Britain's biggest defence group BAE Systems yesterday batted away allegations that it maintained a slush fund to bribe clients, describing the claims as rubbish and 'old hat', writes Guy Dresser.

Allegations that the company had run a multi-million pound fund to entertain Saudi Arabian officials as part of its work on the 1988 oil-for-arms al Yamamah deal were carried in a newspaper report yesterday.

But chief executive Mike Turner moved quickly to deny the claims, saying he had heard them all before and that they were groundless.

'We deny all such allegations. We operate in line with the laws of the United Kingdom and all other countries we operate in.'

Saudi Arabia is one of BAE's biggest markets and the UK's top defence export destination through the 1988 oil-for-arms Al Yamamah deal worth more than pounds 20 billion.

Mr Turner was speaking after unveiling a dip in underlying earnings before goodwill and other exceptional items, as forecast earlier, to pounds 333 million, in the mid-range of City estimates. Pretax profits were up from pounds 41 million a year ago to pounds 56 million, however.

The company reported progress in turning around the defence businesses after big losses last year following cost overruns on two major contracts, the Nimrod anti-submarine patrol aircraft and the Astute class submarine programme.

Talks with the Ministry of Defence have resulted in agreement on capping the overruns on both projects. Concern about the two aircraft carriers that the company is contracted to build for the Royal Navy were also addressed by BAE, which said it had made progress in agreeing a contracting mechanism that will allow costs to be progressively firmed up when the scope and risks of the project become clearer.

It was suggested earlier this year that the project was in danger of running substantially overbudget, a development that spooked analysts in the City.

Tony Lancelott, defence analyst at Arbuthnot Securities, said he was now enthused by the results, adding that the company was making progress in the right direction: 'BAE is moving towards market rehabilitation,' he declared.

BAE shares, down 4 1 /2p at 169 1 /2p yesterday, remain well adrift of their 2001 levels thanks to concerns about project overruns, which resulted in profit warnings, and weakness in the company's important civil aerospace markets.

Mr Turner said the results reflected good progress at the group so far this year, but he admitted that much more work had to be done for the company to deliver acceptable profitable growth and increased shareholder value.

Stronger oil prices boosted operating cash inflows to pounds 273 million, and there was also a better-than-expected contribution from its North American operations.

BAE's commercial aerospace business, which includes a 20 per cent stake in Airbus, was weaker, however, and profits here dropped 28 per cent as the airline industry continued to suffer from overcapacity and uncertainty caused by the war in Iraq and terrorism fears. Mr Investors receive a 3.7p payout on earnings per share before goodwill and one-off items of 7.2p, down from 7.7p.

With acknowledgement to the Birmingham Post.