Pre-tax profits before exceptional items rose to 344 million pounds in the six months to June 30 from 278 million last time, on total sales of 4.24 billion pounds.

The interim dividend was raised by 20 per cent to 2.35 pence a share on pre-exceptional earnings up 25 per cent at 14.2 pence.

But the company warned it had seen a significant increase in its use of cash for working capital, largely due to the falling value of oil under its Al Yamamah arms-for-oil supply agreement with Saudi Arabia.

BAe said it had net cash at the end of June of 513 million pounds, down from 761 million pounds six months ago, despite receiving 851 million pounds from the sale of interests in communications businesses Orange Plc and Orion Network.

This was offset by increased investment in acquisitions andcapital expenditure "and more importantly by a significant movement in working capital, primarily resulting from timing of customer financing as a consequence of the lower sterling value of oil," the company said.

With a fixed volume of 600,000 barrels a day of crude oil sales allocated to funding work on the Saudi programme, analysts had already forecast that the drop in oil prices was likely to hit BAe's cashflow as it has to advance its own cash to make up for the shortfall.

The impact was expected to hit the balance sheet but not profits as BAe expects to be compensated for using its own cash.

However, BAe will eventually have to negotiate a top-up payment to make up for the shortfall, and postpone the launch of new any equipment programmes, analysts have said.