iSoft Group PLC

Interim Results

iSoft Group PLC
11 December 2006

11 December 2006

                                iSOFT Group plc



            Interim results for the six months ended 31 October 2006



iSOFT Group plc (IOT.L), a leading international supplier of software
application solutions to the healthcare sector, announces its unaudited results
for the six months ended 31 October 2006. The Group changed its accounting
policy for revenue recognition when reporting its results for the year ended 30
April 2006. The figures below are produced on the revised basis and comparative
figures have been adjusted in line with the new policy.




                                                   6 months ended       6 months ended        Year ended
                                                  31 October 2006      30 October 2005      30 April 2006
                                                         £m                   £m                  £m

Turnover                                                85.9                 97.2               201.7


Normalised profit from operations                         -                  11.7                13.3
Exceptional items                                      (11.6)                  -                   -
Goodwill impairment                                       -                    -               (351.4)
Finance costs, less investment income                   (3.0)                (3.7)               (5.7)
Profit on disposal                                       0.3                   -                   -
Profit/(loss) before tax                               (14.3)                 8.0              (343.8)
Taxation                                                13.7                (16.5)              (38.4)
Net loss for the period                                 (0.6)                (8.5)             (382.2)





First half 2007 Performance



•  Revenue down by 11.6%, but at the higher end of stated expectations

•  Break-even result at the normalised operating level

•  Cost base reduced by 16% since the start of the year

•  Exceptional costs of £11.6 million incurred in the period, relating to 
   restructuring

•  Net debt increased to £73.8 million, but better than our target at this stage

•  Significant tax credit (and a tax refund relating to the accounts restatement)

•  Net loss of £0.6 million



•  New CSC agreement, giving greater cash flow certainty

•  New CSC agreement driven by software deliveries

•  iSOFT is now delivering NPfIT milestones on schedule

•  Accenture and CSC agreements remove litigation risks

•  Management strengthened

•  Regeneration Plan launched to strengthen operations and reduce costs





Commenting, John Weston, Chairman and acting Chief Executive Officer of iSOFT
said:



We have made significant advances since the middle of 2006. Our position in the
UK National Programme for IT has been stabilised and the new agreement with CSC
underpins and de-risks the development programme for LORENZO. We are
reorganising the business. Management has been strengthened at all levels and
significant action has been taken to reduce costs. We now have much better
visibility on the Group's financial position and the results for the half-year
ended 31 October 2006 demonstrate a sharp improvement in underlying financial
performance. We have still to put long-term financing in place, but iSOFT is
today in considerably better shape than it was a few months ago.



On 17 October 2006, we announced that the Board had received expressions of
interest from a number of parties interested in acquiring iSOFT, taking a large
shareholding in iSOFT or creating a significant strategic alliance with the
Company.  We confirmed that we were taking forward discussions with a number of
those parties with the objective of clarifying the options and determining the
most appropriate route forward for the Company and its shareholders. These
discussions are continuing satisfactorily at this time and we will make a
further announcement in due course.





Enquiries:


iSOFT Group plc                On 11 December:  +44 20 7831 3113
                               Thereafter: +44 (0)1925 283423
John Weston                    Chairman and acting Chief Executive Officer
Gavin James                    Group Finance Director
John White                     Director of Corporate Communications


Financial Dynamics             +44 (0)20 7831 3113
Giles Sanderson
James Melville-Ross
Hannah Sloane





Chairman's Report



Introduction



In recent months we have made considerable progress in turning around the
company. In July this year we began an intensive two-year transformation process
covering every aspect of the business, which we refer to internally as the
Regeneration Plan.  This was launched formally in September. The Group's
management has been strengthened, product management is being fully integrated
with product development on an international basis and we have already made
substantial progress in reducing our cost base. The one-time costs of this
action are significant in the current financial year, but will provide a solid
foundation for the future.



We have secured bank funding until late 2007, but it is clear that if the
business is to prosper we must soon put in place long-term funding arrangements.
At the Annual General Meeting in October, I announced that we would be looking
at alternatives for securing the long-term financing of the Group. On 17 October
2006, we announced that the Board had received expressions of interest from a
number of parties interested in acquiring iSOFT, taking a large shareholding in
iSOFT or creating a significant strategic alliance with the Company.  We
confirmed that we were taking forward discussions with a number of those parties
with the objective of clarifying the options and determining the most
appropriate route forward for the Company and its shareholders. These
discussions are continuing satisfactorily at this time and we will make a
further announcement in due course.



Trading results for the six months ended 31 October 2006



The trading performance in the first half of this financial year was at the
higher end of the Group's stated expectations. Revenues amounted to £85.9
million compared with £97.2 million for the equivalent period last year, as
restated under the new accounting policy for revenue recognition. Profit from
operations before exceptional items ("normalised operating result") was a
break-even result.  Exceptional costs of £11.6 million (HY06: nil), as detailed
in note 3, and net interest costs of £3.1 million (HY06: £3.7 million) were
largely offset by a tax credit of £13.7 million, yielding a net loss of just
£0.6 million.



It has been challenging to sign new contracts during 2006, for obvious reasons,
but the Group has a solid core of contracted and recurring maintenance revenues
from its substantial installed base. I indicated in October that we expected
revenues for the full year to be 10-15% lower than last year, indeed revenues in
the first half were 11.6% down on HY06, with the majority of the decline
occurring in the UK. In Europe, the disposal of our operation in Switzerland was
more than offset by the first-time contribution from Novasoft in Spain, which
was acquired in October 2005. The phasing of revenues across the year,
especially between the two halves, will in future be more balanced, reflecting
the timing of implementation work, which is now the basis for licence revenue
recognition.



