executive director. This includes basic salary, annual bonus, the level and terms of conditional awards under the Long Term Incentive Plan and the terms of performance conditions that apply to such benefits, pension rights and any compensation payments. Where the remuneration committee considers it appropriate, the committee will make recommendations in relation to the remuneration of senior management. The committee also liaises with the board in relation to the preparation of the board’s annual report to shareholders on the Company’s policy on the remuneration of executive directors and in particular the directors’ remuneration report, as required by the Companies Act 2005, the Combined Code and the Listing Rules of the Financial Services Authority. The committee’s terms of reference are published on the Company’s website at www.arm.com.

The committee is chaired by Jeremy Scudamore and the other members are Kathleen O’Donovan and Young Sohn, who was appointed in place of Peter Cawdron on May 15, 2007. The committee met four times during 2007. Given their diverse experience, the three independent non-executive directors are able to offer a balanced view and international expertise in relation to remuneration issues for the Company. The committee has access to professional advice from external advisers (generally appointed by the Executive Vice President, Human Resources) in the furtherance of its duties and makes use of such advice. During 2007, KPMG provided general advice on remuneration and benefits, Linklaters provided legal services, Deloitte and Monks both provided salary survey data, Kepler Associates provided independent verification of TSR calculations for the Long Term Incentive Plan and the Executive Vice President, Human Resources also provided advice to the committee and to the Company. The Chief Executive Officer and the Executive Vice President, Human Resources, normally attend for part of remuneration committee meetings. No director is involved in deciding his own remuneration.

The Deferred Annual Bonus Plan for executive directors and senior managers and the Employee Equity Plan for all other employees were approved by shareholders at the 2006 AGM. These plans brought the remuneration structure more closely in line with UK market norms, increased alignment between remuneration and financial performance and strengthened the retention aspect of the deferred bonus. Cessation of option grants to executive directors (other than in exceptional circumstances) and the reduction from three plans to two for executive directors and senior managers, together with the move away from options to shares for all employees reduces potential dilution and simplifies remuneration arrangements.

Nomination committee

The nomination committee leads the process for board appointments and makes recommendations to the board in relation to new appointments of executive and non-executive directors and on board composition and balance. The terms of reference of the nomination committee are published on the Company’s website www.arm.com. It is chaired by Doug Dunn, and the other members are John Scarisbrick and Lucio Lanza. The committee considers the roles and capabilities required for each new appointment, based on an evaluation of the skills and experience of the existing directors. In relation to the appointment of new directors, the services of external search consultancies are generally used and this was the case in relation to the appointment of Young Sohn.

Internal control/risk management

The Company fully complies with the Combined Code’s provisions on internal control, having established procedures to implement the guidance in the Turnbull Report (2005). The board has established a continuous process for identifying, evaluating and managing the significant risks faced by the Company.

The board confirms that the necessary actions have been or are being taken to remedy any significant failings or weaknesses identified from this process.

The board of directors also has overall responsibility for ensuring that the Company maintains an adequate system of internal control and risk management and for reviewing its effectiveness. Building on the successful project to achieve compliance with section 404 of SOX for the 2006 financial year, a considerable amount of resource and effort continued to be committed during 2007 and compliance in relation to the 2007 financial year was also successfully completed (see “Item 15. Controls and Procedures”). The processes and procedures have been successfully integrated into day-to-day

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business operations and provide a sustainable solution for ongoing compliance. The board has reviewed the system of internal control, including internal control over financial reporting, which has been in place for the year under review and up to the date of approval of the annual report. Such system is designed to manage rather than eliminate the risks inherent in a fast-moving, high-technology business and can, therefore, provide only reasonable and not absolute assurance against material misstatement or loss.

The Company has a number of other committees which contribute to the overall control environment:

· The risk review committee consists of the Chief Technology Officer, the Chief Financial Officer, the Group Financial Controller and the Company Secretary and it receives and reviews quarterly reports from the divisions and corporate functions. The committee is responsible for identifying and evaluating risks which may impact the Company’s strategic and business objectives and for monitoring the progress of actions designed to mitigate such risks. The risk review committee reports formally to the executive committee twice a year where its findings are considered and challenged and, in turn, the executive committee reports to the board once a year.

· The compliance committee consists of the General Counsel, the Chief Operating Officer, the Chief Financial Officer, the EVP Human Resources, the VP Corporate Operations Group, the Director of IT and the Company Secretary. It oversees compliance throughout the business with all appropriate international regulations, trading requirements and standards, including oversight of financial, employment, environmental and security processes and policies. The compliance committee reports to the audit committee.

· The disclosure committee in compliance with SOX comprises the Chief Executive Officer, the Chief Financial Officer, the Group Financial Controller, the General Counsel, the VP Investor Relations and the Company Secretary. It is responsible for ensuring that disclosures made by the Company to its shareholders and the investment community are accurate, complete and fairly present the Company’s financial condition in all material respects.

In addition, there is a series of interconnected meetings that span the Company from the weekly management meeting chaired by the Chief Executive Officer, and the weekly business review meeting chaired by the Chief Operating Officer, the purpose of which is to monitor and control all main business activities, sales forecasts and other matters requiring approval that have arisen within the week, to the board meetings of the Company. Each month there are customer satisfaction and process review meetings attended by managers representing different functions across the Company to review key performance indicators such as revenues, orders booked, costs, product and project delivery dates and levels of defects found in products in development. The outputs of the weekly business review meeting and the monthly operations meeting are reviewed by the executive committee which, in turn, raises relevant issues with the board of the Company. These processes for identifying, evaluating and managing the significant business, operational, financial, compliance and other risks facing the Company have been in place for the year under review and up to the date of approval of the annual report and financial statements.

As required by the Combined Code, the audit committee has considered whether it would be appropriate for the Company to have its own financial internal audit function and has concluded that, taking account of its relatively small number of employees and a high degree of centralization in the way the business is run, this is not appropriate at present. The committee has confirmed this view to the board. The Company does, however, have an operational internal audit function that audits the Company’s business and product/project management processes. These processes are documented, maintained and continuously improved, for effectiveness and efficiency. In addition, they are audited externally by independent auditors for compliance with ISO 9001:2000.

Any significant control failings identified through the operational internal audit function or the independent auditors are brought to the attention of the compliance committee and undergo a detailed process of evaluation of both the failing and the steps taken to remedy it. There is then a process for escalation of any significant control failures to the audit committee.

Environmental, Social, Corporate Governance and ethical policies

While the Company is accountable to its shareholders, it also endeavors to take into account the interests of all its stakeholders, including its employees, customers and suppliers and the local communities and environments in which it operates. The Chief Financial Officer takes responsibility for matters relating to corporate, social and ethical policies and

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these matters are considered at board level. A corporate social responsibility report is described under “—Corporate social responsibility report”, below, and also on the Company’s website www.arm.com. The Company’s Code of Business Conduct and Ethics is available on the Company’s website www.arm.com. The Company also operates a whistleblowing policy which provides for employees to have access to senior management to raise concerns in strict confidence about any unethical business practices. There is also a facility to make reports by telephone to an independent third party through a whistleblowing hotline.

As a company whose primary business is the licensing of IP, employees are highly valued and their rights and dignity are respected. The Company strives for equal opportunities for all its employees and does not tolerate any harassment of, or discrimination against, its staff. In January 2007, ARM was chosen as European Business of the Year having been voted UK Business of the Year in 2006.  In November 2007, ARM received two further prestigious awards when Warren East was voted UK Business Leader of the year and ARM was recognized as techMARK Company of the year.  These represent considerable accolades for the Company and recognize the efforts of all ARM employees worldwide.

The Company endeavors to be honest and fair in its relationships with its customers and suppliers and to be a good corporate citizen respecting the laws of the countries in which it operates.

Environmental policies

The Company’s premises are composed entirely of offices since it has no manufacturing activities. Staff make use of computer-aided design tools to generate IP. This involves neither hazardous substances nor complex waste emissions. With the exception of development systems products, the majority of “products” sold by the Company comprise processor and physical IP designs that are delivered electronically to customers.

The Company recognizes the increasing importance of environmental issues and these are discussed at board level where the Chief Financial Officer takes responsibility for them. A number of initiatives in this area have continued in 2007. The Company’s environmental policy is published on its website www.arm.com within the Corporate Social Responsibility (“CSR”) report. An environmental action plan is implemented through various initiatives. These include monitoring resource consumption and waste creation so that targets set for improvement are realistic and meaningful, ensuring existing controls continue to operate satisfactorily and working with suppliers to improve environmental management along supply chains. Energy usage and resource consumption data is published in the Company’s CSR report on its website.

At the 2007 AGM, resolutions were passed to amend the Articles of Association in line with the Companies Act 2006 to enable the Company to send information to shareholders electronically and make documents available through the website rather than in hard copy, which will provide both environmental and cost benefits. Shareholders can opt to continue receiving a printed copy of the annual report if they prefer.

Health and safety

Although ARM operates in an industry and in environments which are considered low risk from a health and safety perspective, the safety of employees, contractors and visitors is a priority in all ARM workplaces worldwide. Continual improvement in safety management systems is achieved through detailed risk assessments to identify and eliminate potential hazards and occupational health assessments for employees. More detail about the Company’s approach to environmental matters and health and safety is included in the CSR report described under “—Corporate social responsibility report”, below.

Information and Communication with shareholders

The board makes considerable efforts to establish and maintain good relationships with shareholders. The main channel of communication continues to be through the CEO, the CFO and the VP Investor Relations, although the Chairman, the senior independent director and the other non-executive directors remain willing to engage in dialogue with major shareholders as appropriate. There is regular dialogue with institutional shareholders throughout the year other than during close periods. The board also encourages communication with private investors and part of the Company’s website is dedicated to providing accurate and timely information for all investors including comprehensive information about the business, its Partners and products, all press releases, RNS announcements and SEC filings. At present, around 20 analysts write research reports on the Company. The Company publishes telephone numbers on its website enabling shareholders to listen to earnings presentations and audio conference calls with analysts and webcasts of key presentations are also

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made available through the website. Members of the board, including some of the non-executive directors, attend the annual analysts’ day and develop an understanding of the views of major shareholders through any direct contact that may be initiated by shareholders, or through analysts’ and brokers’ briefings. The board also receives feedback from the Company’s brokers and financial PR advisers, who obtain feedback from analysts and brokers following investor roadshows. All shareholders may register to receive the Company’s press releases via the internet.

The board actively encourages participation at the Annual General Meeting, scheduled for May 13, 2008, which is the principal forum for dialogue with private shareholders. A presentation will be made outlining recent developments in the business and an open question-and-answer session will follow to enable shareholders to ask questions about the business in general.

The resolutions put to shareholders at the meeting and the voting results will be published via RNS and the SEC and will be available on the Company’s website.

Corporate social responsibility report

The Company considers itself to be a good corporate citizen and continually strives to improve its performance in this area. The Company aims to reduce the impact it makes on the environment and to make positive connections with the communities in which it operates. Considerable efforts are made to communicate effectively with the Company’s shareholders, Partners, suppliers and employees.

Achievements

The Company was techMARK Company of the Year in 2007 where the judges recognized that ARM has “harnessed its technological achievements and produced sound commercial and financial success. The award also acknowledges analyst and investor recognition of ARM as well as its outstanding long term growth potential and strategy to ensure successful delivery of its commercial advantages and to build shareholder value”.

Chief Executive Officer, Warren East was voted UK Business Leader of the Year at the 2007 National Business Awards, in recognition of being “an outstanding individual who has demonstrated exceptional leadership and vision under whose stewardship the organization has significantly improved performance for its stakeholders – employees, customers, suppliers and shareholders”.

The Company was named as Business of the Year in 2007 at the European Business Awards. The judges commented that “ARM demonstrated an innovative growth strategy, strong financial performance and sustained market leadership in the industry sector”. They were particularly impressed with ARM’s strong market share in the mobile industry and the partnerships with some of the world’s leading technology companies. The European Business Awards is a completely independent programme designed to recognize and celebrate business excellence across the 25 territories of the EU.

The environment

ARM designs the technology at the heart of low-power products across a whole range of application areas from mobile phones to cars, consumer electronics and toys. Intelligence within its low-power IP cores can be used to measure, manage and control the environmental performance of consumer electronics and IT equipment, while improving their functional performance and reducing their carbon footprint. Additionally ARM can leverage its Connected Community™ of Partners to provide complete low-power solutions for products based on the ARM architecture.

The Company’s activities do not produce harmful waste or emissions and the Ethical Investment Research Service (EIRIS) grades ARM as an environmentally “low impact” business. Nevertheless, environmental performance is monitored to enable targets to be set, for example reducing resource usage, increasing the amount recycled and controlling carbon emissions through energy use.

A global environmental impact study on the Company’s operations has been undertaken, covering inputs, processes and outputs. This has provided data upon which to base plans and targeted improvements. For example, electricity supplies for our Cambridge offices are now 100% renewable and the application of a greener policy on energy procurement will be extended to other ARM locations where practicable. In 2007, the Company again demonstrated an increase in paper and packaging recycling and improved facilities to promote recycling of these and other materials, including aluminium cans. Air conditioning systems run on non-ozone-depleting refrigerants. The environmental impact

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of travel is carefully considered. The supply of company cars is discouraged and in a Company of more than 1,700 people, there are fewer than 30 company cars. Employees are encouraged to cycle to work through the provision of improved facilities at the Company’s offices, to share car journeys, or to use public transport. Consistent with local custom and practice, we provide bus transport for employees in Bangalore so that we do not add to local traffic problems and the environmental impact of individual travel to work. Business travel is important in maintaining ARM’s very effective partnership network but ways in which it can be reduced are regularly reviewed and, where possible, travel is reduced through the use of video conferencing equipment. Data regarding flights is being benchmarked with a view to reducing business travel, to the extent compatible ensuring that good business relationships are maintained.

Building upon the work carried out with the British Safety Council and Lloyd’s Register Quality Assurance (“LRQA”), the Company has developed an internal audit process for all of its offices worldwide with regard to health and safety issues, environmental objectives and performance. ARM continues to work with suppliers and service providers to minimise environmental impact, wherever practicable, in the provision of facilities and infrastructure for ARM’s business operations. ARM has adopted LRQA’s Business Assurance approach involving twice yearly ISO9001:2000 surveillance audits which provide an independent assessment of the ARM Management System and the various review procedures in place within the Company.

Connecting with communities

The Company aims to be a good corporate citizen of the communities in which it operates and participates in networking and support initiatives. ARM has established relationships with the local business community in Cambridge and is a founding member of The Learning Collaboration (“TLC”) within the business community in the UK. The TLC enables member companies to pool resources to collaborate to learn, improving the quality, availability and value of training and related services. ARM is also a founder member of the Cambridge Network whose aim is “to link like minded people from business and academia to each other and to the global high technology community for the benefit of the Cambridge region.”

ARM is a founding sponsor of the Electronics Knowledge Transfer Network – an organization which seeks to promote collaboration and the sharing of knowledge throughout the UK electronics industry in order to harness and promote the sector’s global potential.

Supporting education

ARM’s support for education stretches from financial sponsorship of science/IT-related education initiatives, donations of redundant computer equipment to schools and education charities, working on extra-curricular engineering projects with school and college students and working on specific projects with students at management schools.

The Company supports the Engineering Education Scheme, Young Engineers and Young Enterprise. ARM’s University Programme directly engages with universities worldwide, designing course material, providing technical seminars, donating equipment and software and offering assistance to students. ARM has now engaged with universities in nearly every region of the world, including the EU, North and South America, Australia, China and Japan. With a growing demand in India for engineers, ARM has recently hired a program manager for the region. This reflects ARM’s commitment to help universities produce graduates with the necessary skills that its Partners need.

Supporting good causes

ARM encourages employees to support their local communities. Some are school governors, some mentor young people, some organize events to raise money, others support charities directly. In India, ARM employees have organized blood donor sessions. In the US, ARM employees have supported a variety of charitable organizations including those supporting sufferers of leukaemia and lymphoma, cancer, multiple sclerosis, diabetes and AIDS. The Company “doubles the efforts” of employees who raise money for approved charities by matching the funds they raise (with the exception of political donations or other non-approved causes). Charities supporting sufferers of heart disease, Alzheimers, colitis and Crohn’s disease, the Air Ambulance and the Samaritans have been some of the beneficiaries of this scheme.

Connecting with employees

ARM’s aim is to attract and retain the best people available by being a good and ethical employer. The skills, knowledge and motivation of employees are crucial to ARM’s success. The Company promotes and supports individuals

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and teams through on-the-job and formal training, coaching and mentoring. A comprehensive portfolio of learning and development opportunities is available to all employees, depending upon their needs and career aspirations.

Every effort is made to keep employees well informed about the Company and matters that affect them. This is achieved through both formal and informal communication methods across all offices worldwide and includes employee consultation groups in regions where they are culturally appropriate. The Company also carries out a regular, comprehensive global opinion survey to monitor employee views and to provide valuable input on how the Company operates. The Employee Assistance Programme helps staff and their families with issues such as care for children or elderly relatives, legal and health advice and stress or other counseling.

Equal opportunities

The Company needs highly-qualified staff and does not see age, color, disability, ethnic origin, gender, political or other opinion, religion or sexual orientation as a barrier to employment. If any member of staff becomes disabled, their needs and abilities are assessed with a view to them continuing in their current role. If this is impossible, every effort is made to offer them alternative employment.

Benefits

Employees receive benefits including private medical/healthcare; health, travel and life insurance; pensions/401k plan; sabbaticals; flexible working; restricted shares under the employee equity plan and the opportunity to buy shares through savings schemes. The Company supports family friendly initiatives and offers a child care voucher scheme for UK tax payers. Flexible working arrangements are available for all employees, regardless of whether they have children.

Understanding and acceptance of national and cultural diversity is encouraged by giving employees the opportunity to work in offices other than in their home country, where appropriate.

Accessibility

The Company endeavors to provide access to all whether through building design to allow easy disabled access or through improving access to our website for those with visual impairments.

Health and safety

The safety and welfare of employees, contractors and visitors is a priority. ARM measures and analyses all accidents and “near misses” as part of its continuous improvement in this area. This data along with sickness data is monitored to ensure trends are understood and action taken to reduce these occurrences. To date ARM has had no serious issues and retains a very low accident rate. Despite the low-risk nature of its operations ARM aims to provide a safe, secure and sustainable working environment for all employees and stakeholders.

The Company’s UK offices are audited by the British Safety Council and as the UK legislative framework is seen as one of the most developed in the world, ARM has adopted this as a corporate standard in health and safety provision to all sites worldwide. To this end the British Safety Council was engaged to audit its two largest sites outside the UK in 2006, Sunnyvale, California and Bangalore, India. Building on the results of this, ARM has now developed a global internal audit system, which enables the implementation of a consistent programme of health and safety provision worldwide.

In the UK, there is a health and safety committee and all other ARM offices have fire wardens and first aiders. Health and safety is high on the agenda and there has been an increase in the amount of communication with employees particularly on occupational health matters. Health and safety issues are communicated through different media including the intranet and an extensive health and safety workshop is run as part of the company’s induction process.

Business Continuity Planning

The Company has developed disaster recovery plans for all of its operations worldwide, regardless of their size, to enable business to continue should a serious event or incident occur. These plans are designed to protect the interests of ARM’s stakeholders – people, property and other assets and to provide facilities and infrastructure to reinstate business operations as quickly as possible after the event.

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Going concern

After reviewing the 2008 budget and longer term plans, the directors are satisfied that, at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements of the Company.

Statement of Directors’ Responsibilities

The directors are responsible for preparing the annual report, remuneration report and financial statements in accordance with applicable law and regulations.

UK Company law requires the directors to prepare financial statements for each financial year that give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing those financial statements, the directors, are required to:

· Select suitable accounting policies and then apply them consistently;

· Make judgments and estimates that are reasonable and prudent;

· State whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

· Prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.

The directors confirm that they have complied with the above requirements in preparing the financial statements. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act 1985. They are also responsible for the system of internal control , for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Company’s website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Remuneration Committee

See “—Corporate Governance—Remuneration committee” above for details regarding the Company’s Remuneration committee.

Remuneration policy

The remuneration committee, in its deliberations on the remuneration policy for the Company’s directors, seeks to give full consideration to the principles set out in the Combined Code. The committee is able to consider corporate performance on environmental, social and corporate governance issues when setting the remuneration of executive directors.  The committee also monitors developments in the accounting for equity-based remuneration on an ongoing basis.

The Company operates a remuneration policy and framework for executive directors designed to ensure that it attracts and retains the high-quality management skills necessary to achieve a high level of corporate performance, in line with the best interests of shareholders. This policy seeks to provide rewards and incentives for the remuneration of executive directors that reflect their performance and align with the objectives of the Company. These comprise a mix of performance-related and non-performance-related remuneration. The committee believes that a director’s total remuneration should seek to recognize his worth in the external market and, to this end, operates a policy of paying base salaries which are in line with the market median, as part of a total remuneration package which is upper quartile . The committee believes that this is justified, recognizing that more than 50% of total potential remuneration is performance-related. The committee obtains information about the external market from various independently published surveys and is committed to benchmarking the total remuneration package.

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The nature of the Company’s development has meant that there has been a good deal of focus on the attainment of short-term objectives with a high level of variable remuneration. From 2007 onwards, variable remuneration consists of two performance-related elements, annual bonus and a conditional award under the Long Term Incentive Plan. A shareholding guideline is in place for executive directors and certain senior managers who are required to build up a holding of shares in the Company over a period of five years. The shareholdings may be built up of shares received under the Company’s share option schemes and/or the Long Term Incentive Plan and/or the Deferred Annual Bonus Plan and, in the case of executive directors, the required holding is 100% of basic salary.

Incentive arrangements

The remuneration committee aims to ensure that individuals are fairly rewarded for their contribution to the success of the Company. The various incentive schemes that comprise the remuneration packages of executive directors and senior managers are described below:

Deferred Annual Bonus Plan

There is a strong bonus element to executive directors’ remuneration and a bonus of up to 125% of base salary (after application of a personal performance multiplier which flexes the payment by 0.75 to 1.25), can be earned through the Deferred Annual Bonus Plan (“DAB”) if all targets are met. The personal performance multiplier depends on achievement of pre-determined objectives which are reviewed and approved by the remuneration committee each year.  These include key strategic objectives related to each director’s role and responsibilities including compliance with the Management Charter, which is designed to foster employee development, understanding of the overall vision and strategy of the Company and good governance.

There is compulsory deferral into shares of 50% of the bonus earned and an opportunity to earn an equity match of up to 2:1, subject to achievement of an EPS performance condition. Deferred shares and any matching shares earned will normally be transferred three years from the date of award. Payment of bonus for 2007 was subject to the achievement of US$ revenue and EPS targets set by the remuneration committee, which were directly related to the Company’s financial results. The bonuses payable to executive directors in respect of performance during 2007 are shown in the table under “ — Compensation — Directors’ emoluments”, above, and are in the range 39.1% to 40.8% of base salary, 50% of which was compulsorily deferred into shares. At EPS growth equal to the increase in the Consumer Prices Index (“CPI”) plus 4% per annum, the deferred shares will be matched on a 0.3:1 basis, rising to 2:1 when EPS growth is in excess of CPI plus 12% per annum.  The deferred shares can be forfeited in the event of gross misconduct and the matching shares are subject to forfeiture for “bad leavers”.

For 2008, 50% of bonus is dependent on achieving a US$ revenue target and 50% on achieving a normalized operating profit target, which the committee believes have been set at challenging but motivational levels.  These targets are directly related to the Company’s financial results and encourage achievement of the Company’s short term financial goals, while the deferral and matching elements encourage a longer term view of the success of the Company. Maximum bonus is 125% of base salary depending on the personal performance multiplier described above.

Employee Equity Plan

The Employee Equity Plan, approved at the 2006 AGM, operated for 2007 in place of the Employee Share Option Schemes. The introduction of this plan reflected the shift in market practice away from options and towards free shares. However, to enable the Company to respond to any future changes in market conditions, this plan provides the flexibility to grant either shares or options, with a “currency conversion” between the two to ensure that awards are of a similar value to employees and a similar cost to the Company. Under this plan free shares (or, in exceptional circumstances only, options) are granted to employees on an annual basis up to a limit set for each grade and equivalent to grant values under the former Executive Share Option Scheme. In the three major employing countries and other countries as may be appropriate, the Employee Equity Plan may involve the use of government approved plans to deliver awards in a tax efficient manner. The Employee Equity Plan has three related overseas sub-plans, the French sub-plan, the USA sub-plan and the Indian sub-plan which are substantially the same as the Employee Equity Plan except that they have been structured to take account of local requirements and tax benefits for employees applicable in the France, the United States and India.

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U.S. Employee Stock Purchase Plan

The U.S. Employee Stock Purchase Plan (“ESPP”) approved at the 2006 AGM was operated in 2006 in place of the Savings Related Plan. All employees and executive directors of designated subsidiary companies are eligible to participate in offerings under the ESPP except where prohibited by law and subject to the employee or director having been employed by a designated subsidiary for at least six months (or shorter period specified by the share schemes committee). Each offering will be for a period of between 6 and 24 months. During an offering period participating employees will have deductions made from their post tax salaries which will be retained by the Company or relevant designated subsidiary. The deductions will be for a whole percentage of the participating employee’s gross pay (before tax and social security) subject to a maximum deduction of 10% of gross pay.

