Back to GetFilings.com

Use these links to rapidly review the document
TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on [    ]

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number 333-12430

Marconi Corporation PLC
(Name of Registrant as specified in its charter)

        Registrants telephone number, including area code: 011 44 2476 562000.

        Securities registered or to be registered pursuant to Section 12(b) of the Act: None.

        Securities registered or to be registered pursuant to Section 12(g) of the Act:

American Depositary Shares evidenced by American Depositary Receipts, each American Depositary Share representing 2 ordinary shares, nominal value 25 pence per share.

Ordinary Shares of 25 pence per share.

        Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None.

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the nest of registrant's knowledge, in definitive proxy statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

        Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2). Yes ý No o

        Aggregate market value of registrant's ordinary shares held by non-affiliates of the registrant, based upon the closing price of the registrants ordinary shares share on September 30, 2003, as reported by the London Stock Exchange on that date: £900,000,000.

        Number of shares of registrant's ordinary shares outstanding as of June 9, 2004: 200,511,292 Ordinary Shares of 25p each.

TABLE OF CONTENTS

2

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

        In this report, the terms "we", "us", "our", "the Group", "Marconi Corporation" and "the Company" refer to Marconi Corporation plc and its subsidiaries and joint ventures, as the context requires. Marconi Corporation plc is incorporated as a public limited company under the laws of England and Wales.

        We state our financial statements in United Kingdom ("U.K.") pounds sterling. In this report, references to pounds sterling, pounds or £ and to pence or p are to the currency of the United Kingdom, references to euro or € are to the common legal currency of the members of the European monetary union, and references to United States ("U.S.") dollars, U.S.$ or $ are to the currency of the United States of America.

        Some of the market share information and other statements in this report regarding our position relative to our competitors with respect to the manufacture or distribution of particular products are not based on published statistical data or information obtained from independent third parties. Rather, such information and statements reflect our management's best estimates based upon information obtained from our customers and from trade and business organizations and associations and other contacts within the industries in which we compete. Unless otherwise specified or the context otherwise requires, market share and market data are based on fiscal 2004 sales.

        Our fiscal year ends on March 31. Unless otherwise specified, all references in this prospectus to our fiscal year refer to a twelve-month financial period ending March 31. For example, fiscal 2004 represents the fiscal year beginning on April 1, 2003 and ending on March 31, 2004.

        The consolidated financial statements contained in this report have been prepared in accordance with accounting principles generally accepted in the United States, known as U.S. GAAP.

        Various amounts and percentages set forth in this report may have been rounded and, accordingly, may not total.

        The information concerning equity affiliates contained in this report, including financial information, has been taken from or based upon publicly available documents and, where applicable, records on file with the U.S. Securities and Exchange Commission ("SEC"), supplemented by additional information obtained in our capacity as shareholders.

        Solely for convenience, this report contains translations of certain U.K. pounds sterling amounts into U.S. dollars at specified rates. These are simply translations and you should not expect that a U.K. pounds sterling amount actually represents a stated U.S. dollar amount or that it could be converted into U.S. dollars at the rate suggested, or any other rate. In this report, the translations of U.K. pounds sterling amounts into U.S. dollars, where indicated, have been made at the rate of U.S.$1.84 per £1.00, the noon buying rate for cable transfers of U.K. pounds sterling, as reported by the Federal Reserve Bank of New York (the "Noon Buying Rate") on March 31, 2004. The Noon Buying Rate on June 9, 2004 was U.S.$1.8292 per £1.00.

3

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This annual report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial performance and condition as well as for our plans and objectives for our business operations and financial performance and conditions. You can identify these statements by words such as "aim", "anticipate", "assume", "believe", "could", "due", "estimate", "expect", "goal", "intend", "may", "objective", "plan", "positioned", "should", "target", "will", "would", and other similar expressions which are predictions of or indicate future events and future trends. These forward-looking statements involve known and unknown risks, uncertainties and other factors which are in some cases beyond our control and may cause our actual results, performance and condition or achievements to differ materially from those expressed or implied by such forward-looking statements. Factors that may cause such differences include, but are not limited to, the risks described under the caption "Risk Factors" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operation, as well as the risks set forth below:

•

Failure of our business plan to be implemented successfully and, if implemented successfully, failure of our business plan to be effective;



•

Material inaccuracies, errors or misjudgments concerning the assumptions underlying our business plan;



•

Adverse changes or uncertainties in general economic conditions and business conditions in the markets we serve;



•

Failure to successfully dispose of non-Core assets at satisfactory terms and time scales;



•

Continued overcapacity in the market for telecommunications and continued depression in the market demand for telecommunications products;



•

Loss of customers, in particular loss of key customers, or failure to attract new customers;



•

Failure of our Core business to maintain competitiveness;



•

Adverse changes in the markets for our products, including as a result of increased competition and consolidation in the highly competitive international markets for telecommunications products, or a change in the technology used as the industry standard or as the technology of choice of customers;



•

Major disruption of production at our facilities or the facilities from which we source components or products.



•

Any large-scale employee or management turnover;



•

Changes in environmental, tax and other laws and regulations which, among other things, could cause us to incur substantial additional capital expenditures and operational and maintenance costs;



•

Adverse changes in foreign exchange rates;



•

Adverse results in litigation;



•

Terrorism and acts of war;



•

Occurrence of any other developments adversely affecting our liquidity, results of operations of our ability to continue as a going concern.

4

AVAILABLE INFORMATION

        We are subject to the informational requirements of the Securities Exchange Act of 1934 and file reports and other information with the Securities and Exchange Commission. You may read and copy all or any portion of the reports and their exhibits at the public reference facilities maintained by the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at its regional offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material may also be obtained at prescribed rates by writing to the Public Reference Section of the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C., 20549. You may obtain more information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Securities and Exchange Commission also maintains a web site that contains reports and information about issuers, like us, who file electronically with the SEC. The address of that web site is www.sec.gov.

5

PART I

Item 1:    Business:

        We are a multi-regional provider of telecommunications equipment and services, which we supply to major telecommunications network operators, government agencies and selected large enterprises worldwide.

        We were incorporated as a private limited company in England in 1900 under the name The General Electric Company (1900) Limited. Our principal executive offices are in Coventry, United Kingdom. The mailing address of our principal executive office is New Century Park, P.O. Box 53, Coventry, CV3 1HJ, England, United Kingdom. Our website address is www.marconi.com.

Fiscal 2004 significant developments:

Financial Restructuring:

        On May 19, 2003, we concluded a financial restructuring ("Financial Restructuring"). The Financial Restructuring was effected through two separate "schemes of arrangement" under the U.K. Companies Act 1985. A scheme of arrangement is a procedure under English law through which a company may enter into a voluntary compromise or arrangement with one or more classes of its creditors to effect a restructuring of its financial obligations. One scheme of arrangement involved all of the creditors of Marconi Corporation plc, other than certain excepted categories of creditors but including the syndicate banks and bond holders to whom our primary financial indebtedness was owed. The second scheme of arrangement involved creditors of M (2003) plc (previously known as Marconi Plc), our former parent holding company. As a result of the restructuring, Marconi Corporation plc became the new parent holding company of our Group, replacing M (2003) plc, and M (2003) plc ceased to be a member of our Group.

        Our Financial Restructuring covered approximately £4.8 billion of creditors' claims, comprising £4.0 billion of syndicated bank debt and our externally held U.S. dollar and euro denominated bonds and £800 million of related party debt. In exchange for the cancellation of their claims against us, on May 19, 2003 we distributed to the creditors covered by our scheme of arrangement:

•

Cash: £340 million in cash;



•

Senior Notes: U.S.$717,139,584 (approximately £437 million) in aggregate principal amount of new guaranteed senior secured notes due April 2008 issued by Marconi Corporation plc, with interest payable quarterly in cash at a rate of 8% per annum;



•

Junior Notes: U.S.$486,881,472 (approximately £297 million) in aggregate principal amount of new guaranteed junior secured notes due October 2008 issued by Marconi Corporation plc, with interest payable quarterly in cash at a rate of 10% per annum or, at our option, in kind, by issuing additional junior notes, at a rate of 12% per annum; and



•

Marconi Corporation plc Shares: 995 million ordinary shares (199 million ordinary shares after our one-for-five share consolidation that occurred in September 2003), representing 99.5% of our issued ordinary share capital on May 19, 2003.

        Since the completion of the Financial Restructuring we have repaid in full all of the Junior Notes that were issued and only U.S.$487 million (approximately £242 million) of the Senior Notes remain outstanding.

        In addition, we issued 5 million ordinary shares (1 million ordinary shares after the one-for-five share consolidation that occurred in September 2003), representing 0.5% of our issued ordinary share capital upon consummation of the Financial Restructuring, and warrants to subscribe for up to 50 million (10 million following the one-for-five share consolidation that occurred in September 2003)

6

additional ordinary shares, equal to 5% of our issued ordinary share capital upon consummation of the Financial Restructuring, to shareholders of M (2003) plc. In connection with the restructuring we listed our ordinary shares on the London Stock Exchange and established an American Depositary Receipt ("ADR") program in respect of those shares.

        As part of the Financial Restructuring, Marconi Corporation plc separately obtained the sanction of the High Court of Justice of England and Wales for the purpose of implementing a capital reduction under the U.K. Companies Act, 1985. The capital reduction involved the cancellation of the non-voting deferred shares of Marconi Corporation plc and the cancellation of approximately £4.37 billion standing to the credit of Marconi Corporation plc's share premium account, which represented Marconi Corporation plc's entire share premium account following the effectiveness of the Marconi Corporation plc scheme of arrangement. This was effected to create a reserve which will eliminate the deficit on the profit and loss account shown on the balance sheet of Marconi Corporation plc as at March 31, 2003 with the excess reserve over the deficit on the profit and loss account initially being credited to a special reserve which will not be distributable to shareholders of Marconi Corporation plc until the creditors of Marconi Corporation plc so protected have been paid off or the High Court of Justice of England and Wales has agreed otherwise.

        In connection with the Financial Restructuring, the ordinary shares of M (2003) plc were delisted from the London Stock Exchange. While M (2003) plc's ordinary shares remain outstanding, all of M (2003) plc's remaining assets, other than assets necessary to fund the cost of administering its scheme of arrangement, will be distributed to M (2003) plc's creditors over time in accordance with its scheme of arrangement. We expect that M (2003) plc will be liquidated or dissolved in the future following the completion of those distributions.