At the start of this financial year the cost base was running at an annualised
rate of nearly £210 million, largely because we were, and still are, bearing the
dual costs of maintaining the existing portfolio of strategic products, while at
the same time applying maximum effort to complete the development of LORENZO 3.5
for delivery to Computer Sciences Corporation (CSC), the prime contractor for
the UK NHS, in the first quarter of 2008. We have made good progress since June
in reducing our costs and consequently we were able to achieve a broadly
break-even normalised operating result in the first half despite the decline in
revenue. We have already achieved the run-rate target that we set for the end of
this year, which is an overall reduction of some 16%. The exceptional costs of
£11.6 million include £4 million for the closure of the former Head Office in
Manchester and £3.6 million in redundancy and reorganisation costs. A further £4
million was incurred for legal and advisory fees relating to changes in our
funding arrangements, strategic discussions and the FSA investigation.



In the first half of FY07, some revenues were recognised where cash has been
received up-front in prior years. Consequently, there was an operating cash
outflow of £32 million in the period, with net debt increasing from £41.8
million at 30 April 2006 to £73.8 million at 31 October 2006.



There was a tax credit of £13.7 million for the period, resulting in a net loss
of just £0.6 million, or 0.28 pence per share. A tax refund of £20.6 million has
been agreed in connection with the restatement of prior year revenues at 30
April 2006, of which £5.3 million was received in the first half and the balance
will be received in the second half.



There were 232,485,722 shares in issue at 31 October 2006, with outstanding
warrants to subscribe for a further 8,595,362 shares.



New Agreement with CSC - progress with the National Programme



There have been important developments in the first half relating to our
involvement with the English National Programme for IT (NPfIT).



In August 2006, we entered into a new contract with CSC, with whom we have been
working successfully in the North-West region since 2004. Under that contract
iSOFT will in future be paid by CSC based on delivery against a number of key
milestones between now and 2008. The majority of those milestones involve key
product deliverables, which comprise interim stages leading to the delivery of
full LORENZO 3.5 functionality in quarter 1 2008. As the quid pro quo for
greater control and certainty over payment, iSOFT has agreed that in the event
it fails to deliver on time against the key milestones, CSC will have the right
to step in and manage iSOFT's development operation, but without taking over any
intellectual property rights.



This agreement was entered into in anticipation of a major redistribution of
responsibilities within the NPfIT. In September it was announced that Accenture
would transfer to CSC its obligations to provide services to the North-East and
East and East Midlands ("EEM") regions with effect from 8 January 2007.  Also in
September 2006 iSOFT and CSC entered into a further agreement under which iSOFT
will retain exclusivity for providing core software solutions in the North-East
and exclusivity for interim solutions in the EEM region. iSOFT will retain
preferred supplier status for future solutions in the EEM region, subject to a
benchmarking review.



There are two important positive outcomes from this development. First, the new
deal will underpin the company's expectation of achieving revenues of at least
£300 million over the lifetime of the NPfIT contracts. Second, iSOFT and
Accenture agreed that no further payments will be made between the two parties
and that any potential litigation relating to the period between 2 April 2004
and 28 September 2006 will be annulled. That removed a major concern surrounding
the Group's future, and it resolved one of the key issues on the basis of which
the Group's auditors felt unable to give an audit opinion at 30 April 2006.



Our working relationship with CSC remains good. We continue to cooperate
effectively to deliver together this important contract and we are currently on
track to deliver all of the agreed milestones. The decision by CSC to expand its
relationship with iSOFT in the former Accenture clusters represents an important
endorsement by them of our LORENZO product and our ability to deliver.



The Regeneration Plan



The most important internal task on which we have been engaged in the past five
months has been the Regeneration Plan. We have put into action a series of
radical changes to the business to ensure that we maximise the commercial
opportunities for the product portfolio, that the cost base is appropriate for
the business today and that it is an efficient, lean base for the coming years.



The process began in July, coinciding with the appointment of Bill Henry as
Chief Operating Officer. We have also made a number of other senior appointments
including Chris Feeley as Programme Management Director and Mark Gillett as Head
of Product Management. Ajay Vasudeva joined us at the end of November as the new
head of our development operations in India.



We have also engaged the services of a number of experienced managers from
specialist recovery consultants Alvarez and Marsal to accelerate many of the
tasks connected with the Regeneration Plan. Speed has been of the essence in
completing this work and while there is a short-term cost, the board considers
this work to have been a priority.



On the product front, our aim over the next few years is to exploit fully the
existing portfolio of strategic products - especially iPM and iCM - prior to the
gradual introduction of LORENZO from 2008 onwards. We are currently supporting
too many variants of our core portfolio of around 30 existing products and have
therefore put in place a reorganised product management function, whose
principal objective is to rationalise the portfolio and standardise products
based on a single, configurable code stream across all of our international
country operations, thereby leveraging our experience to a far greater degree.



In terms of operating and overhead costs, we have been engaged in a continuous
process of cutting costs to a level that is appropriate for the business as it
is today.  The closure of the company's head office in Manchester and the
transfer of key support functions to other operational locations is typical of
the kind of radical action that we felt was necessary.



The initial target of this programme was to reduce the annualised cost base from
£210 million at the start of this year, to below £180 million in the financial
year commencing 1 May 2007. We are currently running ahead of that target and
there is potential for further reductions in due course, especially once LORENZO
has been launched. At the same time, some reinvestment will be required to
rebalance the business to an optimal size and shape. Our target is to have at
least one-third of revenue derived from the sale of new licences each year,
which in turn will sustain maintenance revenues at about one-third of the group
total, with a further third coming from support services.