At the commencement of the offering (offering date) each participating employee will be granted a share option to purchase ordinary shares in the capital of ARM Holdings plc. The offering date will fall within the period of 42 days commencing on the announcement of results for any period or the day the share schemes committee resolves that exceptional circumstances exist to justify the grant of options.

The exercise price of the options will be set by the share schemes committee on the offering date and may be specified by reference to a proportion of the fair market value of the shares on the offering date, a proportion of the fair market value of the shares on the exercise date or both of these. However, in all cases the exercise price of options will not be less than the lower of:

· 85% of the fair market value of the shares on the offering date; and

· 85% of the fair market value of the shares on the exercise date.

The maximum value of shares that can be subject to these options will not exceed a limit set by the share schemes committee on the offering date, subject to that amount not exceeding $25,000 per employee per calendar year (measured using the fair market value of the shares on the offering date).

Subject to continuing employment, at the end of an offering period (exercise date) a participating employee’s share options will be deemed to have been exercised.

Subject to the above overriding limit, the ESPP also provides (as required by U.S. tax law) a numerical limit on the number of shares which may be issued under the ESPP. The limit in the ESPP has been set at 25,000,000 shares (equivalent to approximately 1.8% of the Company’s current issued share capital).

Existing option schemes

The grant of options under the existing share option schemes ceased once the Deferred Annual Bonus Plan and the Employee Equity Plan were approved by shareholders at the 2006 AGM. These plans have the facility for option grants to be made, but this will be done only in exceptional circumstances. In line with practice among the Company’s peers in the technology sector, there are generally no performance conditions attached to the issue or exercise of discretionary options under the existing schemes, except for those issued to executive directors where performance conditions based on real EPS growth apply. Share options issued to executive directors prior to their appointment to the board of the Company do not have performance conditions attached to them. However, discretionary options issued to executive directors after their appointment to the board of the Company have performance conditions attached to them. These discretionary options will vest after seven years, but may vest after three years from grant if the performance conditions are satisfied.

The performance conditions applicable to the Long Term Incentive Plan are based on total shareholder return (“TSR”) rather than EPS, providing the link to performance against an appropriate peer group.

These performance conditions were selected having regard to the position of the Company within its sector and the nature of the companies against which it competes to attract and retain high caliber employees. The Committee believes that the performance conditions represent the correct balance between being motivational and challenging.

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Pensions

The Company does not operate its own pension scheme but makes payments into a Company personal pension plan, which is a money purchase scheme. For executive directors, the rate of Company contribution is 10% of the executive’s basic salary.

Executive Director Service Contracts

Executive directors have “rolling” service contracts that may be terminated by either party on one year’s notice. The service contracts also terminate when executive directors reach age 65. These agreements provide for each of the directors to provide services to the Company on a full-time basis and contain restrictive covenants for periods of three to six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each service agreement contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the directors in the course of their employment.

The dates of the service contracts of each person who served as an executive director during the financial year are as follows:

Director	Date
Warren East	January 29, 2001
Tim Score	March 1, 2002
Tudor Brown	April 3, 1996
Mike Inglis	July 17, 2002
Mike Muller	January 31, 1996
Simon Segars	January 4, 2005

Where notice is served to terminate the appointment, whether by the Company or the executive director, the Company in its absolute discretion shall be entitled to terminate the appointment by paying to the executive director his salary in lieu of any required period of notice.

Each of the executive officers has the right to participate in relation to existing grants in the various share option schemes and plans described below (other than the Incentive Stock Option Plan, the Savings Related Plan and the Employee Stock Purchase Plan, which are designed for employees in the United States). The grant of options under the existing share option schemes and plans ceased once the  Deferred Annual Bonus Plan and the new Employee Equity Plan were approved by shareholders at the 2006 AGM. Executive officers still have the right to participate in the Save as You Earn (“SAYE”) Scheme except Simon Segars, who is currently based in the United States and has the right to participate in the Employee Stock Purchase Plan.

Although eligible for the Employee Equity Plan, it is not currently envisaged that the executive officers will participate in this plan which is designed for employees who do not participate in the Deferred Annual Bonus Plan.

Non-executive Directors

During 2007, the Chairmen of the audit and remuneration committees and the senior independent director each received a total fee of £41,000 per annum and the other non-executive directors each received a total fee of £36,000 per annum. These fees were arrived at by reference to fees paid by other companies of similar size and complexity, and reflected the amount of time non-executive directors were expected to devote to the Company’s activities during the year, which is between 10 to 15 working days a year. The remuneration of the non-executive directors is set by the executive directors and their term of appointment is three years. Fees paid to non-executive directors are reviewed annually.

Non-executive directors do not have service contracts, are not eligible to participate in bonus or share incentive arrangements and their service does not qualify for pension purposes or other benefits. No element of their fees is performance-related. Share options held by Lucio Lanza were granted prior to the Company’s acquisition of Artisan.

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EMPLOYEES

At December 31, 2007, the Company had 1,728 full-time employees, including 523 in the United States where Simon Segars is President of ARM, Inc., 36 in Japan where Takafumi Nishijima is president of ARM KK, 12 in South Korea, where Young Sub Kim is president of ARM Korea Limited, 9 in Taiwan, where Philip Lu is Chairman of ARM Taiwan Limited, 16 in P.R. China where Jun Tan is Director of ARM Consulting (Shanghai) Co. Ltd, and 292 in India where Anil Gupta is Managing Director of ARM Embedded Technologies Pvt. Limited.

The table below sets forth the number of Company employees by function and by location at year end for the periods indicated:

	Year ended December 31,
	2005		2006		2007
Total		1,324		1,659		1,728
Function
Research and Development		846		1,083		1,195
Marketing and Sales		297		337		313
Finance and Administration		181		239		220
Location
Europe		683		824		840
United States		481		582		523
Far East and India		160		253		365

Overall, approximately 50% of the Company’s employees have technical degrees and approximately 15% of the Company’s employees have advanced technical degrees. The Company’s future success will depend on its ability to attract, retain and motivate highly qualified technical and management personnel who are in great demand in the microprocessor industry. The Company’s employees are not represented by any collective bargaining agreements and the Company has never experienced a work stoppage. The Company believes that its employee relations are good. See “Item 3. Key Information—Risk Factors—We Are Dependent on Our Senior Management Personnel and on Hiring and Retaining Qualified Engineers” for a discussion of the dependence of the Company on identifying, attracting, motivating and retaining qualified engineers and other personnel.

SHARE OWNERSHIP

The following table sets forth, as of March 21, 2008, certain information as to the shares and outstanding options to subscribe for shares held by (i) each executive officer and director of the Company holding options and (ii) all executive officers and directors of the Company, as a group. As of March 21, 2008, there were 1,344,055,696 shares outstanding and options with respect to 55,889,584 underlying shares are exercisable and 1,444,196 RSUs expected to vest within 60 days of March 28, 2008.

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Name	Beneficial Ownership Number(2)		Beneficial Ownership Percentage			Number of Shares underlying options(1)		Weighted average exercise price  (per Share)(1)		Exercise prices and Expiration dates
Tudor Brown		3,286,953		0.24	%		1,958,636	£	0.99		(3	)
Doug Dunn		48,000	less than 0.01%				—		—		—
Warren East		1,846,037		0.14	%		1,740,578	£	1.38		(4	)
Mike Inglis		1,077,233		0.08	%		1,230,285	£	1.37		(5	)
Lucio Lanza		1,578,552		0.12	%		301,261	£	0.60		(9	)
Mike Muller		2,694,550		0.20	%		1,104,463	£	1.32		(6	)
Kathleen O’Donovan		—		—			—		—		(10	)
Philip Rowley		50,000	less than 0.01%				—		—		—
John Scarisbrick		10,800	less than 0.01%				—		—		—
Tim Score		1,294,332		0.10	%		1,483,849	£	1.38		(7	)
Jeremy Scudamore		125,000		0.01	%		—		—		—
Simon Segars		938,410		0.07	%		1,067,355	£	1.25		(8	)
Young Sohn		159,000		0.01	%						(11	)
All current directors and senior management as a group (13 persons)		13,108,867		0.97	%		8,886,427	£	1.24		—

_________________________

(1) Adjusted to reflect 5 for 1 share split in the Company’s ordinary shares which took place in April 2000 and for the 4 for 1 share split in April 1999 where applicable.

(2) Shares that are not outstanding but that may be acquired upon exercise of options within 60 days of the date of this report are deemed outstanding for the purpose of computing the number and percentage of outstanding shares beneficially owned by the relevant person. However, such shares are not deemed to be outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person.

(3) Options to subscribe for 3,736 shares at £6.155 per share expire on May 21, 2010, options to subscribe for 2,091 shares at £3.35 per share expire on May 13, 2011, options to subscribe for 22,909 shares at £3.35 per share expire on May 13, 2008, options to subscribe for 50,000 shares at £2.465 per share expire on April 19, 2009, options to subscribe for 731,428 shares at £0.4375 per share expire on January 30, 2010, options to subscribe for 320,000 shares at £1.25 per share expire on January 30, 2011, options to subscribe for 436,019 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 392,453 shares at £1.325 per share expire on February 1, 2013.

(4) Options to subscribe for 8,480 shares at £1.224 per share expire on March 10, 2009, options to subscribe for 3,187 shares at £6.155 per share expire on May 21, 2010, options to subscribe for 62,909 shares at £3.815 per share expire on May 22, 2008, options to subscribe for 100,000 shares at £2.465 per share expire on April 19, 2009, options to subscribe for 400,000 shares at £1.25 per share expire on January 30, 2011, options to subscribe for 592,417 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 573,585 shares at £1.325 per share expire on February 1, 2013.

(5) Options to subscribe for 223,515 shares at £2.1475 per share expire on May 26, 2009, options to subscribe for 288,000 shares at £1.25 per share expire on January 30, 2011, options to subscribe for 379,147 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 339,623 shares at £1.325 per share expire on February 1, 2013.

(6) Options to subscribe for 3,736 shares at £6.155 per share expire on May 21, 2010, options to subscribe for 2,091 shares at £3.35 per share expire on May 13, 2011 and options to subscribe for 22,909 shares at £3.35 per share expire on May 13, 2008, options to subscribe for 50,000 shares at £2.465 per share expire on April 19, 2009, options to subscribe for 288,000 shares at £1.25 per share expire on January 30, 2011, options to subscribe for 398,104 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 339,623 shares at £1.325 per share expire on February 1, 2013.

(7) Options to subscribe for 206,896 shares at £2.465 per share expire on April 19, 2009, options to subscribe for 320,000 shares at £1.25 per share expire on January 30, 2011, options to subscribe for 473,934 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 483,019 shares at £1.325 per share expire on February 1, 2013.

(8) Options to subscribe for 6,792 shares at £3.35 per share expire on May 13, 2011, options to subscribe for 33,208 shares at £3.35 per share expire on May 13, 2008, options to subscribe for 40,000 shares at £2.465 per share expire on April 18, 2009, options to subscribe for 105,142 shares at £0.4375 per share expire on January 30, 2010, options to subscribe for 224,000 shares at £1.25 per share expire on January 29, 2011, options to subscribe for 341,232 shares at £1.055 per share expire on February 4, 2012 and options to subscribe for 316,981 shares at £1.325 per share expire on February 1, 2013.

(9) Options to subscribe for 89,912 shares at £0.57 per share expire on February 16, 2010, options to subscribe for 7,498 shares at £0.22 per share expire on April 15, 2011, options to subscribe for 26,236 shares at £0.44 per share expire on February 6, 2012 and options to subscribe for 177,615 shares at £0.66 per share expire on March 10, 2014.

(10) Kathleen O’Donovan was appointed to the board on December 7, 2006.

(11) Young Sohn was appointed to the board on April 2, 2007.

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Share Option Schemes and Plans

The Company operates the following share option schemes and plans under which employees may acquire shares: the new Deferred Annual Bonus Plan, the new Employee Equity Plan and the U.S. Employee Stock Purchase Plan. For a description of these plans, please see “—Board Practices—Incentive Arrangements” above.

During 2007, the Company operated the ARM Holdings plc Deferred Annual Bonus Plan (the “Deferred Annual Bonus Plan”), ARM Holdings plc Employee Equity Plan, (the “Employee Equity Plan”), the ARM Holdings plc Executive Share Option Scheme (the “Executive Scheme”), the ARM Holdings plc Unapproved Share Option Scheme (the “Unapproved Scheme”), the Long Term Incentive Plan (“LTIP”), the ARM Holdings plc Unapproved Share Option Scheme French Operation (the “French Scheme”), the ARM Holdings plc Unapproved Share Option Scheme Belgian Operation (the “Belgian Scheme”) the ARM Holdings plc Savings Related Share Option Scheme (the “Save As Your Earn Scheme” or “SAYE Scheme”), the ARM Holdings plc Stock Option Plan (the “US Incentive Stock Option Scheme” or “US ISO Scheme”) and the ARM Holdings plc Savings Related Share Option Plan (the “Savings Related Plan”) (together, the “Schemes and Plans”). Following the adoption of the Deferred Annual Bonus Plan and the Employee Equity Plan at the 2006 AGM, awards are no longer made pursuant to the Executive Scheme, the Unapproved Scheme, the French Scheme, the Belgian Scheme and the US ISO Scheme, although existing grants of options under such schemes remain exercisable. See “—Board Practices—Incentive Arrangements” above. Upon the acquisition of Artisan in 2004, the Company assumed the share plans of Artisan, namely the 1993 Plan, the 1997 Plan, the 2000 Plan, the 2003 Plan, the Director Plan, the Executive Plan and the ND00 Plan. Following the acquisition of Artisan, the Artisan plans were closed to new grants. The Company has also established an employee trust and a Qualifying Employee Share Ownership Trust (“QUEST”). None of the benefits under the Schemes and Plans are pensionable. Options granted under the SAYE Scheme and the Savings Related Plan are at an option price equal to not less than 85% of the market value of the shares.

Details of the Schemes and Plans are set out below.

Save As You Earn (“SAYE”) Scheme

Issue of Invitations. Invitations to join the SAYE Scheme are normally issued within 42 days of the announcement of the Company’s results for any period.

Eligibility. All employees of the Company and any subsidiaries designated by the Board of Directors who have worked for the Company or a participating subsidiary for a qualifying period as determined by the Board of Directors (but not to exceed five years) and any other employees nominated by the Board of Directors are eligible to participate in the SAYE Scheme.

Savings Contract. Employees joining the SAYE Scheme must enter into a savings contract with a designated savings carrier under which they make a monthly saving for a period of three or five years or, if the Board of Directors so allows, any other period permitted under the relevant legislation. The monthly saving must not exceed such limit as is fixed by the Board of Directors within the ceiling imposed by the relevant legislation (currently £250 per month). With the three year savings period, the employee receives a tax-free bonus of one monthly payment. With the five year savings period, the employee receives a tax-free bonus of 3.7 monthly payments. With the five year savings period, the employee has the choice of leaving the money for a further two years to receive an additional bonus of 3.9 monthly payments, making a total bonus of 7.6 monthly payments over seven years (which sum cannot be used to buy shares in the Company). An option is granted to the employee to acquire shares in the Company which is exercisable within six months of maturity after the bonus is payable under the savings contract.

Option Price. Options are granted at an option price which is not less than 85% of the market value of the shares on the day before the date of invitation (or some other date agreed with the UK Inland Revenue) and, where shares are to be subscribed, their nominal value (if greater). Market value means a value for the shares agreed in advance with the UK Inland Revenue if the shares are not listed or, if they are listed, the middle market quotation on the immediately preceding business day, or the average of the middle market quotations over the three preceding business days.

Exercise of Options. Options are normally exercisable for a six month period following the maturity date under the relevant savings contract. If the option is not exercised within this six month period, the option will lapse. Options may also, however, be exercised, in certain circumstances, for example on an option holder ceasing to be an employee due to injury, disability, redundancy, retirement, following change of control of the employing company and in the event of a

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takeover or winding up of the Company. If any option is exercised early in one of these circumstances, the optionholder may only use the savings made under his savings contract at that time to exercise the option. Options are not transferable and may only be exercised by the person to whom they are granted, except in certain specific circumstances (e.g. death of employee).

Exchange of Options. In the event of a change of control of the Company in certain circumstances, optionholders may exchange their options for options over shares in the acquiring company.

Issue of Shares. Shares issued on the exercise of options rank equally with shares of the same class in issue on the date of allotment except in respect of rights arising by reference to a prior record date. Application has been made to and approved by the London Stock Exchange for the listing of shares issued under the SAYE Scheme.

Variation in Share Capital. Options may be adjusted following certain variations in the share capital of the Company, including a capitalization or rights issue, sub-division or consolidation or reduction of the share capital.

Termination of the SAYE Scheme. No options may be granted under the SAYE Scheme after the tenth anniversary of the date of the adoption of the rules.

Savings Related Plan

The Savings Related Plan is substantially the same as the SAYE Scheme except that it has been structured to give tax benefits to employees in the United States. In addition, the directors may amend the Savings Related Plan to take account of any taxation, securities or exchange control laws in other territories to allow the Savings Related Plan to be operated for the benefit of employees in other territories, provided that the terms of any options of such employees are not more favorable overall than the terms of options granted to other employees.

Executive Scheme

Eligibility. All employees (excluding executive directors) of the Company and any subsidiaries of the Company (designated by the directors) who are not within two years of their normal retirement date are eligible to participate in the Executive Scheme.

Grant of Options. Options are granted by the Remuneration Committee which consists wholly of non-executive directors. Options are normally granted within 42 days of the announcement of the Company’s results for any period.

Option Price. Options will be granted at an option price which is not less than the market value of the shares on the date of grant, or such other day as agreed with the UK Inland Revenue and, where shares are to be subscribed, the nominal value (if greater). Market value is defined as a value for the shares agreed upon in advance with the UK Inland Revenue if the shares are not listed, or if they are, the middle market quotation on the preceding business day.

Limitation on Employee Participation. An employee’s participation is limited so that the aggregate price payable for shares under option at any one time does not exceed £30,000. This limit applies to options granted under the Executive Scheme and any other UK Inland Revenue approved executive share option scheme established by the Company or associated companies.

Exercise of Options. Options are normally exercisable, subject to any performance condition being satisfied, and by a person who remains a director or employee of the Company or any subsidiary, between the third and tenth anniversaries of grant. Options may also, however, be exercised early in certain circumstances, for example on an optionholder ceasing to be an employee due to ill health, redundancy, retirement, following a change in control of the employing company, and in the event of a takeover or winding up of the Company. Options are not transferable and may only be exercised by the persons to whom they are granted, except in certain specific circumstances (e.g. death of employee).

Exchange of Options. In the event of a change of control of the Company in certain circumstances, optionholders may exchange their options for options over shares in the acquiring company.

Issues of Shares. Shares issued on the exercise of options rank equally with shares of the same class in issue on the date of allotment except in respect of rights arising by reference to a prior record date. Application has been made to and approved by the London Stock Exchange for the listing of shares which may be issued under the Executive Scheme.

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Variation in Share Capital. Options may be adjusted following certain variations in the share capital of the Company including a capitalization or rights issue.

Termination of the Executive Scheme. No options may be granted under the Executive Scheme after the tenth anniversary of the adoption of the Executive Scheme.

Unapproved Scheme

The Unapproved Scheme is substantially the same as the Executive Scheme except that the £30,000 limit on individual participation does not apply. Instead, the Board of Directors shall consider any limits on the grant of options to employees having regard to the performance of the employee and prevailing market practice. At the 2001 AGM the Chairman of the Company stated that the Company’s internal policy is never to issue options to a value of more than two times salary in any one year, provided however, that the Company may, in exceptional circumstances, offer options up to five times annual salary for the recruitment of a key individual.

Options granted to executive directors are exercisable on or after the seventh anniversary of the date of grant, vesting may be accelerated if a performance condition is satisfied, in which case the options are exercisable on or after the third anniversary of grant. For options granted in 2004 and 2005, 50% of the shares under option will vest after three years if the Company achieves average real EPS growth of 12.5% over the performance period. If average real EPS growth of at least 33.1% is achieved over the performance period, 100% of the shares under option will vest after three years. The Remuneration Committee has a discretion to amend or waive the performance condition in certain circumstances. Options granted to persons other than the executive directors are normally exercisable over 4 years, as to 25% of the shares covered by the option on the first anniversary following grant, and 25% on or after each subsequent anniversary. All employees of ARM Limited at the year end are eligible to receive options under the Annual Share Grant which typically occurs in late January following the results announcement of the previous year. These options are exercisable over four years, as to 25% of the shares covered by the option on December 31 following grant, and 25% on or after each subsequent December 31. All options expire on the seventh anniversary of their grant.

Performance Condition. The Remuneration Committee may grant options subject to a performance condition aimed at linking the exercise of options to sustained improvements in the underlying financial performance of the Company.

Long Term Incentive Plan

A Long Term Incentive Plan was approved by shareholders at the 2003 Annual General Meeting. Conditional share awards held by directors are as follows:

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Director	Performance period ending December 31,	Award date	Market price at date of award £	As at January 1, 2007 Number	Conditional award Number	Vested Number	As at  December 31, 2007 Number	Vesting date
Warren East	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	248,756 268,240 278,388 –	– – – 308,594	(248,756)* – – –	– 268,240** 278,388 308,594	February 2007 February 2008 February 2009 February 2010
				795,384	308,594	(248,756)*	855,222
Tim Score	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	199,005 214,592 234,432 –	– – – 261,719	(199,005)* – – –	– 214,592** 234,432 261,719	February 2007 February 2008 February 2009 February 2010
				648,029	261,719	(199,005)*	710,743
Tudor Brown	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	199,005 197,425 190,476 –	– – – 214,844	(199,005)* – – –	– 197,425** 190,476 214,844	February 2007 February 2008 February 2009 February 2010
				586,906	214,844	(199,005)*	602,745
Mike Inglis	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	179,104 171,674 164,835 –	– – – 187,500	(179,104)* – – –	– 171,674** 164,835 187,500	February 2007 February 2008 February 2009 February 2010
				515,613	187,500	(179,104)*	524,009
Mike Muller	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	179,104 180,258 164,835 –	– – – 183,594	(179,104)* – – –	– 180,258** 164,835 183,594	February 2007 February 2008 February 2009 February 2010
				524,197	183,594	(179,104)*	528,687
Simon Segars	2006 2007 2008 2009	November 3, 2004 July 20, 2005 May 8 , 2006 February 8, 2007	1.005 1.165 1.365 1.280	149,254 154,506 153,846 –	– – – 179,688	(149,254)* – – –	– 154,506** 153,846 179,688	February 2007 February 2008 February 2009 February 2010
				457,606	179,688	(149,254)*	488,040

________________________

* The performance conditions applicable to the 2004 conditional awards were not satisfied and these awards lapsed in January 2007.

** The performance conditions applicable to the 2005 conditional awards were satisfied to the extent of 55% plus dividend shares as detailed below.

Conditional awards will vest to the extent that the performance criteria are satisfied over a three-year performance period from January 1 of the year of award, and no re-testing thereafter is possible. The performance conditions are based on the Company’s TSR (Total Shareholder Return) when measured against that of two comparator groups (each testing half of the shares comprised in the award). The first index comprises UK companies across all sectors (FTSE 350) and the second comprises predominantly US companies within the Hi Tech sector (FTSE Global Technology Index). For each comparator group, the number of shares that may vest may be up to a maximum of 200% of the shares if the Company’s TSR ranks in the upper decile, 50% will vest in the event of median performance and between median and upper decile performance vesting will increase on a straight-line basis. Additional shares may vest to cover dividends paid by the Company during the performance period. No shares will be received for below-median performance. In addition, no shares will vest unless the committee is satisfied that there has been a sustained improvement in the underlying financial performance of the Company.

The performance conditions applicable to the conditional awards granted on July 20, 2005 were satisfied to the extent of 55% plus dividend shares which vested on February 8, 2008, as follows:

Director	Conditional award Number		Vested award Number		Dividend shares Number		Total award Number		Market value at vesting £
Warren East		268,240		147,532		3,525		151,057		143,504
Tim Score		214,592		118,026		2,820		120,846		114,804
Tudor Brown		197,425		108,584		2,594		111,178		105,619
Mike Muller		171,674		94,420		2,256		96,676		91,842
Mike Inglis		180,258		99,141		2,369		101,510		96,434
Simon Segars		154,506		84,979		2,030		87,009		82,659
TOTAL		1,186,695		652,682		15,594		668,276		634,862

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The following awards over ordinary shares were made under the LTIP on February 8, 2008: Warren East 446,237; Tim Score 387,097; Tudor Brown 306,452; Mike Inglis 268,817; Mike Muller 263,441 and Simon Segars 268,817. The mid-market closing price of an ordinary share on the date of these conditional awards was 95 pence.

The Deferred Annual Bonus Plan

There is a compulsory deferral of 50% of the annual bonus earned by executive directors in the year. Half of the bonus is settled in cash and the deferred element will be settled in shares after three years. The following share awards were made on February 8, 2008 in respect of the deferred proportion of the 2007 bonus: Warren East 82,043; Tim Score 69,581; Tudor Brown 54,739; Mike Inglis 48,810; Mike Muller 48,810 and Simon Segars 47,772.

French Scheme

The French Scheme is substantially the same as the Executive Scheme, except that it has been structured to enable options granted under it to provide tax benefits for employees in France. Options granted under the French Scheme are not subject to performance conditions. The rules of the French Scheme state that options may not be exercised until the fourth anniversary of grant.

The Incentive Stock Option Plan

The Incentive Stock Option Plan is substantially the same as the Unapproved Scheme, except that it has been structured to enable options granted under it to qualify as incentive stock options for the purpose of the US Internal Revenue Code and therefore provide tax benefits for employees in the United States.

