Financial Review

Sales for the first half were £63.5m (2003: £29.5m) and the Group reported a record first half pre- tax profit of £14.2m (2003: £7.1m). The earnings per share were 12.1p (2003: 6.0p).

Whilst sales have more than doubled the gross margin has reduced reflecting expected price pressure from customers on mature products. As is customary in our industry we continue to focus on cost reduction through re-engineering, component price and manufacturing cost reductions. Our overheads are tightly controlled, resulting in our cost base as a percentage of sales reducing to 6.8% from 11.4% a year ago.

The interim dividend is to be increased to 2.0p (2003: 1.5p) per ordinary share to be paid on 6 April 2005 to shareholders on the register as at 25 February 2005.

The Group balance sheet remains strong with net assets of £40.8m (2003: £27.9m) of which £22.2m (2003: £22.6m) was cash. Stocks, debtors and creditors were significantly higher than a year ago, reflecting the increased level of business in the last couple of months of the financial period and the planned build-up of inventory ahead of Chinese New Year.

Operating Review

The business experienced an exceptional rise in turnover, reflecting significant sales of PVR set top boxes (a set top box incorporating a hard disc drive) and set top boxes to our Italian customer; neither of these products were sold in the half year to 31 December 2003.

Deliveries of digital satellite set top boxes to our Italian broadcaster customer commenced ahead of schedule in August 2004 and during the half year to 31 December 2004 we shipped significant volumes to this important new customer.

In the UK a large proportion of our orders for this financial year for standard set top boxes and PVR boxes were shipped in the half year to 31 December 2004, reflecting a strong demand in the run up to Christmas.

The Hong Kong operation, which makes direct shipments of audio products mainly to the US market, continues to be a successful part of our business with turnover ahead of the same period last year.

In September we launched the E3, a new generation e-mailer, at a retail price of around £99. Although at launch its full capability was restricted awaiting further development of new software. In addition to e-mail, sms, internet access and other functionality available on the previous version, the E3 has a colour screen and video phone functionality. The in-built camera enables users to hold video calls with other users and to send and receive picture messages with mobile phones and PCs. Initial sales have been low and various initiatives are planned in the second half to stimulate sales once new software is available. The previous model, the e-mailer plus, continues to sell well.

Approximately 403k e-mailer units have now been bought and registered since the launch of the product of which 35k units were in the last six months.

In December 2004 the average revenue generated from the installed base of e-mailers was £22k per day (approximate annualised rate of £8m per annum). The majority of the revenue continues to be derived from e-mail, surf usage and the downloading of ringtones, which in the last couple of months has been enhanced by the addition of polyphonic ringtones which are very popular on mobile phones.

Outlook

The development and the start of shipment of the new generation e-mailer telephone is an important milestone for the Company as the technology contained within it is a significant leap forward for us, one on which the Company expects to capitalise on in years to come. With the rapid advancement in Internet Protocol telephony such as Voice over IP and other data transfer features the Company is well poised to exploit opportunities in both home and overseas markets catering for these new and exciting applications.

New features will continue to be downloaded as time goes by. In the short term the downloading and display of digital photos from the now very popular digital cameras to the E3 e-mailer will be possible making it a simple and fast picture viewer as well as having the ability to send pictures by e-mail. Another major feature and advance in technology will be the ability to operate the unit on an ADSL line for high speed data transfer applications.

The industry is now well into the digital revolution and the transition from analogue consumer products is rapidly gaining momentum. For Amstrad we see the sacred treasures of our business as being advanced telephony and digital gateways into the home such as PVR and more importantly the transition away from the VCR to read-write DVD technology. The Company intends to invest in development in these exciting new areas to lay a solid foundation for the future.

For the reasons outlined previously the Group has reported an exceptional result for the first half. Shareholders should however remember that the second half of the financial year always reflects the normal seasonal reduction in sales volumes.

We have a good order book for set top boxes for the rest of the financial year and have been awarded further orders by our customers that will secure sales well into and throughout our next financial year. As such our expectations for this financial year's result remains positive.

Sir Alan Sugar
Chairman
17 February 2005