Chief Executive's Operating Review

Summary
Continuing operations
Point to Point
Defence Electronics
Discontinued Operations
Group Matters
Capital Expenditure
Employees
Pension Scheme

Summary
Once again, the year has been eventful with a number of major changes for the group with the disposal of the Compound Semiconductors and US Defence businesses, and the closure of the defined benefit pension scheme. Point to Point delivered another year of outstanding growth and Defence Electronics produced an unchanged operating profit despite reduced revenues.

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Continuing operations
The segmental analysis of the operating results is as follows:

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Point to Point
The Point to Point business designs and manufactures customised microwave electronic sub assembly components that are integrated by OEMs into point to point (PTP) radios. These radios provide the backhaul links for telecom networks particularly for the mobile basestation market. Customers require a broad radio portfolio in order to provide global coverage of the licensed communication bands.

Point to Point applies specialised microwave technology and radio expertise to develop custom solutions for each OEM customer. It provides a broad product range of frequency bands underpinned by cost effective designs in order to offer highly competitive volume supply across two product lines - microwave transceiver modules and filters. These products are integrated by the customer into the radio.

The business has developed proprietary semiconductor technology that enables a high level of product integration. These devices have been developed on large scale semiconductor foundries and are manufactured for Point to Point by key semiconductor partners. This provides significant cost advantage compared to the normal level of product integration by reducing the complexity of manufacture of transceiver modules. Point to Point also offers a full portfolio of filters required to channelise the licensed frequency bands in the radio. These products are optimised to meet market needs for high volume supply with short lead times. Point to Point has invested in a world class automated manufacturing facility co-located with its development teams and offering a unique volume supply capability with the high degree of flexibility demanded by the mobile telecoms market. Point to Point is the leading merchant supplier of transceivers and diplex filters. Several additional products have been developed and qualified during this financial year. Expansion of its product portfolio and significant volume demand from these customers has enabled Point to Point to increase its revenue 79% compared with last financial year and achieve operating margins of 15% in the year.

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Defence Electronics
The Defence Electronics business supplies complex components, sub-assemblies or major subsystems for use in military communications, radar and sensing equipment. Its customers are typically the prime contractors for defence equipment and its products are used to intercept, identify, analyse, generate and transmit radio frequency, microwave and millimetre wave signals.

Defence Electronics was affected throughout the year by weaker order intake, largely as a result of customers facing delays to major projects. Whilst this reduced the overall sales revenue, efficiencies achieved throughout the year enabled the business to achieve an overall margin improvement. Significant new product advances were made both in the UK and in Australia.

The UK new product launches led directly to the award of a major contract from Thales for the supply of receiver subsystems for SMART, the radar electronic support measures suite upgrade for the UK submarine fleet. In Australia, a successful demonstration of a new radar concept has assisted the securing of follow on research contracts for stand off security imaging hardware and a UAV Collision Avoidance system.

Revenue was down 10% year on year but operating profit was unchanged at £1.3m.

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Discontinued Operations

US Defence
Sale of this business was completed in October 2007 producing cash proceeds of £1.4m and a loss of £0.7m.

Compound Semiconductors
Sale of the Compound Semiconductors business was completed in February 2008. Disposal proceeds net of working capital adjustments were £10.3m and, in addition, the business generated a cash flow of £6.8m up to disposal.

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Group Matters
Central costs before exceptional items again reduced in the year to £3.0m (2007 £4.8m).

The properties at Saltaire and Stewarton were disposed of in the year producing proceeds of £6.1m and a £0.1m loss on
disposal.

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Capital expenditure
The group’s capital expenditure in the year was £2.3m, of which £0.4m was incurred in discontinued operations.

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Employees
At 31 May 2008, the group employed 392 people (2007 801).

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Pension Scheme
Past service liabilities for the defined benefit pension scheme have been secured by purchasing annuities with Paternoster. The scheme is now in the process of being wound up with an anticipated completion by the end of calendar year 2008. There are provisions for £1.0m of liability left on the balance sheet which the company anticipates funding prior to completion of the remaining wind up process.

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Charles Hindson
Chief Executive
28 July 2008