        Prior to the Financial Restructuring, we and M (2003) plc had issued options in respect of M (2003) plc's shares to Group employees under a number of different option plans. In order to hedge some of the potential cost of acquiring the shares necessary to satisfy the Group's obligations under these plans, we, through an Employee Share Option Plan ("ESOP") trust entity, entered into contracts, which we refer to as ESOP derivative transactions, to purchase shares in the future at prices that were fixed at the dates of the contracts. In connection with the restructuring process, on March 26, 2003 we and M (2003) plc entered into a final settlement with the banks, which we refer to as the ESOP derivative banks, that were the counterparties under the ESOP derivative transactions. This settlement agreement definitively settled the claims of the ESOP derivative banks against us in relation to the ESOP derivative transactions. Under the settlement, which was conditional on our Financial Restructuring becoming effective, we paid a total of £35 million to the ESOP derivative banks and we excluded the claims of the ESOP derivative banks under the ESOP derivative transactions from our schemes of arrangement.

        As part of our Financial Restructuring, we contractually separated or ringfenced our U.S. based businesses from the rest of our Group. The ringfenced businesses were our North American Access ("NAA"), which we subsequently sold on February 20, 2004, Broadband Routing and Switching ("BBRS") and Outside Power and Plant ("OPP") businesses. While the business units that were ringfenced are located predominantly in the United States, the ringfenced entities are not limited to subsidiaries that are organized or incorporated under the laws of the United States, the states thereof or the District of Columbia but also include subsidiaries that are organized and incorporated under the laws of other jurisdictions including Republic of Ireland, Mexico and Switzerland.

        The covenants in the indenture governing the Senior Notes significantly restricts the type of financial, operational and other dealings that the non-ringfenced entities can have with the ringfenced entities. The covenants for the Senior Notes also require us to separate the BBRS and OPP businesses into separate subsidiaries, or groups of subsidiaries, within the ringfencing no later than May 19, 2005. Moreover, the non-ringfenced entities are generally prohibited from providing funding for any of the

7

ringfenced entities. Following the separation of the principal businesses within the ringfencing, BBRS and OPP businesses will generally be prohibited from providing funding to each other.

Sale of NAA:

        On February 20, 2004 we completed the sale of our NAA business for cash consideration of U.S.$240 million to a subsidiary of Advanced Fibre Communications, Inc. The cash proceeds when received were paid into the Mandatory Redemption Escrow Account ("MREA") and were used to fund a mandatory redemption of the then remaining outstanding Junior Notes and a portion of the Senior Notes.

Sale of Easynet Group plc ("Easynet"):

        During fiscal 2004, we disposed of our entire investment in our affiliate, Easynet. We effected this disposal through two share placings completed on July 4, 2003 and September 4, 2003. Before expenses, the disposal on July 4, 2003 raised approximately £40.5 million and the disposal on September 4, 2003 raised approximately £56.7 million. The cash proceeds were paid into the MREA and were used to fund partial redemptions of our Junior Notes. We no longer have an interest in Easynet.

Organizational structure:

        Set forth below is the simplified legal structure chart of our principal group companies following our Financial Restructuring and reflecting our new reporting structure adopted effective October 1, 2003. The chart does not show all intermediate companies. As at March 31, 2004, all companies shown were wholly owned directly or indirectly by Marconi Corporation plc.

8

Principal operations:

        Our principal executive office is in Coventry, United Kingdom with principal operating sites in:

•

United Kingdom: Coventry, Beeston, Chorley, Egham, Liverpool, London, Stafford and Wellingborough;



•

United States and Canada: Pennsylvania, Ontario, Georgia, Mississippi, North Carolina, Illinois and Ohio;



•

Italy: Genoa, Marcianise and Pisa;



•

Germany: Backnang, Offenburg, Frankfurt and Radeberg;



•

Spain: Madrid;



•

Australia: Melbourne and Sydney;



•

China: Beijing, Guilin, Hong Kong and Shanghai;



•

Malaysia: Daralam and Kuala Lumpur;



•

New Zealand: Auckland;



•

India: New Delhi;



•

Saudi Arabia: Riyadh;



•

United Arab Emirates: Dubai;



•

South Africa: Johannesburg;



•

Brazil: São Paulo and Votorantim;



•

Mexico: Naucalpan de Juarez and Huixquilucan Edo de Mexico.

Core businesses:

        We divide our Core activities into two main business types:

•

Network Equipment, comprising optical networks, BBRS, access networks and other network equipment as well as OPP, which we no longer deem to be a core business and which we are currently managing for value.



•

Network Services, comprising installation, commissioning and maintenance and valued added services.

        The discussion of our Network Equipment and Network Services businesses that follows should be read in conjunction with the Segmental analysis of Revenues contained in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

Customers:

        We are a multi-regional business, supporting customers in North America, Europe, the Middle East and Africa, Central and Latin America and the Asia-Pacific region. Our customer base mainly comprises telecommunications companies and providers of internet services for their public networks. In addition, we count certain large corporations, government departments and agencies, utilities and educational institutions for their private networks as customers.

9

        The main customers of our Network Equipment and Network Services businesses include:

•

Europe: British Telecommunications plc ("BT"), the Metro City Carriers in Germany, E-Plus, Telecom Italia, O₂ and Vodafone Group;



•

United States: The U.S. Federal Government, Sprint, AT&T, Verizon.

        These customers accounted for approximately 50% of our total revenues during fiscal 2004.

        Customers of our optical networks and access networks businesses are predominantly based in Europe as well as in the Asia-Pacific region and Central and Latin America. Customers of our BBRS and OPP businesses are predominantly based in the Americas. In addition, we provide network services to customers in the transportation and utility sectors, mainly in Europe.

        BT is our single largest customer and accounted for approximately 21% of our total revenues in fiscal 2004 and 28% of the revenues of our Non-NARF segment (as defined in "Basis of Presentation" on page 38). Sales to the U.S. Federal Government and Verizon accounted for 24% and 11% respectively of the £399 million total revenues of our NARF segment (as defined in "Basis of Presentation" on page 38) in fiscal 2004, representing 7% and 3% respectively of our total revenues in fiscal 2004.

        We have entered into frame contracts with the majority of our major customers. While the terms of the frame contracts vary from customer to customer, these contracts generally set out the terms and conditions, including pricing, on which we will supply a customer with products and services. The length of frame contracts varies from customer to customer and can range from one to five years or more. Some of the frame contracts establish price and volume expectations that provide us with some visibility of expected sales during the terms of the contracts. However, the frame contracts do not typically guarantee the volume or value of products or services actually supplied by us, which remain at the discretion of the relevant customer. Near the end of their term, some frame contracts impose an obligation on the parties to negotiate in good faith to agree an extension of the contract.

Sales, marketing and distribution:

        We sell our Network Equipment and Network Services using our direct sales force as well as indirect channels such as local partners and distribution partners. Our sales activities include sales and marketing organizations in all major geographic regions. There are specialized product marketing groups, which support these organizations internally. In addition, we have a central marketing staff, which provides strategic direction and customer and market communications support for these organizations externally. Each of these regional organizations has responsibility for account management, sales, technical support and contract negotiation.

Partners:

        Marconi places importance on building partnerships with best-in-class vendors and has a small team dedicated to identifying, securing and managing these arrangements. Our partnerships can be categorized into three groups. These examples set out below are not exhaustive.

•

Outbound Route to Market Partners: that enable Marconi to enter new market areas, geographic areas and customers.



•

Inbound Technology Partners: that enable Marconi to fill gaps in the product portfolio for niche or specialist products where the business case does not justify in-house development.



•

Marketing Alliances: for products that enhance our offering but will be traded through our partners.

10

Network Equipment:

        We design and supply communications systems that transmit and switch voice, data and video traffic in predominantly public networks. Our network equipment products include optical networking systems, broadband and narrowband switches, routers and aggregation devices, wireless transmission systems and software management systems. In addition, we sell outside plant and power products for use in communications networks.

        Aggregate revenues for all of our Network Equipment businesses for fiscal 2004 were £897 million, representing 61.7% of our total revenues, compared to £1,036 million, or 57.5% of total revenues, in fiscal 2003 and £1,691 million, or 54.1% of total revenues, in fiscal 2002.

Overview of the public network market and competition:

        Historically, government-owned or government-regulated monopolies have operated public networks, which traditionally transmitted voice calls between users. Privatization and deregulation of public networks contributed to the entry of a large number of new companies into the public network market, offering new voice, data and video services.

        The telecommunication vendor network markets in which we operate are highly competitive. Our principal competitors include Alcatel, Ciena, Cisco Systems, ECI Telecom, Ericsson, Fujitsu, Huawei Technologies, Lucent Technologies, NEC, Nortel Networks and Tellabs. The primary method of competition in the telecommunication network market is the widespread use of open bids for equipment purchases. Buyers use a combination of factors to evaluate bids, including price, technical compliance, and ability to deliver in the required timescale and provide after-sales support, financial stability and long-term viability. As the public and private network markets converge, other specialist companies in the information technology sector may also emerge as strong competitors. In addition, competitors are emerging in rapidly developing telecommunications markets such as China.

        A typical telecommunication network can be portrayed as comprising three high-level layers. These are the service, switching and transport layers. Traffic in the network is moved around the network by equipment in the transport layer and routed to different points in the network by equipment in the switching layer. Equipment in the services layer defines and makes available the service associated with each particular class of network traffic, for example, voice, data or video services. Public networks, which comprise the three layers above, can typically be either access, metro or core networks, depending on the connections they establish. The access network typically connects an end user of a service to a network operator's local exchange, where switches are located. The core network usually connects an operator's major points of presence such as the routes between two cities. The metro network typically provides connections between the access and core networks such as between a major city and the various local exchanges or points of presence within a particular geographic region.

Optical Networks

        Communications service providers primarily use three technologies, Synchronous Digital Hierarchy ("SDH"), Synchronous Optical Network ("SONET") and Dense Wavelength Division Multiplexing ("DWDM"), to transmit voice, data and video traffic over fiber optic communications networks. DWDM is a relatively new transmission technology that is used worldwide. SDH is the digital transmission standard that is used in most regions except North America and Japan. SONET is the predominant standard that is used in North America and Japan. We no longer develop and sell SONET products. Sales of our optical networks products constituted 36.8% of our total Network Equipment revenues in fiscal 2004 (2003, 42.4%; 2002, 43.8%). During the latter period, sales were predominantly in Europe and Asia.

11

        We have focused our development on a comprehensive range of optical transmission equipment based on SDH and, more recently, DWDM technology.