Funding



The Group signed a new agreement with its banks at the end of August 2006, which
provides facilities of £141 million until November 2007. The cost of drawings
against those facilities will range from 200 - 450 basis points over LIBOR.
However, the Group will be required to pay additional payment-in-kind interest
at the rate of 5% per annum on the total committed facilities in quarter 1 of
calendar year 2007, rising to 7.5% per annum in quarter 2 and 10% per annum from
1 July 2007 onwards. As such, the cost of borrowing will become increasingly
expensive through 2007, providing the Group with a significant incentive to
secure long-term funding swiftly and before the current facilities expire in
November 2007.



Over the next 2-3 years a substantial amount of licence implementation work will
take place. For part of this work the Group has already received payment
up-front in prior years. Letters of credit and other guarantees of £88 million
that were outstanding at 1 May 2006 will also unwind over the next 2-3 years as
the contracts are delivered and the revenues are recognised. Third party
contract financing arrangements that amounted to £55.7 million at 31 October
2006 will also unwind over the next three years in the same manner.



Cash management has been an important part of the Regeneration Plan and in the
first half of FY07 we have been successful in managing our cash resources
efficiently. Net debt of £41.8 million at 30 April 2006 increased to £73.8
million at 31 October 2006, but that was better than we had expected during
discussions with our bankers in August. Total utilisation of the term and
revolving credit facilities with the banks amounted to £113.2 million at the end
of the period, leaving unused facilities of £27.8 million at that date, with
cash of £26.8 million also available. Utilisation of the facilities included
advance payments and other guarantees of £69.2 million, issued mainly in the
form of letters of credit (LOC). While the Group will have further funding
requirements through 2007, LOC commitments will be reduced on a continuous basis
as product implementation and support takes place, thus freeing up existing bank
facilities.



In the event that the Group disposes of any non-core assets, following mandatory
prepayment of the proceeds against existing borrowing, additional bank
facilities of up to £25 million will become available. Based on current
projections for trading and cash management and the key assumptions set out in
note 2 to the financial information, the Group has adequate facilities for its
immediate needs.



Investigation into possible accounting irregularities



In June 2006 the Group announced a change in accounting policy, as a consequence
of which it became necessary to review revenue recognition in prior years, in
order to re-state some prior year revenues. Arising out of that review a number
of possible accounting irregularities came to light in which it appears that
some revenues reported in 2003/04 and 2004/05 may have been recognised earlier
than they should have been.



On 20 July 2006 the Group engaged its auditors, Deloitte & Touche LLP, to
conduct a formal initial investigation into these possible irregularities. In
August it was confirmed that there are indeed matters that need further
investigation and we handed over relevant documents to the Financial Services
Authority (FSA), which is now conducting further investigations. The Group is
working closely and cooperatively with the FSA in order to complete these
investigations as quickly as possible. At the current time it would be
inappropriate to comment on the likely outcome.



On 25 October 2006 the Accountancy Investigation and Discipline Board (AIDB)
announced that it will conduct its own investigation. The AIDB investigation is
a review of the conduct of those members of accountancy bodies that are
regulated by the AIDB who were executive or non-executive directors of iSOFT
during the relevant periods, and RSM Robson Rhodes LLP, iSOFT's auditor for the
financial years ended 30 April 2003, 2004 and 2005.



All current executive directors of iSOFT who are members of those accountancy
bodies were appointed after the dates under investigation, as was the
non-executive director who is currently chairman of the audit committee. The
initial investigation into possible accounting irregularities conducted by the
Group's current auditors, Deloitte & Touche LLP, in July and August 2006 did not
uncover evidence that any of the current non-executive directors had any
knowledge of the irregularities.



On the basis of information that has come to light so far, we do not believe
that these matters will have any impact on the current or future financial
position of iSOFT. Nevertheless they must be thoroughly investigated and we will
continue to cooperate with both investigations.



Guidance for the current financial year



The Group has already announced that it expects revenues for the full year to be
between 10 - 15% lower than in the last financial year. Order cover for the year
is approximately 85% although closing the remaining order gap is more demanding
under the rigorous provisions of the new accounting policy.



Exceptional costs were £11.6 million in the first half of the year and are
likely to rise to approximately £25.0 million for the full year, with
corresponding cash outflow. Whilst clearly this will have a negative impact on
profitability for the current year, we expect that the benefits will start to be
fully realised with effect from the financial year commencing 1 May 2007.



We have negotiated a tax repayment of £20.6 million relating to the restatement
of revenues under the new accounting policy adopted at April 2006. A total of
£5.3 million has been received in cash in the first half of this financial year
and we expect the remainder to be received in the second half, which will
partially offset the cash cost of exceptional items in FY07.



Summary



In conclusion, we have made significant advances since the middle of 2006. Our
position in the UK National Programme for IT has been stabilised and the new
agreement with CSC underpins and de-risks the development programme for LORENZO,
which we continue to believe is potentially the most advanced healthcare IT
system.



We are reorganising the business. Management has been strengthened at all levels
and significant action has been taken to reduce costs. We now have much better
visibility on the Group's financial position and the results for the half-year
ended 31 October 2006 demonstrate a sharp improvement in underlying financial
performance. We have still to put long-term financing in place, but iSOFT is
today in considerably better shape than it was a few months ago.

