The group also announced that its chairman Sir Richard Evans would step down at the company's annual general meeting in 2004.

BAE has seen its stock market value fall by two-thirds in the past year, as difficulties with its UK Ministry of Defence contracts have mounted.

Although BAE has now agreed new terms of its contracts with the MoD, the changes have cost the firm �750m ($1.2bn; 1.1bn euros).

The company's core profits fell by 27% to �796m in 2002, at the lower end of the City's estimates.

Restored relations?

The firm was eager to draw a line under its past difficulties.

"We made a mistake, we've now put that behind us. But I'm afraid it has cost our taxpayers a great deal of money," said the firm's chief executive Mike Turner.

"We now have a new spirit of co-operation for the good of the UK armed forces," he added.

Analysts have expressed concern that the company has lost credibility with the ministry, which has proved increasingly willing to funnel large orders to non-British companies.

Out of the woods?

But BAE's difficulties are not yet over.

The firm said that profits in 2003 would be hit by "low export activity and with production programmes still in early phases of maturity".

Investors, however, were not impressed by a more positive assessment of trading conditions in the UK and the company's shares closed down 1% at 126p, reversing earlier gains.

"They're clearly not out of the woods," said Lawrence Peterman, investment director at Eden Group.

Shooting

In a separate development, a BAE Systems employee was shot dead in the Saudi Arabia capital, Riyadh, on Thursday.

The man, who has not been named, was attacked as he sat in his car at traffic lights.

The motive for the killing is unclear.

But it has also emerged that there have been two other attempted shootings against BAE personnel in Riyadh, both unsuccessful, in the past two weeks.