Options granted under the Incentive Stock Option Plan are not subject to performance conditions. The rules of the Incentive Stock Option Plan state that options may not be exercised after the fifth anniversary of grant. Options granted to new employees are normally exercisable over 4 years, as to 25% of the shares covered by the option on the first anniversary following grant, and 25% on or after each subsequent anniversary. In addition, all employees of ARM, Inc. and ARM Physical IP, Inc. at the year end are eligible to receive options under the Annual Share Grant. These options are exercisable over four years, as to 25% of the shares covered by the option on December 31 following grant, and 25% on or after each subsequent December 31. All options expire on the seventh anniversary of their grant.

Belgian Scheme

The Belgian Scheme is substantially the same as the Executive Scheme, except that it has been structured to enable options granted under it to provide tax benefits for employees in Belgium. Options granted under the Belgian Scheme are not subject to performance conditions. The rules of the Belgian Scheme state that the options may not be exercised until the first January following the third anniversary of grant.

Employee Share Ownership Trust (“ESOP”)

The ESOP is a Jersey (Channel Islands) resident discretionary trust established with the object of facilitating the recruitment, retention and motivation of employees. The trustee is a subsidiary of the Company. Beneficiaries include all employees and former employees together with spouses and children under the age of 18. The trustee has power to apply the income and capital of the trust for the benefit of the beneficiaries and at its discretion accumulate income.

The ESOP was funded initially through an interest free loan totaling approximately £1.4 million. The trustee is likely to repay the loan from cash contributions from the employing companies. The trustee acquired 5,000,000 shares at the Company’s Initial Public Offering. Conditional awards under the Company’s Long Term Incentive Plan were granted over these shares at December 31, 2006. In February 2006, 3,798,562 shares were awarded from the ESOP to directors and employees as a result of the satisfaction of the performance criteria of the 2003 LTIP Scheme.

As at December 31, 2007, the trust held 1,201,434 shares (nominal value £601) with a market value of £ 1,490,000 and at December 31, 2006, the trust held 1,201,434 shares (nominal value £601) with a market value of £1,511,000. All costs relating to the scheme are dealt with in the profit and loss account as they accrue and the trust has waived the right to receive dividends of over and above 0.01 pence per share on all shares held.

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The trust waived the right to receive dividends on the shares held by QUEST, and all costs relating to the scheme are dealt with in the profit and loss account as they accrue.

1993 Plan, the 1997 Plan, the 2000 Plan, the 2003 Plan, the Director Plan, the Executive Plan and the ND00 Plan (the “Artisan Plans”)

As stated, all these plans were assumed following the acquisition of Artisan in 2004 and were immediately closed to new grants. Under each plan, there are multiple vesting templates and vesting periods. The majority of the options were already vested upon acquisition, and the most common vesting template was 25% vesting after one year, and then 6.25% vesting each quarter thereafter, until 100% vest after four years. Some options vest on a monthly basis, and some over five years. All options lapse ten year from the date of grant.

The Deferred Annual Bonus Plan, Employee Equity Plan and U.S. Employee Stock Purchase Plan

For a description of these plans, please see “—Board Practices—Incentive Arrangements” above.

Amendments to the Schemes and Plans

The directors may amend the Schemes and Plans, except that any amendment relating to the identity of optionholders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an optionholder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for optionholders in the event of a variation in share capital may not be made to the advantage of optionholders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the Executive Scheme and the SAYE Scheme are subject to the prior approval of the UK Inland Revenue, while they are to retain their approved status.

Limits

In any five year period, not more than 10% of the issued ordinary share capital of the Company may in aggregate be issued or issuable under the Schemes and Plans and any other employee share schemes or plans operated by the Company. Shares issued to satisfy options granted under the Artisan Plans are excluded from this 10% limit.

ITEM 7.         MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

MAJOR SHAREHOLDERS

The following table sets forth certain information as at March 21, 2008, with respect to each person who is known by the Company to be the beneficial owner of more than 3% of outstanding shares.

Beneficial ownership is determined in accordance with the rules of the US Securities and Exchange Commission and includes voting or investment power with respect to the securities. As at February 28, 2008, the number of our shares held in the US in the form of ordinary shares or ADSs amounts to approximately 58% of our total outstanding share capital. There are 379 holders on record of our shares in the US. We believe that the persons named in the table have sole voting and investment power with respect to all shares shown as beneficially owned by them. The shareholders listed below have the same voting rights as our other shareholders. As far as the Company is aware, it is neither directly nor indirectly owned or controlled by one or more corporations or by any government.

As at March 21, 2008, which is the most recent practicable date prior to the date of this annual report, except as noted below, we are not aware of:

· any arrangements that might lead to a change in control of our business;

· any person who is interested in 3% or more of our capital; or

· any person who can, will or could directly or indirectly, jointly or severally, exercise control over us.

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Name	Shares Beneficially Owned (Number)		Percent
Janus Capital Corporation		170,128,633		13.37	%
Fidelity Investments		110,418,080		8.63	%
Thornburg Investment Management		96,296,541		7.57	%
Capital Group Companies		76,327,160		5.96	%
Invesco		67,001,300		5.23	%
Wellington Management Company		63,857,117		5.02	%
Legal & General Investment Management		52,695,881		4.01	%

RELATED PARTY TRANSACTIONS

During the year, the Company paid royalty fees of £81,000 (2006: £124,000; 2005: £33,000) and made cross-license payments of £nil (2006: £nil; 2005: £26,000) to Superscape Group plc (“Superscape”), a company in which Mike Inglis, an executive director of ARM, was a non-executive director during the year.  Amounts owed to Superscape at December 31, 2007 and 2006 were £nil.  In addition, in 2007, the Company received royalty fees of £14,000 (2006: £19,000; 2005: £2,000) and license fees of £nil (2006: £nil; 2005: £11,000) from Superscape.  At December 31, 2007, £nil (2006: £17,000) was owed by Superscape.

Also in 2007, the Company received license fees of £4,000 (2006: £3,085,000; 2005: £321,000), support and maintenance income of £32,000 (2006: £37,000; 2005: £37,000) and evaluation tools fees of £123,000 (2006: £82,000; 2005: £17,000) from CSR plc, a company in which John Scarisbrick, a non-executive of ARM, was an executive director during the year.  Amounts owed by CSR at December 31, 2007 were £31,000 (2006: £14,000).

During 2007, the Company received funding for SOI technology development of £1,507,000 (2006: £319,000; 2005: £nil) from SOI TEC Silicon On Insulator Technologies SA (“Soitec”).  Furthermore, the Company paid £181,000 (2006: £nil; 2005: £nil) to Soitec during the year in relation to license income from the two parties’ ongoing collaborative agreement to develop SOI technology. Soitec is an SOI IP company in which Doug Dunn, Company Chairman, is a non-executive director. At December 31, 2007, £nil (2006: £383,000) is owed by Soitec.  Amounts owed to Soitec at December 31, 2007 and 2006 were £nil.

ITEM 8.         FINANCIAL INFORMATION

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Consolidated financial statements are set forth under “Item 18. Financial Statements.”

LEGAL PROCEEDINGS

ARM’s license agreements with its licensees often include provisions which, subject to the satisfaction of certain conditions, require ARM to indemnify its licensees if the licensed technology infringes the intellectual property rights of a third party. The following proceeding in which products incorporating ARM’s processor designs have been accused of patent infringement, is subject to such indemnification provisions.

Nazomi In May 2002, Nazomi Communications, Inc. (“Nazomi”) filed suit against ARM alleging willful infringement of US Patent No. 6,332,215. ARM answered the complaint in July 2002 denying infringement. Following an original ruling in ARM’s favour, Nazomi appealed and received a supplementary “Markman” hearing in 2005 that resulted in a decision that supported the original ruling. On February 13, 2007, Nazomi again appealed and, on February 21, 2008, the Court of Appeals for the Federal Circuit upheld the District Court’s claim construction and affirmed the District Court’s grant of summary judgment in favour of ARM. The period for any further appeal by Nazomi has now passed and accordingly this litigation is now concluded with judgment in favour of ARM.

Technology Properties Limited, Inc. In October 2005, Technology Properties Limited, Inc. (“TPL”) filed suit, in the United States District Court for the Eastern District of Texas (Marshall Division), against certain companies in the Fujitsu,

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Matsushita. NEC and Toshiba groups of companies alleging infringement of TPL’s US Patents Nos. 5,809,336; 5,784,584 and 6,598,148 (the “Litigation”). All of the defendants are licensees of various ARM technologies. It was revealed as part of the preliminary infringement contentions in the Litigation, filed in July 2006, that certain ARM technology is alleged to infringe a single claim in US Patent No 5,784,584 (the “`584 Patent”). In September 2006, ARM filed a motion to intervene in the Litigation and that motion has been granted. ARM is now a defendant party in the Litigation. The claim construction (or “Markman”) hearing took place in May 2007. Based on the claim construction delivered by the District Court, TPL filed a motion stipulating that the accused ARM technology does not infringe the ‘584 Patent with a request that final judgement be entered to that effect.  TPL subsequently filed notice to appeal the claim construction to the Court of Appeals for the Federal Circuit. Based on independent legal advice, ARM is confident that the Court of Appeals will uphold the claim construction ruling delivered by the District Court.

ARM does not expect any significant liability in respect of these claims.

DIVIDEND DISTRIBUTION POLICY

The directors recommend payment of a final dividend in respect of 2007 of 1.2 pence per share which, taken together with the interim dividend of 0.8 pence per share paid in October 2007, gives a total dividend in respect of 2007 of 2.0 pence per share, an increase of 100% over the 1.0 pence per share in 2006. Subject to shareholder approval, the final dividend will be paid on May 21, 2008 to shareholders on the register on May 2, 2008.

It is the board’s intention to increase the dividend over time, taking into account the opportunity for continued investment in the business and the Company’s underlying operational performance.

SIGNIFICANT CHANGES

We have not experienced any significant changes since the date of the annual financial statements.

ITEM 9.         LISTING DETAILS

The information in this section has been extracted from publicly available documents from various sources, including officially prepared materials from the London Stock Exchange and the Nasdaq National Market and has not been prepared or independently verified by us. This is the latest available information to our knowledge.

MARKET PRICE INFORMATION

Shares

The Company’s ordinary shares were listed on the London Stock Exchange in April 1998 under the symbol ARM. The London Stock Exchange is the principal trading market for the Company’s ordinary shares.

The following table sets forth, for the periods indicated, the high and low sales price of the ordinary shares reported on the London Stock Exchange:

	Price per Share
	High		Low
Annual prices:
2003	£	1.36	£	0.43
2004		1.45		0.79
2005		1.27		0.94
2006		1.42		0.99
2007		1.65		1.18
Quarterly prices:
2006:
First Quarter		1.42		1.20
Second Quarter		1.42		1.03

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	Price per Share
	High	Low
Third Quarter	1.24	0.99
Fourth Quarter	1.26	1.04
2007:
First Quarter	1.37	1.18
Second Quarter	1.48	1.30
Third Quarter	1.65	1.34
Fourth Quarter	1.60	1.19
2008:
First Quarter (through March 28)	1.26	0.78
Monthly prices:
October 2007	1.60	1.38
November 2007	1.50	1.21
December 2007	1.35	1.19
January 2008	1.26	0.97
February 2008	1.22	0.90
March 2008 (through March 28)	0.92	0.78

ADSs

The Company’s ordinary shares were listed in April 1998 on the Nasdaq Stock Market in the US in the form of American Depositary Shares (“ADSs”), evidenced by American Depositary Receipts, under the symbol ARMHY. One of the Company’s ADSs, for which The Bank of New York is the Depository, represents 3 ordinary shares.

The following table sets forth, for the periods indicated, the reported high and low closing prices on the Nasdaq National Market for the outstanding ADSs.

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	Price per ADS
	High		Low
Annual prices:
2003	$	6.94	$	2.25
2004		7.80		4.27
2005		6.79		5.38
2006		7.78		5.41
2007		10.07		6.92
Quarterly prices:
2006:
First Quarter		7.48		6.24
Second Quarter		7.78		5.66

Third Quarter	6.93	5.41
Fourth Quarter	7.40	6.18
2007:
First Quarter	8.07	6.92
Second Quarter	8.84	7.53
Third Quarter	10.07	8.02
Fourth Quarter	9.69	7.20
2008:
First Quarter (through March 28)	7.58	4.78
Monthly prices:
October 2007	9.69	8.76
November 2007	9.20	7.56
December 2007	8.24	7.20
January 2008	7.58	6.02
February 2008	7.31	5.39
March 2008 (through March 28)	5.53	4.78

ITEM 10.        ADDITIONAL INFORMATION

CORPORATE GOVERNANCE

Differences in our corporate governance and Nasdaq corporate governance practices

In February 2005, the SEC approved Nasdaq’s new corporate governance rules for listed companies. Under these new rules, as a Nasdaq-listed foreign private issuer, we must disclose any significant ways in which our corporate governance practices differ from those followed by US companies under Nasdaq listing standards. We believe the following to be the significant differences between our corporate governance practices and Nasdaq corporate governance rules applicable to US companies.

Independent Directors

The Company complies, and complied throughout 2007, with the UK Combined Code 2006, with the exception only that the board did not comprise a majority of independent non-executive directors throughout the year. The board currently comprises six executive directors, six independent non-executive directors and the Chairman. The board has considered the overall balance between executive and non-executive directors and believes that the number of executive directors is fully justified by the contribution made by each of them. To increase the size of the board further to meet this particular provision is not considered appropriate.

Nomination of Directors. Nasdaq listing standards require that nominees to a company’s board of directors be selected, or recommended for the board’s selection, either by a majority of the company’s independent directors or by a nominations committee comprised solely of independent directors. The nomination committee leads the process for board appointments and makes recommendations to the board in relation to new appointments of executive and non-executive directors and on board composition and balance. It is chaired by Doug Dunn, Chairman of the Board of Directors, and the other members are John Scarisbrick and Lucio Lanza. In accordance with the UK Combined Code 2006, the Chairman of the Board of Directors is not considered independent.

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Shareholder Approval

Stock option plans. Nasdaq listing standards require listed companies to obtain shareholder approval before a stock option or purchase plan is established or materially amended or other equity compensation arrangement is made pursuant to which stock may be acquired by officers, directors, employees or consultants of the Company, subject to certain exceptions. The Company’s directors may amend the Schemes and Plans, except that any amendment relating to the identity of optionholders, the limitations on their benefits, the number of shares which may be issued under the Schemes and Plans, the basis for determining an optionholder’s entitlement to shares (other than provided for in accordance with the rules) or the adjustment of rights for optionholders in the event of a variation in share capital may not be made to the advantage of optionholders without prior approval of the shareholders of the Company in general meeting, except for minor amendments relating to tax and administrative matters. Amendments to the UK Approved Executive Scheme and the SAYE Scheme are subject to the prior approval of the UK Inland Revenue, while they are to retain their approved status.

Other transactions. Nasdaq listing standards require listed companies to obtain shareholder approval prior to the issuance of securities in certain circumstances related to a change of control of the issuer, the acquisition of the stock or assets of another company under certain circumstances and in connection with certain transactions involving the sale, issuance or potential issuance of 20% or more of common stock or voting power of the issuer. As a foreign private issuer, the Company complies with corporate governance practices customary in its home jurisdiction, the United Kingdom. While not dealing directly with the transactions enumerated in the Nasdaq listing requirements, there are various provisions requiring shareholder vote, which can best be summarized as follows.

Under the Listing Rules of the UK Financial Services Authority, shareholder approval is usually required for an acquisition or disposal by a listed company if, generally, the size of the company or business to be acquired or disposed of represents 25% or more of the assets, profits, turnover or gross capital of the listed company or if the consideration to be paid represents 25% or more of the aggregate market value of the listed company’s equity shares. Shareholder approval may also be required for an acquisition or disposal of assets between a listed company and parties, including: (a) directors or shadow directors of the company or its subsidiaries; (b) any person who is, or was in the last 12 months preceding the date of the transaction, a holder of 10% or more of the nominal value of any class of the company’s or any holding company’s or its subsidiary’s shares having the right to vote in all circumstances at general meetings; or (c) any of the associates of persons described in (a) or (b).

Quorum

Nasdaq rules require that the quorum for any meeting of shareholders must not be less than 331/3% of the outstanding shares of a company’s commerce voting stock. We comply with the relevant quorum standards applicable to companies in the United Kingdom, as set forth in our Memorandum and Articles of Association summarized below.

Independent Review by Regulatory Body

The Company’s auditors are registered with the US Public Company Accounting Oversight Board and, therefore, are subject to its inspection regime.

MEMORANDUM AND ARTICLES OF ASSOCIATION

The following summarizes certain rights of holders of shares. The following summary does not purport to be complete and is qualified in its entirety by reference to the Memorandum and Articles of Association of the Company, a copy of which has been filed as an exhibit hereto. At the Annual General Meeting of the Company to be held on May 13, 2008, a resolution will be proposed  seeking authority from shareholders to update the Company’s Articles of Association primarily to take account of changes in UK company law brought about by the Companies Act 2006.  The principal change is in relation to conflicts of interest and, in addition amendments have been made to reflect the fact that the concept of extraordinary resolutions has not been retained under the Companies Act 2006.  These changes are described in more detail in the Circular and Notice of Annual General Meeting 2008.

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Memorandum of Association

The Memorandum of Association of the Company provides that its principal objects (set out in Clause 4 thereof) are to design, modify, develop, manufacture, assemble and deal in computers and peripheral equipment, to provide a technical advisory and design service for users and potential users of computers and other electronic or automatic equipment and to devise and supply programs and other software for such users.

Shareholder Meetings

An Annual General Meeting of shareholders must be held once in every year (within a period of not more than 15 months after the holding of the last preceding Annual General Meeting). The Board of Directors may convene an Extraordinary General Meeting of shareholders whenever they think fit. General meetings may be held at such time and place as may be determined by the Board of Directors. An Annual General Meeting may be convened on at least 21 days’ written notice to shareholders entitled to receive notices. Most Extraordinary General Meetings may be convened on at least 14 days’ written notice, but Extraordinary General Meetings at which it is proposed to pass certain types of special resolutions must be convened on at least 21 days’ written notice. The Company may determine that only those persons entered on the register at the close of business on a day determined by the Company, such day being no more than 21 days before the day the notice of the meeting is sent, shall be entitled to receive such a notice. Three shareholders must be present in person or by proxy to constitute a quorum for all purposes at general meetings.

Voting Rights

Subject to disenfranchisement in the event of (i) non-payment of any call or sum due and payable in respect of any ARM ordinary share or (ii) a shareholder, or other person interested in ARM ordinary shares held by a shareholder, being in default for a period of 14 days of a notice requiring them to supply ARM with information under Section 793 of the UK Companies Act 2006, on a show of hands every shareholder who is present in person has one vote and, on a poll, every shareholder present in person or by proxy or by representative has one vote for each share held. In the case of joint holders of ordinary shares the vote of the person whose name stands first in the share register in respect of the shares who tenders a vote, whether in person or by proxy, is accepted to the exclusion of any votes tendered by any other joint holders. Proxies appointed by certain depositaries (including The Bank of New York as depositary) can vote on a show of hands upon having been validly appointed for the relevant meeting.

Voting at any general meeting is by a show of hands unless a poll is demanded. A poll is required for any special or extraordinary resolution which is proposed. A poll may be demanded by (i) the chairman of the meeting, (ii) not less than five shareholders present in person or by proxy and entitled to vote, (iii) any shareholder or shareholders present in person or by proxy and representing not less than one-tenth of the total voting rights of all shareholders having the right to vote at such meeting or (iv) any shareholder or shareholders present in person or by proxy and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right. Where a poll is not demanded, the interests of beneficial owners of shares who hold through a nominee, such as a holder of an ADR, may not be reflected in votes cast on a show of hands if such nominee does not attend the meeting or receives conflicting voting instructions from different beneficial owners for whom it holds as nominee. A nominee such as a depositary is able to appoint any ADR holder as its proxy in respect of the ADR holders’ underlying ordinary shares. Since under English law voting rights are only conferred on registered holders of shares, a person holding through a nominee may not directly demand a poll unless such person has been appointed as the nominee’s proxy with respect to the relevant meeting.

Unless a special or extraordinary resolution is required by law or the Articles (see below), voting in a general meeting is by ordinary resolution. An ordinary resolution (e.g., a resolution for the election of directors, the approval of financial statements, the declaration of a final dividend, the appointment of auditors, the increase of authorized share capital or the grant of authority to allot shares), in the case of a vote by show of hands, requires the affirmative vote of a majority of the shareholders present in person or by proxy who vote on the resolution, or, on a poll, a majority of the votes actually cast by those present in person or by proxy. A special resolution (e.g., a resolution amending the Memorandum of or Articles of Association, changing the name of the Company or waiving the statutory pre-emption rights which would otherwise apply to any allotment of equity securities), the voting for which must be taken on a poll, requires at least three-fourths of the votes actually cast on the resolution by those present in person or by proxy. In the case of a tied vote, whether on a show of hands or on a poll, the chairman of the meeting is entitled to cast a deciding vote in addition to any other vote he may have.

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The Articles of Association provide that holders of ADRs are entitled to attend, speak and vote on a poll or show of hands, at any general meeting of the Company by The Bank of New York, as the depositary, as proxies in respect of the underlying ordinary shares represented by the ADRs. Each such proxy may also appoint a substitute proxy. Alternatively, holders of ADRs are entitled to vote on a poll by supplying their voting instructions to the depositary, who will vote the ordinary shares underlying their ADRs on their behalf.

Directors

A Director shall not, except as otherwise provided in the Memorandum and Articles of Association, vote in respect of any contract or arrangement in which he has any material interest and shall not be counted in the quorum at a meeting in relation to any resolution on which he is not entitled to vote. Subject to the provisions of law, a Director shall (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution concerning the giving of any security, guarantee or indemnity in respect of money lent or obligations incurred by him or by any other person for the benefit of the Company or any of its subsidiaries or in respect of any debt or other obligation of the Company or its subsidiaries for which he himself has assumed responsibility under a guarantee or indemnity or by the giving of security. A Director shall also (in the absence of some other material interest) be entitled to vote and be counted in the quorum in respect of any resolution regarding an offer of shares or other securities of or by the Company or any of its subsidiaries in which offer he is or may be entitled to participate, subject to the provisions of law.

A Director shall not be required to retire by reason of his having attained any particular age, and any provision of law which would have the effect of rendering any person ineligible for appointment or election as a Director or liable to vacate office as a Director on account of his having reached any specified age or of requiring special notice or any other special formality in connection with the appointment or election of any Director over a specified age, shall not apply to the Company. A Director shall not be required to hold any shares of the Company by way of qualification.

Dividends

The Company may by ordinary resolution declare dividends but no such dividend shall exceed the amount recommended by the directors. If and so far as in the opinion of the directors the profits of the Company justify such payments, the directors may also from time to time pay interim dividends of such amounts and on such dates and in respect of such periods as they think fit. The directors may also pay fixed dividends on any class of shares carrying a fixed dividend expressed to be payable on fixed dates on the half-yearly or other dates prescribed for the payment thereof. Subject to the extent that rights attached to any shares or the terms of issue thereof provide otherwise, all dividends shall be apportioned and paid proportionately to the amounts paid up during any portion or portions of the period in respect of which the dividend is paid. No amount paid on a share in advance of calls shall be treated as paid on the share. Dividends may be paid in such currency as the Board of Directors may decide; however, the Company intends to pay cash dividends denominated in pounds sterling.

No dividend shall be paid otherwise than out of profits available for distribution (determined in accordance with the provisions of the UK Companies Act 1985). No dividend or other moneys payable on or in respect of a share shall bear interest as against the Company. Any dividend unclaimed after a period of 12 years from the date on which such dividend was declared or became due for payment shall be forfeited and shall revert to the Company. With the sanction of an ordinary resolution and the recommendation of the Board of Directors, payment of any dividend may be satisfied wholly or in part by the distribution of specific assets and in particular of paid up shares or debentures in any other company. The Board of Directors may, if authorized by an ordinary resolution, offer a scrip dividend to ordinary shareholders.

Winding Up

If the Company shall be wound up, the liquidator may, with the authority of an extraordinary resolution of the Company: (i) divide amongst the members in specie or in kind the whole or any part of the assets of the Company (whether they shall consist of property of the same kind or not) and, for that purpose, set such value as he deems fair upon any property to be divided and determine how the division shall be carried out between the members; or (ii) vest any part of the assets in trustees upon such trusts for the benefit of members as the liquidator shall think fit; but no member shall be compelled to accept any shares or other property in respect of which there is a liability.

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Issues of Shares and Pre-emptive Rights

Without prejudice to any special rights previously conferred on the holders of any issued shares or class of shares, any share in the Company may be issued with such preferred, deferred or other special rights, or subject to such restrictions, whether as regards dividend, return of capital, voting or otherwise, as an ordinary resolution of a general meeting of shareholders may from time to time determine (or, in the absence of any such determination, as the Board of Directors may determine). The Company may issue redeemable shares provided that there are shares outstanding at the time which are not redeemable at the relevant time.

Subject to the provisions of the Statutes relating to authority, pre-emption rights and otherwise and of any resolution of the Company in general meeting, all unissued shares shall be at the disposal of the directors and they may allot (with or without conferring a right of renunciation), grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.