Financial information

Consolidated income statement for the six months ended 31 October 2006

                               Note     Six months ended      Six months    Year ended
                                                                   ended
                                         31 October 2006      31 October 30 April 2006
                                                                    2005
                                                              (restated)
                                                   £'000           £'000         £'000
Revenue                                           85,876          97,167       201,695

Goodwill impairment                                    -               -     (351,410)
Exceptional costs                3              (11,613)               -             -
Profit on disposal of                                269               -             -
subsidiary
Other operating costs                           (85,857)        (85,448)     (188,386)
Total operating costs                           (97,201)        (85,448)     (539,796)

(Loss)/profit from                              (11,325)          11,719     (338,101)
operations
Investment revenues                                1,090             845         3,099
Finance costs                                    (4,140)         (4,562)       (8,748)
(Loss)/profit before tax                        (14,375)           8,002     (343,750)
Tax credit/(charge)              4                13,728        (16,519)      (38,432)
Loss for the period                                (647)         (8,517)     (382,182)

Attributable to:
Minority interests - equity                          177             132           357
Equity holders of the                              (824)         (8,649)     (382,539)
parent
Loss for the period                                (647)         (8,517)     (382,182)





Loss per share

                               Note      31 October 2006 31 October 2005 30 April 2006

Basic and diluted loss per       6               (0.28p)         (3.72p)      (165.1p)
share












Consolidated statement of recognised income and expense for the six months ended
31 October 2006

                                              Six months      Six months          Year
                                                   ended           ended         ended
                                         31 October 2006 31 October 2005 30 April 2006
                                                              (restated)
                                                   £'000           £'000         £'000

Exchange differences on translation
of foreign operations                              (935)            (60)         (345)
Actuarial losses on defined benefit 
pension schemes                                  (2,039)           (283)         (957)
Tax on items taken directly to equity                559             267           942
Net loss recognised directly in                  (2,415)            (76)         (360)
equity
(Loss)/profit for the period                       (647)         (8,517)     (382,182)
Total recognised income and expense
for the period                                   (3,062)         (8,593)     (382,542)
                                                 


Attributable to:
Equity holders of the parent                     (3,239)         (8,725)     (382,899)
Minority interests                                   177             132           357
                                                 (3,062)         (8,593)     (382,542)






Consolidated balance sheet as at 31 October 2006

                                                                  31 October          31 October          30 April
                                                                        2006                2005              2006
                                                                                      (restated)
                                                                       £'000               £'000             £'000
Non-current assets
Goodwill                                                             141,070             496,206           144,144
Other intangible assets                                                    -               2,307               771
Property, plant and equipment                                         10,585              12,456            14,057
Deferred tax asset                                                    10,731              41,964            10,027
                                                                     162,386             552,933           168,999
Current assets
Inventories                                                              398                 597               720
Trade and other receivables                                           61,308              50,128            66,250
Cash and cash equivalents                                             26,791              72,435            77,543
                                                                      88,497             123,160           144,513
Assets held for resale                                                 4,000               4,000             4,000
Total assets                                                         254,883             680,093           317,512
Current liabilities
Trade and other payables                                           (105,796)           (129,216)         (151,698)
Current tax liabilities                                                    -             (4,749)                 -
Obligations under finance leases                                       (690)             (1,222)             (947)
Bank and other loans                                                (38,224)            (32,466)          (47,765)
Short-term provisions                                                (1,380)             (1,039)             (943)
                                                                   (146,090)           (168,692)         (201,353)
Liabilities associated with assets held for sale                     (3,000)             (3,000)           (3,000)
                                                                   (149,090)           (171,692)         (204,353)
Net current liabilities                                             (57,593)            (45,532)          (56,840)
Non-current liabilities
Bank and other loans                                                (61,303)            (87,963)          (70,149)
Retirement benefit obligation                                       (13,032)             (9,706)          (10,712)
Obligations under finance leases                                       (350)               (284)             (529)
Deferred tax liabilities                                               (305)             (3,964)             (805)
Other payables                                                       (3,342)             (4,906)           (3,327)
Long-term provisions                                                 (3,644)             (2,533)           (2,199)
                                                                    (81,976)           (109,356)          (87,721)
Total liabilities                                                  (231,066)           (281,048)         (292,074)
Net assets                                                            23,817             399,045            25,438
Equity
Share capital                                                         23,249              23,173            23,249
Share premium account                                                 53,543              52,362            53,543
Own shares                                                           (3,758)             (3,533)           (3,758)
Merger and other reserves                                            132,183             362,749           130,742
Retained earnings                                                  (182,187)            (36,085)         (178,948)
Equity attributable to equity holders
of the parent                                                         23,030             398,666            24,828
Minority interest                                                        787                 379               610
Total equity                                                          23,817             399,045            25,438









Consolidated cash flow statement for the six months ended 31 October 2006

                                    Note      Six months     Six months     Year ended
                                                   ended          ended
                                              31 October     31 October       30 April
                                                    2006           2005           2006
                                                             (restated)
                                                   £'000          £'000          £'000
Operating activities
Cash (used in)/generated by          8          (34,948)       (17,408)          1,946
operations
Income taxes received/(paid)                       6,747       (14,546)       (17,788)
Interest paid                                    (2,676)        (4,290)        (4,644)
Net cash flow used in operating
activities                                      (30,877)       (36,244)       (20,486)

Investing activities
Interest received                                    791            845          2,456
Purchases of property, plant and
equipment                                        (1,099)        (2,136)        (5,717)
Proceeds on disposal of property
plant and equipment                                    -             33             37
Deferred consideration paid                        (200)          (140)          (241)
Purchase of own shares                                 -        (3,533)        (3,758)
Disposal/(acquisition) of                            317        (6,123)        (8,250)
subsidiaries
Cash acquired with subsidiary                          -            250              -
Capitalised development costs                          -          (722)          (722)
Net cash used in investing                         (191)       (11,526)       (16,195)
activities

Financing activities
Dividends paid                                         -        (4,176)        (6,030)
Proceeds on issue of shares                            -          5,763          7,030
New loans raised                                       -         22,307         41,548
Repayments of obligations under                        -          (526)        (1,199)
finance leases
Debt issue costs                                   (600)           (66)           (66)
Repayment of loans                              (18,919)       (13,237)       (37,195)
Net cash (used in)/from financing
activities                                      (19,519)         10,065          4,088

Net decrease in cash and cash
equivalents                                     (50,587)       (37,705)       (32,593)
Exchange differences                               (165)              -            (4)
Cash and cash equivalents at
beginning of period                               77,543        110,140        110,140
Cash and cash equivalents at end
of period                                         26,791         72,435         77,543



Notes to the financial information

For the six months ended 31 October 2006

1.            Basis of preparation

The interim financial information has been prepared in accordance with the
measurement and recognition criteria of International Financial Reporting
Standards (IFRS).  The same accounting policies and methods of computation are
followed in the interim financial report as included in the Group financial
statements for the year ended 30 April 2006.  Due to the changes in income and
funding recognition adopted in the latter statements, the comparative balances
for the period ended 31 October 2005 have been restated (see note 9).



