Sales for the year ended 31 May 2004 were £237.2m (2003 £241.3m), and operating profit was £3.7m (2003 £6.7m). An exceptional profit on disposal of a business was £4.5m. Net interest and financing costs were £8.6m (2003 £2.9m). This change was primarily due to the early repayment of the 10% Senior Notes. This resulted in a loss before tax of £0.4m (2003 £3.8m profit), and a loss after tax of £3.0m (2003 £1.1m profit). Basic and diluted loss per share was 4.04p (2003 1.46p basic earnings, 1.45p diluted earnings).

Dividend
The Board is proposing to maintain the final dividend of 1.80p (2003 1.80p) payable on 1 November 2004 to shareholders on register at 13 August 2004.

Foreign currency and trading factors
Two consecutive years in which sterling has appreciated at greater than 10% against the US dollar inevitably creates pressure for our UK based operations. The Board has accelerated the transition of manufacturing to China such that transmit/receive modules in Wireless Infrastructure are now manufactured there in quantities exceeding UK output. Future expansion in this market will benefit from the lower cost of Chinese manufacturing and will provide a natural hedge against the strength of sterling.

Since our Handset Products group operates in dollar/euro economies, the percentage margins earned are independent of the strength of sterling. Absolute value of sales and the profit delivered suffered when translated into sterling.

Most of the operations of the Integrated Products group are located in the UK while the majority of its output operates in a market priced in dollars. This has resulted in pressure on margins in this business segment.

The global nature of the business implies exposure to currency movement. This has contributed a loss in the year as the euro, like the dollar, moved against sterling for a sustained interval. The Board will conduct a review of procedures and policy with the intention of introducing improvements in the finance and accounting areas during the year.

Operations
As advised in the interim statement, the Board implemented a management and reporting reorganisation of the business segments. This was done so that Filtronic is better positioned to address the challenges of moving from the development stage into production with a broad range of new products, including power amplifiers. Accordingly, the segmental analysis of the operating results is as follows:

*Includes the Filtronic Solid State Electronic Warfare business, which was sold on 31 December 2003.

Wireless Infrastructure
This business includes the traditional transmit/receive modules and new integrated power amplifiers for mobile base stations. The company is now delivering production quantities of WI products to all major original equipment manufacturers (OEMs). Additional investments were made during the second half of the year in both aspects of the business. In the transmit/receive module business, the decision to expand in China to meet the increasing demands of our existing customers and the production ramp for a new major OEM customer required additional funding. A decision was made to continue to procure materials in the UK in order to provide cover against any delays in ramping up the Chinese production. Following successful ramp-up in China, the UK operation will now focus on new product introduction for transmit/receive modules and integrated power amplifiers.

It became apparent earlier in this calendar year that the company¹s market opportunity in power amplifiers was for the supply of higher value integrated power amplifiers rather than power amplifier modules. Consequently, additional resources were deployed in the UK to establish a production facility for this complex integrated product and this involved an additional £2m of investment. In the full year, the cost, including this £2m has totalled £5m and following the year-end the first production contract has been secured.

Handset Products
The supply of internal antennas with higher levels of mechanical integration has dominated this year¹s performance. Since the proportion of our added value has decreased, the margins have fallen in line.

Taking into account the retranslation of the first half with respect to the end of year exchange rates, the effective operating margins in the second half were approximately 15% and are likely to remain at this level with the current level of product integration.

Integrated Products
Increasing sales in compound semiconductor devices have enabled the whole group to reduce losses. This trend is expected to continue. Fully automated assembly systems are now operational for incorporating high power transistors into modules for the integrated power amplifiers in WI. Operational improvements within the defence component of the business have allowed profitable operation for the year in the US and UK.

Central R&D
In addition to creating sales for DSP (Digital Signal Processing) subsystems for both commercial and defence applications, a considerable advance has been made on the development of digital predistortion techniques for 3G integrated power amplifiers.

