Financial results
Sales for the year ended 31 May 2003 were £241.3m (2002 £280.5m). Operating profit before exceptional costs, goodwill amortisation, and share compensation costs was £11.0m (2002 £17.8m).

After charging exceptional costs of £1.8m, goodwill amortisation of £2.3m, share compensation costs of £0.2m, and net interest and financing currency costs of £2.9m, the profit before tax was £3.8m (2002 £25.5m loss). After tax, this was £1.1m (2002 £29.0m loss), resulting in basic earnings per share of 1.46p (2002 39.31p basic loss), which is 1.45p on a diluted basis (2002 39.31p loss).

Net interest and financing currency costs have fallen to £2.9m from £12.5m in 2002. This is partly due to lower levels of net interest payable which reduced to £8.0m from £12.6m in 2002 as a result of buying in $37.2m of 10% Senior Notes during the year. Additionally, a net financing currency exchange gain of £4.2m (2002 £0.1m) has arisen on the 10% Senior Notes and an exceptional net gain of £0.9m (2002 £nil) was realised on buying in the Senior Notes at a discount to par value.

Cash
At 31 May 2003, Filtronic had a cash balance of £6.5m, having generated £19.5m of cash during the financial year. Filtronic¹s debt was $103.6m (£63.2m) of 10% Senior Notes, after using £22.1m of cash to buy in $37.2m of 10% Senior Notes. Additionally, the company continues to have bank borrowing facilities totalling £31.0m, none of which was being utilised at the year end. Net gearing was 51%, compared to 81% at 31 May 2002.

Dividend
The Board is proposing to maintain the final dividend of 1.8p (2002 1.8p) payable on 3 November 2003 to shareholders on the register at 15 August 2003.

Operations
The segmental analysis of the business is as follows:

Wireless Infrastructure
Market conditions have been characterised by strong pricing pressure in 2G and 2.5G systems and low levels of demand for 3G WCDMA products. As a result, both sales and operating margins in this business segment declined. Although the larger operations in the UK and the USA continued to achieve our target operating margins, low levels of 3G WCDMA demand adversely impacted performance in our Finnish and Australian operations. Overall, Filtronic continued to outperform its competitors and remains the number one independent supplier of its type in the world. Continued focus on customer support, cost reductions and operating efficiency will remain at the forefront of this business segment¹s strategy.

Cellular Handset Products
The Cellular Handset Products business had another outstanding year. During the financial year, Filtronic supplied approximately 106 million handset antennas, an increase of 23% over the previous financial year. Over one third of these units were manufactured in Suzhou, China. Several Far Eastern handset manufacturers have been added as customers during the year, although to date they have not accounted for material levels of sales.

Electronic Warfare
The Electronic Warfare business segment finished the financial year strongly after a disappointing first half. The business was profitable, and increasingly so, in each of the last four months of the financial year, reflecting the increasing volumes of production in the European Fighter Aircraft programme, alongside strong demand for certain products in the USA.

Broadband Access
The Broadband Access business continued to suffer from low levels of demand for its current point to point transceiver products resulting in continuing losses. New high performance, lower cost, monolithic microwave integrated circuits (³MMICs²) from Newton Aycliffe have been designed and are expected to be introduced during the second half of the next financial year, which should assist in improving financial performance in this business segment.

Compound Semiconductors
Throughout the year, focus has been maintained on developing and qualifying the compound semiconductor processes at our state of the art facility at Newton Aycliffe. As I stated in my Interim Statement in January 2003, our agreement for foundry sales with M/A-COM, Inc., has not proved fruitful. As a result, we have developed a new proprietary switch process and sample product has been supplied to several major potential customers for mobile handset and wireless LAN market applications. In addition, an innovative process for the manufacture of very high power transistors has been developed for the base station power amplifier market. These transistors are essential to meet the high efficiency requirements of our power amplifier development. The MMIC process has been used to supply initial quantities of product to BAE SYSTEMS Avionics Ltd and other customers, including internal requirements in the Broadband Access business. These products address both the defence and wireless communications markets.

Filtronic Solid State, California
Last year, the Board announced the closure of the fabrication facility for compound semiconductors at Filtronic Solid State, Santa Clara, California. The exceptional closure costs amounted to £1.8m, £0.9m lower than the estimate made in the half year results to 30 November 2002. The compound semiconductor team at Filtronic Solid State is now operating as a Œfabless¹ compound semiconductor business using the manufacturing capability at Newton Aycliffe.

Outlook
The Board expects that the group will continue to generate cash and reduce indebtedness during the financial year ending 31 May 2004.

Worldwide demand for mobile infrastructure products continued to decline during the past year with few signs of an imminent upturn. Independent forecasts indicate a further decline in the range of 10% to 20% in this market in 2003. Notwithstanding these challenging market conditions, Filtronic has continued to consolidate its position as the world¹s leading independent supplier of transmit/receive modules for mobile base stations. Despite pricing pressures and difficult markets, the Board remains confident in the medium and long term opportunities offered by the wireless communications markets, including 3G, for both the company¹s existing and new products including high performance power amplifiers.

Filtronic is one of the world¹s leading manufacturers of mobile handset antennas and supplies over 25% of the world demand. The world market for mobile handsets is independently forecast to show an approximate 10% year on year unit growth in 2003. The Board expects Filtronic to maintain its market position in this business segment in the financial year ending 31 May 2004.

The Electronic Warfare business is characterised by long development cycles and requires demanding technical performance. Filtronic has now entered the production phase for several qualified products on a number of major programmes, which should provide sustainable, profitable growth over a number of years.

Considerable pressure exists to develop and produce more sophisticated and cost effective solutions in the mobile telecommunications industry. For the last three years our major research and development effort has been aimed specifically at 3G base station equipment. At the heart of the new products are the compound semiconductor transistors manufactured at Newton Aycliffe, which are embedded in proprietary circuits to provide high power (360 Watts peak) very efficiently. Following the successful demonstration of this technology to several Original Equipment Manufacturers (³OEMs²), customer specific 3G power amplifier requirements are now being addressed using internally developed advanced digital linearisation techniques. These customer specific sample units will be delivered to at least four major OEMs over the next few months. Other market demands have led us to develop a larger range of compound semiconductor products at Newton Aycliffe with an increased urgency to introduce multifunction MMICs for both the commercial and defence sectors. Our developments at Newton Aycliffe position Filtronic to take advantage of a wide range of compound semiconductor related market opportunities as they arise.

Overall, our two main businesses are expected at least to maintain their market position. In addition, the Electronic Warfare business is now growing and profitable. The range of products and processes, particularly at Newton Aycliffe, has been expanded to provide a platform for growth.

Professor J D Rhodes CBE FRS FREng
Executive Chairman and CEO
28 July 2003