•

SDH: We were a pioneer of SDH technology following its introduction in the early 1990s and have continued to introduce next generation SDH products. We are a leading supplier of SDH transmission equipment within Europe and believe we have a tenable position in other markets including the Central and Latin American and Asia-Pacific regions.

Our add-drop multiplexers transport voice, data and video traffic streams over ring-based optical fiber networks to provide protection against network failures. Our line systems transport high-capacity voice, data and video traffic streams between major traffic centers. We also supply cross-connects to provide points of flexibility and restoration within an SDH network and to switch traffic streams from one transmission line to another. During fiscal year 2004, we launched a number of cost competitive next generation SDH products with greater functionality, for use both in core networks and for connecting residential and business customers to the core network. During fiscal year 2005 we are planning to enhance our next generation SDH products to enable customers' transport networks to handle more effectively data services as well as providing improved automated network resilience.

•

DWDM: DWDM is the transmission of closely spaced signals through a single optical fiber using wavelengths each of which functions as a separate, independent signal, and allows the capacity of installed optical fiber to be increased substantially to meet future growth in demand for voice, data and video traffic capacity. Our DWDM equipment is complementary to our SDH equipment and enables service providers to increase significantly the bandwidth of installed fiber optic cabling while still using the existing network infrastructure.

We have already established what we believe is a tenable market position with our photonic line system, or PLx. In 2002 we launched a soliton-based, ultra-long-haul photonic line system, or "UPLx", that extended the distance that traffic can be transported before regeneration of the signal is required. We launched this product specifically for ultra and extended long-haul DWDM networks that will have much higher per fiber capacity than SDH or SONET networks. In 2003 we developed a "multi-haul' product that incorporated the functionality of our PLx and UPLx line systems onto a single converged platform capable of delivering solutions across a wide range of DWDM applications. In addition we plan to derive products from this platform capable of delivering shorter-range metro applications.

Because our DWDM equipment is complementary to our SDH equipment, we intend to take advantage of our positions in the SDH markets of Europe, Central and Latin America and Asia-Pacific to sell our DWDM products to our existing SDH customer base as well as to new customers that want to make a cost effective and simple increase in their available bandwidth.

        Our network management system, or "ServiceOn", manages our transmission equipment. ServiceOn provides a broad range of management functions required by a network operator. It can be used by service providers to remotely re-configure their networks in accordance with changing traffic patterns. ServiceOn also provides network performance information and has fault detection capability to support the day-to-day operation of the network.

        Our broad portfolio of optical networks products, coupled with scalability and ease of upgrade, enables us to sell optical networks to our customers which optimize network design and cost for those customers. Our focus on overall optical networks solutions, rather than single product solutions, enables us to design more cost effective networks and to integrate future product offerings over the life of frame contracts. We believe that our installed base of SDH equipment, deep customer relationships, superior knowledge of the incumbent network design, and interoperability of our products with that

12

installed base of SDH equipment, are an important competitive advantage for both the existing and next generation SDH and DWDM product ranges.

        Our objective is to maintain a leading position in the European optical networking markets and to increase market share in the Asia-Pacific region as well as Central and Latin America.

Broadband Routing and Switching

        We have refocused our technical and commercial resources in our BBRS business towards customers requiring more resilient networking platforms of the sort found in carrier-class networks, namely government and military agencies, selected telecommunications service providers and other large corporations. Our BBRS business also continues to provide support services to our approximately 1,000 service providers, enterprise customers and the U.S. Federal Government. Our single largest customer of BBRS products is the U.S. Federal Government with whom we have enjoyed a long relationship. BBRS has a base of almost U.S.$1.5 billion in deployed network platforms and support services across various departments and agencies of the U.S. Federal Government.

        Our BBRS business contributed approximately 14.5% of total Network Equipment revenues in fiscal 2004, approximately 13.7% in fiscal 2003 and approximately 12.4% in fiscal 2002. The BBRS business' sales are made predominantly in the North American market.

        Our broadband routing and switching multiservice platforms, including the BXR-48000, the industry's highest-capacity switch router, combines the scalability and reliability to protect existing revenue streams with the flexibility to offer profitable, carrier class, next-generation IP, Ethernet, Third Generation ("3G") and packetised voice services. Designed for Core and Edge networks, our switch-routers, support the exceptionally high Quality of Service needed for today's real-time, mission-critical, IP-based applications.

        Our products address the three principal packet-oriented protocols in use today:

•

Asynchronous transfer mode, or ATM;



•

Internet protocol, or IP; and



•

Multi-protocol label switching, or MPLS, an emerging standard which provides greater predictability, quality of service (QoS) and differentiated service levels for IP-based data, voice and video communications when compared with services available over traditional, connectionless IP networks.

        Our principal products comprise a range of multiservice switch-router devices that both establish the physical communication links between end points and determine the optimal route across the network. In addition, we also develop and sell a range of integrated access devices, or IADs, which are cost-effective solutions supporting converged voice, data and video transmissions over a single circuit. We have focused on the sale and support of our next-generation BXR-48000, which we believe provides the highest capacity of any multiservice switch currently available in the telecommunications industry, as well as our ASX-200BX, ASX-1000 and ASX-4000 range of multi-service switches.

        We design our switch-router platforms to support communications traffic transmitted by ATM, IP and MPLS protocols as well as enable operators to build on their existing switching and routing infrastructures to continue to support their legacy services while offering the flexibility and scalability to roll-out next-generation IP, wireless and packet voice services. This approach also allows operators to reduce their capital investment and operating costs.

        The ASX-4000 can switch at transmission speeds ranging from 10 to 40 gigabits per second ("Gbps") and can be positioned either within the core or at the edge of service provider networks or high-capacity private networks. The platform allows service providers to transport voice traffic over

13

packet switched infrastructures such as ATM (Voice Telephony Over ATM ("VTOA")) or IP (Voice Over Internet Protocol ("VoIP")).

        The BXR-48000 can operate at transmission speeds ranging from 40 Gbps to 480 Gbps. It can be configured as a very high capacity router or a very high capacity switch. Routers function in the IP (packet) networking domain, while switches typically operate in the traditional voice, frame relay and ATM domains. The BXR-48000 has been deployed by U.S. Federal Government agencies to carry mission critical encrypted video traffic. The military-grade capabilities demonstrated by the BXR-48000 are equally applicable for the voice, video, data and multiservice networks of service providers and large non-military institutions. During fiscal 2004 we have shipped a number of BXR-48000 products to both U.S. Federal Government entities as well as a leading European financial institution.

        We also provide support services to customers of our BBRS products and report those revenues within our Network Services segment. The BBRS business service offerings range from routine technical support and assistance for our switch-routers, to dedicated, on-site project and program support for complex network environments.

        Within the broadband switching and routing market, we believe that the IP router market will be a significant source of potential growth in the longer term due to the continued growth in IP traffic and the launch of new services such as VoIP. We note, however, that the introduction of these new services is dependent on the development of technologies that permit the "toll-grade" transmission, over IP, of voice and real-time multimedia services. In the meantime, concern from carriers and security sensitivity of private network operators over the security and reliability of their networks are expected to lead to continued growth in the ATM market.

        We will continue to spend the majority of our research and development on multi-service products that support ATM, IP and MPLS protocols. In particular, our BBRS equipment is designed to enable carrier operators to address the divergent demands of today's difficult market environment. The market demands continued support for the ATM networks that transport today's services as well as providing a safe and viable migration path for the convergence of these networks with data oriented IP networks. To address the increasing requirements of our customers for IP services, we also intend to develop a platform for a range of IP services routers. This platform will be able to provide virtual private networks in the mission critical applications typically required by our customers. During 2004, we acquired, for immaterial consideration, the intellectual property and assets of Crescent Networks, which we consider will form the basis for this new platform. Our BBRS business is now part of our U.S. ring-fenced group but remains an important element of our core product and service offering.

Access Networks

        Access equipment connects the end user to a service provider's switch or local exchange across what has been traditionally known as the "last mile" or "local loop". This is the physical wire, fiber or wireless link that runs from a subscriber's telephone set or other communications device to the service provider's local exchange. We design, manufacture, sell and support a range of access equipment, which maximizes the capabilities of physical transport media, including copper telephone lines, fiber optics, and both licensed and unlicensed wireless spectra. Our access systems activities have undergone significant rationalization and are now focused on leveraging our reputation and relationships in Europe to continue penetration of key customers with fixed wireless, access hub and voice software systems. Our Access business contributed approximately 25.3% of our total Network Equipment revenues in fiscal 2004, 24.9% in fiscal 2003 and 21.3% in fiscal 2002. During fiscal 2004, approximately 93% of the European Access business' sales were in Europe, Middle East and Africa ("EMEA") with Asia-Pacific ("APAC") and Central and Latin America ("CALA") representing the balance of revenues (2003, 84% EMEA and the balance in APAC and CALA).

14

        Our Access Networks business comprises three main product groupings: Next Generation Broadband Access products, Fixed Wireless Access products and Mature Access products.

        Our Next Generation Broadband Access products are our Access Hub and our SoftSwitch.

•

Multi-service access node ("MSAN") known as Access Hub. These products are typically located within an operator's local exchange on one end of the subscriber loop providing broadband internet/ Digital Subscriber Line ("DSL") data and voice services. Our Access Hub, which can be configured as an advanced high density Digital Subscriber Line Access Multiplexer ("DSLAM"), also incorporates integrated ATM edge switching and IP multi-casting functionality. This enables it to perform as a broadband aggregator for multiple applications including voice, video and data services. This next-generation product offers high port densities and is very flexible. It is capable of delivering a wide range of services, including Plain Ordinary Telephone Service ("POTS"), Integrated Services Digital Network ("ISDN"), Asymmetric Digital Subscriber Line ("ADSL"), Symmetric Digital Subscriber Line ("SDSL") and Very High Bit-Rate Digital Subscriber Line ("VDSL") from dedicated line cards or in combinations from a single card. We launched our Access Hub platform in 2001and have already won several major frame contracts with British Telecom, Telecom Italia, Telekom Malaysia and Telkom (South Africa). Wind and Fastweb in Italy are also customers. During calendar 2003 we benefited from the increasingly rapid rollout of broadband services by operators. In this period according to independent research published by industry analyst firm RHK our share of the equipment market for the deployment of broadband DSL lines in Europe rose to approximately 9%.