The UK Companies Act 1985 confers on shareholders, to the extent not disapplied, rights of pre-emption in respect of the issue of equity securities that are, or are to be, paid up wholly in cash. The term “equity securities” means: (i) shares other than shares which, with respect to dividends and capital, carry a right to participate only up to a specified amount in a distribution and other than shares allotted pursuant to an employees’ shares scheme: and (ii) rights to subscribe for, or to convert securities into, such shares. These provisions may be disapplied by a special resolution of the shareholders, either generally or specifically, for a maximum period not exceeding five years.

Subject to the restrictions summarized below, on April 26, 2004, the directors were generally and unconditionally authorized for the purpose of Section 80 of the UK Companies Act 1985 to exercise all or any powers of the Company to allot relevant securities (within the meaning of that Section) up to an aggregate nominal amount of £170,500 (i.e., a total of 341,000,000 shares) for a period expiring (unless previously renewed, varied or revoked by the Company in general meeting) on April 25, 2009 (on terms that, during such period, the Company may make an offer or agreement which would or might require relevant securities to be allotted after the expiry of such period). On April 26, 2004, the directors were empowered (within the scope of the general authorization referred to above) to allot new shares for cash, and to sell for cash any shares which the Company may hold in treasury, otherwise than to shareholders in proportion to existing holdings, up to an aggregate nominal amount of £25,500 (51,000,000 ordinary shares of 0.05p each).

The directors have also been empowered pursuant to Section 95 of the UK Companies Act 1985 to allot equity securities (within the meaning of Section 94(2) of the UK Companies Act 1985) for cash pursuant to the authority described above as if Section 89(1) of the UK Companies Act 1985 did not apply to any such allotment (on terms that the Company may make an offer or agreement which would or might require equity securities to be allotted after the expiry of such authority), such power to be limited to (a) allotments of equity securities in connection with an offer of such securities open for acceptance for a period fixed by the directors to holders of shares on the register on the record date fixed by the directors in proportion to their prospective holdings, but subject to such exclusions or other arrangements as the directors may deem necessary or expedient in relation to fractional entitlements or legal or practical problems under the laws of, or the requirements of any recognized regulatory body or any stock exchange, in any territory; and (b) the allotment (otherwise than as described in (a) above) of equity securities for cash up to an aggregate nominal amount equal to 5% of the issued share capital of the Company.

Transfer of Shares

Any holder of ordinary shares which are in certificated form may transfer in writing all or any of such holder’s shares in any usual or common form or in any other form which the directors may approve and may be made under hand only. The instrument of transfer of a share which is in certificated form shall be signed by or on behalf of the transferor and (except in the case of fully paid shares which are in certificated form) by or on behalf of the transferee. All instruments of transfer which are registered may be retained by the Company. All transfers of shares which are in uncertificated form may be effected by means of the CREST settlement system.

The directors may in their absolute discretion and without assigning any reason therefore refuse to register any transfer of shares (not being fully paid shares) which are in certificated form provided that, where such shares are admitted to the Official List maintained by the UK Listing Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class on a proper and open basis. The directors may also refuse to register an allotment or transfer of shares (whether fully paid or not) to more than four persons jointly. The directors may also refuse

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to register a transfer of shares which are in certificated form unless the instrument of transfer is both (i) in respect of only one class of shares, and (ii) lodged at the transfer office accompanied by the relevant share certificate(s) and such other evidence as the directors may reasonably require to show the right of the transferor to make such transfer. The registration of transfers may be suspended at such times and for such periods (not exceeding 30 days in any year) as the directors may from time to time determine and either generally or in respect of any class of shares, except that, in the case of shares held in the CREST settlement system, the registration of transfers shall not be suspended without the consent of CRESTCo Limited, the operator of the CREST settlement system.

Disclosure of Interests

Chapter 5 of the Disclosure and Transparency Rules published by the Financial Services Authority provides that if the percentage of voting rights that a person (including a company and other legal entities) that holds directly or indirectly as a shareholder or through other financial instruments (such as derivatives) exceeds 3% of the voting rights attached to all shares (whether or not the voting rights are suspended and including voting rights held through ADRs) is required to notify the company of its interest within two trading days following the day on which the notification obligation arises. After the 3% level is exceeded, similar notifications must be made in respect of increases or decreases of 1% or more.

For the purposes of the notification obligation, a person is an indirect holder of voting rights to the extent that it is able to acquire, dispose of or exercise voting rights in any of the following cases: (i) voting rights held by a third party with whom that person has concluded an agreement, which obliges them to adopt, by concerted exercise of the voting rights they hold, a lasting common policy towards the management of the issuer in question; (ii) voting rights held by a third party under an agreement concluded with that person providing for the temporary transfer for consideration of the voting rights in question; (iii) voting rights attaching to shares which are lodged as collateral with that person provided that person controls the voting rights and declares its intention of exercising them; (iv) voting rights attaching to shares in which that person has the life interest; (v) voting rights which are held, or may be exercised within the meaning of points (i) to (iv) or, in cases (vi) and (viii) by a firm undertaking investment management, or by a management company, by an undertaking controlled by that person; (vi) voting rights attaching to shares deposited with that person which the person can exercise at its discretion in the absence of specific instructions from the shareholders; (vii) voting rights held by a third party in his own name on behalf of that person; and (viii) voting rights which that person may exercise as a proxy where that person can exercise the voting rights at his discretion in the absence of specific instructions from the shareholders.

Certain interests (e.g., those held by certain investment fund managers) may be disregarded for the purposes of calculating the 3% threshold, but the disclosure obligation will still apply where such interests exceed 5% or 10% or more of voting rights, and to increases or decreases of 1% or more at above the 10% threshold.

In addition, Section 793 of the UK Companies Act 2006 gives the Company  the power by written notice to require a person whom the Company knows or has reasonable cause to believe to be, or to have been at any time during the three years immediately preceding the date on which the notice is issued, interested in its voting shares  to confirm that fact or to indicate whether or not that is the case and, where such person holds or during the relevant time had held an interest in such shares, to give such further information as may be required relating to such interest and any other interest in the shares of which such person is aware.

Where any such notice is served by a company under the foregoing provisions on a person who is or was interested in shares of the company and that person fails to give the company any information required by the notice within the time specified in the notice, the company may apply to the English court for an order directing that the shares in question be subject to restrictions prohibiting, among other things, any transfer of those shares, the exercise of the voting rights in respect of such shares, the taking up of rights in respect of such shares and, other than in liquidation, payments in respect of such shares. In this context, the term “interest” is widely defined and will generally include an interest of any kind whatsoever in voting shares, including the interest of a holder of an ADR.

A person who fails to fulfill the obligations imposed by Chapter 5 of the Disclosure and Transparency Rules may be subject to a penalty by the Financial Services Authority. The Financial Services Authority may use its powers to ensure that the relevant information is disclosed to the Company (and to the market) and may order that information be disclosed to it. A person who fails to fulfill the obligations imposed by 793 of the UK Companies Act 2006 described above is subject to criminal penalties.

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Restrictions on Voting

No shareholder shall, unless the directors otherwise determine, be entitled in respect of any share held by him to vote either personally or as a proxy if any call or other sum payable by him to the Company in respect of that share remains unpaid.

If a shareholder, or a person appearing to be interested in shares held by such shareholder, has been duly served with a notice under Section 793 of the UK Companies Act 2006 (as described above) and is in default for a period of 14 days in supplying to the Company the information thereby required, then (unless the directors otherwise determine) the shareholder shall not (for so long as the default continues) nor shall any transferee to whom any such shares are transferred (other than pursuant to an approved transfer (as defined in the Articles) or pursuant to the paragraph below), be entitled to attend or vote either personally or by proxy at a shareholders’ meeting or exercise any other right conferred by membership in relation to shareholders’ meetings in respect of the shares in relation to which the default occurred (“default shares”) or any other shares held by the shareholder.

Where the default shares represent 0.25% or more of the issued shares of the class in question, the directors may by notice to the shareholder direct that any dividend or other money which would otherwise be payable on the default shares shall be retained by the Company without liability to pay interest and the shareholder shall not be entitled to elect to receive shares in lieu of dividends and/or that no transfer of any of the shares held by the shareholder shall be registered unless transfer is an approved transfer or the shareholder is not himself in default in supplying the information required and the transfer is of part only of the shareholders holdings and is accompanied by a certificate given by the shareholder in a form satisfactory to the directors to the effect that after due and careful enquiry the shareholder is satisfied that none of the shares which are the subject of the transfer are default shares. In the case of shares in uncertificated form, the directors may only exercise their discretion not to register a transfer if permitted to do so under the UK Uncertificated Securities Regulations 2001. Any direction notice may treat shares of a member in certificated and uncertificated form as separate holdings and either apply only to the former or to the latter or make different provisions for the former and the latter.

Alteration of Share Capital

The Company may from time to time by ordinary resolution of its shareholders:

(i) increase its share capital by the creation of new shares of such amount as the resolution shall prescribe;

(ii) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;

(iii) cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so canceled;

(iv) subdivide its shares, or any of them, into shares of smaller amount than is fixed by the Memorandum of Association  so that the resolution in question may determine that one or more of the shares in question  may have preferred, deferred or other special rights, or be subject to any such restrictions, as the Company has power to attach to unissued or new shares; and

(v) subject to the provisions of the UK Companies Act 1985:

by extraordinary resolution purchase all or any of its shares of any class; and

by special resolution, reduce its share capital, any capital redemption reserve and any share premium account or other undistributable reserve in any way.

The following resolution was passed at the 2007 AGM:

That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 166 of the UK Companies Act 1985 to make market purchases (as defined in Section 163 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:

(a) the maximum number of shares which may be purchased is 133,361,000;

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(b) the minimum price which may be paid for each share is 0.05 pence;

(c) the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the middle-market quotations of the Company’s ordinary shares as derived from the Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and

(d) this authority shall expire at the conclusion of the AGM of the Company held in 2008 or, if earlier, August 15, 2008 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time.

The following resolution is proposed for approval by shareholders at the 2008 AGM:

That the Company be and is hereby unconditionally and generally authorized for the purpose of Section 166 of the UK Companies Act 1985 to make market purchases (as defined in Section 163 of that Act) of ordinary shares of 0.05 pence each in the capital of the Company provided that:

(a) the maximum number of shares which may be purchased is 127,134,000;

(b) the minimum price which may be paid for each share is 0.05 pence;

(c) the maximum price (excluding expenses) which may be paid for any ordinary share is an amount equal to 105% of the average of the middle-market quotations of the Company’s ordinary shares as derived from the Official List of the London Stock Exchange plc for the five business days immediately preceding the day on which such share is contracted to be purchased; and

(d) this authority shall expire at the conclusion of the AGM of the Company held in 2009 or, if earlier, August 13, 2009 (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be executed wholly or partly after such expiry) unless such authority is renewed prior to such time.

Reserves

The directors may from time to time set aside out of the profits of the Company and carry to reserve such sums as they think proper which, at the discretion of the directors, shall be applicable for any purpose to which the profits of the Company may properly be applied and pending such application may either be employed in the business of the Company or be invested. The directors may divide the reserve into such special funds as they think fit and may consolidate into one fund any special funds or any parts of any special funds into which the reserve may have been divided. The directors may also without placing the same to reserve carry forward any profits.

Capitalization of Profits and Reserves

The directors may, with the sanction of an ordinary resolution of the Company, capitalize any sum standing to the credit of any of the Company’s reserve accounts (including any share premium account, capital redemption reserve or other undistributable reserve) or any sum standing to the credit of its profit and loss account. Such capitalization shall be effected by appropriating such sum to the holders of ordinary shares on the register on the date of the resolution (or such other date as may be specified therein or determined as therein provided) in proportion to their then holdings of ordinary shares  and applying such sum in paying up in full unissued ordinary shares (or, subject to any special rights previously conferred on any shares or class of shares for the time being issued, unissued shares of any other class). The directors may do all acts and all things considered necessary for the purpose of such capitalization, with full power to the directors to make such provisions as they think fit in respect of fractional entitlements which  would arise on the basis aforesaid (including provisions whereby fractional entitlements are disregarded or the benefit thereof accrues to the Company rather than to the members concerned). The directors may authorize any person to enter into, on behalf of all the members an agreement with the Company providing for any such capitalization and matters incidental thereto and any such agreement shall be effective and binding on all concerned.

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MATERIAL CONTRACTS

Service Agreements

Executive directors (as referred in “Item 6. Directors, Senior Management and Employees”) have “rolling” service contracts that may be terminated by either party on one year’s notice. These agreements provide for each of the executive directors to provide services to the Company on a full-time basis. The agreements contain restrictive covenants for periods of three or six months following termination of employment relating to non-competition, non-solicitation of the Company’s customers, non-dealing with customers and non-solicitation of the Company’s suppliers and employees. In addition, each employment agreement contains an express obligation of confidentiality in respect of the Company’s trade secrets and confidential information and provides for the Company to own any intellectual property rights created by the executives in the course of their employment.

The service contracts for each of, Mr. East, Mr. Muller, Mr. Brown, Mr. Score, Mr. Inglis and Mr. Segars all of whom served as directors during the financial year, are as described above. Mr. East’s contract is dated January 29, 2001, Mr. Muller’s contract is dated January 31, 1996, Mr. Brown’s contract is dated April 3, 1996, Mr. Score’s contract is dated March 1, 2002, Mr. Inglis’s contract is dated July 17, 2002 and Mr. Segars’ contract is dated January 4, 2005.

EXCHANGE CONTROLS

There are currently no government laws, decrees or regulations in the United Kingdom that restrict the export or import of capital, including, but not limited to, UK foreign exchange controls on the payment of dividends, interest or other payments to non-resident holders of the shares.

TAXATION

The following is a discussion of certain US federal and UK tax consequences of the ownership and disposition of shares or ADSs by a beneficial owner of shares or ADSs evidenced by ADRs that is (i) a citizen or resident of the United States, a corporation or other entity taxable as a corporation, created or organized under the laws of the United States or any political subdivision thereof, or an estate or trust the income of which is subject to US federal income tax regardless of its source, and (ii) that owns such shares or ADSs evidenced by ADRs as capital assets (a “US Holder”).

This discussion does not address the tax consequences to a US Holder (i) that is resident (or, in the case of an individual, ordinarily resident) in the United Kingdom for UK tax purposes or who is subject to UK taxation by virtue of carrying on a trade, profession or vocation in the United Kingdom, or (ii) that is a corporation which alone or together with one or more associated corporations, controls, directly or indirectly, 10% or more of the voting stock of the Company. This discussion is not exhaustive of all possible tax considerations that may be relevant in the particular circumstances of each US Holder and does not address all tax considerations that may be relevant to all categories of potential purchasers, some of whom may be subject to special rules. In particular, the discussion does not address special classes of holders, such as (i) certain financial institutions, (ii) insurance companies, (iii) dealers and traders in securities or foreign currencies, (iv) persons holding shares or ADSs as part of a hedge, straddle, conversion transaction or other integrated transaction, (v) persons whose functional currency for US federal income tax purposes is not the US dollar, (vi) partnerships or other entities classified as partners for US federal income tax purposes, (vii) persons liable for the alternative minimum tax, (viii) tax-exempt organizations, or (ix) persons who acquired shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation. Prospective investors are advised to satisfy themselves as to the tax consequences, including the consequences under foreign, US federal, state and local laws applicable in their own particular circumstances, of the acquisition, ownership and disposition of shares or ADSs by consulting their tax advisers.

The statements regarding US and UK tax laws and practices set forth below, including the statements regarding the US / UK double taxation convention relating to income and capital gains (the “Treaty”) and the US / UK double taxation convention relating to estate and gift taxes (the “Estate Tax Treaty”), are based on those laws and practices and the Treaty and the Estate Tax Treaty as in force and as applied in practice on the date of this annual report and are subject to changes to those laws and practices and the Treaty and the Estate Tax Treaty subsequent to the date of this annual report, possibly on a retroactive basis. This discussion is further based in part upon representations of the Depositary and assumes that

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each obligation provided for in, or otherwise contemplated by, the Deposit Agreement and any related agreement will be performed in accordance with its respective terms. In general, US Holders of ADSs will be treated as owners of the shares underlying their ADSs for US federal income tax purposes. Accordingly, except as noted, the US federal and UK tax consequences discussed below apply equally to US Holders of ADSs and shares.

The US Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of ADSs. Such actions would also be inconsistent with the claiming of the reduced rate of tax, described below, applicable to dividends received by certain non-corporate holders. Accordingly, the analysis of the creditability of UK taxes and the availability of the reduced tax rate for dividends received by certain non-corporate holders, each described below, could be affected by actions taken by parties to whom the ADSs are pre-released.

Taxation of Dividends

Under current UK tax law, no withholding tax will be deducted from dividends paid by the Company.

Subject to the passive foreign investment company (“PFIC”) rules described below, distributions paid on ADSs or shares, other than certain pro rata distributions of shares, will be treated as a dividend to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under US federal income tax principles). Because the Company does not maintain calculations of its earnings and profits under US federal income tax principles, it is expected that distributions generally will be reported to US Holders as dividends. Dividends paid in pounds sterling will be included in a US Holder’s income, in a US dollar amount calculated by reference to the exchange rate in effect on the date that the depositary, in the case of ADSs, or US Holder, in the case of shares, actually or constructively receives the dividend, regardless of whether the payment is in fact converted into US dollars on such date. If the dividend is converted into US dollars on the date of receipt, a US Holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A US Holder may have foreign currency gain or loss if such holder does not convert the amount of such dividend into US dollars on the date of its receipt.

Subject to applicable limitations and the discussion above regarding concerns expressed by the US Treasury, dividends paid to certain non-corporate US Holders in taxable years beginning before January 1, 2011 will be taxable at a maximum rate of 15%. US Holders should consult their own tax advisers regarding the availability of the reduced tax rate on dividends in their particular circumstances. The amount of the dividend will not be eligible for the dividends received deduction generally allowed to US corporations under the Internal Revenue Code.

Taxation of Capital Gains

Subject to the comments set out below in relation to temporary non-residents, a US Holder not resident (or in the case of an individual, ordinarily resident) in the UK will not ordinarily be liable for UK taxation on capital gains realized on the disposition of such US Holder’s shares or ADSs unless, at the time of the disposition, in the case of a corporate US Holder, such US Holder carries on a trade in the United Kingdom through a permanent establishment or, in the case of any other US Holder, such US Holder carries on a trade, profession or vocation in the UK through a branch or agency and such shares or ADSs are, or have been, used, held or acquired by or for the purposes of such trade (or profession or vocation), permanent establishment, branch or agency in which case such US Holder may, depending on the circumstances, be liable to UK tax on a gain realized on disposal of such holder’s shares or ADSs.

An individual US Holder who has ceased to be resident or ordinarily resident for UK tax purposes in the UK for a period of less than five years of assessment and who disposes of shares or ADSs during that period may, for the year of assessment when that individual returns to the UK, be liable to UK tax on gains arising during the period of absence, subject to any available exemption or relief.

Subject to the PFIC rules discussed below, a US Holder will generally recognize capital gain or loss for US federal income tax purposes on the sale or exchange of the shares or ADSs in the same manner as such holder would on the sale or exchange of any other shares held as capital assets. As a result, a US Holder will generally recognize capital gain or loss for US federal income tax purposes equal to the difference between the US dollar amount realized and such holder’s adjusted tax basis in the shares or ADSs, and this gain or loss be long-term capital gains or loss if the US Holder held the shares of ADSs for more than one year. The gain or loss will generally be US source income or loss for foreign tax credit purposes. US Holders should consult their own tax advisers about the treatment of capital gains, which may be taxed at

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lower rates than ordinary income for non-corporate taxpayers, and capital losses, the deductibility of which may be limited.

A US Holder who is liable for both UK and US tax on a gain recognized on the sale or exchange of a share or ADS will generally be entitled, subject to certain limitations and subject to the discussion above regarding concerns expressed by the US Treasury, to credit the UK tax against its US federal income tax liability in respect of such gain.

PFIC Rules

The Company believes that it was not a PFIC for US federal income tax purposes for 2007. However, since PFIC status depends upon the composition of a company’s income and assets and the market value of its assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time, which may be largely based upon the market value of its shares, which will vary over time and may be especially volatile in a technology-related enterprise such as the Company, there can be no assurance that the Company will not be considered a PFIC for any taxable year. If the Company were treated as a PFIC for any taxable year during which a US Holder held shares or ADSs, certain adverse consequences could apply to the US Holder.

If the Company is treated as a PFIC for any taxable year during a US Holder’s holding period for the shares or ADSs, gain recognized by such US Holder on a sale or other disposition of the share or ADS would be allocated ratably over the US Holder’s holding period for the share or ADS. The amounts allocated to the taxable year of the sale or other exchange and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, and an interest charge would be imposed on the amount allocated to such taxable year. Further, any distribution in respect of ADSs or ordinary shares in excess of 125% of the average of the annual distributions on ADSs or ordinary shares received by the US Holder during the preceding three years or the US Holder’s holding period, whichever if shorter, would be subject to taxation in the manner just described for gains. Certain elections may be available to US persons that would result in alternative treatments (such as a mark-to-market treatment) of the shares or ADSs.  US Holders should consult their tax advisers to determine whether any such elections are available and, if so, what the consequences of the alternative treatments would be in those holders’ particular circumstances.

In addition, if the Company were to be treated as a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the 15% dividend rate discussed above applicable to dividends paid to certain non-corporate US Holders, would not apply. US Holders should consult their tax advisers concerning the potential application of the PFIC rules to their ownership and disposition of the shares and ADSs.

Estate and Gift Tax

Subject to the discussion of the Estate Tax Treaty in the next paragraph, shares or ADSs beneficially owned by an individual will be subject to UK inheritance tax on the death of the individual or, in certain circumstances, if the shares or ADSs are the subject of a gift (including a transfer at less than full market value) by such individual. Inheritance tax is not generally chargeable on gifts to individuals or to certain types of settlement made more than seven years before the death of the donor. Special rules apply to shares or ADSs held in a settlement.

Shares or ADSs held by an individual whose domicile is determined to be the United States for purposes of the Estate Tax Treaty, and who is not a national of the United Kingdom, will not be subject to UK inheritance tax on the individual’s death or on a lifetime transfer of the shares or ADSs except where the shares or ADSs (i) are part of the business property of a UK permanent establishment of an enterprise, or (ii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit against US federal tax liability for the amount of any tax paid in the United Kingdom in a case where the shares or ADSs are subject both to UK inheritance tax and to US federal estate or gift tax.

Stamp Duty and Stamp Duty Reserve Tax

UK stamp duty will, subject to certain exceptions, be payable at the rate of 1.5% of the amount or value of the consideration payable if on sale or of the value of the shares (rounded up to the next multiple of £5) on any instrument transferring the shares (i) to, or to a nominee for, a person whose business is or includes the provision of clearance services or (ii) to, or to a nominee or agent for, a person whose business is or includes issuing depositary receipts. This would include transfers of shares to the Custodian for deposits under the ADR Deposit Agreement. UK stamp duty reserve tax

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(“SDRT”), at the rate of 1.5% of the amount or value of the consideration payable or, in certain circumstances, the value of the shares, could also be payable in these circumstances, and on issue to such a person, but no SDRT will be payable if stamp duty equal to such SDRT liability is paid. In circumstances where stamp duty is not payable on the transfer of shares to the Custodian at the rate of 1.5% (i.e., where there is no chargeable instrument) SDRT will be payable to bring the charge up to 1.5% in total. In accordance with the terms of the ADR Deposit Agreement, any tax or duty payable by the ADR Depositary or the Custodian on any such transfers of shares in registered form will be charged by the ADR Depositary to the party to whom ADRs are delivered against such transfers.

No UK stamp duty will be payable on the acquisition of any ADR or on any subsequent transfer of an ADR, provided that the transfer (and any subsequent instrument of transfer) remains at all times outside the United Kingdom and that the instrument of transfer is not executed in or brought into the United Kingdom. An agreement to transfer an ADR will not give rise to SDRT.

Subject to certain exceptions, a transfer of shares in registered form (including a transfer from the ADR Depositary to an ADR holder) will attract ad valorem UK stamp duty at the rate of 0.5% of the amount or value of the consideration for the transfer (rounded up to the next multiple of £5). Generally, ad valorem stamp duty applies neither to gifts nor on a transfer from a nominee to the beneficial owner, although in cases of transfers where no ad valorem stamp duty arises, a fixed UK stamp duty of £5 may be payable. SDRT at a rate of 0.5% of the amount or value of the consideration for the transfer may be payable on an unconditional agreement to transfer shares. If, within six years of the date of the agreement, an instrument transferring the shares is executed and duly stamped, any SDRT paid may be repaid or, if it has not been paid the liability to pay such tax (but not necessarily interest and penalties) would be cancelled. SDRT is chargeable whether the agreement or transfer is made or effected in the United Kingdom or elsewhere and whether or not any party is resident or situated in any part of the United Kingdom.

Information Reporting and Backup Withholding

Payment of dividends and sales proceeds that are made within the United States or through certain US-related financial intermediaries generally are subject to information reporting and to backup withholding unless (i) they are received by a corporation or other exempt recipient or (ii) in the case of backup withholding, the recipient provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

The amount of any backup withholding from a payment to a US holder will be allowed as a credit against the US holder’s US federal income tax liability and may entitle such US holder to a refund, provided that the required information is furnished to the Internal Revenue Service.

DOCUMENTS ON DISPLAY

The documents concerning us which are referred to herein may be inspected at the Securities and Exchange Commission. You may read and copy any document filed or furnished by us at the SEC’s public reference rooms in Washington D.C., New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the reference rooms.