The interim financial information was approved by the Board of Directors on 10
December 2006 and is unaudited.



The financial information set out does not constitute statutory accounts for the
purposes of Section 240 of the Companies Act 1985.  A copy of the statutory
accounts for year ended 30 April 2006 has been delivered to The Registrar of
Companies.  The condensed information for the year ended 30 April 2006 has been
extracted from the Group's statutory accounts for that period.

The statutory accounts for the year ended 30 April 2006 have been reported upon
by the auditors, Deloitte & Touche LLP. Their report contains a disclaimer of
opinion on the view given by the financial statements.  The audit report did not
contain a statement under s237 (2) of the Companies Act 1985. The audit report
did include a statement under s237 (3) Companies Act 1985 that, in respect of
the limitations on the work of the auditors, the auditors had not obtained all
the information and explanations that they considered necessary for the purpose
of their audit. The statutory accounts for the year ended 30 April 2006 have
been delivered to the Registrar of Companies.



2.            Significant matters relating to the basis of preparation of the
interim financial information



In preparing this interim financial information, the following significant
limitations and circumstances were taken into account.



Investigations into accounting irregularities



On 20 July 2006 the company announced that the Board had commissioned an
investigation into possible accounting irregularities. The initial independent
investigation was completed on 7 August and concluded that there were grounds
for a more formal investigation. The conclusion of the initial investigation was
that there is evidence of irregularities in respect of subsidiaries affecting
the financial years 2003/4 and 2004/5. The principal effects of this would
appear to have been to recognise revenues earlier than they should have been and
would not appear to have had any effect on the cash position of the company.



On 26 August 2006, the Group was notified that the Financial Services Authority
("FSA") had commenced an investigation into possible accounting irregularities.
Furthermore, on 25 October 2006, the Accountancy Investigation and Discipline
Board ("AIDB") announced its intention to commence its own investigation into
the same matters.



The Board also recognise that the commencement of these investigations may give
rise to further investigations by the company and other parties.  It is not
possible for the Board to conclude what implications, if any, may arise from the
conclusion of the investigations into these matters and it is possible that
certain adjustments or restatements to the financial information as presented
may arise which could be material to the reported results or statement of
financial position as presented.



Accounting policy for revenue and cost recognition and lack of associated
accounting information



On 8 June 2006 the Board announced that it had decided to change the Group's
accounting policy for revenue recognition to one appropriate to the current
commercial situation of the business.



In considering the most appropriate policy to apply the Board considered a
number of different policies and practices. The criteria applied in determining
the most appropriate policy included an assessment of which policy would best
reflect the underlying business contracts, the cash flows and the application of
the resources of the business with the objective of ensuring that information
could be reported so as to help users to assess business performance and the
amount, timing and uncertainty of future cash outflows and cash inflows. The
Board consider such information is essential in assessing the ability of the
business to generate net cash inflows and provide economic returns to investors.



The revenue recognition policy as historically implemented was that all
contracts were unbundled into their constituent parts, and an internally
determined proportion of the contract value attributed to implementation and
support was recognised evenly over the implementation and support phases of the
contract respectively. The balance of the contractual value was attributed to
licence revenue and recognised at the date of contract.



The historical implementation of this policy presumed that supply of product
licences can be separated from implementation and support. The complex
construction of the commercial contracts of the business, the level of resources
applied to implementation and support on an ongoing basis and the absence of a
reliable third party market in implementation and support of the Company's
product have made it increasingly difficult to distinguish between the supply of
product licences and implementation and support.



As the current Board had concluded that the previous accounting policy had
become inappropriate and did not achieve the criteria and objective for
determining the most appropriate policy it decided that licence revenues will
typically be recognised over the period of implementation, which may range from
a few months to a number of years from contract signature, and over the full
contract term in the case of full service contracts that are not capable of
being unbundled.



Changing the accounting policy required previously reported revenues to be
restated under the newly adopted accounting policy. In the case of
implementation projects the licence and implementation revenues are
appropriately recognised over the implementation period. In the case of bundled
contracts the total revenues of the contract (including licence) are
appropriately recognised over the total duration of the contract. The judgement
of the Board is that this is the most appropriate way for the Company to
recognise revenues and profits on projects.

In accordance with IAS 18, revenue of the business that is earned through the
rendering of services should be recognised on a stage of completion basis in
line with the activity and costs associated with each of the projects.



Steps have been taken such that for new contractual arrangements the directors
believe that it will be possible to capture costs and activity on a contract by
contract basis so that the costs and activity can be used as a basis of
allocating costs and revenues between accounting periods. Under the previous
accounting policy capturing individual contract costs to measure contract
activity was not deemed necessary.



Given that the historical costing records of the business do not identify
activity by contract, the information is not available to enable management to
measure revenue on a strict stage of completion basis and therefore the
directors have concluded that, in the absence of more reliable data, the most
appropriate and practicable basis in the circumstances is to recognise revenue
on existing contracts is using time as the basis of recognition. The licence and
implementation revenue is therefore spread evenly over the estimated period of
the implementation in the case of implementation (unbundled) contracts and over
the total contract term in the case of bundled contracts.