•

SoftSwitch: This next generation product is a system which builds on many of the features of the narrowband switch allowing network operators to combine their traditional telephony services with broadband multimedia and high-speed data services across a single broadband packet switched network. Our SoftSwitch is currently one of only a limited number of products available in the market offering full class 4 and class 5 capability as well as IP Centrex functionality. It can therefore address both public and private network applications and has been designed to allow customers significantly to reduce the cost of operating their networks. We have initial network deployments with Jersey Telecom and Kingston Communications and have been selected to support BT in its next generation Public Switched Telephone Networks (PSTN) transformation trial.



•

Fixed Wireless: Our Mobile Digital Radio System ("MDRS") product family encompasses our point-to-point portfolio that offers long- and short-haul SDH transmission for services ranging from trunk networking, local access bypass and mobile network feeder applications. Our Mobile Digital Multipoint System ("MDMS") point-to-multi-point portfolio offers cost-effective broadband wireless solutions ranging from 2.4 Gigahertz ("Ghz") to 32 Ghz, depending on the country's frequency allocation, and supports subscriber voice and broadband data, using both standards-based and optimized techniques. Our radio planning and installation services enhance our ability to offer customized, cost-effective solutions for network operators and service providers. The main customers of our range of fixed wireless access products include Vodafone, O₂ and E-Plus all in Germany.



•

Mature Access Products: We continue to supply upgrades and extensions to our significant installed base of narrowband voice telephony systems, or "System X". The majority of this installed base is in the United Kingdom. The need for operators to adapt their networks to changing traffic patterns, predominantly caused by the growth in Internet traffic, has driven upgrades and extensions.

15

Outside Plant and Power

        We are one of the major providers of outside plant and power products and services in North America. We are one of the major suppliers to Qwest, Verizon BellSouth, SBC, Sprint, AT&T and MCI. In addition, we are a supplier to Cingular, Telcel and U.S. Cellular. We currently have contracts to provide services to Bechtel in the building of wireless networks for AT&T and Cingular. Our OPP business contributed 17.3% of our total Network Equipment revenues in fiscal 2004, 13.5% in fiscal 2003 and 14.6% in fiscal 2002.

        Our OPP business has three primary product lines:

•

Outside Plant supplies connection, protection and enclosure products for the local loop, and is a supplier in enclosure design such as thermal management and analysis, water and dust intrusion, equipment packaging techniques and corrosion resistance. Although these are primarily passive hardware products, the trend of placing sensitive electronics outside the local exchange and closer to the subscriber requires increasingly sophisticated enclosures and static protection. The connection and protection products include distribution pedestals, building entrance terminals, cross connect terminals, cable television enclosure products, fiber optic splice enclosures, large electronic configuration cabinets, central office main distribution frames, heat management systems, power surge protection devices and connection blocks and terminals. The enclosure products are metal and plastic cabinets that house equipment such as power supplies, connection products, and digital and wireless transmission equipment.



•

Power supplies power systems to service providers and telecommunications equipment manufacturers for the local loop, local exchange switching, wireless sites and other customer equipment such as computer networks. Our power products and systems include large power systems for local exchange applications, smaller cabinet power systems with "plug and play" flexibility, modular power systems, custom power subsystems sold to original equipment manufacturers ("OEMs"), DC distribution and DC-DC conversion systems and traditional ringing and signaling equipment. We market our family of power products under Vortex, Lorain and other brand names. We base them on a single integrated platform suitable for multiple wire-line and wireless applications. This microprocessor-based "plug and play" architecture allows for software-based configuration, management, monitoring and local and remote power system access that is easily expanded for system configuration and control.



•

Services provides customers with software that allows for remote monitoring and control of power systems as well as complete program management support for communications systems deployment. Additionally, we provide a range of customer services, including site contract maintenance and breakdown service, spare parts provisioning, equipment depot repair, and training.

        Our OPP business is now part of our U.S. ring-fenced group. OPP continues to be managed for value and ultimately for disposal.

Other Network Equipment businesses

        Other Network Equipment businesses contributed 6.1% of our total Network Equipment revenues in fiscal 2004, 5.5% in fiscal 2003 and 7.7% in fiscal 2002. These comprise mainly the following businesses:

•

Marconi Interactive Systems ("MIS"): MIS manufactures payphones and multimedia terminals which range from an indoor "desk top" phone through to sophisticated multimedia street terminals which have voice telephony and internet access capability. The business sells primarily to the major public network customers such as BT, Telecom Italia, Singtel, Telenor and Teledanmark.

16

•

Network South Africa CPE: Our operations in South Africa include the design, manufacture and supply of a range of terminal products including telephones, Private Automatic Branch Exchange ("PABX") key-systems and public payphones.

Network Services:

        Our Network Services activities comprise a broad range of support services to telecommunications operators and other providers of communication networks. We support both our own products as well as those of other vendors of network equipment.

        Aggregate revenues for all our Network Services activities for fiscal 2004 were £556 million, or approximately 38.3% of our total revenues, compared to £743 million or approximately 41.3% of total revenues in fiscal 2003 and £969 million or approximately 31.0% of total revenues in fiscal 2002.

Overview of the Network Services market

        As network operators have sought to reduce expenditures to cope with excess capacity, the requirements for maintenance and support have continued. In some cases, new opportunities have emerged as operators have sought to consolidate vendors and outsource additional services.

        The nature of the network support services market means there are no dominant competitors in the provision of services to the public network market. However, major telecommunications vendors, such as Alcatel, Cisco, Ericsson, Lucent and Siemens are extending their service capabilities to offer total solutions in direct competition to us. In addition, major information technology and systems integrators, such as CSC, EDS and IBM, are now offering telecommunications solutions to their customers. Furthermore, independent service and support organizations such as Data and Telindus offer a broad portfolio of services.

        The principal method of competition in this market is through open bidding. Services may also be sold as a part of, or linked to, equipment sales.

Service offerings

        We provide, plan, build and operate support services to both fixed line and wireless network operators in many countries around the world. We target customers in the service provider, large-scale "carrier class" markets and in the government, transport and utilities sector. The services segment has two main sub-groupings:

Installation, Commissioning and Maintenance ("IC&M"):

        Aggregate revenues for IC&M for fiscal 2004 were £291 million, representing 52.3% of our total Network Services revenues, compared to £368 million, or 49.5% of total Network Services revenues in fiscal 2003 and £528 million or 54.5% of total Network Services revenues in fiscal 2002. IC&M comprises the following activities:

•

Customer Fulfillment: provides project management, installation and commissioning, field engineering support and customer training. The main markets are the United Kingdom, North America, Germany and Italy. The North American activities are associated with the OPP business.



•

Managed Services: supports the installed base of our equipment worldwide through technical support, on-site maintenance and spares & repairs management. Managed services also remotely monitors, manages and supports customers' live networks. Services are provided from a global network of technical assistance centers ("TAC") and stock hubs and network operation centers ("NOC"). We operate thirteen TACs: five in the United States, two in the United Kingdom, two in the rest of Europe, two in Canada, and one in each of Japan and Australia, offering

17

around-the-clock telephone assistance to customers. We also have five NOCs: one in each of Australia, Germany, Italy, the United Kingdom and the United States, for remote monitoring, fault diagnosis and network repair. We can support our own product range as well as products supplied by other communication equipment companies.

•

Operational Support Systems: provides the software systems and systems integration services that enable operators to maximize the efficiency of their networks and the quality of the services they provide to customers.

        The bulk of these services are related to the sale of our products, although we also have considerable experience of working with equipment from other vendors.

Value-Added Services ("VAS"):

        Aggregate VAS revenues for fiscal 2004 were £265 million, representing 47.7% of our total Network Services revenues, compared to £375 million, or 50.5%, in fiscal 2003 and £441 million, or 45.5%, in fiscal 2002. VAS comprises the following activities:

•

Integrated Systems: provides turnkey projects and plan, build and operate services for mainly non-telecommunications businesses in market sectors such as transportation and government. The projects involve planning, building, operating and supporting carrier-class telecommunications infrastructure and are generally long-term. The principal geographical markets are the United Kingdom, Germany and the Middle East.



•

Wireless Services: provides radio frequency consulting services to both wireless and wireline network operators. These are primarily consulting and contractual services for site acquisition, mast design and construction, radio frequency cell site planning and network optimization. Our radio planning and installation services enhance our ability to offer customized, cost-effective solutions for network operators and service providers. In North America, our primary focus is on radio cell site planning and network optimization. In Europe our principal geographical markets are the United Kingdom, the Netherlands and Germany.



•

Managed Services: provides customer support services associated with our BBRS equipment.

        We have developed our services businesses over a number of years and it forms an important part of our portfolio of activities.

        Within Integrated Systems, our key initiative is to expand out of our strong U.K. base into carefully selected overseas markets, such as Germany, through a combination of skills transfers and working with selected partners.

        We intend to grow our Wireless Services business by targeting mobile network operators operating second generation ("2G") networks and planning 3G networks and equipment vendors providing turnkey projects to the mobile network operators who require service partners.

Other:

        Other activity for the year ended March 31, 2004, included our Italian-based public mobile radio networks business, which developed base stations and controllers for 3G networks until its disposal to Finmeccanica SpA on July 17, 2003.

Research and Development:

        We expended approximately £190 million, or 13.1% of revenues on research and development, or R&D, in fiscal 2004 as compared with expenditure of £274 million or 15.2% of revenues in fiscal 2003. Cost savings have been made throughout the year and were achieved mainly through headcount reductions and initiatives to significantly improve efficiency of our R&D by rationalizing, consolidating

18

and closing research and development centers around the world. Other factors contributing to the overall reduction in R&D expenditure included lower levels of spend on third party sub contractors and a reduced level of depreciation due to lower levels of capital expenditure and the write-down of development and test models.

        We have continued to focus the majority of our R&D investment in three main product areas: Optical Networks, Access Networks and BBRS and in aggregate, spend in these three areas accounted for over 80% of our R&D expenditure during fiscal 2004. During the year, an increasing proportion of R&D expenditure has been directed towards Access Networks.

        Investment in Optical Networks has focused primarily on broadening our Metro portfolio, an area of increased focus by telecoms operators. Marconi's already comprehensive range of next-generation SDH products has been further extended with the launch of the OMS1664, a multi-service data enabled transport platform capable of delivering high-capacity SHD and ethernet services, the SMA1/4UC, a cost-effective and highly compact addition to our Next Generation SDH product family and by the introduction of a new optical multi-service product in our PacketSpan range, the OMS840, designed specifically for simultaneously handling a wide range of data and TDM services in the edge network. Aside from new platforms, existing SDH equipment can now be data-enabled with the development of a new range of PacketSpan plug-in data cards, enabling existing networks to deliver data services alongside traditional TDM services.