ITEM 11.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY EXCHANGE RATE RISK

The Company’s earnings and liquidity are affected by fluctuations in foreign currency exchange rates, principally the US dollar rate, as most of the Company’s revenues and cash receipts are denominated in US dollars while a high proportion of its costs are in sterling.

The Company reduces this US dollar/sterling risk where possible by currency hedging. Due to the high value and timing of receipts on individual licenses and the requirement to settle certain expenses in US dollars, the Company reviews its foreign exchange exposure on a transaction-by-transaction basis. It then hedges this exposure using forward contracts for the sale of US dollars, which are negotiated with major UK clearing banks. The average size of each forward contract was $4.3 million in 2005, $3.9 million in 2006 and $4.2 million in 2007. The Company also uses currency options as a further translation instrument for limited proportions of its dollar exposure. The fair values of the financial instruments

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outstanding at December 31, 2005, 2006 and 2007 are disclosed in Note 15 to the Consolidated Financial Statements. The settlement period of the forward contracts outstanding at December 31, 2007 was between January 8, 2008 and March 26, 2008. The settlement period of the option contracts outstanding at December 31, 2007 was between January 23, 2008 and January 5, 2009.

During the preceding fiscal year, the Company was exposed to foreign currency exchange risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than sterling. ARM transacts business in approximately eight foreign currencies worldwide, of which the most significant to the Company’s operations were the US dollar, the Indian Rupee, the euro and the Japanese yen for 2007. Generally, the Company is a net receiver of US dollars, and therefore benefits from a weaker sterling and is adversely affected by a stronger sterling relative to the dollar. It is a net payer of other foreign currencies but at a significantly lower level than the US dollar receivables. The Company has performed a sensitivity analysis at December 31, 2007, 2006 and 2005, using a modeling technique that measures the changes in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to sterling with all other variables held constant. The analysis covers all of the Company’s foreign currency contracts offset by the underlying exposures. The foreign currency exchange rates used were based on market rates in effect at December 31, 2007, 2006 and 2005. The sensitivity analysis indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a loss in the fair values of ARM’s foreign exchange derivative financial instruments, net of exposures, of £11.5 million at December 31, 2007 (2006: £8.9 million, 2005: £3.9 million).

INTEREST RATE RISK

At December 31, 2007, the Company had £54 million (2006: £128 million) of interest-bearing assets. At December 31, 2007, 79% (2006: 68%) of interest-bearing assets, comprising cash equivalents; short-term and long-term investments; short-term marketable securities; are at fixed rates and are therefore exposed to fair value interest rate risk. Floating rate cash earns interest based on relevant national LIBID equivalents and is therefore exposed to cash flow interest rate risk.

Other financial assets, such as available-for-sale investments, are not directly exposed to interest rate risk.

Whilst the Company had no borrowings at December 31, 2005, 2006, 2007, it did have limited level of borrowings during 2007. Had interest rates been 1% higher throughout the year, the increase in the Company’s interest payable would have been negligible. However, a 1% decrease in the average interest rate during the year would have reduced interest income by approximately £1.0 million and profit after tax by £0.7 million.

The Company has no derivative financial instruments to manage interest rate fluctuations in place at the year-end since it has no loan financing, and as such no hedge accounting is applied.

The Company’s cash flow is carefully monitored on a daily basis. Excess cash, considering expected future cash flows, is placed on either short-term or medium-term deposit to maximize the interest income thereon. Daily surpluses are swept into higher-interest earning accounts overnight. The Company manages its proportion of fixed-to-floating deposits based on the prevailing economic climate at the time (with reference to forward interest rates) and also on the required maturity of the deposits (as driven by the expected timing of the Company’s cash receipts and payments over the short-to medium-term).

ITEM 12.       DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13.       DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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ITEM 14.       MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM 15.       CONTROLS AND PROCEDURES

Disclosure controls and procedures. As of December 31, 2007, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures. The Company’s management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature can provide only reasonable assurance regarding management’s control objectives. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the rules and forms of the SEC and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s report on internal controls over financial reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP and includes those policies and procedures that:

· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;

· Provide reasonable assurance that transaction are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use of disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that the Company’s internal control over financial reporting was effective as of December 31, 2007 based on those criteria.

The Company’s independent auditors, PricewaterhouseCoopers LLP, which audited the consolidated financial statements of the Company for the fiscal year ended December 31, 2007, have issued an audit report on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2007; their report is included herein.

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ITEM 16.           RESERVED

ITEM 16A.        AUDIT COMMITTEE FINANCIAL EXPERT

The Board has determined that Philip Rowley, an independent non-executive director and Chairman of the Company’s Audit Committee, is an audit committee financial expert for the purposes of the Sarbanes-Oxley Act of 2002. Kathleen O’Donovan, who was appointed to the board as an independent non-executive director in December 2006 and became a member of the Audit Committee in January 2007 is also qualified to be an audit committee financial expert.

ITEM 16B.        CODE OF ETHICS

The Company has in place a code of business conduct and ethics, which is applicable to all directors, officers and employees, including the Chief Executive Officer, Chief Financial Officer, Financial Controller and any person performing similar functions. The policy contains provisions relating to honest and ethical conduct (including the handling of conflicts of interest between personal and professional relationships), the preparation of full, fair, accurate, timely and understandable disclosure in reports and documents filed with the Securities and Exchange Commission and in other public communications made by the Company, compliance with applicable laws, rules and regulations, prompt internal reporting of violations of company policies, accountability for adherence to the policy and other matters. This policy is available on our website at www.arm.com and upon written request from ARM Holdings plc, 110 Fulbourn Road, Cambridge, CB1 9NJ, UK. Any amendment to or waiver from a provision of the policy relating to directors and executive officers will be promptly disclosed on the Company’s website.

ITEM 16C.        PRINCIPAL ACCOUNTANT FEES AND SERVICES

	2006		2007
	£’000
Audit Fees(1)		1,075		1,344
Audit-Related Fees(2)		113		100
Tax Fees(3)		861		302
All Other Fees(4)		56		76

_______________________

(1) Audit fees include fees for services pursuant to section 404 of the Sarbanes-Oxley Act, being £533,000 in 2006 and £649,000 in 2007. Included within the 2007 costs are fees of £255,000 incurred in relation to the Group’s initial compliance with Section 404 of the Sarbanes-Oxley Act.

(2) Audit-related services consist primarily of work completed on quarterly earnings and technical assistance on understanding and implementing new accounting and financial reporting guidance, as further described in our audit and non-audit services pre-approval policy filed in our annual report on Form 20-F for the year ended December 31, 2003.

(3) Tax services consist primarily of fees in respect of post-acquisition restructuring and tax compliance work, as further described in our audit and non-audit services pre-approval policy.

(4) All other fees consist primarily of fees for royalty audits and advice relating to employee stock-based compensation.

The audit of ARM Holdings plc (included in Audit Fees) and the royalty audits (categorized as All Other Fees) were specifically pre-approved by the audit committee. The remaining services (including the annual audit services performed for each subsidiary of the Company) received general pre-approval from the audit committee.

Fees to other major firms of accountants for non-audit services amounted to £1,449,000 (2006: £1,466,000).

ITEM 16D.        EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

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ITEM 16E.        PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

Period	Total number of Shares Purchased(1)(2)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs		Maximum Number of Shares that may yet be purchased under the Program
January 1, 2007 to January 31, 2007		—		—		—		80,028,500
February 1, 2007 to February 28, 2007		6,219,000	£	1.30		6,219,000		73,809,500
March 1, 2007 to March 31, 2007		9,238,000		1.29		9,238,000		64,571,500
April 1, 2007 to April 30, 2007		1,000,000		1.38		1,000,000		63,571,500
May 1, 2007 to May 31, 2007		11,250,000		1.38		11,250,000		127,111,000
June 1, 2007 to June 30, 2007		6,112,240		1.38		6,112,240		120,998,760
July 1, 2007 to July 31, 2007		3,000,000		1.46		3,000,000		117,998,760
August 1, 2007 to August 31, 2007		14,488,120		1.44		14,488,120		103,510,640
September 1, 2007 to September 30, 2007		5,500,000		1.45		5,500,000		98,010,640
October 1, 2007 to October 31, 2007		2,000,000		1.46		2,000,000		96,010,640
November 1, 2007 to November 30, 2007		21,638,394		1.31		21,638,394		74,372,246
December 1, 2007 to December 31, 2007		14,079,794		1.29		14,079,794		60,292,452

_______________________

(1) On July 19, 2005, the Company announced a rolling share repurchase program whereby a maximum number of shares, being 10% of issued share capital, may be purchased between Company AGMs (subject to shareholder approval, authority to purchase shares is renewed at each AGM). At the 2007 AGM, the shareholders authorized the repurchase of 133,361,000 shares during the period May 16, 2007 to May 13, 2008 (the date of the 2008 AGM). From May 16, 2007 to December 31, 2007, the Company repurchased 73,068,548 shares.

(2) 49,500,000 of the shares acquired by the Company in 2006, and a further 6,200,000 shares acquired in early 2007, were acquired at a time when the Company had insufficient distributable reserves (although sufficient distributable reserves were available in ARM Limited). The Company resolved the matter by cancelling the relevant shares by Court order. See Note 1 to the Consolidated Financial Statements.

ITEM 17.           FINANCIAL STATEMENTS

The Company has responded to Item 18 in lieu of this item.

PART III

ITEM 18.           FINANCIAL STATEMENTS

The following financial statements, together with the report of PricewaterhouseCoopers LLP thereon, are filed as part of this Form 20-F.

	Page
Report of Independent Registered Public Accounting Firm	F-1
Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2005, 2006 and 2007	F-3
Consolidated Balance Sheets as of December 31, 2006 and 2007	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007	F-5
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2004, 2006 and 2007	F-6
Notes to the Consolidated Financial Statements	F-8

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ITEM 19.           EXHIBITS

*1.1	Memorandum and Articles of Association of ARM Holdings plc.
**4.1	Executive Service Agreement between Advanced Risc Machines Limited and Robin Keith Saxby, dated January 31, 1996.
**4.2	Executive Service Agreement between Advanced Risc Machines Limited and Jonathan Brooks, dated February 2, 1996.
**4.3	Executive Service Agreement between ARM Limited and Warren East, dated January 29, 2001.
**4.4	Executive Service Agreement between Advanced Risc Machines Limited and James Stuart Urquhart, dated February 2, 1996.
**4.5	Executive Service Agreement between ARM Limited and Peter J. Magowan, dated January 29, 2001.
**4.6	Executive Service Agreement between Advanced Risc Machines Limited and William Tudor Brown, dated April 3, 1996.
**4.7	Executive Service Agreement between Advanced Risc Machines Limited and Michael Peter Muller, dated January 31, 1996.
***4.8	Executive Service Agreement between ARM Limited and Tim Score, dated March 1, 2002.
***4.9	Executive Service Agreement between ARM Limited and Mike Inglis, dated July 17, 2002.
*****4.10	Executive Service Agreement between ARM Limited and Simon Segars, dated January 4, 2005.
****4.11	ARM Holdings plc Employee Equity Plan.
****4.12	ARM Holdings plc Deferred Annual Bonus Plan.
****4.13	ARM Holdings plc U.S. Employee Stock Purchase Plan.
8.1	List of significant subsidiaries.
12.1	CEO certification required by Rule 13a-14(a).
12.2	CFO certification required by Rule 13a-14(a).
13.1	Certification required by Rule 13a-14(b).
15.1	Consent of the Independent Registered Public Accounting firm.

_______________________

* Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 21, 2004 and incorporated herein by reference.

** Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 15, 2001 and incorporated herein by reference.

*** Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on June 23, 2003 and incorporated herein by reference.

**** Previously filed with the Securities and Exchange Commission as part of the registration statement on Form S-8 on May 8, 2006 and incorporated herein by reference.

***** Previously filed with the Securities and Exchange Commission as part of the annual report on Form 20-F as filed on May 23, 2006 and incorporated herein by reference.

94

SIGNATURE

The registrant certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

ARM Holdings plc
By:	/s/ Tim Score
Tim Score
Chief Financial Officer

Dated: April 7, 2008

95

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the board of directors and shareholders of ARM Holdings plc

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in shareholders’ equity and consolidated statements of cash flows present fairly, in all material respects, the financial position of ARM Holdings plc and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Controls over Financial Reporting.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our audits (which were integrated audits in 2007 and 2006).  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in footnote 1 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions and the costs related to employees’ sabbatical leave in 2007.

Also as discussed in footnote 1, in 2006 the Company changed the manner in which it accounts for share based compensation.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP       

PricewaterhouseCoopers LLP

London, United Kingdom

April 3, 2008

F-1

ARM Holdings plc

CONSOLIDATED STATEMENTS OF INCOME

(Year ended December 31)

	2005 £000		2006 £000		2007 £000
Revenues
Product revenues	217,711		247,194		242,726
Services revenues	14,728		16,060		16,434
Total revenues	232,439		263,254		259,160
Cost of revenues
Product costs	(21,754	)	(24,156	)	(21,475	)
Service costs	(6,093	)	(6,721	)	(6,483	)
Total cost of revenues	(27,847	)	(30,877	)	(27,958	)
Gross profit	204,592		232,377		231,202
Operating expenses
Research and development	(61,633	)	(75,498	)	(72,744	)
Sales and marketing	(36,234	)	(44,198	)	(46,393	)
General and administrative	(41,082	)	(48,643	)	(49,964	)
Restructuring costs	-		-		(1,037	)
In-process research and development	(335	)	(595	)	-
Amortization of intangibles purchased through business combination	(17,391	)	(18,423	)	(18,226	)
Total operating expenses	(156,675	)	(187,357	)	(188,364	)
Income from operations	47,917		45,020		42,838
Interest, net	5,317		6,758		5,402
Profit on disposal of available-for-sale security	-		5,270		-
Income before income tax and cumulative effect of change in accounting policy	53,234		57,048		48,240
Provision for income taxes	(11,354	)	(9,438	)	(11,398	)
Net income before cumulative effect of change in accounting policy	41,880		47,610		36,842
Cumulative effect of change in accounting policy, net of tax	-		(2,447	)	-
Net income	41,880		45,163		36,842
Basic earnings (before cumulative effect of change in accounting policy) per common share	3.1	p	3.5	p	2.8	p
Basic earnings (after cumulative effect of change in accounting policy) per common share	3.1	p	3.3	p	2.8	p
Diluted earnings (before cumulative effect of change in accounting policy) per common share	2.9	p	3.4	p	2.7	p
Diluted earnings (after cumulative effect of change in accounting policy) per common share	2.9	p	3.2	p	2.7	p

All activities relate to continuing operations.

The accompanying notes are an integral part of the financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Year ended December 31)

	2005 £000		2006 £000		2007 £000
Net income	41,880		45,163		36,842
Realized gain on available-for-sale security, net of tax of £850,000	-		(2,375	)	-
Unrealized holding losses on available-for-sale securities, net of tax of £146,000 (2006: £477,000; 2005 £981,000)	(2,316	)	(1,090	)	(608	)
Currency translation adjustment	58,561		(68,128	)	(6,777	)
Total comprehensive income/loss	98,125		(26,430	)	29,457

F-2

CONSOLIDATED BALANCE SHEETS

(as of December 31)

	2006 £000		2007 £000
Assets
Current assets:
Cash and cash equivalents	90,743		49,509
Short-term investments	18,600		232
Marketable securities	19,151		1,582
Accounts receivable, net of allowances for doubtful debts of £1,504,000 (2006: £2,556,000) (see Note 10)	69,552		68,232
Inventory: finished goods	1,933		2,339
Income taxes receivable	5,761		6,552
Prepaid expenses and other assets	12,668		13,089
Investments	—		1,180
Total current assets	218,408		142,715
Deferred income taxes	9,872		11,309
Prepaid expenses and other assets	1,328		2,860
Property and equipment, net	13,970		12,042
Goodwill	349,243		344,663
Other intangible assets	56,027		39,375
Investments	3,855		3,701
Total assets	652,703		556,665
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	1,826		2,230
Income taxes payable	5,572		3,704
Personnel taxes	1,408		1,751
Accrued liabilities (see Note 11)	33,021		25,670
Deferred revenue	31,485		27,543
Total current liabilities	73,312		60,898
Deferred income taxes	4,744		2,027
Total liabilities	78,056		62,925
Commitments and contingencies (see Note 13).
Shareholders’ equity
Ordinary shares: £0.0005 par value; 2,200,000,000 authorized (2006: 2,200,000,000); 1,344,055,696 issued (2006: 1,389,907,834)	695		672
Additional paid-in capital	446,005		367,680
Treasury stock, at cost:  66,402,610 ordinary shares (2006: 50,701,434)	(58,245	)	(90,000	)
Retained earnings	197,874		234,455
Accumulated other comprehensive income:
Unrealized holding gain on available-for-sale securities, net of tax asset of £85,000 (2006: £231,000)	394		(214	)
Cumulative translation adjustment	(12,076	)	(18,853	)
Total shareholders’ equity	574,647		493,740
Total liabilities and shareholders’ equity	652,703		556,665

The accompanying notes are an integral part of the financial statements.

F-3

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Year ended December 31)

	2005 £000		2006 £000		2007 £000
Cash flows from operating activities
Net income	41,880		45,163		36,842
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of tangible and intangible assets	28,060		25,812		25,939
Write-off in-process research and development	335		595		–
Profit on disposal of available-for-sale security	–		(5,270	)	–
Stock option compensation	9,727		21,788		15,979
Excess tax benefits from share-based compensation	–		(3,682	)	(2,546	)
Provision for doubtful accounts	722		932		215
Provision for slow-moving inventories	22		65		247
Amount written off investments	337		–		1,162
Loss on disposal of property, plant and equipment	16		63		317
Changes in operating assets and liabilities:
Accounts receivable	(21,247	)	(18,986	)	260
Inventory	(519	)	(508	)	(653	)
Prepaid expenses and other current assets	1,446		454		(2,647	)
Accounts payable	(1,931	)	(672	)	404
Income taxes payable	(3,093	)	(12,758	)	(867	)
Deferred revenue	(2,043	)	11,071		(3,877	)
Accrued liabilities and other creditors	(5,569	)	2,056		(8,424	)
Personnel taxes	(963	)	(71	)	343
Net cash provided by operating activities	47,180		66,052		62,694
Cash flows from investing activities:
Purchase of equipment	(5,956	)	(7,476	)	(4,093	)
Purchase of leasehold improvements	(108	)	(1,083	)	(1,351	)
Sale of equipment	37		31		–
Purchase of patent and licenses	–		–		(2,549	)
Purchase of investments	(274	)	(165	)	(2,657	)
Sale of investments/available-for-sale securities	96		5,567		–
(Purchase)/maturity of short-term investments	(569	)	(4,926	)	35,937
Purchase of subsidiaries and businesses, net of cash acquired	(20,304	)	(17,270	)	(3,357	)
Net cash (used in)/provided by investing activities	(27,078	)	(25,322	)	21,930
Cash flows from financing activities:
Cash received on issue of new share capital on exercise of share options	13,083		2,106		5,509
Proceeds received on issuance of shares from treasury stock	838		15,754		13,383
Excess tax benefits from share-based compensation	–		3,682		2,546
Purchase of own shares	(16,211	)	(76,519	)	(128,561	)
Payment of dividends	(10,436	)	(12,367	)	(18,547	)
Net cash used in financing activities	(12,726	)	(67,344	)	(125,670	)
Effect of foreign exchange on cash and cash equivalents	10,140		(10,720	)	(188	)
Net increase/(decrease) in cash and cash equivalents	17,516		(37,334	)	(41,234	)
Cash and cash equivalents at beginning of the period	110,561		128,077		90,743
Cash and cash equivalents at end of the period	128,077		90,743		49,509
Supplemental disclosure of cash flow information:
Cash paid for income taxes	14,447		21,147		12,265
Cash received on interest	5,444		6,636		5,607

The accompanying notes are an integral part of the financial statements.

F-4

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Ordinary shares

Accumulated other comprehensive income

Number

Amount £000

Additional paid-in capital £000

Deferred compensation £000

Treasury stock £000

Retained earnings* £000

Unrealized holding gain £000

Cumulative translation adjustment £000

Total £000

Balances, December 31, 2004

1,350,786,975

675

414,133

(12,083

)

(7,485

)

153,421

6,175

(2,509

)

552,327

Shares issued on exercise of options

35,315,705

18

13,065

–

–

–

–

–

13,083

Net income

–

–

–

–

41,880

–

–

41,880

Dividends

–

–

–

–

(10,436

)

–

–

(10,436

)

Tax effect of disqualifying dispositions

–

370

–

–

–

–

–

370

Deferred compensation arising on share schemes

–

3,290

(3,290

)

–

–

–

–

–

Tax benefits on exercise of options issued as part consideration for a business combination

–

1,227

–

–

–

–

–

1,227

Amortization of deferred compensation

–

–

9,727

–

–

–

–

9,727

Reversal of unearned compensation

–

(1,242

)

1,242

–

–

–

–

–

Issuance of shares from treasury

–

(5,591

)

–

7,381

(952

)

–

–

838

Purchase of own shares

–

–

–

(16,211

)

–

–

–

(16,211

)

Accumulated other comprehensive income:

Unrealized holding losses on available-for-sale securities (net of tax of £981,000)

–

–

–

–

–

(2,316

)

–

(2,316

)

Currency translation adjustment

–

–

–

–

–

–

58,561

58,561

Balances, December 31, 2005

1,386,102,680

693

425,252

(4,404

)

(16,315

)

183,913

3,859

56,052

649,050

Shares issued on exercise of options

3,805,154

2

2,104

–

–

–

–

–

2,106

Net income

–

–

–

–

45,163

–

–

45,163

Dividends

–

–

–

–

(12,367

)

–

–

(12,367

)

Tax effect of option exercises

–

3,682

–

–

–

–

–

3,682

Netting of deferred compensation**

–

(4,404

)

4,404

–

–

–

–

–

Amortization of deferred compensation

–

19,371

–

–

–

–

–

19,371

Issuance of shares from treasury

–

–

–

34,589

(18,835

)

–

–

15,754

Purchase of own shares

–

–

–

(76,519

)

–

–

–

(76,519

)

F-5

Ordinary shares

Accumulated other comprehensive income

Number

Ordinary shares Amount £000

Additional paid-in capital £000

Deferred compensation £000

Treasury stock £000

Retained earnings* £000

Unrealized holding gain £000

Cumulative translation adjustment £000

Total £000

Accumulated other comprehensive income:

Realized gain on available-for-sale security (net of tax of £850,000)

–

–

–

–

–

(2,375

)

–

(2,375

)

Unrealized holding losses on available-for-sale securities (net of tax of £477,000)

–

–

–

–

–

(1,090

)

–

(1,090

)

Currency translation adjustment

–

–

–

–

–

–

(68,128

)

(68,128

)

Balances, December 31, 2006

1,389,907,834

695

446,005

–

(58,245

)

197,874

394

(12,076

)

574,647

Shares issued on exercise of options

9,866,862

5

5,504

–

–

–

–

–

5,509

Net income

–

–

–

–

36,842

–

–

36,842

Dividends

–

–

–

–

(18,547

)

–

–

(18,547

)

First time adoption of EITF 06-2, net of tax***

–

–

–

–

(2,278

)

–

–

(2,278

)

First-time adoption of FIN 48

–

–

–

–

838

–

–

838

Tax effect of option exercises

–

2,546

–

–

–

–

–

2,546

Amortization of deferred compensation

–

15,350

–

–

–

–

–

15,350

Conversion of liability award to equity award

–

1,396

–

–

–

–

–

1,396

Issuance of shares from treasury

–

–

–

30,767

(17,384

)

–

–

13,383

Purchase of own shares

–

–

–

(128,561

)

–

–

–

(128,561

)

Cancellation of shares

(55,719,000

)

(28

)

–

–

66,039

(66,011

)

–

–

–

Cancellation of share premium account

–

(103,121

)

–

–

103,121

–

–

–

Accumulated other comprehensive income:

Unrealized holding losses on available-for-sale securities (net of tax of £146,000)

–

–

–

–

–

(608

)

–

(608

)

Currency translation adjustment

–

–

–

–

–

–

(6,777

)

(6,777

)

Balances, December 31, 2007

1,344,055,696

672

367,680

–

(90,000

)

234,455

(214

)

(18,853

)

493,740

F-6

___________________

* The amount of shareholders’ equity available for distribution to shareholders is the amount of profits determined under UK GAAP in the statutory accounts of the parent company. At December 31, 2007, such distributable profits amounted to £334,156,000.

** FAS123R requires that deferred stock-based compensation on the date of adoption be netted against additional paid-in capital.

*** In accordance with EITF 06-2, the cumulative provision for employee sabbatical leave as at January 1, 2007 is charged directly to retained earnings.

The accompanying notes are an integral part of the financial statements.

F-7

ARM Holdings plc

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1     The Company and a summary of its significant accounting policies

The business of the Company

ARM Holdings plc and its subsidiary companies (“ARM” or “the Company”) design reduced instruction set computing (RISC) microprocessors, physical IP and related technology and software, and sell development systems, to enhance the performance, cost-effectiveness and power-efficiency of high-volume embedded applications. The Company licenses and sells its technology and products to leading international electronics companies, which in turn manufacture, market and sell microprocessors, application-specific integrated circuits (ASICs) and application-specific standard processors (ASSPs) based on the Company’s architecture to systems companies for incorporation into a wide variety of end products. By creating a network of Partners, and working with them to best utilize the Company’s technology, the Company is establishing its architecture as a RISC processor for use in many high-volume embedded microprocessor applications, including digital cellular phones, modems and automotive functions and for potential use in many growing markets, including smart cards and digital video. The Company also licenses and sells Development Systems direct to systems companies and provides consulting and support services to its licensees, systems companies and other systems designers. The Company’s principal geographic markets are Europe, the US and Asia Pacific.