The lack of historical records to support the strict allocation of costs and
revenues has meant that it is not possible to provide sufficient and appropriate
evidence to the independent auditors to demonstrate that revenue is recognised
in line with contract activity as required by the new policy.



The cost base of the iSOFT business units has historically been predominantly
fixed in nature. The judgement of the Board, given the historical costing
records, is that it is currently most appropriate and prudent to treat the costs
of the business as period costs accounting for them in the period in which they
arise.



The Board is of the view that the new accounting policy now reflects an
appropriate presentation of revenues. Further, the Board is of the opinion,
given the lack of historical records and resulting limitations in information,
that spreading revenue evenly over the estimated period of the implementation in
the case of implementation contracts and over the total contract term in the
case of bundled contracts and treating costs as period costs provides the most
representative available recognition of revenues and presentation of results of
the business.



Information concerning the status of delivery under the National Programme for
IT



Revenue in relation to the National Programme contracts was formerly recognised
according to development work done. The new policy is to recognise revenue based
on the timing of software delivery.



The National Programme contracts are product delivery arrangements with a phased
release of functionality enhancements over the duration of the contracts. The
licence revenue arising is recognised as the elements of the product are
delivered. Historically, given the complexity of the contractual arrangements
between Connecting for Health and the Local Service Providers (LSPs) and between
the LSPs and iSOFT and the difficulty in measuring and recording delivery of
product the Board has been unable to obtain conclusive third party confirmation
of the status of delivery.



In August and September 2006 new agreements were entered into with CSC and
Accenture transferred its obligations under the National Programme to CSC. Under
these new contracts iSOFT will in future be paid by CSC based on its delivery
against milestones. The achievement of milestones will now form the basis for
revenue recognition under the National Programme and provide appropriate third
party evidence to support the phasing of revenue.



The Accenture agreement also provided third party evidence of the revenue
recognisable to date under that element of the National Programme, and confirmed
the Group's appropriate cumulative revenue recognition on the National Programme
to 30 April 2006. The Group is still unable to obtain third party evidence to
determine the appropriate phasing of that revenue between historical periods.



On the basis of the limited third party evidence that is available and the
detailed internal knowledge and records of the iSOFT operational team, the Board
believes that in the circumstances it has taken all reasonable steps to ensure
that revenue recognised in the comparative periods is in accordance with the
stated accounting policies. However, conclusive third party confirmation of the
status of delivery from the LSPs may have given rise to adjustments or
restatements to the comparative periods as presented which could be material to
those periods.



Potential for claims



The Group had previously reported that it had experienced a number of
difficulties in the delivery of the National Programme for IT, some of which
were outside the control of the Group. Some of these difficulties resulted in
formal correspondence being exchanged between the Company and the LSPs,
Accenture and CSC, alleging material contractual breach by the Company. The
Company has vigorously denied all of the alleged breaches. None of this
correspondence has resulted in notice to terminate being given or any formal
claims being made by the LSPs.



During the period agreement was reached with Accenture whereby all potential
claims have been waived. iSOFT and CSC have reached an agreement that, subject
to certain conditions, no claims will be raised in relation to historical
activities.



The Group has contracted to supply health information systems to the Health
Services Executive (HSE) in Ireland over the period to 2015, with a contract
value of €56 million. To date, implementation of these systems is in accordance
with the operational plans. Within the contract however, iSOFT contracted to
provide a letter of credit if the net assets shown in the consolidated accounts
of iSOFT Group plc are less than €75 million, and to maintain professional
indemnity insurance cover at levels not currently available to the company in
the insurance markets. Following the Group's change in accounting policy, its
consolidated net assets under the new accounting policies fall below this
amount. Additionally, iSOFT contracted to make available certain software
functionality which will not be available in the timescales contracted.  iSOFT
and the customer are engaged in constructive discussions to resolve these
matters, however, were agreement not to be reached, the remedies for such
breaches in contract could include termination of the contract and damages. The
remainder of the HSE programme is proceeding satisfactorily.



Were any claims, including the potential for claims noted above, to be brought
against the Company, the Board would defend its position vigorously. Should any
such claims be substantiated then they could give rise to adjustments to the
financial information as presented, which could be material to reported results,
cash flows and statement of financial position.



Going concern



The Board has prepared projected cash flow information for the period ending 12
months from the date of approval of this interim financial information. The
projections include certain key assumptions made by the directors:



(a)   Future sales and margins consistent with prior experience,
which also take into account the anticipated effect of the current circumstances
facing the business.

(b)   Significant restructuring of its UK and international
operations to generate cost savings from the reduction of resources, the
simplification and re-engineering of the Group's core processes and systems and
the streamlining and simplification of the Group's product offerings.

(c)   Disposal of the Group's non-core activities.

(d)   Renegotiation of certain key contractual arrangements.

(e)   The satisfaction of the conditions contained in the banking
agreement to enable the continuation of the bank's facilities.

(f)   The refinancing of the Group's banking facilities on or
before their expiry on 14 November, 2007.



The nature of the Group's business is such that there can be considerable
unpredictable variation and uncertainty regarding the timing and/or occurrence
of the matters referred to above,  the timing and margin on sales, the quantum
and timing of cash flows from new business activity and the achievement of
contractual milestones.



In preparing these projections the directors recognise that there are material
uncertainties that may cast significant doubt on the Group's ability to continue
as a going concern.