        Our increased focus in Access Networks has been concentrated on three main product platforms

•

Our multi-service access node solution, the Access Hub with the launch of new functionality enhancements including the planned launch of two new line-cards, the VDSL-combo card and a new fiber-to-the-home card over Ethernet. Both new cards offer operators significant cost saving and potential new revenue opportunities by combining voice and data services, as well as handling high definition video streams considerably faster than traditional networks;



•

Further enhancements to our carrier-grade Softswitch platform which has recently undergone successful pilot tests with both Jersey Telecom and Kingston in the U.K. and which we plan to further strengthen through our new relationship with IP communications specialists, Mitel; and



•

Fixed wireless access with the planned launch of the AXR, digital multipoint radio transmission platform.

        In BBRS, we have achieved significant cost savings mainly as a result of realignment of core programmes to meet specific customer demand. Almost half of the spend in fiscal 2004 related to further enhancements to our BXR-48000. The second release of this multi-service switch-router incorporates enhanced IP functionality and improved ATM capability. Other programmes are focused on adding Transparent Local Area Network ("LAN") Service, LAN Emulation Service, MPLS and IP VPN services to multi service switches, the release of Virtual Presence ("Vipr") products, and maintenance activities throughout the product portfolio.

Intellectual property:

        We own a number of intellectual property rights including patents and designs throughout the world. We have a number of patent and know-how and other licenses from third parties relating to products and methods of manufacturing products. We have also granted patent and know-how and other licenses to third parties.

        Because we develop some of our technologies through customer-funded research, we may not always retain proprietary rights to the products we develop.

        We rely on patents, trademarks, trade secrets, design rights, copyrights, confidentiality provisions and licensing agreements to establish and protect our proprietary technology and to protect against

19

claims from others. Infringement claims have been and may continue to be asserted against us or against our customers in connection with their use of our systems and products. We cannot ensure the outcome of any such claims and, should litigation arise, such litigation could be costly and time-consuming to resolve and could result in the suspension of the manufacture of the products utilizing the relevant intellectual property. In each case, our operating results and financial condition could be materially affected. See "Business—Legal proceedings".

        The "Marconi" trademark used by many of our businesses is identified with and important to the sale of our products and services. It is either registered or the subject of an application for registration in approximately 120 territories, including all of those territories which we currently view as being our major trading territories.

        In connection with our Financial Restructuring, we consolidated our patents and patent applications owned by our U.S. and U.K. subsidiaries into three separate special purpose vehicles organized for that purpose. Those patents and patent applications have been allocated as follows:

•

Patents and patent applications owned by our U.K. subsidiaries were assigned to Marconi Intellectual Property U.K. Limited and then each licensed back to the appropriate operating subsidiary.



•

Patents and patent applications that were owned by U.S. subsidiaries and used in the BBRS business, OPP business or (until disposed) NAA business were assigned to Marconi Intellectual Property (Ringfence), Inc. and then licensed back to the appropriate operating subsidiary.



•

Patents and patent applications that were owned by U.S. subsidiaries and not used in the BBRS business, OPP business or (until disposed) NAA business were assigned to Marconi Intellectual Property, Inc. and then licensed back to the appropriate operating subsidiary.



•

Patents and patent applications as well as any other intellectual property owned by our German subsidiaries were assigned to a security trustee to facilitate the granting of security in Germany and then licensed back to the appropriate operating subsidiary.



•

Patents and patent applications that were not owned by U.S., U.K. or German subsidiaries remained in place.

        In addition, security interests have been granted to our scheme creditors over all of our intellectual property. In connection with granting the security interests, we agreed to limit the transfer of patents and patent applications within the group and to third parties. In so doing, we agreed to limit those transfers to transfers made in the ordinary course of business or, if not in the ordinary course of business, made with the consent of Marconi Corporation plc. In relation to the sale of the NAA business that completed on February 20, 2004, the divested assets of NAA were released from the global security interest pursuant to a Release Agreement, dated February 10, 2004, between The Law Debenture Trust P.L.C. (in its capacity as Security Trustee) and Marconi Corporation plc and its affiliates (including Marconi Communications, Inc. and Marconi Intellectual Property (Ringfence) Inc.).

Environmental And Other Regulations

Environmental, and employee health and safety matters

        We are subject to increasingly stringent regulation under various U.K., U.S., European Union ("EU") and other international, national and local laws and regulations relating to employee safety and health, and environmental protection, including law and regulations governing air emissions, water discharges and the use, management and disposal of hazardous substances.

20

        One of the many environmental laws affecting us in the United States is "CERCLA", which is the primary federal statute governing clean-up of contaminated properties. CERCLA can impose joint, several and retroactive liability for the costs of investigating and cleaning up contaminated properties, without regard to fault or the legality of the original conduct. Potentially liable parties under CERCLA can include current and former owners or operators of a site, as well as those who generate or arrange for the disposal of hazardous substances. Environmental laws in other jurisdictions can also impose significant clean-up liabilities. We are currently conducting investigations or clean-ups at eight contaminated sites, principally in the United States. The sites are being cleaned up voluntarily in connection with a prior property sale or purchase, or pursuant to government directive. We estimate the cost associated with these sites will be between approximately £3 million and £7 million. These former sites were associated with hazardous substance use and may give rise to unforeseen liabilities. We could therefore incur additional clean-up costs upon the discovery of new contamination at these or other sites for which we may be found to be responsible, either directly under CERCLA or other laws, or through a contractual indemnity obligation as the result of a prior property or business sale. We could also incur additional costs as a result of any related personal injury or property damage claims. Although such additional costs, if any, could be substantial, we are not aware of any material claims and do not expect future clean up or related costs to have a material affect on us. Litigation is by its nature an unpredictable form of risk and is disclosed wherever unliquidated damages are sought but no information is currently available that indicates a material liability.

        The European Commission has issued two directives, which will require member states of the EU to meet certain targets for collection, re-use and recovery of waste electrical and electronic equipment. It is likely that these obligations will be achieved through legislation placing the responsibility for meeting these obligations on equipment producers. Producers will also be required to phase out certain hazardous materials from the equipment. This legislation could significantly increase costs to producers of electrical and electronic equipment. We regularly audit our facilities' compliance with employee safety and environmental requirements. We have not incurred material capital expenditures for environmental, health or safety matters during the past three financial years, nor do we anticipate having to incur material capital expenditures during the current or the succeeding financial years. Although environmental costs cannot be predicted with certainty, we believe that costs relating to non-compliance or liability under current environmental, health and safety laws and regulations will not have a material adverse effect on our financial condition or results of operations as a whole.

Other government regulation

        Our products are subject to industry-specific government regulation and legislation in the United States, the European Union and throughout the world. For example, our Network Equipment business must comply with U.S. Federal Communications Commission requirements and regulations and other safety regulations governing communications products sold in the United States. Our businesses would suffer if they failed to obtain or lost the certifications, clearances and authorizations required to participate in new or existing projects. In addition, we could be subject to fines, criminal sanctions or the revocation of important licenses and certifications if we fail to comply with government regulations. We believe that any non-compliance or liability under current government regulations will not have a material adverse effect on our financial condition or results of operation as a whole.

21

Employees

        The table below sets out the average number of people (full time equivalents) we employed in the previous three financial years:

        During fiscal 2004, we took a number of steps to reduce our workforce as we restructured our cost base in response to the deterioration in trading conditions that we have experienced over the last three years.

        A number of our employees are collectively represented by and are members of trade unions and work councils. Membership and representation varies from country to country, and we have entered into various collective bargaining agreements. It is our practice to renew or replace our various labor arrangements relating to continuing operations as and when they expire, and we are not aware of any material arrangements whose expiration is pending and which is not expected to be satisfactorily renewed or replaced in a timely manner. We have not experienced any material work stoppages or strikes in the past three fiscal years. Although trade unions, from time to time, have publicly expressed dissatisfaction with our plans to reduce our workforce, we believe that relations with our employees are generally good.

Item 2:    Properties

        Our registered office is located at New Century Park, P.O. Box 53, Coventry, Warwickshire, CV3 1HJ. Our London office is located at 34 Grosvenor Square, London, W1K 2HD.

        We have facilities in the United Kingdom, continental Europe, North America, Africa, Asia and Australasia. We own or lease all of our principal sites. Our principal facilities, most of which are used jointly by our reporting segments, are as follows:

22

Owned property

23

Leased properties

        There has been significant consolidation from existing facilities concentrating our activities on our remaining major key hub locations. We believe that our principal facilities are suitable and adequate for their use. Use of these facilities may vary with economic and other business conditions, but none of the principal plants are idle.

Item 3:    Legal proceedings

        We are not and have not been engaged in, nor, so far as we are aware, do we have pending or threatened by or against us, any legal or arbitration proceedings which may have or have had in the recent past, including at least the 12 months immediately preceding the date of this report, a significant effect on our financial position as a whole, except as set out below. Where a liquidated sum is claimed, a de minimis figure of £5 million has been applied in determining which claims may have a significant effect. The figures given are the full amounts claimed by the claimants in each case, which may be much greater than the amounts the claimants realistically believe they can recover. We and our other former group companies intend to defend claims vigorously. While we believe that we have meritorious defenses, the duration and outcome of the litigation are not predictable at this point.

Claims against us or our former group companies

        The following represents the largest outstanding claims made against us or our former group:

•

Marconi Corporation plc, FORE Systems Inc., or FORE Systems (now known as Marconi Communications, Inc.), and 13 persons who were then directors and/or senior executives of Marconi Communications, Inc. were defendants in a consolidated class action lawsuit filed in the United States District Court for the Western District of Pennsylvania on behalf of the public

24

shareholders of Marconi Communications, Inc., other than defendants and their respective affiliates. The action alleged that Marconi Corporation plc violated federal securities law in relation to Marconi Corporation plc's tender offer for Marconi Communications, Inc's shares, Marconi Communications, Inc.s' grant of share options to certain of the individual defendants and the treatment afforded the individual defendants' share options in that tender offer and in the merger agreement between Marconi Corporation plc and Marconi Communications, Inc. Millionerrors Investment Club was the representative of the named plaintiff class. The Complaint sought unspecified damages, counsel and expert fees, other costs of the claim and other unspecified relief. Plaintiffs' lawyers stated that their damage claims would exceed U.S.$450 million. On August 21, 2002 the District Court granted summary judgment in favor of defendants on all claims. On September 23, 2002, the plaintiffs filed a notice of appeal. The appeal was stayed and the case remanded to the district court to consider a settlement agreement reached among the parties. Under the terms of the Settlement Agreement, the Directors and Officers liability insurance carrier will pay U.S.$250,000 to defray a portion of the Plaintiff Class Attorneys' verifiable out-of-pocket expenses and Marconi Corporation plc, Marconi Communications, Inc. or their designee paid less than U.S.$50,000 for the costs of notice to the class. On February 27, 2004, the court approved the settlement and entered the final order and judgment, which is now final and not subject to appeal. The lawsuit has been dismissed.