Incorporation and history

ARM is a public limited company incorporated under the laws of England and Wales. The Company was formed on October 16, 1990, as a joint venture between Apple Computer (UK) Limited, and Acorn Computers Limited, and operated under the name Advanced RISC Machines Holdings Limited until March 10, 1998, when its name was changed to ARM Holdings plc. Its initial public offering was on April 17, 1998.

Group undertakings include ARM Limited (incorporated in the UK), ARM, Inc. (incorporated in the US), ARM KK (incorporated in Japan), ARM Korea Limited (incorporated in South Korea), ARM France SAS (incorporated in France), ARM Belgium N.V. (incorporated in Belgium), ARM Germany GmbH (incorporated in Germany), Keil Elektronik GmbH (incorporated in Germany), ARM Norway AS (incorporated in Norway), ARM Embedded Technologies Pvt Limited (incorporated in India), ARM Physical IP Asia Pacific Pte. Limited (incorporated in Singapore), ARM Taiwan Limited (incorporated in Taiwan) and ARM Consulting (Shanghai) Co. Limited (incorporated in PR China). All entities are 100% owned.

Basis of preparation

The accompanying consolidated financial statements have been prepared under the historical cost convention and in accordance with accounting principles generally accepted in the United States (US GAAP). The Company maintains its accounting records and prepares its financial statements in UK sterling.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Principles of consolidation

The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries. Intra-group transactions, including sales, profits, receivables and payables, have been eliminated on consolidation. The results of subsidiaries acquired in the year are included in the income statement from the date they are acquired. On acquisition, all of the subsidiaries’ assets and liabilities that exist at the date of acquisition are recorded at their fair values reflecting their condition at that date.

Investments

Publicly traded investments are classed as available-for-sale in accordance with Statement of Financial Accounting Standards No.115, “Accounting for certain investments in debt and equity securities” (FAS 115), and are carried at fair value. Unrealized holding gains or losses on such securities are included, net of related taxes, in other comprehensive income. Other-than-temporary impairment losses and realized gains and losses of such securities are reported in earnings. Equity securities that are not publicly traded are recorded at cost less permanent diminution in value; at December 31,

F-8

2007 and 2006, the estimated fair value of these investments approximated their recorded basis, based on estimates determined by management.

Intangible assets

Purchased patents and licenses to use technology are capitalized and amortized on a straight-line basis over a prudent estimate of the time that the Company is expected to benefit from them.

Although an independent valuation is made of any intangible assets purchased as part of a business combination, management is primarily responsible for determining the fair value of intangible assets. Such assets are capitalized and amortized over a period of one to six years, being a prudent estimate of the time that the Company is expected to benefit from them, with the exception of in-process research and development which is written off immediately.

Goodwill

Goodwill represents the excess of the fair value of the consideration paid on acquisition of a business over the fair value of the assets, including any intangible assets identified and liabilities acquired.

Goodwill is tested for impairment at least annually. Annual impairment reviews in 2006 and in 2007 determined, primarily with reference to cash flow forecasts, that there was no indication of impairment with respect to goodwill. The estimates of future cash flows involve considerable management judgment and are based on assumptions about expected future operating performance. The actual cash flows could differ from management’s estimates due to changes in business conditions, operating performance and economic conditions.

In accordance with FAS 131 “Disclosures about Segments of an Enterprise and Related Information”, the Company has identified its operating segments based on the information used by the Chief Operating Decision Maker in monitoring the business. For the purposes of assessing the carrying value of goodwill for impairment, goodwill has been allocated to reporting units. Based on the nature and extent of discrete information available to management, the Company believes that, for ARM, each operating segment consists of a single reporting unit. Goodwill has been allocated to the three reporting units as shown in note 9.

Impairment charges

The Company reviews goodwill for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It also reviews long-lived assets and identifiable intangibles for impairment if an event occurs that indicates that the carrying amount may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets would be written down to their estimated fair value.

Revenue recognition

Revenue consists of license fees received under the terms of license agreements with customers to enable them to use the Company’s intellectual property (“IP”), which is often customized to each customer’s manufacturing process. The Company receives royalties on sales by the Company’s customers of products containing ARM technology. It also supplies off-the-shelf software tools and IP, bought-in boards and toolkits, training and consultancy services.

The Company primarily earns revenues from licensing its IP to leading electronics companies which in turn manufacture, market and sell microprocessors, ASICs and ASSPs based on the Company’s architecture to systems companies for incorporation into a wide variety of end products. The Company’s IP consists of software and related documentation which enables a customer to design and manufacture microprocessors and related technology and software. Most licenses are designed to meet the specific requirements of each customer and are generally not time limited in their application. In general, the time between the signing of a license and final validation of the customer’s ARM technology-compliant product is between six and 15 months. Specified upgrades or modifications to the licensed IP are not provided. Following validation of the customer’s ARM-technology compliant product, the Company has no further obligations under the license agreement.

F-9

In accordance with SOP 81-1, “Accounting for performance of construction-type and certain production type contracts,” when license agreements include deliverables that require “significant production, modification or customization,” contract accounting is applied. Revenues from license fees are recognized based on the percentage-of-completion method over the period from signing of the license to validation of the customer’s ARM technology-compliant product and the completion of all outstanding obligations. The amount of revenue recognized is based on the total license fees under the license agreement, or that portion of the total license fees which is determined to be fixed or determinable in arrangements involving extended payment terms and the percentage-of-completion achieved. Those amounts that are not deemed fixed or determinable at the outset of the arrangement are recognized as the payments become due. Where an arrangement is for multiple elements, each requiring significant production, modification or customization, the Company evaluates whether the bifurcation criteria of SOP 81-1 are met, and if so, the total arrangement fee is allocated accordingly. The percentage-of-completion is measured by monitoring progress using records of actual time incurred to date in the project, compared with the total estimated project requirement. Revenues are recognized only when collectability is probable. Estimates of total project requirements are based on prior experience of customization, delivery and validation of the same or similar technology and are reviewed and updated regularly by management. Under the percentage-of-completion method, provisions for estimated losses on uncompleted contracts are recognized in the period in which the likelihood of such losses is determined.

Agreements that include rights to unspecified future products (as opposed to unspecified upgrades and enhancements) are accounted for using subscription accounting, revenue from the arrangement being recognized ratably over the term of the arrangement, or an estimate of the economic life of the products offered if no term is specified, beginning with the delivery of the first product.

In accordance with SOP 97-2, “Software revenue recognition,” where agreements involve elements that do not require “significant production, modification or customization,” the Company recognizes license revenue when a signed contract or other persuasive evidence of an arrangement exists, the product has been shipped or electronically delivered, the license fee is fixed or determinable and collection of the resulting receivable is probable. Where agreements include multiple elements, the revenue recognition criteria for each element are typically met within the same accounting period, i.e. on delivery of the elements. If an element that is essential to the functionality of the delivered elements is undelivered at a period end, the Company determines whether it has sufficient vendor specific objective evidence (“VSOE”) of fair value in order to make an allocation amongst the elements. For the majority of its products and services, with the exception of post-contract support (“PCS”), certain development systems products and certain services undertaken by the Company, the Company does not believe it has sufficient VSOE of fair value to make such allocations. Accordingly, no revenue is recognized on an arrangement where deliverables other than PCS and the aforementioned development systems products and services remain undelivered.

License fees are considered fixed or determinable if they are not dependent on customers completing specific milestones and they are not subject to extended payment terms, i.e. the payment terms do not extend over a substantial period when compared to the payment terms in similar license arrangements and when compared with the licensed products’ life cycle. If all the fees in an arrangement are deemed to be fixed or determinable, the Company recognizes revenue when all other revenue recognition criteria have been met. The excess of revenue recognized in respect of such fees over fees invoiced is recorded as an accrued revenue asset. Where an arrangement includes fees that are not deemed fixed or determinable, revenue from the arrangement is recognized as the payments become due and the excess of fees invoiced over revenue recognized in respect of such fees is recorded as a deferred revenue liability.

PCS consists of the right to receive services and/or unspecified product upgrades/enhancements that are offered on a when-and-if-available basis. PCS is generally priced separately from the initial licensing fee in a contract and revenue is allocated to PCS based on VSOE of fair value. VSOE of fair value is determined with reference to contractual renewal rates. If no renewal rates are specified, the entire fee under the arrangement is amortised and recognised ratably over the contractual PCS period. Where renewal rates are specified, PCS revenue is recognised ratably over the term of the PCS arrangement.

Certain products have been co-developed by the Company and a collaborative partner, with both parties retaining the right to sell licenses to the product. In those cases where the Company makes sales of these products and considers itself to be the principal under EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” the total value of the license is recorded as revenue and the amount payable to the collaborative partner is recorded as cost of sales. Where the collaborative partner makes sales of these products, the Company records as revenue the commission it is due when informed by the collaborative partner that a sale has been made and cash has been collected.

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Sales of boards and toolkits are recognized upon delivery. While some arrangements with distributors provide very limited rights of return, the Company’s history is that actual returns are negligible and accordingly no provisions are deemed necessary.

Services, such as consulting and training, are typically sold in stand-alone arrangements. Where they are sold in conjunction with other deliverables and they are not considered essential to the functionality of those other deliverables, they are accounted for separately based on VSOE, if VSOE has been established. Revenue for these services is recognized as the services are performed and collectability is probable. If VSOE for the services does not exist or the services are deemed to be essential to the functionality of the other deliverables in the arrangement, the entire arrangement fee is recognized as the services are performed. The excess of fees invoiced over revenue recognized in respect of such fees is recorded as a deferred revenue liability.

Revenues from consulting projects, which are typically of a short duration, are recognized when the service has been provided and all obligations to the customer under the consulting agreement have been fulfilled. For longer term and more complex consulting projects, typically containing several project milestones, where significant modification to ARM core-based IP is required, revenues are recognized on a percentage-of-completion basis as milestones are achieved. This method approximates to percentage-of-completion based on labor inputs.

Royalty revenues are earned on sales by the Company’s customers of products containing ARM technology. Revenues are recognized when the Company receives notification from the customer of product sales, or receives payment of any fixed royalties. Notification is typically received in the quarter following shipment of product by the customer.

Where the Company enters into more than one agreement with the same customer in the same, short time frame, an assessment is made to establish whether the group of agreements is so closely related that they effectively form a single multiple-element arrangement. The factors considered in making this assessment include, but are not limited to:

·  Whether the different elements are closely interrelated or interdependent in terms of design, technology, or function;

·  Whether the fee for one or more of the agreements is subject to a refund or forfeiture or other concession if one of the other contracts is not completed satisfactorily;

·  Whether one or more elements in one agreement are essential to the functionality of an element in another agreement;

·  Whether payment terms under one agreement coincide with performance criteria of another agreement; and

·  Whether the negotiations are conducted jointly with two or more parties to do what in essence is a single project.

Research and development

All ongoing research and development expenditure is expensed in the period in which it is incurred. Costs include salaries of engineers and associated staff, relevant EDA tools costs and other directly related expenditure, such as contractors, as well as an allocation of facilities costs. The facilities costs for each office are allocated according to the proportion of employees in engineering functions within these offices. Any collaborative agreements whereby a third party agrees to partially fund the Company’s research and development is recognized over the period of the agreement as a credit within research and development costs.

Grants

Grants in respect of specific research and development projects are receivable from the European Commission, a European organization which funds certain research and development activities on application to it for the purposes of furthering research and development activities within the European Union. The Company retains significant rights to IP developed under projects which are funded under these arrangements. Grants received are typically intended to cover 50% of expected project costs. Grant income is recognized over the period of the project in line with the costs incurred. Unconditional undertakings have been received from the European Commission to provide the funding, and there is no obligation to refund any amounts already received. Amounts receivable under these arrangements in the year ended

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December 31, 2007 were £289,000 (2006: £467,000; 2005: £nil) and were netted against related research and development costs.

Pension costs

The Company contributes to defined contribution plans substantially covering all employees in Europe and the US and to government pension schemes for employees in Japan, South Korea, Taiwan, PR China and Israel. The Company contributes to these plans based upon various fixed percentages of employee compensation and such contributions are expensed as incurred. The amount of contributions expensed by the Company for the years ended December 31, 2005, 2006 and 2007 were £3,371,000, £3,840,000 and £4,327,000, respectively.

Loss contingencies

The Company accrues an estimated loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.

Fair value of financial instruments

The Company’s financial instruments consist principally of cash and cash equivalents, short-term investments and marketable securities, accounts receivable and foreign currency exchange contracts. The Company believes all of the financial instruments carrying values approximate to fair value due to their nature and respective durations.

Cash equivalents

The Company considers all highly liquid investments with original maturity dates of three months or less to be cash equivalents.

Short-term investments and marketable securities

The Company considers all highly liquid investments with original maturity dates of greater than three months but less than one year to be either short-term investments (when invested on deposit with major clearing banks) or short-term marketable securities (when custodied with major financial institutions). Any investments with a maturity date of greater than one year are classified as long-term marketable securities.

Allowance for doubtful debts

Allowance is made for doubtful debts following reviews of individual customer circumstances by management.

Inventory

Inventory is stated at the lower of cost and net realizable value. In general, cost is determined on a first-in-first-out basis and includes transport and handling costs. Where necessary, provision is made for obsolete, slow-moving and defective inventory.

Property and equipment

The cost of property and equipment is their purchase cost, together with any incidental costs of acquisition. Costs that are directly attributable to the development of new business application software and which are incurred during the period prior to the date that the software is placed into operational use, are capitalized. External costs and internal costs are capitalized to the extent they enhance the future economic benefit of the business.

Depreciation is calculated so as to write off the cost of property and equipment, less their estimated residual values, on a straight-line basis over the expected useful economic lives of the assets concerned. The principal economic lives used for this purpose are:

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Freehold buildings	25 years
Leasehold improvements	Five years or term of lease, whichever is shorter
Computers and software	Three to five years
Fixtures and fittings	Five to ten years
Motor vehicles	Four years

Provision is made against the carrying value of property and equipment where an impairment in value is deemed to have occurred.

Operating leases

Costs in respect of operating leases are charged on a straight-line basis over the lease term.

Currency translation

The Company’s functional currency is the currency of the primary economic environment in which the Company operates.

The assets and liabilities of subsidiaries with functional currencies other than sterling are translated into sterling at rates of exchange ruling at the balance sheet date. Statements of income of overseas subsidiaries are translated at the monthly exchange rates during the year. Translation differences are taken to the cumulative translation adjustment.

The Company utilizes forward exchange contracts and currency options to manage the exchange risk on actual transactions related to accounts receivable, denominated in a currency other than the functional currency of the business. The Company’s forward exchange contracts do not subject the Company to risk from exchange rate movements because the gains and losses on such contracts offset losses and gains, respectively, on the transactions being hedged. Because the Company does not meet the criteria for hedge accounting, the forward and option contracts and the related accounts receivable are recorded at fair value at each period end. All recognized gains and losses resulting from the settlement of the contracts are recorded within general and administrative costs in the income statement. The fair value of derivative instruments are disclosed within either prepaid expenses and other assets or accrued liabilities on the balance sheet and within net cash provided by operating activities in the cash flow statement. The Company does not enter into foreign exchange contracts for the purpose of hedging anticipated transactions.

Other transactions denominated in foreign currencies have been translated into sterling at actual rates of exchange ruling at the date of transaction. Monetary assets and liabilities denominated in foreign currencies have been translated at rates ruling at the balance sheet date. Exchange differences have been included in general and administrative costs.

From time to time, the Company enters into contracts denominated in a currency (typically US dollars) that is neither the functional currency of the Company nor the functional currency of the customer. In accordance with FAS 133, “Accounting for derivative instruments and hedging activities”, where there are unpaid amounts on such contracts, the Company carries such derivatives at fair value. The resulting gain or loss is recognized in the income statement under general and administrative costs. For the year ended December 31, 2007 the gain on exchange is £1,400,000 (2006: loss of £898,000; 2005: gain of £2,101,000).

Income taxes

Income taxes are computed using the liability method. Under this method, deferred income tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established against deferred tax assets where it is more likely than not that some portion or all of the asset will not be realized.

The Company applies the “with and without” approach with respect to the allocation of net operating losses and other reliefs due to share-based compensation costs. Under this approach a benefit is recorded in additional paid-in capital only

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to the extent that the amount of available net operating losses generated for operations can be offset against the current year taxable income.

In July 2006, the FASB issued Interpretation, or FIN, No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 provides detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements in accordance with FAS 109. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. The Company adopted FIN 48 effective January 1, 2007 and the provisions of FIN 48 have been applied to all income tax positions commencing from that date. Potential accrued interest and penalties related to unrecognized tax benefits within operations are recognized as an income tax expense. The cumulative effect of applying the provisions of FIN 48 has been reported as an adjustment to retained earnings as of January 1, 2007. Prior to 2007, tax contingencies were determined in accordance with FAS No. 5 “Accounting for contingencies” (“FAS 5”) and estimated tax liabilities were recorded to the extent the contingencies were probable and could be reasonably estimated.

Earnings per share

Basic earnings per common share is computed based on the weighted average number of ordinary shares. Diluted earnings per common share is computed by including potential common shares where the effect of their inclusion would be dilutive. The diluted share base for the year ended December 31, 2007 excludes incremental shares of approximately 8,786,000 (2006: 33,390,000; 2005: 39,614,000) related to employee stock options and awards. These shares are excluded due to their antidilutive effect as a result of the exercise price of these shares being higher than the market price. The ordinary equivalent shares for share options were determined using the treasury stock method.

Accounting for share-based payments

Since January 1, 2006, the Company has applied FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”) in relation to accounting for share-based payments. Under FAS 123R, share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee’s requisite service period. The fair value of these awards is calculated using appropriate valuation techniques.

Some awards made by the Company are liability-classified awards under FAS 123R as (i) there is an obligation to settle a fixed monetary amount in a variable number of shares; or (ii) the awards are indexed to a factor other than performance, market or service condition. The fair value of these awards is re-measured at each period end until the award has vested. Once the award has vested, or for (i) above when the number of shares becomes fixed, the award becomes equity-classified. The transitional rules detailed in FAS 123R required the Company in 2006 to make a re-measurement adjustment for compensation cost for liability awards that had been recognised in that year as a cumulative effect of change in accounting policy in the income statement.

The Company adopted the provisions of FAS 123R using a modified prospective application. Accordingly, periods prior to adoption have not been revised for comparative purposes. The valuation provisions of FAS 123R apply to new awards and to awards that are outstanding on the effective date, which are subsequently modified or cancelled. Estimated compensation expense for awards outstanding at the effective date will be recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”).

On November 10, 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards.” The Company elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based compensation pursuant to FAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies which could be recognized subsequent to the adoption of FAS 123R.

For a summary of all the Company’s share-based award schemes, please refer to the Shareholder’s equity section in footnote 12.

The Company uses the Black-Scholes option pricing model to estimate the fair value of share-based payments. This model is consistent with that used for the Company’s pro forma information required under FAS 123. The determination

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of the fair value using this model is affected by the share price at grant, as well as a number of other assumptions including expected volatility, expected life, risk-free interest rate and expected dividends.

Treasury stock

Treasury stock represents the cost of shares in the Company held by the Company and the Employee Benefit Trust (“ESOP”).

During 2007, to supplement the payment of dividends to shareholders, the Company continued its rolling share buyback programme under the shareholder authority conferred at the 2007 Annual General Meeting. The quantum and frequency of share re-purchases is not predetermined and will take into account prevailing market conditions, the short- to medium-term cash needs of the business and the level of employee share-based remuneration going forward. In 2007, a total of 94,525,548 (2006: 63,600,000; 2005: 13,868,000) shares were re-purchased from the market at a cost of £128,561,000 (2006: £76,519,000; 2005: £16,211,000). At December 31, 2007, there were 65,201,176 (2006: 49,500,000) shares in the Company still held from these purchases with a market value of £80,849,000 (2006: £62,246,000).

The ESOP was set up on April 16, 1998 to facilitate the recruitment, retention and motivation of employees. Under the Company’s Long Term Incentive Plan, 7,943,979 shares could be awarded from shares already issued within the ESOP and treasury stock held by the Company. The number of unearned shares within the ESOP at December 31, 2007 was 1,201,434 (2006: 1,201,434) with a market value of £1,490,000 (2006: £1,511,000).

All costs relating to the schemes are recognized in the income statement as they accrue and the ESOP has waived the right to receive dividends of over and above 0.01 pence per share on all shares held. For the purpose of earnings per share calculations, the shares are treated as canceled until such time as they vest unconditionally.

Employer’s taxes on share options

Employer’s National Insurance in the UK and equivalent taxes in other jurisdictions are payable on the exercise of certain share options issued to employees in certain tax jurisdictions. In accordance with EITF 00-16 no provision has been made for the employer’s taxes on these share options. These amounts are recognized in the consolidated income statement when payable.

Provision for accrued sabbatical leave

The Company operates a sabbatical leave scheme for employees that have had at least four years’ service. In accordance with EITF 06-2 “Accounting for Sabbatical Leave and Other Similar Benefits”, a provision is created with a corresponding charge being made to the income statement over the period this leave is earned based on management’s estimate of the leave that will eventually be taken. This provision is released to the income statement as employees either take the leave or cease to be employees of the Company. The Company adopted EITF 06-2 from January 1, 2007 and in accordance with the standard recorded the opening provision against retained earnings.

Recently issued accounting standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (FAS 157), which provides guidance on how to measure assets and liabilities that use fair value. FAS 157 will apply whenever another US GAAP standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. FAS 157 will be effective for our financial statements for the year ending December 31, 2008. We are currently evaluating the potential impact this standard may have on our financial position and results of operations, but do not believe the impact of the adoption will be material. This is supplemented by FSP FAS 157-1 which defers the requirement to fair value non-financial assets and liabilities until ARM’s fiscal year ending December 31, 2009.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an Amendment of FASB Statement No. 115” (“FAS 159”) which provides companies the irrevocable option to measure many financial assets and liabilities at fair value with the changes in fair value recognized in earnings. The accounting provisions of FAS 159 will be effective for the Company’s financial year ending December 31, 2008. The Company is in the process of determining the effects, if any, the adoption of FAS 159 will have on its consolidated financial statements, but do not believe the impact of the adoption will be material.

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In June 2007, the EITF issued the statement EITF 07-1, “Accounting for Collaborative Arrangements”, which discusses the accounting for arrangements with third parties and whether transactions should be reported gross or net in the financial statements. We currently already apply the provisions of EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent” and as such do not believe the impact of adoption will be material.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“FAS 141R”), which amends principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also amends guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R will be effective for the Company’s financial statements for the year ending December 31, 2009. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until January 1, 2009. We expect FAS 141R will have an impact on the Company’s consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions consummated after the effective date. We are still assessing the impact of this standard on our future consolidated financial statements.

In December 2007, the US Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 110 (“SAB 110”) to amend the SEC’s views discussed in Staff Accounting Bulletin 107 (“SAB 107”) regarding the use of the simplified method in developing an estimate of expected life of share options in accordance with FAS 123R. SAB 110 is effective for the Company beginning in the first quarter of 2008. We will continue to use the simplified method until we have the historical data necessary to provide a reasonable estimate of expected life in accordance with SAB 107, as amended by SAB 110.

Companies Act 1985

These financial statements do not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985 of Great Britain (the “Companies Act”). The Company’s statutory accounts, which are its primary financial statements, are prepared in accordance with International Financial Reporting Standards (IFRSs) for consolidated accounts and accounting principles generally accepted in the United Kingdom (UK GAAP) for ARM Holdings plc company only accounts. They are prepared in compliance with the Companies Act and are presented in pounds sterling. Statutory accounts (upon which the auditors gave unqualified reports under Section 235 of the Companies Act and which did not contain statements under sub-sections 237(2) and (3) of the Companies Act) for the years ended December 31, 2005 and 2006 have been, and those for the year ended December 31, 2007 will be, delivered to the Registrar of Companies for England and Wales. Dividends are required to be declared in sterling out of profits available for that purpose as determined in accordance with UK GAAP and the Companies Act.

49,500,000 of the shares acquired by the Company in 2006, and a further 6,200,000 shares acquired in early 2007, were acquired at a time when the Company had insufficient distributable reserves (although sufficient distributable reserves were available in ARM Limited).  The Company resolved the matter by cancelling the relevant shares by Court order.

2     Related party transactions

During the year, the Company paid royalty fees of £81,000 (2006: £124,000; 2005: £33,000) and made cross-license payments of £nil (2006: £nil; 2005: £26,000) to Superscape Group plc (“Superscape”), a company in which Mike Inglis, an executive director of ARM, was a non-executive director during the year. Amounts owed to Superscape at December 31, 2007 and 2006 were £nil. In addition, in 2007 the Company received royalty fees of £14,000 (2006: £19,000; 2005: £2,000) and license fees of £nil (2006: £nil; 2005: £11,000) from Superscape. At December 31, 2007, £nil (2006: £17,000) was owed by Superscape.