Finance
As advised in the interim statement, the outstanding 10% Senior Notes were re-financed with a £50m term loan. The trading conditions prevailing in the latter part of the financial year and the appreciation of sterling against the dollar have led to certain breaches of the financial covenants associated with the term loan. The group¹s lending banks have confirmed their continuing support, including the waiving of the covenant breaches, whilst reserving their rights. Future covenant tests will be set to a suitable level based on prevailing trading conditions. The group¹s overdraft facility has been renewed at £9m until July 2005.

Capital investment
The growth in demand from both our existing and new customers for wireless infrastructure transmit/receive modules caused us to commit further capital expenditure for test equipment and facilitisation, mainly in China. This investment, together with new generic manufacturing equipment and processes to service the integrated handset antenna product line with new foil technology and automated test equipment for production of integrated power amplifiers for 3G WCDMA networks will result in capital expenditure of £18m, approximately 50% more than in the 2003/4 financial year.

Outlook
In WI, production contracts have now been secured with all major OEMs. Growth will mainly occur in China for our transmit/receive modules towards the end of this calendar year and the beginning of 2005. A similar time frame also exists for the production in the UK for the first integrated power amplifiers, where production requirements are larger than initially anticipated. Start-up costs will lead to a loss of approximately £6m before a positive contribution is achieved by the year-end.

In HP, the addition of our new foil technology and the utilisation of our impact extrusion expertise should consolidate our world leading position.

IP will grow primarily due to the increase in sales of compound semiconductors and in particular, the growth in RF switch products for mobile handsets. Further growth will also be achieved in supplying the high yield large power transistors mounted in the high efficiency module units for the integrated power amplifiers. Past investment at the compound semiconductor foundry in Newton Aycliffe has equipped the Integrated Products segment with the capacity to react rapidly to increasing market demand creating strong upside potential.

By far the largest market opportunity for the company is the supply of integrated power amplifiers for 3G base stations. Uniquely in this market, Filtronic controls its own supply of GaAs transistors, which are lower cost per watt of power compared to silicon LDMOS, the technology used by our competitors. Using feed-forward linearisation, GaAs units are more efficient than LDMOS units and with the state-of-the-art digital predistortion both techniques result in lower cost and higher efficiency. Whilst GaAs units are more difficult to linearise digitally, full UMTS specifications have been met by Filtronic for both constant and pulse power conditions. The company believes that LDMOS amplifiers, linearised through digital predistortion will have difficulty in meeting this critical specification under practical pulsed-power conditions. Hence, it is likely that our technology offers a significant advantage over competing solutions particularly for multicarrier and HSDPA (high speed data packet access) applications.

The strategic alliance with BAE SYSTEMS is producing sales, at development level, with growth potential as BAE SYSTEMS moves to production with its Seaspray 7000 series of active array radars for the surveillance market. Potential exists for expansion of the agreement as a result of the proposed merger of Gallileo Avionica, part of Finmeccanica, and the Avionics Group of BAE SYSTEMS. The experience of the alliance indicates increased scope for business in the sub-system arena coupled with benefits of high reliability manufacturing at low cost. Increased emphasis and budget allocation for European homeland security projects offers additional scope for supply of infrastructure elements, including airborne active antennas for satellite communications.

Company Directors
Last year a decision was made to split the roles of Chairman and CEO. Earlier this year, the position of CEO was offered to Professor John Roulston. Professor Roulston resigned from the Board of BAE Systems Avionics Limited in June and by agreement with his previous employer will take up his position at Filtronic on 6 September 2004.

Professor Christopher Snowden has accepted the prestigious position as Vice-Chancellor at the University of Surrey but will stay as a director with the company until April 2005, after which he will remain as a technical consultant in the area of compound semiconductors.

John Samuel resigned as Finance Director at the beginning of June. Christopher Schofield resigned as Company Secretary and executive director to concentrate on the Law practice, Schofield Sweeney, which he co-founded. Dr Maura Moynihan, a qualified solicitor specialising in intellectual property and a PhD graduate in biochemistry, joined Filtronic two years ago with the remit to become Company Secretary to which position she has now been appointed.

Professor J David Rhodes CBE FRS FREng
Chairman
2 August 2004