•

Marconi Communications, Inc., together with six of its former directors and officers, were defendants in a consolidated class action lawsuit filed in the United States District Court for the Western District of Pennsylvania on behalf of a class of persons, other than defendants and their respective affiliates, who purchased Marconi Communications, Inc. securities during the period July 19, 1996 to April 1, 1997, inclusive. Robert K. Bell was the first named plaintiff class representative. The plaintiffs alleged that, during this period, Marconi Communications, Inc. misrepresented material facts relating to its results of operations, competitive position and future prospects and concealed its alleged deterioration, declining growth and inability to compete successfully until the April 1, 1997 preliminary release of Marconi Communications, Incs' projected results of operations for fiscal 1997. The plaintiffs also alleged that Marconi Communications, Inc.s' financial statements for the quarters ended June 30, September 30 and December 31, 1996 improperly recognized revenues on sales to certain customers. These alleged misrepresentations were said to constitute violations of the anti-fraud provisions of Section 10(b) of the U.S. Securities Exchange Act of 1934 and, as to the individual defendants, of Section 20(a) of the U.S. Securities Exchange Act of 1934. The plaintiffs' consolidated complaint sought unspecified damages, counsel and expert fees and other costs of suit and other unspecified relief. The defendants denied all allegations of wrongdoing. The plaintiffs' damages expert had initially estimated damages at U.S.$792 million, then U.S.$865 million and then U.S.$724 million. The parties have agreed to a settlement, which resulted in the Marconi group not making any payment to the plaintiff class. The court approved the settlement and entered the final order and judgment on December 22, 2003. No appeals were filed and the settlement is now final. The lawsuit has been dismissed.

25

•

Marconi Communications, Inc. is a defendant in a lawsuit filed by Bell Communications Research, Inc., now known as Telcordia Technologies Inc., or Telcordia, on October 14, 1998 in the United States District Court for the District of Delaware. Upon filing the case, Telcordia, a patent holder, alleged that Marconi Communications, Inc. infringed four patents owned by Telcordia, and sought unspecified damages for past infringement and an injunction against future infringement. Marconi Communications, Inc. denied infringement and asserted the affirmative defenses of invalidity, unenforceability, laches, equitable estoppel, implied license, misuse and unclean hands. In addition, Marconi Communications, Inc. counterclaimed for a declaratory judgment on non- infringement, invalidity, unenforceability, laches, equitable estoppel, implied license, misuse and unclean hands and asserted affirmative claims seeking damages for reformation of contract based on fraud, breach of the covenant of good faith and fair dealing, negligent misrepresentation and common law unfair business practices and competition. Prior to trial, Telcordia dismissed with prejudice its claims for infringement of two of the four asserted patents, and Marconi Communications, Inc. dismissed with prejudice its counterclaims for reformation of contract based on fraud, breach of the covenant of good faith and fair dealing, negligent misrepresentation and common law unfair business practices and competition. Telcordia maintained its claims for infringement on the remaining two patents. Discovery in this case has closed.

The trial court conducted a claim construction hearing in late August 2000 and subsequently entered an order construing the claims of the patents. Telcordia, taking the position that it could not, given the court's patent claim construction, prevail on its claims of infringement at trial, moved the court to enter an order finding that Marconi Communications, Inc. had not infringed the patents in suit so that the case would be procedurally postured for appeal. Marconi Communications, Inc. subsequently moved the court to require that Telcordia identify which of the construed patent claim elements it contends were in error and which precluded Telcordia from proving infringement. Telcordia identified some claim elements, and, on September 21, 2001, the court entered a final judgment of non-infringement. Oral argument in the appeal took place on February 3, 2003. The appellate court upheld dismissal of one patent and remanded the one remaining patent to trial court for further clarification of original Markman ruling. In accordance with the appellate court's ruling on September 29, 2003, the district court reconsidered its claim construction and issued a claim construction that permitted Telcordia to maintain its claim of infringement at trial. After the district court's revised claim construction, the parties entered into settlement negotiations. On January 12, 2004 the parties entered into a letter of understanding ("LOU") wherein Marconi Communications, Inc. agreed to pay Telcordia U.S.$23.5 million in exchange for a license for Marconi Communications, Inc. and all affiliated Marconi companies under Telcordia's ATM patent portfolio and as full and final settlement of all outstanding claims. Payment will be made in accordance with and upon execution of a final confidential settlement agreement, which is currently being negotiated. Additionally, as a result of the LOU, the parties agreed to have the court remove the trial date originally set for February 8, 2004, from its docket.

•

Marconi Communications, Inc. is a defendant in a second lawsuit filed by Telcordia, a patent holder, on June 8, 1999 in the United States District Court for the District of Delaware. Telcordia's second lawsuit alleges that Marconi Communications, Inc. has infringed two additional Telcordia patents. Marconi Communications, Inc. has denied infringement and asserted the affirmative defenses of invalidity, unenforceability, laches, equitable estoppel, implied license, misuse and unclean hands. In addition, FORE Systems has counterclaimed for a declaratory judgment on the issues of non-infringement, invalidity and unenforceability. Marconi Communications, Inc. has also asserted a counterclaim seeking damages for Telcordia's infringement of a Marconi Communications, Inc. patent. The case was scheduled for trial in November 2000. However, all proceedings have been stayed pending the outcome of the

26

proceedings in the first lawsuit described above, and discovery in this second case has not yet been completed. The second case is included in the settlement of the case detailed in the immediately preceding paragraph above.

•

Systems Management Specialists, Inc., or SMS, is a defendant in a demand for arbitration brought by Esprit de Corp, or Esprit, in April 2002. This action relates to two outsourcing agreements entered into by Esprit and SMS in 1995 and 1999; Esprit alleges that SMS breached its obligations under the agreements and is seeking damages in range of U.S.$8.8—U.S.$18.2 million. M (2003) plc was originally a party to the arbitration demand under a legal theory alleging that SMS and M (2003) plc are alter egos of one another. Esprit released M (2003) plc from its original arbitration demand, but then named M (2003) plc in a federal court proceeding. In response, M (2003) plc moved to stay the federal court proceeding until after the arbitration between SMS and Esprit concluded. The Court granted M (2003) plc's motion to stay, and, therefore, Esprit will be permitted to proceed on its claims against M (2003) plc only after the arbitration between SMS and Esprit is completed, and only to the extent Esprit prevails on any of its claims in the arbitration against SMS. The parties had agreed to conduct the arbitration hearing between October 13-24, 2003, and significant discovery had taken place. Beginning in September 2003, the parties reached a settlement in principle in the U.S.$710,000-U.S.$725,000 range, payable to Esprit in exchange for a full release and settlement of the actions. The settlement agreement is being negotiated but has not yet been finalized or executed. The parties continue to negotiate in an attempt to resolve this matter.



•

Marconi Corporation plc and Marconi Commerce Systems Inc., or MCSI, are defendants in an action brought by a former employee, Larry Anthony Gillus, or Gillus. The complaint alleges that Gillus suffered racial discrimination and subsequent retaliatory action whilst employed by Gilbarco, subsequently known as MCSI, which has now been sold to subsidiaries of Danaher Corporation plc. A second claim has been brought against M (2003) plc and MCSI for retaliation and intentional infliction of emotional distress alleged to have occurred after he brought the original action. Additionally, on September 10, 2003, the Court granted plaintiff's motion to add a breach of employment contract claim and injunctive relief. Gillus' counsel has in the past stated that he is seeking a total of U.S.$19 million in respect of both claims. Potential liabilities in respect of the claim against Marconi Corporation plc and M (2003) plc were compromised pursuant to its restructuring. As a result, on November 5, 2003, Gillus voluntarily dismissed without prejudice Marconi Corporation plc and M (2003) plc from the cases. Discovery has commenced with respect to the remaining defendants.



•

Marconi Corporation plc, M (2003) plc, Marconi Inc. and Marconi Data Systems Inc. are defendants in an action brought by a former employee, Thomas Edeus, or Edeus. The complaint asserts three causes of action; firstly that Edeus was unlawfully deprived of benefits to which he was entitled under Marconi Data Systems Inc's United States severance plan; secondly for failure to provide Edeus with a summary plan description relating to the severance plan; and thirdly for age discrimination in employment. The plaintiff has purported to have made out claims in various specified amounts totaling over U.S.$901,000, some of which may be in the alternative, and also unspecified punitive damages, liquidated damages and front and back pay, making the impact of this claim on us and the former group difficult to assess. An answer and affirmative defenses have been filed on behalf of all defendants. On June 5, 2003, the court entered an order providing as follows: "Plaintiff having advised the court that one or more defendants' [sic] are in Bankruptcy, this action is placed on the court's [suspense] calendar pending disposition of the bankruptcy case. Plaintiff is directed to file and notice for hearing a motion to reinstate upon disposition of the bankruptcy proceedings." Potential liabilities in respect of the claim against Marconi Corporation plc and M (2003) plc were compromised pursuant to our restructuring.

27

•

Inglis Limited and The English Electric Company, Limited ("English Electric") are defendants in an action brought by Manitoba Hydro. In the early 1960s, Manitoba Hydro contracted with Inglis Limited to design and manufacture, amongst other equipment, three turbines for the hydro electric plant at Grand Rapids, which is located in Manitoba, Canada. Inglis Limited worked closely with English Electric, who prepared certain aspects of the turbine design. One of the turbines exploded in March 1992. Manitoba Hydro is suing Inglis Limited for negligence and breach of contract in the design and manufacture of the turbines, and English Electric for negligence in relation to the design. In June 1998, Manitoba Hydro was granted leave to commence an action against English Electric and Inglis Limited and proceedings are progressing, the documentary disclosure phase having been largely completed and examination for discovery of witnesses being partly undertaken. Manitoba Hydro has pleaded, in broad terms, around 35 million Canadian dollars, approximately £14 million. This sum is exclusive of interest, which could approximately double this figure as the explosion took place over 10 years ago. This amount assumes 100% liability on the part of English Electric, which is denied.