Also in 2007, the Company received licence fees of £4,000 (2006: £3,085,000; 2005: £321,000), support and maintenance income of £32,000 (2006: £37,000; 2005: £37,000) and evaluation tools fees of £123,000 (2006: £82,000; 2005: £17,000) from CSR plc, a company in which John Scarisbrick, a non-executive of ARM, was an executive director during the year. Amounts owed by CSR at December 31, 2007 were £31,000 (2006: £14,000).

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During 2007, the Company received funding for SOI technology development of £1,507,000 (2006: £319,000; 2005: £nil) from SOI TEC Silicon On Insulator Technologies SA (“Soitec”). Furthermore, the Company paid £181,000 (2006: £nil; 2005: £nil) to Soitec during the year in relation to license income from the two parties’ ongoing collaborative agreement to develop SOI technology. Soitec is an SOI IP company in which Doug Dunn, Company Chairman, is a non-executive director. At December 31, 2007, £nil (2006: £383,000) is owed by Soitec. Amounts owed to Soitec at December 31, 2007 and 2006 were £nil.

3     Income taxes

Income before income tax is analyzed as follows:

	Year ended December 31,
		2005 £000	2006 £000	2007 £000
United Kingdom		47,930	19,886	54,950
Foreign		5,304	37,162	(6,710	)
		53,234	57,048	48,240

The provision for income taxes consisted of:

	Year ended December 31,
		2005 £000		2006 £000		2007 £000
Current
United Kingdom		15,519		9,958		14,090
Foreign		1,430		6,138		4,676
Total current		16,949		16,096		18,766
Deferred
United Kingdom		(1,241	)	(5,476	)	(2,536	)
Foreign		(4,354	)	(1,182	)	(4,832	)
Total deferred		(5,595	)	(6,658	)	(7,368	)
Total provision for income taxes		11,354		9,438		11,398

Included in the income tax payable is a current tax benefit of £2,546,000 (2006: £3,682,000; 2005: £370,000) and a deferred tax credit of £nil (2006: £nil; 2005: £6,072,000) in relation to employee stock options. Such benefits are reflected as additional paid-in capital.

Also included in the provision for income taxes is utilization of the deferred tax liability in relation to acquired intangibles of £7,231,000 (2006: 6,264,000; 2005: £6,921,000).

Total income tax expense differs from the amounts computed by applying the UK statutory income tax rate of 30% for 2007, 2006 and 2005 to income before income tax as a result of the following:

	Year ended December 31,
		2005* £000		2006* £000		2007 £000
UK statutory rate 30% (2006: 30%; 2005: 30%)		15,970		17,114		14,472
Research and development tax credits		(1,911	)	(2,879	)	(5,170	)
Permanent differences – foreign exchange		–		(7,558	)	(84	)
Permanent differences – other**		(3,164	)	(5,603	)	(3,007	)
Valuation allowances		112		3,394		4,824
Amortization of intangibles		(1,730	)	(1,467	)	(1,279	)
Differences in statutory rates of foreign countries		(45	)	613		(895	)
Foreign withholding tax		1,444		2,450		912
Stock-based compensation expense		749		1,747		548
Other, net***		(71	)	1,627		1,077

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Year ended December 31,
	2005* £000	2006* £000	2007 £000
	11,354	9,438	11,398

______________________

* The 2005 and 2006 comparatives have been reclassified for comparability with 2007.

** Permanent differences comprise permanent adjustments and benefits resulting from re-structuring following the acquisition of Artisan.

*** Other, net comprises prior year adjustments and deferred tax adjustments.

Significant components of the deferred tax assets/(liabilities) are as follows:

	At December 31,
		2006 £000		2007 £000
Deferred tax assets
Current
Stock compensation charge		5,016		6,447
Temporary difference on available-for-sale securities		231		678
Non-deductible accruals and reserves		1,766		7,562
Losses carried forward		12,816		7,101
		19,829		21,788
Valuation allowance		(3,838	)	(6,612	)
Net current deferred tax assets		15,991		15,176
Non-current
Fixed asset temporary differences		5,244		4,610
R&D tax credits carried forward		6,178		5,149
		11,422		9,759
Valuation allowance		(2,211	)	(2,962	)
Net non-current deferred tax assets		9,211		6,797
Deferred tax liabilities
Non-current
Amounts relating to intangible assets arising on acquisition		(20,074	)	(12,691	)
Total non-current deferred tax liabilities		(20,074	)	(12,691	)
Net non-current deferred tax assets/(liabilities)		(10,863	)	(5,894	)

Disclosed on the balance sheet within:

	At December 31,
		2006 £000		2007 £000
Assets		9,872		11,309
Liabilities		(4,744	)	(2,027	)
Net deferred tax assets/(liabilities)		5,128		9,282

Included in the amount of £12,691,000 (2006: £20,074,000) relating to intangible assets on acquisition is £6,735,000 (2006: £13,178,000) relating to liabilities that are expected to accrue after more than one year.

The valuation allowance for deferred tax assets increased by £3,525,000 in 2007 primarily due to non-deductible interest carryforwards of certain foreign subsidiaries, where management believes it is more likely than not that such amounts will not be realized. If or when recognized, the benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2007 will be accounted for as follows: £8,034,000 as a reduction of income tax expense and £1,540,000 as a reduction of goodwill.

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The Company has net operating loss carryforwards for tax purposes and other deferred tax benefits that are available to offset against future taxable income. At December 31, 2007 the Company has US federal, US state, United Kingdom, Norwegian, French and Belgian net operating loss carryforwards of approximately £13.7 million, £14.2 million, £10.2 million, £1.9 million, £6.4 million and £1.3 million, respectively. If unutilized, the US federal net operating loss will begin to expire in 2019 and the US state net operating loss will begin to expire in 2013.

In addition to the net operating losses, the Company also had unutilized federal R&D tax credits of £5,737,000 which will begin to expire in 2012 and unutilized state R&D tax credits of £3,191,000 which have no expiration date.

The future use of the net operating losses carried forward in ARM, Inc. may be restricted in the event of a purchase by a third party, whereby the level of losses to be utilized on an annual basis would be limited to 4% of the market value of ARM, Inc. at the date of the transaction.

As a result of FAS 123R, the Company’s deferred tax assets at December 31, 2007 do not include £2,713,000 of excess tax benefits from employee share option exercises in 2007 and £1,909,000 due to exercises in 2006 that are a component of the Company’s research and development and net operating loss carryovers. Equity will be increased by £4,622,000 if and when such excess tax benefits are ultimately realized.

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately £31,655,000 (2006: £31,809,000) at December 31, 2007. Those earnings are considered to be indefinitely reinvested and accordingly no UK income taxes have been provided thereon. If these earnings were to be remitted without offsetting tax credits in the UK, taxes would be approximately £7,981,000 (2006: £10,758,000).

On January 1, 2007, the Company adopted the provisions of FIN 48 “Accounting for Uncertainty in Income Taxes”. As a result of applying the provisions of FIN 48, the Company recognized a decrease of £838,000 in the liability for unrecognized tax benefits, which was accounted for as an increase to the opening retained earnings. The Company’s unrecognized tax benefits at December 31, 2007 relate to the UK and various foreign jurisdictions. The following table summarizes the movements in unrecognized tax benefits:

	£000
Balance at January 1, 2007	4,327
Increases related to current year tax positions	3,188
Decreases related to prior year tax positions	(232	)
Balance at December 31, 2007	7,283

Included in the balance at December 31, 2007 are £3,175,000 of tax benefits that, if recognized, would reduce our annual effective tax rate. The Company recognized accrued interest of £131,000 related to these unrecognized tax benefits during 2007 in income tax expense. The Company does not expect its unrecognized tax benefits to change significantly over the next 12 months.

The tax years 2004 through to 2007 generally remain subject to examination by the UK tax authorities. In the US, the tax years 2001 through to 2007 generally remain subject to examination by federal and most state tax authorities.

4     Earnings per share

	Year ended December 31, 2005
	Income £		Shares Number		Per share Amount
Net income		41,880,000
Basic EPS:
Income available to common stockholders		41,880,000		1,369,335,202		3.1	p
Effect of dilutive securities:
Share options and awards				57,701,294
Diluted EPS:
Income available to common stockholders plus assumed conversion		41,880,000		1,427,036,496		2.9	p

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	Year ended December 31, 2006
	Income £			Shares Number		Per share Amount
Basic EPS:
Net income before cumulative effect of change in accounting policy		47,610,000			1,366,816,499		3.5	p
Cumulative effect of change in accounting policy		(2,447,000	)				(0.2p	)
Net income after cumulative effect of change in accounting policy		45,163,000					3.3	p
Effect of dilutive securities:
Share options and awards					37,934,830
Diluted EPS:
Net income before cumulative effect of change in accounting policy		47,610,000			1,404,751,329		3.4	p
Cumulative effect of change in accounting policy		(2,447,000	)				(0.2p	)
Net income after cumulative effect of change in accounting policy		45,163,000					3.2	p

	Year ended December 31, 2007
	Income £		Shares Number		Per share Amount
Net income		36,842,000
Basic EPS:
Income available to common stockholders		36,842,000		1,321,860,197		2.8	p
Effect of dilutive securities:
Share options and awards				44,523,595
Diluted EPS:
Income available to common stockholders plus assumed conversion		36,842,000		1,366,383,792		2.7	p

5     Business risks and credit concentration

The Company operates in the intensely competitive semiconductor industry which has been characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened foreign and domestic competition. Significant technological changes in the industry could affect operating results.

Financial instruments that potentially subject the Company to concentrations of credit risk comprise principally cash, cash equivalents, short- and long-term investments and marketable securities and accounts receivable. The Company generally does not require collateral on accounts receivable, as many of the Company’s customers are large, well established companies. The Company has not experienced any significant losses related to individual customers or groups of customers in any particular industry or geographic area.

The Company markets and sells to a relatively small number of customers with individually large value transactions. At December 31, 2005, 2006 and 2007 no customers accounted for more than 10% of accounts receivable.

At December 31, 2006 and 2007, the Company’s cash, cash equivalents, short-term investments and marketable securities were deposited with major clearing banks and building societies in the UK and US in the form of money market deposits and corporate bonds for varying periods up to two years.

6     Acquisitions

There were no acquisitions in 2007, but the following acquisitions were made in 2005 and 2006.

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Falanx Microsystems AS

On May 30, 2006, the Company purchased the entire share capital of Falanx Microsystems AS (“Falanx”), a graphics IP company incorporated in Norway for total consideration of $25.1 million (£13.4 million), comprising $24.9 million cash consideration and $0.2 million of related acquisition expenses.

Falanx develops graphics accelerator IP and software for semiconductor system-on-chip (“SoC”) vendors that deliver high-quality multimedia images without compromising performance, power consumption or system cost. The acquisition fits the ARM strategy of enabling users to create SoCs seamlessly in their design process. The Mali™ Graphics Processor Unit (“GPU”) is a combination of hardware and software that enables industry-leading 3D graphics and video on mobile phones, portable media players, set-top boxes, handheld gaming devices and automotive systems, providing the Company with full control over the development of its future 3D graphics solutions.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date.

The operating results for Falanx have been included in these financial statements for the period from May 30, 2006 to December 31, 2006 in the 2006 comparatives and for the entire year in 2007. The acquisition was accounted for under FAS 141.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2006 consolidated financial statements:

	Fair value to Company
		£000
Assets
Cash and cash equivalents		24
Accounts receivable, net		118
Other debtors		101
Deferred tax asset		543
Property and equipment, net		62
Total assets acquired		848
Liabilities
Accounts payable and other creditors		(238	)
Accrued liabilities and deferred revenue		(368	)
Total liabilities assumed		(606	)
Net assets acquired		242

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Falanx and those intangible assets of Falanx that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Falanx concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Falanx clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

	Useful estimated life
	(years)		£000
Fair value of net assets acquired			242
Intangible assets acquired:
Developed technology		3–5	4,267
Customer relationships		3	990

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	Useful estimated life
	(years)	£000
Deferred tax liability		(1,472	)
Goodwill		9,383
Purchase price		13,410

If the acquisition of Falanx had occurred on January 1, 2006, net income for the Company in 2006 would have been £0.8 million lower than reported, including the additional amortization of intangibles.

During 2007, the provisional fair values of Falanx’s accounts receivable and other creditors were finalized resulting in a reduction in net assets acquired of £17,000. As a result, goodwill increased by £17,000 during the year.

Soisic SA

On October 30, 2006, the Company purchased the entire share capital of Soisic SA (“Soisic”), a silicon-on-insulator (SOI) IP company incorporated in France for consideration of €5.1 million (£3.4 million), comprising €4.7 million cash consideration and €0.4 million of related acquisition expenses.

With this acquisition, the Company is making an investment in new technologies related to physical IP to enhance its leadership position in providing customers access to the higher performance and lower power offered by SOI process technologies. Soisic develops a similar set of products to the ARM Physical IP Division, specifically standard cells, static random access memory (“SRAM”) compilers and input/output (“I/O”) cells, however, based on SOI design rules and process models. Integrating this capability with ARM’s widely-used physical IP opens the possibility for SoC designers to access SOI technology, which currently is used only in full custom designs, such as high-performance microprocessors.

The Company is investing in this area to be at the forefront of the design technologies needed to exploit the potential advantages of SOI as its usage grows in mobile, home and enterprise SoC and ASIC applications.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date. A further €8 million was potentially payable on the achievement of various post-acquisition financial milestones and will be accrued when the milestones have been achieved, other than as noted below, whereby a small portion of this contingent consideration was accrued at acquisition.

The operating results for Soisic have been included in these financial statements for the period from October 30, 2006 to December 31, 2006 in the 2006 comparatives and for the entire year in 2007. The acquisition was accounted for under FAS 141.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2006 consolidated financial statements:

	Fair value to Company
		£000
Assets
Accounts receivable, net		165
Other debtors		411
Deferred tax asset		1,392
Property and equipment, net		117
Total assets acquired		2,085
Liabilities
Cash overdraft		(53	)
Accounts payable and other creditors		(949	)
Accrued liabilities		(413	)
Total liabilities assumed		(1,415	)

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	Fair value to Company
		£000
Net assets acquired		670

The intangible assets recognized represented those intangible assets of Soisic that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Soisic concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Soisic clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

	Useful estimated life (years)		£000
Fair value of net assets acquired			670
Intangible assets acquired:
Developed technology		5	4,283
Deferred tax liability			(1,413	)
Purchase price			3,540

The purchase price above includes £0.1 million of contingent consideration. Whilst the Company does not normally accrue this payable until earned, in line with FAS 141 it has been accrued to reduce any potential negative goodwill to nil.

If the acquisition of Soisic had occurred on January 1, 2006, net income for the Company would have been £2.5 million lower than reported, including the additional amortization of intangibles.

During 2007, a proportion of the financial milestones were achieved resulting in €1.3 million (£0.9 million) consideration being accrued in addition to the amount accrued in 2006. There was a corresponding increase to goodwill as a result. Furthermore, the provisional fair values in respect of deferred tax were finalized resulting in an increase in net assets of £0.7 million and a corresponding reduction in goodwill. The net impact of these items resulted in an increase to goodwill of £0.2 million.

PowerEscape, Inc.

On June 21, 2006, the Company purchased certain assets of PowerEscape, Inc., (“PowerEscape”) a private company incorporated in the US, for total consideration of $1.1 million (£0.6 million), comprising $1.0 million cash consideration and $0.1 million of related acquisition expenses.

The PowerEscape team, which has been integrated into the Company’s Development System Division, will focus on adding innovative profiling and analysis features to the Company’s portfolio of market-leading development tools.

The Company has allocated £595,000 of the purchase price to in-process research and development which reflects certain research projects that have not yet reached technological feasibility and commercial viability or had no alternative future use at the time of the acquisition. In-process research and development has been written-off immediately to the income statement.

Keil Elektronik GmbH and Keil Software, Inc.

On October 27, 2005, the Company purchased the entire share capital of Keil Elektronik GmbH (“KEG”), a company incorporated in Germany for total consideration of $10.9 million (£6.1 million), comprising $10.4 million cash consideration and $0.5 million of related acquisition expenses. On the same day, the Company purchased the entire share capital of Keil Software, Inc. (“KSI”), a US company, for total consideration of $5.2 million (£2.9 million), comprising $5.0 million cash consideration and $0.2 million of related acquisition expenses.

The Company has identified the MCU market as a critical growth area for the Company’s future business and with this acquisition, the Company will be able to accelerate progress in that market by offering a more complete solution. As

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the MCU applications shift from 8/16-bit to 32-bit solutions, the combination of the ARM® Cortex™-M3 processor, which is ideally suited for microcontroller applications, the RealView® high-performance compiler, and Keil’s complementary MCU tools for ARM, will enable new generations of ARM MCU solutions.

The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date. A further $2.3 million for KEG and $1.0 million for KSI was potentially payable on the achievement of various post-acquisition financial milestones. The financial milestones relating to the first year post-acquisition were achieved in 2006 and are accrued at the year end. Further potential payments relating to the second year post-acquisition will be accrued when payable. Keil is a leading independent provider of software development tools for the microcontroller (“MCU”) market.

The acquisition was accounted for under FAS 141. The operating results for Keil have been included in these financial statements for the period October 27, 2005 to December 31, 2005 in the 2005 comparatives and for the entire year in 2006 and 2007.

The following table sets out the provisional fair values of the assets acquired and liabilities assumed at the date of acquisition as reported in the 2005 consolidated financial statements:

Fair value to Company	KEG £000			KSI £000
Assets
Cash and cash equivalents		2,911			32
Accounts receivable, net		477			169
Inventories		60			36
Other debtors		11			5
Property and equipment, net		12			–
Total assets acquired		3,471			242
Liabilities
Accounts payable and other creditors		(1,593	)		(19	)
Accrued liabilities and deferred revenue		(2,280	)		(62	)
Total liabilities assumed		(3,873	)		(81	)
Net (liabilities assumed)/assets acquired		(402	)		161

The intangible assets recognized, apart from goodwill, represented contractual or other legal rights of Keil and those intangible assets of Keil that could be clearly identified. These intangibles were identified and valued through interviews and analysis of data provided by Keil concerning development projects, their stage of development, the time and resources needed to complete them, and if applicable, their expected income generating ability. There were no other contractual or other legal rights of Keil clearly identifiable by management, other than those identified below. The allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was as follows:

	Useful estimated life (years)		KEG £000			KSI £000
Fair value of net (liabilities)/assets acquired				(402	)		161
Intangible assets acquired:
Customer relationships		2–3		4,290			482
Developed technology		1–5		2,744			–
Trade names		5		–			1,175
Deferred tax liability				(2,673	)		(663	)
Goodwill				2,178			1,764
Purchase price				6,137			2,919

KEG made a profit after tax for the year ended December 31, 2004 of £1.0 million and for the period from January 1, 2005 until acquisition a profit after tax of £1.0 million. KSI made a loss after tax for the year ended December 31, 2004 of

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£95,000 and for the period from January 1, 2005 until acquisition a loss after tax of £40,000. The results of the Company would not have been significantly different had the acquisition of KEG and KSI occurred on the January 1, 2005.

During 2006 and 2007, a further $2.1 million and $0.8 million consideration became payable for KEG and KSI respectively following the achievement of various post-acquisition financial milestones, with a corresponding increase to total consideration and goodwill. In addition in 2006, the provisional fair values in respect of KEG’s income tax liabilities were finalized resulting in an increase in the net assets acquired by £1.1 million. Due to this change in fair value, an additional £1.1 million of consideration was paid. As both consideration and net assets were increased by the same amount, there was no corresponding change to goodwill.

7     Investments and marketable securities

	Listed investments £000			Unlisted investments £000			Total investments £000
Cost
At January 1, 2007		1,714			1,970			3,684
Additions		–			2,657			2,657
Impairment		(236	)		(926	)		(1,162	)
At December 31, 2007		1,478			3,701			5,179
Aggregate movements in fair value
At January 1, 2007		171			–			171
Unrealized holding losses		(469	)		–			(469	)
At December 31, 2007		(298	)		–			(298	)
Carrying value
At December 31, 2007		1,180			3,701			4,881
At December 31, 2006		1,885			1,970			3,855

Listed investments comprise an investment in Superscape Group plc, the fair value of which at December 31, 2007 is £1,180,000 (2006: £1,885,000; 2005: £3,474,000). In 2008, Superscape was acquired by Glu Mobile Inc. for 10 pence per share, and therefore the Company’s investment has been impaired to this carrying value through the income statement, with the further reduction in carrying value to 7.98 pence per share at December 31, 2007 going through equity. In 2006, the Company disposed of its investment in CSR plc for £5.6 million resulting in a profit of £5.3 million that was recognised in the 2006 income statement. The fair value of this investment at December 31, 2005 was £3,521,000.

In 2007, the Company invested £2,534,000 in W&W Communications Inc. by way of a convertible loan note. This note earns interest at 10% per annum, and may convert into equity to a maximum investment of 14.99%. Also during 2007, an investment of £123,000 was made in Embest Info and Tech Inc., an unlisted company based in China. In 2005, the Company invested £274,000 in Luminary Micro Inc., an unlisted company, and made a further investment of £165,000 in the company in 2006.

At December 31, 2007, the Company had £1,582,000 (2006: £19,151,000; 2005: £8,835,000) of short-term marketable securities. These represent both the fair market value and amortized cost of these securities.

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8     Property and equipment

	2006 £000		2007 £000
Owned buildings	190		190
Leasehold improvements	18,054		15,837
Computers	18,445		17,078
Software	8,457		8,491
Fixtures, fittings and motor vehicles	4,676		3,878
Assets under construction	–		758
	49,822		46,232
Less: accumulated depreciation	(35,852	)	(34,190	)
Property and equipment, net	13,970		12,042

Depreciation charged to income for the years ended December 31, 2005, 2006 and 2007 was £7,750,000, £6,895,000 and £7,236,000 respectively. The net book value of software at December 31, 2007 was £2,706,000 (2006: £3,674,000) with depreciation charged in 2007 on software of £1,744,000 (2006: 1,610,000; 2005: £1,851,000).

9     Intangible assets

	Goodwill			Patents		Licenses		Developed technology			Existing agreements and customer relationships			Core technology			Trademarks			Order backlog			Total
		£000			£000		£000		£000			£000			£000			£000			£000			£000
Cost
At January 1, 2007		352,563			8,196		5,906		29,676			42,827			11,802			3,707			1,635			456,312
Additions		–			–		2,549		–			–			–			–			–			2,549
Additions (Falanx)		17			–		–		–			–			–			–			–			17
Additions (Soisic)		205			–		–		–			–			–			–			–			205
Additions (KEG)		588			–		–		–			–			–			–			–			588
Additions (KSI)		186			–		–		–			–			–			–			–			186
Exchange differences		(5,576	)		–		–		84			(627	)		(198	)		(63	)		(27	)		(6,407	)
At December 31, 2007		347,983			8,196		8,455		29,760			42,200			11,604			3,644			1,608			453,450
Aggregate amortization
At January 1, 2007		3,320			8,151		5,327		10,595			15,661			4,771			1,582			1,635			51,042
Charge for the year		–			45		431		6,730			8,344			2,304			848			–			18,702
Exchange differences		–			–		–		(43	)		(180	)		(62	)		(20	)		(27	)		(332	)
At December 31, 2007		3,320			8,196		5,758		17,282			23,825			7,013			2,410			1,608			69,412
Net book value
At December 31, 2007		344,663			–		2,697		12,478			18,375			4,591			1,234			–			384,038
At December 31, 2006		349,243			45		579		19,081			27,166			7,031			2,125			–			405,270

Amortization charged to income for the years ended December 31, 2005, 2006 and 2007 was £20,310,000, £18,917,000 and £18,702,000 respectively.

Licenses to use technology are being amortized over periods of three to ten years. The amortization periods for licenses have been determined according to their estimated useful economic life.

Patents are being amortized over four to five years, developed and core technology (the main IP of the company existent at acquisition and generating revenue) over five years and customer relationships (relationships with customers which were generating revenue at acquisition) over two to six years, being the periods over which the Company is expected to derive benefit from them.

The estimated amortization expense of intangible assets in each of the next five years is set forth below:

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	£000
2008	17,609
2009	11,179
2010	7,885
2011	1,363
2012	255
Thereafter	1,084

In accordance with FAS 142, goodwill is no longer amortized, and is tested for impairment at least annually.

The split of goodwill by segment is shown below. Additions in the year relating to Keil and Falanx have been allocated to the Systems Design and Processor divisions respectively. Additions to Soisic have been allocated between the Processor and Physical IP divisions. The foreign exchange difference arises as goodwill on Artisan, Axys and KSI is denominated in US dollars and on Soisic in euros and thus is subject to revaluation at the period-end rates. Changes in the carrying amount for the year are as follows:

	Processor Division			Physical IP Division			Systems Design Division			Total
		£000			£000			£000			£000
Balance at January 1, 2007		109,096			227,361			12,786			349,243
Additions (KEG)		–			–			588			588
Additions (KSI)		–			–			186			186
Additions (Falanx)		17			–			–			17
Additions (Soisic)		–			205			–			205
Exchange differences		(1,635	)		(3,810	)		(131	)		(5,576	)
Balance at December 31, 2007		107,478			223,756			13,429			344,663

10   Accounts receivable

Included within accounts receivable at December 31, 2007 are £24.5 million (2006: £23.8 million) of amounts recoverable on contracts.

11   Accrued liabilities

Included within accrued liabilities at December 31, 2007 are £5.1 million (2006: £8.8 million) for staff costs, £7.0 million (2006: £5.6 million) of accrued employee vacation and sabbatical leave and £1.9 million (2006: £3.2 million) representing unpaid consideration for acquisitions.