Having taken into account the uncertainties inherent in the assumptions referred
to in this note, the directors consider that the cash flow projections are
compiled on a reasonable basis and that it is appropriate that the financial
information should be prepared on the going concern basis. Future events may
give rise to circumstances not foreseen by the stated assumptions such that the
use of the going concern basis proves to be inappropriate. Should the going
concern basis be inappropriate, the Company may be unable to realise its assets
and discharge its liabilities in the normal course of business. The financial
information does not contain any adjustments that would be required were a
satisfactory outcome to the uncertainties, as detailed above, not be achieved.
Such adjustments would include writing down the carrying value of assets,
including goodwill, to their recoverable amount and providing for any further
liabilities that may arise.



3.            Exceptional costs

The exceptional costs of £11.6 million include £4.0 million for the closure of
the former Head Office in Manchester and £3.6 million in redundancy and
reorganisation costs. A further £4.0 million was incurred for legal and advisory
fees relating to changes in our funding arrangements, strategic discussions and
the FSA investigation.



4.            Tax

The tax credit for the period included £15.1 million resulting from the
amendment of prior period UK tax returns to reflect the revised policy for
income recognition.  No current year tax charge is anticipated in the UK for the
year to 30 April 2007 due to losses.  The credit for the period includes a
charge of £2.0 million at an effective rate of 32.8% in respect of overseas
taxation (31 October 2005: £1.3 million at 30.1%).



5.            Dividends

No dividend was paid during the period (2005: 1.82p per share).



6.            Loss per share


                                                         Six months      Six months          Year
                                                              ended           ended         ended
                                                         31 October      31 October      30 April
                                                               2006            2005          2006
                                                                         (restated)
                                                              Pence           Pence         Pence
Basic and diluted loss per share                             (0.28)          (3.72)      (165.10)




Basic and diluted loss per share was based on losses of £647,000 (six months
ended 31 October 2005: £8,517,000;  year ended 30 April 2006: £382,182,000).



Loss per share was based on the weighted average number of shares in issue of
232,485,722 (six months ended 31 October 2005: 229,127,000; year ended 30 April
2006: 231,550,000). The diluted loss per share was based on a weighted average
number of shares of 232,485,722 (six months ended 31 October 2005: 232,240,000;
year ended 30 April 2005: 229,700,000).  The diluted weighted average number of
shares is the same as that used for the basic loss per share due to the losses
incurred in each of the periods.



7.            Consolidated reconciliation of changes in equity


                                                        Six months       Six months          Year
                                                             ended            ended         ended
                                                        31 October       31 October      30 April
                                                              2006             2005          2006
                                                                         (restated)
                                                             £'000            £'000         £'000

Opening equity                                              25,438          404,255       404,255
Dividends paid                                                   -          (4,176)       (6,030)
Total recognised income and expense                        (3,062)          (8,593)     (382,542)
Issue of ordinary shares, net of costs                           -            9,675        10,929
Investment in own shares                                         -          (3,533)       (3,758)
Other movements                                              1,441            1,417         2,584
Closing equity                                              23,817          399,045        25,438



8.            Reconciliation of (loss)/profit from operations to net cash from
operating activities


                                                             Six months    Six months         Year
                                                                  ended         ended        ended
                                                             31 October    31 October     30 April
                                                                   2006          2005         2006
                                                                           (restated)
                                                                  £'000         £'000        £'000
(Loss)/profit from operations                                  (11,325)        11,719    (338,101)
Amortisation and impairment of intangible assets                    771           769      353,715
Depreciation of property, plant and equipment                     2,568         2,246        4,768
Share-based payment charge                                        1,441         1,418        2,585
Difference between pension charge and
contributions                                                       128            98          258
Increase/(decrease) in provisions                                 1,882         (377)        (833)
Impairment of property, plant and equipment                       1,747             -            -
Profit on asset disposals                                         (269)           (9)            -
Operating cash flows before movements in
working capital                                                 (3,057)        15,864       22,392
Decrease in inventories                                             322           258          492
Decrease in receivables                                          10,312        25,401       12,547
Decrease in payables                                           (42,525)      (58,931)     (33,485)
Cash (used in)/generated by operations                         (34,948)      (17,408)        1,946







9.            Revenue recognition and contract financing adjustments

As indicated in note 2 the Group has amended its revenue recognition and
contract funding accounting policies as the Board has concluded that the
previous policy is inappropriate in light of the factors outlined.  The impact
of the reported results for the period ended 31 October 2005 is detailed below:
                                                                              Revenue
                                                                          Recognition
                                                                                  and
                                                                             Contract
                                                                  As          funding
                                                          previously       prior year            2005
                                                            reported       adjustment        Restated
                                                               £'000            £'000           £'000
Revenue                                                      106,189          (9,022)          97,167
Total operating costs                                       (87,068)            1,620        (85,448)
Profit from operations                                        19,121          (7,402)          11,719
Investment revenues                                                -              845             845
Finance costs                                                (1,267)          (3,295)         (4,562)
Profit before tax                                             17,854          (9,852)           8,002
Tax charge                                                   (5,516)         (11,003)        (16,519)
Profit for the financial period                               12,338         (20,855)         (8,517)