•

Datang Telecom Technology Co. Ltd, Optical Communication Branch, or Datang, has indicated that it may bring a claim against Chengdu Marconi Communications Ltd, or Chengdu. On August 24, 2000 Chengdu Marconi Communications Ltd entered into an Original Equipment Manufacture agreement with Datang. Datang has approximately U.S.$5.2 million on account payable to Chengdu Marconi Communications Ltd but has not paid as it claims that it has been unable to sell U.S.$7 to U.S.$9 million of products purchased from Chengdu Marconi Communications Ltd due to their quality. Datang has indicated that it will not pay the outstanding sums and may bring court proceedings against Chengdu Marconi Communications Ltd in China. The value of such a claim might be in the region of U.S.$7 to U.S.$9 million, the value of the products that Datang claims it has been unable to sell, but could potentially be for U.S.$18 million, the value of the entire contract. Arbitration proceedings have not yet begun and Datang and Chengdu continue to seek a resolution without resorting to litigation.



•

There is an outstanding tax dispute between the Indian tax authorities and Marconi Corporation plc, English Electric and Associated Electrical Industries Limited, or AEI. In 1989/90, as part of the reorganization of the Marconi group's European operations, Marconi Corporation plc, English Electric and AEI transferred their shareholdings in The General Electric Company of India Limited, or GEC India, The English Electric Company of India Limited, or EE India, and GEC Power Engineering Services of India Limited, or GEP India, to a Dutch company, GEC Alsthom NV, or Alsthom. The Indian tax authorities claim that this transfer gives rise to an Indian capital gains tax charge for each of Marconi Corporation plc, English Electric and AEI, although this is one of the issues in dispute. An advance Indian capital gains tax payment had to be made before the Indian authorities would issue a no-objection certificate, which was required before the transfer could proceed. This advance payment was based on the value of GEC India, EE India and GEP India at the date of the no-objection certificate. The Indian tax authorities have, however, assessed Marconi Corporation plc, English Electric and AEI to tax on the basis of the value of GEC India, EE India and GEP India at the date of the actual transfer, which could give rise to a tax liability of up to £11 million, of which £3 million relates to Marconi Corporation plc. Marconi Corporation plc, English Electric and AEI are disputing this liability and the basis of valuation in the Indian courts and in pursuance of interim orders of the Indian Court have deposited £2.686 million with the Indian tax authorities. In January 2004, the case was heard in the Calcutta High Court on a point of tax law. No judgment has yet been delivered.



•

M (2003) plc and four of its former officers were defendants in a consolidated class action lawsuit pending in the United States District Court for the Western District of Pennsylvania

28

brought on behalf of a putative class of all persons, other than defendants and their respective affiliates, who purchased American depository receipts or were United States residents and purchased common stock of M (2003) plc between April 10, 2001 and July 5, 2001, inclusive. Plaintiffs alleged that, during this period, M (2003) plc and the individual defendants falsely reassured investors that Marconi's revenues would rise during the year and that its geographic and business mix left it relatively immune to the economic downturn affecting its competitors. Plaintiffs further alleged that on July 4, 2001 defendants belatedly disclosed that tougher trading conditions in the quarter ended June 30, 2001 indicated that M (2003) plc's sales and operating profits for fiscal 2002 would fall significantly from the levels previously estimated. Defendants' alleged misrepresentations were said to violate the anti-fraud provisions of Section 10(b) of the U.S. Securities Exchange Act of 1934 and, as to the individual defendants, Section 20(a) of the U.S. Securities Exchange Act of 1934. Plaintiffs sought class certification, an award of unspecified damages, counsel and expert fees and other costs of suit and other unspecified relief. All defendants filed a motion to dismiss the lawsuit, which by opinion and order dated September 18, 2002, was granted in part and denied in part. The Court ruled that it had no jurisdiction over claims of holders of Marconi ordinary shares not residents of the United States, but had jurisdiction over claims of American resident owners of ordinary shares and owners of ADRs. The parties agreed to a settlement, which resulted in M (2003) plc and the Marconi group not making a payment to the claimants. The court approved the settlement and entered the final order and judgment on January 16, 2004. No appeals were filed and the settlement is now final. The lawsuit has been dismissed.

•

In November 2002 Marconi Communications, Inc. ("MCI") brought a claim against Brambles Enterprises Limited ("Brambles") in the English High Court for non-payment of invoices totaling U.S.$0.998 million, U.S.$0.2 million for future milestone payments (both exclusive of interest and costs) plus damages arising from various breaches of an agreement for the development and supply by MCI of RFID tags and readers. Brambles filed a counter-claim against MCI alleging various breaches of contract by MCI and claiming damages of approximately U.S.$1.055 million (U.S.$0.455 million being the expenses incurred in obtaining a short-term replacement for the RFID system and U.S.$0.6 million being estimated costs of a new development programme for the full system). In January 2004 Brambles was given permission to amend its counter-claim. The counter-claim specifies additional heads of damage and the estimated losses are pleaded at between U.S.$6.52m and U.S.$24.21million. The matter is listed for trial in October 2004.

Claims brought by our group companies

        The following represent the largest outstanding claims made on behalf of our group:

•

Marconi Communications Inc., or MCI, is the claimant in two actions against Vidar SMS Co., Ltd, or Vidar, a company with its principal place of business in Taiwan. In May 2000, MCI brought an International Chamber of Commerce arbitration proceeding against Vidar in connection with Vidar's breaches of an Engineering Services Agreement between Vidar and a Marconi-acquired company, RELTEC Corporation. In August 2002, the arbitration tribunal awarded MCI U.S.$25,879,544 under its breach of warranty claims, U.S.$5,604,270.12 for prejudgment interest, and U.S.$156,702.56 for costs, for a total award of U.S.$31,640,516.68. Vidar claims that it has no assets to satisfy this judgment.



•

A second action was brought by MCI against Vidar in May 2000 in the United States Court for the Northern District of Texas for fraud, negligent misrepresentation, Texas common law indemnity and California equitable indemnity, all relating to Vidar's wrongful acts in connection with various business relationships between the parties. On October 30, 2002, the U.S. District Court entered default judgment against Vidar on all claims and assessed MCI's actual damages

29

at U.S.$72,402,065 plus prejudgment interest on this amount at the rate of 10% per annum. Vidar filed a petition for reorganization in the Taipei (Taiwan) District Court in 2001 and claims that it has no assets to satisfy the judgments referred to above. However, the Taipei District Court dismissed Vidar's petition on January 28, 2002 based on its lack of viability for reorganization and the Taiwan High Court dismissed Vidar's appeal of the lower court's ruling on March 25, 2002 based on the same reason.

Industrial injury claims

        English Electric, Associated Electrical Industries Limited and various other group companies are subject to injury claims from former employees. The types of illness or injury in respect of which damages are commonly claimed include industrial deafness, pleural plaques, asbestosis, mesothelioma and vibration white finger. The group is currently defending approximately 200 cases of this nature. Chester Street Limited (formerly Iron Trades), GEC's employer's liability insurer during the period the damage was caused is now insolvent and is being administered through a scheme of arrangement. Accordingly, for claims where the illness or injury was caused before 1972, 95% of the liability attaches to companies in our group. The remaining 5% attaches to Chester Street Limited and is payable by the aforementioned scheme of arrangement. For claims where the illness or injury was caused after 1972, the Financial Services Compensation Scheme (a scheme established by the U.K. Financial Services and Markets Act 2000) will meet 100% of the liability. The liability for industrial injury claims is ongoing and we may continue to receive claims of this nature for many years.

Item 4:    Submission of Matters to a Vote of Security Holders:

        During the fourth quarter of fiscal 2004, there were no matters submitted to a vote of our security holders.

30

PART II

Item 5:    Market for Registrant's Common Equity and Related Stockholder Matters:

Stock Price History:

        Our ordinary shares have been listed on the London Stock Exchange since May 19, 2003. Since that time, the highest closing market price has been 732 pence and the lowest closing market price has been 270 pence. ADRs representing our ordinary shares have been quoted on the NASDAQ National Market under the symbol MRCIY since October 2, 2003. Since that time, the highest closing market price has been 2,750 cents and the lowest closing market price has been 925 cents.

        The following table sets forth quarterly market price information for our ordinary shares on the London Stock Exchange (as reported by Bloomberg) and our ADR's in the over-the-counter market and NASDAQ National Market (since October 2, 2003) (as reported by Bloomberg).

(1)

The pre-September 2003 market prices have been adjusted to reflect the five-for-one share consolidation that became effective on September 9, 2003.

(2)

Each ADR represents two ordinary shares, nominal value 25 pence per share.

Dividends

        We do not currently and have not in the last two fiscal years paid a dividend on our common stock. The terms of our Senior Notes restrict us from paying a dividend until the Senior Notes are repaid in full.

Number of Shareholders:

        As at June 9, 2004, we had 54,163 registered holders of ordinary shares with addresses in the United Kingdom. These U.K. ordinary shareholders collectively held 200,260,254 ordinary shares, or 99.87% of our total issued share capital as at June 9, 2004. In total, at June 9, 2004, we had 55,840 registered holders of ordinary shares who collectively held 200,511,292 ordinary shares.

        As at June 10, 2004, there were 56 registered holders of our ADRs. Each ADR issued represents two ordinary shares. Of these registered ADR holders, 54 have addresses in the United States. One of the registered ADR holders is The Depository Trust Company, which represents the total number of ADRs held in book-entry form. The ADR holders collectively held 3,329,148 ADRs, or approximately 3.32% of our total issued share capital as at June 9, 2004.

Sale of Unregistered Securities:

        In connection with our Financial Restructuring, on May 19, 2003, we issued to creditors having approximately £4.8 billion of claims covered by our scheme of arrangement, 995 million ordinary shares (199 million after our one-for-five share consolidation that occurred in September 2003), together with

31

the other consideration described under Item 1: Business—Fiscal 2004 Significant Developments—Financial Restructuring, in exchange for the cancellation of their claims against us. These ordinary shares were issued as part of a court-approved exchange pursuant to Section 3(a)(10) of the Securities Act of 1933.

Securities Authorized for issuance under Equity Compensation plans:

        See Item 12—Security Ownership of Certain Beneficial Owners and Management.

Share Repurchases:

        None

Item 6:    Selected Financial Data:

        The selected historical consolidated financial information presented below as at and for each of the five years ended March 31, 2000 through 2004, has been derived from our audited consolidated financial statements prepared in accordance with U.S. GAAP.