12   Share-based compensation

The board is authorized to issue options to acquire ordinary shares in the Company and awards of shares in the Company up to a maximum of 10% of the issued ordinary share capital in any five-year period. The exercise of options or vesting of share awards will be satisfied either out of newly issued share capital, or from shares held by the Company as treasury stock or within the ESOP. Treasury stock is purchased from the market and the quantum and timing of these purchases is at the discretion of the directors, and based on the share price and short-term cash requirements of the Company.

Under the UK Inland Revenue Executive Approved Share Option Plan (the “Executive Scheme”), the Company may grant options to employees meeting certain eligibility requirements. Options under the Executive Scheme are exercisable between three and ten years after their issue, after which time the options expire.

Under the Company’s Unapproved Scheme (the “Unapproved Scheme”), for which it has not sought approval from the UK tax authorities, options are exercisable one to seven years after their issue, after which time the options expire. The Company also operates the US ISO Scheme, which is substantially the same as the Unapproved Scheme, the main difference being that the options are exercisable one to five years after their issue. Under both of these schemes options are exercisable as follows: 25% maximum on first anniversary, 50% maximum on second anniversary, 75% maximum on third anniversary, 100% maximum on fourth anniversary. Various options to directors under the Unapproved Scheme have

F-27

certain performance criteria attached, which if met are exercisable after three years, otherwise they will become exercisable after seven years.

There are further schemes for the Company’s French and Belgian employees (the “French Scheme” and the “Belgian Scheme”). In the French Scheme, options are exercisable between four and seven years after their issue, whilst in the Belgian Scheme, options are exercisable from 1 January following the third anniversary after their issue, up to seven years from issue.

From 2006, the Company has begun issuing Restricted Stock Units (“RSUs”) to employees instead of options as approved at the 2006 AGM. RSUs are actual share awards on vesting rather than options to buy shares at a fixed exercise price. The main RSU awards (to employees in all jurisdictions other than France) vest similarly to the unapproved scheme above, namely 25% on each anniversary over four years. RSU awards to the Company’s French employees vest 50% after two years, and then a further 25% after three and four years. Whilst the Company reserves the right to award options to employees going forward, the majority of awards to employees will be in RSUs.

Additionally from 2006, the Company introduced the Deferred Annual Bonus plan (DAB). Under the DAB, which is for directors and selected senior management within the Company, participants are required to defer 50% of any related annual bonus into shares on a compulsory basis. These shares will be deferred for three years, and then a further matching award will be made depending on the achievement of an EPS performance condition over that time. The Company also operates the Long Term Incentive Plan (LTIP), also for directors and selected senior management, whereby share awards are made and vest depending on the Company’s TSR performance compared to two comparator groups over the three-year performance period.

Upon the acquisition of Artisan in 2004, the Company assumed the share schemes of Artisan existing at acquisition. The schemes remained substantially the same as prior to the acquisition, other than the options became options to purchase shares in ARM Holdings plc instead of Artisan Components Inc. The number and value of options were amended in line with the conversion ratio as detailed in the merger agreement. The schemes assumed were the “1993 Plan”, the “1997 Plan”, the “2000 Plan”, the “2003 Plan”, the “Director Plan”, the “Executive Plan” and the “ND00 Plan”.

Under each plan, there are multiple vesting templates and vesting periods. The majority of the options were already vested upon acquisition, and the most common template was 25% vesting after one year, and then 6.25% vesting each quarter thereafter, until 100% vest after four years. Some options vest on a monthly basis, and some vest over five years. All options lapse ten years from the date of grant.

In 1998, the Company set up two savings-related share option schemes for all employees and executive directors of the Company. The number of options granted is related to the value of savings made by the employee. The period of savings is three or five years except for employees of ARM Inc. where the period is two years. The option price for grants made in 2007 is set at 80% of the market share price prior to the grant (and for grants made in 2006 and before set at 85%), and the right to exercise normally only arises for a six-month period once the savings have been completed except for ARM Inc. where the right to exercise normally only arises for a three-month period once the savings have been completed. The Company set up further savings-related option schemes in each year up to and including 2006 for all employees and executive directors of the Company, which have the same characteristics as those schemes set up in 1998. In 2007, a further scheme was created for non-US employees.

In 2007, the Company commenced a new savings-related option scheme for US employees, namely the Employee Share Purchase Plan (“ESPP”). The number of options granted is related to the value of savings made by the employee. The period of savings is six months, with the option price being at 85% of the lower of the market share price at the beginning and end of the scheme.

Activity under all share schemes is detailed below, including weighted average exercise prices for share options and weighted average grant-date fair values for share awards:

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	Outstanding options					Outstanding RSUs/ LTIP/DAB awards
	Options Number			Weighted average exercise price £		Awards Number			Weighted average grant-date fair value £
Balances, December 31, 2004		164,019,815			0.870		5,003,724			0.909
Granted in year		27,127,630			1.051		3,543,455			1.165
Lapsed in year		(11,027,172	)		1.110		(786,298	)		0.987
Exercised in year		(37,096,283	)		0.374		–
Balances, December 31, 2005		143,023,990			1.014		7,760,881			1.018
Granted in year		9,064,290			1.250		10,589,718			1.310
Additional awards earned based on performance conditions		–					1,672,009			0.805
Lapsed in year		(9,508,283	)		1.697		(558,985	)		1.255
Options exercised/awards vested in year		(30,656,261	)		0.583		(3,798,567	)		0.805
Balances, December 31, 2006		111,923,736			1.093		15,665,056			1.236
Granted in year		1,065,813			1.104		12,742,465			1.264
Lapsed in year		(6,909,858	)		3.026		(3,604,445	)		1.099
Options exercised/awards vested in year		(30,850,202	)		0.612		(2,119,532	)		1.313
Balances, December 31, 2007		75,229,489			1.113		22,683,544			1.266

The total number of options exercisable at December 31, 2007 was 55,652,780 (2006: 74,533,736; 2005: 64,431,089).

The Company uses the historical price of the Company’s stock for the expected volatility assumption, including some adjustments for non-recurring one-time events, consistent with the guidance in FAS 123R and the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. Adjustments were made as the Company’s assessment of future stock price trends were more representative of historical data excluding these events rather than including them. The expected life of options is based on known vesting dates and historical exercise patterns for the different schemes. The risk-free interest rate is based on observed interest rates appropriate for the terms of the share options. The dividend yield assumption is based on the Company’s last declared dividend and expected payouts.

The fair value of the Company’s restricted stock units and LTIP awards is based on the share price at date of grant, discounted for any dividends that will not be earned during the vesting period.

The fair values per share of share options granted have been estimated with the following weighted average assumptions:

	Options									RSUs/LTIP awards
	2005			2006			2007			2005			2006			2007
Expected life (in years)		3.07			3.11			3.43			3.00			2.57			2.65
Volatility		50	%		40	%		34	%		50	%		40	%		33	%
Risk-free interest rate		4.00	%		4.01	%		5.50	%		4.00	%		4.13	%		5.28	%
Dividend yield		0.70	%		0.70	%		1.45	%		0.70	%		0.70	%		0.75	%
Weighted average fair value (£)		0.38			0.43			0.52			1.17			1.31			1.26

All of the options granted in 2007 were options within the SAYE scheme which have an exercise price that was 80% of the market price at date of grant (as noted above). The weighted average grant-date fair value of these SAYE options granted during 2007 was £0.52 (2006: £0.44; 2005: £0.40). The weighted-average exercise price of these SAYE options granted during 2007 was £1.104 (2006: £1.0264; 2005: £0.9095).

The following table presents details of the total stock-based compensation expense that is included in each functional line item of the Company’s consolidated statements of income for the years ended December 31. Note that the 2005 comparative income statement has been re-analyzed to absorb the stock-based compensation expenses into the functional line items rather than as a separate line as reported in the income statements in that year.

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	2005	*	2006			2007
	£000			£000			£000
Cost of revenues	2,489			1,098			959
Research and development costs	1,582			10,609			9,268
Sales and marketing costs	2,132			3,658			3,196
General and administrative costs	3,524			2,927			2,556
Cumulative effect of change in accounting policy	–			3,496	**		–
Share-based payment expense	9,727			21,788			15,979
Tax benefit for share-based payment compensation expense	(1,799	)		(4,181	)**		(4,246	)
Share-based payment expense, net of tax	7,928			17,607			11,733

___________

* The amounts included in 2006 and 2007 reflect the adoption of FAS 123R. In accordance with the modified prospective transition method, the Company’s consolidated statements of income for 2005 have not been restated to reflect, and do not include, the impact of FAS 123R.

** The cumulative effect of change in accounting policy arises as a re-measurement adjustment for liability-classified awards on cumulative share-based compensation for earlier years on adoption of FAS 123R. Included within tax benefits above is £1,049,000 relating to this cumulative effect of change in accounting policy.

The adoption of FAS 123R will continue to have a significant adverse impact on the Company’s reported results of operations, although it should not have a material impact on its overall financial position. The amount of unearned stock-based compensation currently estimated to be expensed in the period from 2008 to 2012 related to unvested share-based payment awards at December 31, 2007 is £16.3 million (2006: £19.5 million). Of this amount, £9.7 million is estimated to be expensed in 2008, £4.9 million in 2009, £1.5 million in 2010 and £0.2 million in 2011. The weighted average period over which the unearned share-based compensation is expected to be recognized is approximately 1.0 years. If there are any cancellations or accelerated vestings, the Company may be required to accelerate or cancel some of the remaining compensation expense. The share-based compensation expense in future periods will be more than stated above to the extent that the Company grants additional options or awards after the balance sheet date. Furthermore, the estimated future compensation charge may be affected by any change to the fair value of liability-classified awards.

In accordance with the requirements of the disclosure-only alternative of FAS 123, the following table illustrates the effect on net income and earnings per share for 2005 had the Company applied the fair value recognition provisions of FAS 123 instead of the guidelines provided by APB 25.

	2005 £000
Net income:
As reported	41,880
Deduct: Total stock-based compensation expense determined under fair value-based method for all awards, net of related tax effects	(20,120	)
Add back: Total stock-based compensation expense determined under the intrinsic value-based method for all awards, net of related tax effects	7,928
Pro forma net income	29,688
Basic earnings per common share (pence):
As reported	3.1	p
Pro forma	2.2	p
Diluted earnings per common share (pence):
As reported	2.9	p
Pro forma	2.1	p

The total pre-tax intrinsic value of options exercised and share awards (LTIP, RSU and DAB) made in 2007 was £23.8 million (2006: £21.6 million) and £2.9 million (2006: £5.2 million) respectively. This intrinsic value represents the difference between the fair market value of the Company’s shares on the date of exercise and the exercise price of each option. The total fair value of LTIP awards that vested in 2006 was £1.7 million; no LTIP awards vested in 2007 as all lapsed. The total fair value of RSU and DAB awards that vested in 2007 was £2.8 million (2006: nil vested). Based on the closing price of the Company’s shares on December 31, 2007 of £1.24 per share, the total pre-tax intrinsic value of all outstanding options, RSUs, LTIP and DAB awards was £54.0 million (2006: closing price of £1.2575, total pre-tax

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intrinsic value of £67.3 million). The total pre-tax intrinsic value of all exercisable options at December 31, 2007 was £22.5 million (2006: £39.2 million).

The total cash received on the exercise of options in 2007 was £18.9 million (2006: £17.9 million). The total tax benefits realized from the exercise of options and share awards in the year was £8.9 million (2006: £9.0 million).

The following options over ordinary shares were in existence at December 31:

2007

	Options outstanding						Options exercisable
Exercise price (£)	Number outstanding		Weighted average remaining life (years)		Weighted average exercise price (£)		Number outstanding		Weighted average remaining life (years)		Weighted average exercise price (£)
0.1125–0.45		14,608,232		3.11		0.32		14,608,232		3.11		0.32
0.46–0.9475		14,142,469		5.48		0.63		11,637,194		5.78		0.60
1.005–1.055		18,110,574		3.56		1.05		8,301,003		3.47		1.05
1.0575–1.25		13,713,481		2.95		1.23		11,441,370		2.83		1.24
1.325–7.738		14,654,733		2.78		2.34		9,664,981		1.69		2.87
Total		75,229,489		3.57		1.11		55,652,780		3.42		1.12

2006

	Options outstanding						Options exercisable
Exercise price (£)	Number outstanding		Weighted average remaining life (years)		Weighted average exercise price (£)		Number outstanding		Weighted average remaining life (years)		Weighted average exercise price (£)
0.026–0.40		15,662,942		4.24		0.25		15,662,942		4.24		0.25
0.405–0.50		21,310,841		4.13		0.45		19,649,705		4.01		0.45
0.51–0.9475		17,465,042		5.96		0.71		9,678,857		6.48		0.66
1.005–1.224		25,943,761		4.37		1.07		9,884,878		4.03		1.09
1.25–7.738		31,541,150		3.52		2.18		19,657,354		2.55		2.72
Total		111,923,736		4.31		1.09		74,533,736		4.00		1.12

There were also 13,845,565 RSUs, 7,943,979 LTIP and 894,000 DAB awards outstanding at December 31, 2007 (2006: 7,893,640 RSUs and 7,771,416 LTIP awards) with a weighted average remaining life of 1.43 years (2006: 1.51 years). RSUs, LTIP and DAB awards have no exercise price and all were unvested at December 31, 2007.

13   Commitments and contingencies

The Company leases its office facilities (which expire at various dates through 2018) and certain equipment (including EDA design tools which expire at various dates through 2012) under non-cancelable operating lease agreements.

Future minimum lease commitments at December 31, 2007, are as follows:

Years ending December 31,	Operating leases £000
2008		18,351
2009		16,423
2010		16,062
2011		11,522
2012		4,550
Thereafter		7,115

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Years ending December 31,	Operating leases £000
Total minimum lease payments		74,023

Rental expense under operating leases totalled £15,809,000, £18,800,000 and £17,558,000 for the years ended December 31, 2005, 2006 and 2007 respectively.

Nazomi  In May 2002, Nazomi Communications, Inc. (“Nazomi”) filed suit against ARM alleging willful infringement of US Patent No. 6,332,215. ARM answered the complaint in July 2002 denying infringement. Following an original ruling in ARM’s favor, Nazomi appealed and received a supplementary “Markman” hearing in 2005 that resulted in a decision that supported the original ruling. On February 13, 2007, Nazomi again appealed and, on February 21, 2008, the Court of Appeals for the Federal Circuit upheld the District Court’s claim construction and affirmed the District Court’s grant of summary judgment in favor of ARM. The period for any further appeal by Nazomi has now passed and accordingly this litigation is now concluded with judgment in favor of ARM.

Technology Properties Limited, Inc.  In October 2005, Technology Properties Limited, Inc. (“TPL”) filed suit, in the United States District Court for the Eastern District of Texas (Marshall Division), against certain companies in the Fujitsu, Matsushita. NEC and Toshiba groups of companies alleging infringement of TPL’s US Patents Nos. 5,809,336; 5,784,584 and 6,598,148 (the “Litigation”). All of the defendants are licensees of various ARM technologies. It was revealed as part of the preliminary infringement contentions in the Litigation, filed in July 2006, that certain ARM technology is alleged to infringe a single claim in US Patent No. 5,784,584 (the “’584 Patent”). In September 2006, ARM filed a motion to intervene in the Litigation and that motion has been granted. ARM is now a defendant party in the Litigation. The claim construction (or “Markman”) hearing took place in May 2007. Based on the claim construction delivered by the District Court, TPL filed a motion stipulating that the accused ARM technology does not infringe the ‘584 Patent with a request that final judgment be entered to that effect. TPL subsequently filed notice to appeal the claim construction to the Court of Appeals for the Federal Circuit. Based on independent legal advice, ARM is confident that the Court of Appeals will uphold the claim construction ruling delivered by the District Court.

ARM does not expect any significant liability in respect of these claims.

Guarantees  It is common industry practice for licensors of technology to offer to indemnify their licensees for loss suffered by the licensee in the event that the technology licensed is held to infringe the intellectual property of a third party. Consistent with such practice, the Company provides such indemnification to its licensees but subject, in all cases, to a limitation of liability. The obligation for the Company to indemnify its licensees is subject to certain provisos and is usually contingent upon a third party bringing an action against the licensee alleging that the technology licensed by the Company to the licensee infringes such third party’s intellectual property rights. The indemnification obligations typically survive any termination of the license and will continue in perpetuity.

The Company does not provide for any such guarantees unless it has received notification from the other party that they are likely to invoke the guarantee. The provision is made if both of the following conditions are met: (i) information available prior to the issuance of the financial statements indicates that it is probable that a liability had been incurred at the date of the financial statements; and (ii) the amount of the liability can be reasonably estimated. Any such provision is based upon the directors’ estimate of the expected costs of any such claim.

There was no provision for such guarantees at either December 31, 2007 or December 31, 2006.

At December 31, 2007, ARM had provided in aggregate £nil (2006: £1.1 million) in relation to claims, being the expected future costs to be incurred.

At December 31, 2007, the Company had outstanding capital commitments of £276,000 (2006: £525,000).

14   Geographic and segment information

At December 31, 2007, the Company is organized on a worldwide basis into three business segments, namely the Processor Division (“PD”), the Physical IP Division (“PIPD”) and the Systems Design Division (“SDD”). In 2004, the directors were of the opinion the Company only had one class of business, and then following the acquisition of Artisan in December 2004, the Company had two reportable segments in 2005 (namely PD and PIPD).

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This was based upon the Company’s internal organization and management structure and was the primary way in which the Chief Operating Decision Maker (“CODM”) and the rest of the board were provided with financial information. Whilst revenues were reported into four main revenue streams (namely licensing, royalties, development systems and services), the costs, operating results and balance sheets were only analyzed into the two segments.

In 2006, this structure and system of internal financial reporting to the CODM and board was changed resulting in a third division, namely SDD (called DevSys in 2006), becoming a separate reportable segment. In previous years, the results of SDD were reported within PD, but for ease of comparability, have been separated out in the comparatives below. PIPD consists of the business stream previously undertaken by Artisan. PD primarily comprises the legacy ARM products and services. Recent acquisitions have been allocated to the various divisions as follows: KEG and KSI in 2005 to SDD, Falanx in 2006 to PD and Soisic in 2006 to PIPD. Goodwill on each acquisition has also been allocated into these divisions, except for Artisan whereby this has been allocated between PD and PIPD.

The following analysis is of revenues, operating costs, interest income, income before income tax, depreciation and amortization, capital expenditure, total assets and liabilities, net assets and goodwill of each segment and of the Company in total:

Year ended December 31, 2007	Processor Division £000			Physical IP Division £000			Systems Design Division £000			Unallocated £000			Group £000
Segmental income statement
Revenue		187,829			43,418			27,913			-			259,160
Operating costs		(112,579	)		(61,765	)		(42,218	)		240			(216,322	)
Interest, net		-			-			-			5,402			5,402
Income/(loss)before tax		75,250			(18,347	)		(14,305	)		5,642			48,240
Segmental balance sheet
Total assets		171,887			278,346			33,517			72,915			556,665
Total liabilities		(33,173	)		(13,303	)		(10,587	)		(5,862	)		(62,925	)
Net assets		138,714			265,043			22,930			67,053			493,740
Other segmental items
Depreciation and amortization		5,411			16,292			4,236			-			25,939
Capital expenditure		3,161			1,336			947			-			5,444
Goodwill		107,478			223,756			13,429			-			344,663

Year ended December 31, 2006	Processor Division £000			Physical IP Division £000			Systems Design Division £000			Unallocated £000			Group £000
Segmental income statement
Revenue		180,426			53,996			28,832			-			263,254
Operating costs		(115,196	)		(66,593	)		(40,967	)		4,522			(218,234	)
Interest, net		-			-			-			6,758			6,758
Profit on disposal of available-for-sale investment		-			-			-			5,270			5,270
Income/(loss) before tax		65,230			(12,597	)		(12,135	)		16,550			57,048
Segmental balance sheet
Total assets		171,085			300,851			33,614			147,153			652,703
Total liabilities		(37,308	)		(19,589	)		(10,843	)		(10,316	)		(78,056	)
Net assets		133,777			281,262			22,771			136,837			574,647
Other segmental items
Cumulative effect of change in accounting policy		(2,028	)		(979	)		(489	)		-			(3,496	)
Depreciation and amortization		4,678			16,352			5,377			-			26,407
Capital expenditure		4,077			2,368			2,114			-			8,559
Goodwill		109,096			227,361			12,786			-			349,243

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Year ended December 31, 2005	Processor Division £000			Physical IP Division £000			Systems Design Division £000			Unallocated £000			Group £000
Segmental income statement
Revenue		156,641			50,159			25,639			-			232,439
Operating costs		(87,357	)		(64,012	)		(30,868	)		(2,285	)		(184,522	)
Interest, net		-			-			-			5,317			5,317
Income/(loss) before tax		69,284			13,853			(5,229	)		3,032			53,234
Segmental balance sheet
Total assets		161,885			349,769			36,068			168,371			716,093
Total liabilities		(22,226	)		(20,115	)		(12,168	)		(12,534	)		(67,043	)
Net assets		139,659			329,654			23,900			155,837			649,050
Other segmental items
Depreciation and amortization		6,632			18,245			3,518			-			28,395
Capital expenditure		2,737			1,584			1,743			-			6,064
Goodwill		113,358			259,197			13,017			-			385,572

Unallocated operating costs are foreign exchange revaluation on monetary items, including cash and cash equivalents. Unallocated assets and liabilities include cash and cash equivalents, short-term investments and marketable securities, some deferred tax balances, current tax and VAT. There are no inter-segment revenues. The results of each segment have been prepared using consistent accounting policies with those of the Company as a whole.

The following analysis is of revenues by geographic segment and origin and long-lived assets, excluding deferred tax assets, by Group companies in each territory:

	Year ended December 31,
		2005 £000	£	2006 £000	£	2007 £000
Revenues (by market destination):
Europe		32,971		42,746		42,654
North America		99,727		111,194		109,895
Japan		42,270		40,303		41,868
Asia Pacific excluding Japan		57,471		69,011		64,743
Total revenues		232,439		263,254		259,160

The Company’s exports from the UK were £172,592,000, £195,868,000 and £216,976,000 for the years ended December 31, 2005, 2006 and 2007 respectively.

	Year ended December 31,
		2005 £000	2006 £000	2007 £000
Revenues (by origin):
Europe		170,505	198,386	215,371
United States		59,183	63,028	42,115
Asia Pacific		2,751	1,840	1,674
Total revenues		232,439	263,254	259,160

	At December 31,
		2006 £000	2007 £000
Long-lived assets (excluding deferred tax assets):
Europe		13,045	11,025
United States		3,614	2,827
Asia Pacific		1,166	1,891
Total long-lived assets		17,825	15,743

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In 2007, 2006 and 2005, no single customer accounted for more than 10% of total revenues.

15   Fair values of financial instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and cash equivalents, short-term investments and accounts receivable. The carrying amount approximates fair value because of the short maturity of those instruments.

Marketable securities. The carrying amount approximates fair value because these instruments are marked-to-market.

Foreign currency contracts and embedded derivatives. The fair value of foreign currency contracts and embedded derivatives is estimated using the settlement rates prevailing at the period end. The fair value of foreign exchange option contracts is derived using the Black-Scholes valuation model and includes the balance sheet spot rate, currency volatility and respective interest rate curves for the different currencies as inputs to this model.

Short-term debt. During the year, the Company entered into a £100 million revolving credit facility providing the Company access to funds for any corporate purpose. Whilst the Company did make various drawdowns totalling £30 million on this facility during the year, these had been fully repaid and the facility was undrawn at the balance sheet date. Any drawn amounts accrue interest at a LIBOR-plus rate whilst there is a nominal charge for the undrawn portion. Furthermore, the facility requires the Company to adhere to various financial covenants relating to EBITDA multiples and interest cover; the Company adhered to all covenants during the year.

The estimated fair values of the Company’s financial instruments are as follows:

	At December 31,
	2006						2007
	Carrying amount £000			Fair value £000			Carrying amount £000			Fair value £000
Cash and cash equivalents		90,743			90,743			49,509			49,509
Short-term investments		18,600			18,600			232			232
Marketable securities		19,151			19,151			1,582			1,582
Accounts receivable		69,552			69,552			68,232			68,232
Foreign currency contracts		439			439			(496	)		(496	)
Embedded derivatives		(1,620	)		(1,620	)		(220	)		(220	)
Short-term debt		–			–			–			–

16   Valuation and qualifying accounts

	Balance at January 1, £000		Charged/ (credited) to income statement  £000		Acquired with subsidiary undertaking £000			Utilized/ Reclassification £000			Foreign exchange £000			Balance at  December 31, £000
2007 – allowance for doubtful debts		2,556		215		–			(1,253	)		(14	)		1,504
2006 – allowance for doubtful debts		2,173		932		–			(377	)		(172	)		2,556
2005 – allowance for doubtful debts		1,451		547		27			–			148			2,173
2007 – valuation allowance against deferred tax assets		6,049		4,824		(749	)		(533	)		(17	)		9,574
2006 – valuation allowance against deferred tax assets		366		3,394		2,289			–			–			6,049
2005 – valuation allowance against deferred tax assets		254		112		–			–			–			366

F-35

17   Post balance sheet events

At the 2008 Annual General Meeting of the Company, a final dividend of 1.2 pence per share (total cost £15.3 million) will be proposed in respect of the 2007 financial year, and if approved will be paid on May 21, 2008 to shareholders on the register on May 2, 2008.

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