9.       Revenue recognition and contract financing adjustments (continued)



The impact on the balance sheet as at 31 October 2005 is as follows:
                                                                           Revenue
                                                                       Recognition
                                                                      and contract
                                                         As                funding
                                                 previously             prior year
                                                   reported             adjustment        Restated
                                                      £'000                  £'000           £'000
Non-current assets
Goodwill                                            496,206                      -         496,206
Other intangible assets                               2,307                      -           2,307
Property plant and equipment                         12,456                      -          12,456
Deferred tax asset                                    5,125                 36,839          41,964
                                                    516,094                 36,839         552,933
Current assets
Inventories                                             597                      -             597
Trade and other receivables                         113,928               (63,800)          50,128
Cash and cash  equivalents                           72,435                      -          72,435
Current Assets                                      186,960               (63,800)         123,160
Assets held for sale                                  4,000                      -           4,000
Total assets                                        707,054               (26,961)         680,093
Current liabilities
Trade and other payables                           (95,965)               (33,251)       (129,216)
Current tax liabilities                            (11,061)                  6,312         (4,749)
Obligations under finance leases                    (1,222)                      -         (1,222)
Bank and other loans                               (17,631)               (14,835)        (32,466)
Short term provisions                               (1,039)                      -         (1,039)
                                                  (126,918)               (41,774)       (168,692)
Liabilities associated with
 assets held for sale                               (3,000)                                (3,000)
Net current assets/(liabilities)                     60,042              (105,574)        (45,532)
Non-current liabilities
Bank overdrafts and loans                          (34,900)               (53,063)        (87,963)
Retirement benefit obligation                       (9,706)                      -         (9,706)
Obligations under finance leases                      (284)                      -           (284)
Deferred tax liabilities                                  -                (3,964)         (3,964)
Other Payables                                      (4,906)                      -         (4,906)
Long term provisions                                (2,533)                      -         (2,533)
                                                   (52,329)               (57,027)       (109,356)
Total liabilities                                 (182,247)               (98,801)       (281,048)
Net assets                                          524,807              (125,762)         399,045
Equity
Called up share capital                              23,173                      -          23,173
Share premium account                                52,362                      -          52,362
Own shares                                          (3,533)                      -         (3,533)
Currency and other reserves                         360,014                  2,735         362,749
Retained earnings                                    92,412              (128,497)        (36,085)
Equity attributable to equity
holders of the parent                               524,428              (125,762)         398,666
Minority interests                                      379                      -             379
Total equity                                        524,807              (125,762)         399,045





Independent review report to iSOFT Group plc



Introduction



We have been instructed by the company to review the financial information for
the six months ended 31 October 2006, which comprise the consolidated income
statement, the consolidated balance sheet, the consolidated statement of
recognised income and expense, the consolidated cash flow statement and related
notes 1 to 9. We have read the other information contained in the interim report
and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.



This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.



Directors' responsibilities



The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority, which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.



Review work performed



We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions.  It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.



However, the evidence available to us was limited because of the following
significant matters:



Investigations into accounting irregularities in relation to subsidiaries

As detailed in note 2, the Board initiated a formal investigation into
accounting irregularities during the year ended 30 April 2006, which has given
rise to investigations by other parties, including the Financial Services
Authority. This may give rise to further investigations by other parties,
together with possible resulting actions by the company and other parties. All
of these circumstances have limited the ability of the directors to conclude on
the completeness or accuracy of transactions recorded in past periods. As a
result, and in the absence of any alternative evidence available to us, we have
been unable to form a view on any possible adjustments to the interim financial
information that might have been determined had the limitation not existed.



Accounting policy for revenue and cost recognition and lack of associated
accounting information

As detailed in note 2, the group changed its accounting policy for revenue and
cost recognition on contracts in the previous accounting period as the current
Board considered the previous accounting policy to be inappropriate. Under the
previous accounting policy the directors deemed it unnecessary to establish a
detailed contract costing and review process to measure contract activity. Under
the new accounting policy, sufficient and appropriate evidence is not available
to determine whether revenue and costs are recognised in the consolidated income
statement and consolidated balance sheet to reflect the stage of completion of
contracts. In the absence of any alternative evidence available to us, we have
been unable to form a view on any possible adjustments to the interim financial
information that might have been determined had the limitation not existed.



Lack of information on status of delivery of product under the National
Programme for IT and the associated capitalisation of development costs

As detailed in note 2, the group changed its accounting policy for revenue
recognition under the National Programme for IT in the previous accounting
period, the new policy being based on the timing of software delivery. Under the
previous accounting policy, the directors deemed it unnecessary to record the
detailed status of delivery and acceptance of product. The company has been
unable to obtain conclusive third party confirmation of the status of delivery
and acceptance of software in previous periods. As a result, under the new
accounting policy, sufficient and appropriate evidence is not available to
determine whether revenue and costs, including the appropriate capitalisation of
associated development costs, had been recognised in the consolidated income
statement and consolidated balance sheet in previous periods to reflect contract
activity. In the absence of any alternative evidence available to us, we have
been unable to form a view on any possible adjustments to the comparative
financial information that might have been determined had the limitation not
existed.



Potential for claims

Note 2 to the financial information sets out details of certain potential
claims. The ultimate outcome of these potential claims, together with any other
claims, cannot presently be determined. As a result, and in the absence of any
alternative evidence available to us, we have been unable to form a view on the
reasonableness of the lack of provision for such matters in the interim
financial information.



Going concern

As detailed in note 2, the directors recognise that there are material
uncertainties which may cast significant doubt on the group's ability to
continue in operation.  Having taken into account these material uncertainties,
the directors consider it is appropriate to prepare the interim financial
information on the going concern basis. In the circumstances of the group, we
have been unable to obtain sufficient and appropriate evidence regarding the
reasonableness of the directors' assumptions regarding the identified material
uncertainties. As a result, and in the absence of any alternative evidence
available to us, we have been unable to form a view as to the applicability of
the going concern basis, together with the effect on the interim financial
information should this basis be inappropriate. Any such adjustments would
include writing down the carrying value of assets, including goodwill, to their
recoverable amount and providing for any further liabilities that might arise.



Denial of review conclusion



On the basis of our review and, as a result of the matters noted above, we are
unable to determine whether any material modifications should be made to the
financial information as presented for the six months ended 31 October 2006.







Deloitte & Touche LLP
Chartered Accountants
Manchester
10 December 2006




                      This information is provided by RNS
            The company news service from the London Stock Exchange