        On May 19, 2003, we concluded our Financial Restructuring through two separate "schemes of arrangement" under the U.K. Companies Act 1985. As a result of the restructuring, we became the new parent holding company of the company, replacing M (2003) plc, and M (2003) plc ceased to be a member of our group. Additional details on the restructuring are included elsewhere in this document.

        Prior year amounts have been adjusted for the effects of discontinued operations. Details of these adjustments are described in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The information set forth below is not necessarily indicative of future results and should be read in conjunction with the audited consolidated financial statements and accompanying notes included elsewhere in this annual report and with the information set forth in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.

32

Notes:

(1)

For fiscal 2004, Other income, net includes a gain on the Financial Restructuring of £2,695 million. For further information about this gain, see note 3 of our consolidated financial statements contained elsewhere herein.

(2)

For fiscal 2002, operating loss is reflected after business restructuring and asset impairment charges of £5,319 million. For further information about these charges, see note 6 of our consolidated financial statements in this report.

(3)

The consolidated financial statements are presented in millions of U.K. pounds sterling. U.S. dollar amounts are presented solely for the convenience of the reader at the rate of £1.00 = U.S.$1.84, the noon buying rate in the City of New York for cable transfers in pounds sterling as certified for customs purposes by the Federal Reserve Bank of New York on March 31, 2004. These translated

33

amounts should not be construed as representations that the U.K. pounds sterling amounts could have been, or could in the future, be converted into U.S. dollars at this or any other exchange rate.

(4)

We adopted EITF 00-19, "Accounting for Derivative Instruments Indexed to, and Potentially Settled in, the Company's Own Stock" in fiscal 2002. The value of such instruments, as of the implementation date, was recorded as a cumulative effect of a change in accounting principles of £240 million in fiscal 2002.

(5)

No cash dividends have been paid in the last five fiscal years.

(6)

Shares issued and outstanding at March 31, 2004 are after the one-for-five share consolidation that occurred in September 2003.

Item 7:    Management's Discussion and Analysis of Financial Condition and Results of Operations:

        This discussion and analysis should be read in conjunction with the information under "Selected Consolidated Financial Information" and the consolidated financial statements and related notes and the descriptions of our businesses included elsewhere in this document.

Overview

        We completed our Financial Restructuring and re-listing in May 2003 (as described in Item 1, Business) and this has provided us with a solid foundation from which to develop our ongoing business.

        Over the past two fiscal years, we have increased the focus of our business to concentrate on those areas of the telecommunications market where we believe that we are well positioned and have a strong product and service offering and solid customer relationships. As a result, we have disposed of a number of non-core businesses, principally the sale of our NAA and Strategic Communications businesses, which were disposed of in February 2004 and August 2002 respectively. Also, during 2003, we disposed of our interest in Easynet, which had been accounted for under the equity method of accounting as an affiliate. In addition, as we have previously disclosed, we are managing our OPP business for value and, ultimately for disposal. Upon disposal, we will use the proceeds to fund a further repayment of our Senior Notes.

Market environment and revenues

        In the period prior to 2001 there was unprecedented growth in capital expenditure on telecommunications equipment as established and new operators invested in increased capacity to meet expected growth in both data and mobile traffic. Although data and mobile traffic has grown, it has not grown as strongly as expected and operators' revenue has not matched the investment in capacity. Both new and incumbent carriers became overextended financially and capital spending was dramatically curtailed. In this environment, telecommunications equipment vendors, like us, experienced substantial declines in turnover. The speed of this decline was far greater than anticipated. In this environment, we, along with our major competitors, were unable to reduce the cost base of the business at the same rate. Consequently, during this period, we have experienced a significant decline in business performance.

        We believe that the slowdown in Network Equipment sales was driven primarily by oversupply rather than reduced demand in the end-user telecommunications services markets. Underlying data and mobile traffic growth, driven by broadband, data and mobile services, remains quite strong. At the same time, total operator revenues have continued to rise at modest rates. We believe that there is increasing confidence amongst operators to invest in infrastructure to provide new services to their customers or to reduce their operating costs and in some cases to begin to provide additional network capacity. This has led to a more stable outlook for the level of capital spending by our customers, which has lead to a progressive stabilization of our own revenues. This is broadly in line with the trend experienced by our international competitors.

34

        Whilst our major telecommunications customers continue to exercise tight control over capital expenditure on network equipment and services, we have experienced increasing stability in demand throughout the course of the year. This translated to three quarters of modest sequential revenue growth to £378 million in the final quarter of fiscal 2004 from the seasonally low first quarter when revenues from our continuing operations amounted to £342 million.

        More importantly, we have observed a marked increase in tender activity and product trials across most geographic areas, with customers particularly focused on the deployment of access networks to deliver new broadband services.

        We have been talking to network operators for some time now about next generation networks and are encouraged to see a common view emerging in the industry. This centers on the provision of multiple voice, data and multimedia services across single product platforms. We believe that we have next generation broadband products available today and innovative product developments planned, which position us well to compete in this market.

Product roadmaps

        Over 50% of our research & development investment is focused on next generation products, which are yet to be launched or have been commercially available for less than two years. During the last 12 months, in particular, we have:

•

Launched a complete new range of next generation SDH and DWDM optical transmission products with enhanced data functionality, which will optimize network efficiency and lower operating costs;



•

Increased the range of services that operators can offer across our leading-edge Access Hub platform, with the introduction of VDSL and Ethernet line cards; and



•

Launched the second release of our BXR-48000 multi-service switch router incorporating enhanced IP protocol

        More information on these and other product developments can be found in Item 1, Business, Core Businesses.

Significant contract renewals and new business wins

        We have dedicated resource focused on customer satisfaction and continuously aim to improve the quality of service we provide to our customers. We believe that this, combined with our next generation product offering is key to our continued success in our competitive marketplace.

        During fiscal 2004 we signed frame contract renewals for optical transmission equipment with Belgacom and Telecom Italia and recorded new optical business wins with Telstra (Australia) and TeliaSonera (Scandinavia). We continued to build on our initial achievements in broadband access. In particular, in August 2003, we became the first strategic supplier to be selected to participate in BT's 21^st Century Network project, with the award of a three-year frame contract for the supply of our Access Hub and associated services. We are seeing an increasing level of interest for carrier-grade softswitching from many customers in Europe and Asia-Pacific. This will be an important component of next generation networks. We have initial network deployments with Jersey Telecom and Kingston Communications and have been selected to support BT in its next generation PSTN transformation trial. We believe this is an endorsement of the capabilities of our products and are increasingly confident that we have a differentiated competitive softswitch solution. In the US, we continue to benefit from increased sales to the Federal Government, who awarded us a new U.S.$33 million order for additional units of the BXR-48000 in the final quarter of fiscal 2004. In addition, we signed a number of major long-term service contracts in the UK, Germany and Middle East during fiscal 2004.

35

Operational performance

        We increased gross margin from 23.4% in the first quarter of fiscal 2004 to 31.5% in the fourth quarter of fiscal 2004 and exceeded our target range of 28 to 30%, even after excluding the 1% margin impact of a high margin software sale.

        During fiscal 2003 and 2004, we focused equally on gross margin improvement and operating cost reduction.

        As we enter fiscal 2005, our primary focus is on continued improvement in gross margin, whilst maintaining tight control of operating expenditure. We expect the following factors to contribute to our underlying gross margin improvement during the year:

•

Further efficiency gains and the benefit of further transfers of our outsourced manufacturing operations to low cost locations in Eastern Europe and Asia Pacific;



•

Increased sourcing of components from low cost locations, particularly in Asia Pacific; and



•

Further benefit of product cost reductions through increased sales of new, cost reduced products and additional planned product re-design and re-engineering initiatives

Operational restructuring

        Since September 2001, we have embarked on a series of substantial cost reduction programmes in order to build a sustainable business in the face of the industry-wide downturn in demand for telecommunications equipment and services.

        During fiscal 2004, we incurred cash costs of £124 million in relation to our business restructuring efforts. A number of specific initiatives, namely headcount reductions in Germany and Italy and early settlement of onerous leases, are ongoing and we therefore expect to incur further cash costs during fiscal 2005. We currently estimate that these will be in the region of £35 million.

        We will continue to target the early settlement of onerous leases where this represents an economic benefit for the Group.

        In addition to the above, as disclosed in Item 3, Legal Proceedings, we have agreed to pay U.S.$23.5 million (approximately £13 million) to Telcordia in exchange for full and final settlement of a previously disclosed lawsuit. We are in the process of negotiating formal definitive agreements and currently expect to make payments over the next three years. These costs were fully provided for at March 31, 2004.

Repayment of Notes

        During fiscal 2004, we generated net cash proceeds from disposals of investments in affiliates and subsidiaries of £222 million and an overall cash inflow after financing activities of £203 million. Through a series of mandatory redemptions and market repurchases, we made substantial progress towards the repayment of the new Junior and Senior Notes issued at the time of our Financial Restructuring. By March 31, 2004, we had repaid the Junior Notes in full and reduced the amount of Senior Notes outstanding to approximately £250 million. With over £500 million of total cash in the bank, we have a net cash balance of over £200 million.

        During fiscal 2004, we commenced a review of our capital structure, which was completed in May 2004. This resulted in the Board's decision to confirm our strategy to continue to focus on the paydown of our Senior Notes in order to eliminate the associated interest charge. To this end, we continue to manage our U.S.-based OPP business for value and to pursue further releases of performance bond cash collateral.

36

Fiscal 2005 outlook and business priorities

        Focusing on fiscal 2005, we continue to see stability in market conditions and based on our view of activity under existing frame contracts and our order pipeline, we see potential for low single digit percentage growth in revenues compared to the £1,453 million recorded in fiscal 2004 (assuming constant currency exchange rates). We expect this to be driven mainly by incremental sales of our Access Hub product as BT begins to deploy its next generation network.

        We have three main operational priorities:

•

To capture market share today through next generation contract wins that will translate to growth opportunities for the business in the medium-term.



In particular, we aim to defend our leading position in European optical networks, while aggressively growing our share of the broadband access market in Europe and selected territories in Asia Pacific. We will exploit opportunities for growth in the field of VAS as well as in BBRS where we are particularly focused on government, security and surveillance activities.

•

To further improve our gross margin and maintain our tight control on operating costs.




We are targeting a four percentage point improvement in gross margin as a percentage of revenue for the year as a whole, which we expect to achieve mainly through further benefits from our outsourced manufacturing arrangements and product cost reductions.



Effective April 1, 2004, we have reclassified certain costs, which were previously accounted for within Direct costs and are now treated as R&D expenses. These reallocations result mainly from a change in the way in which we organize our new product introduction activities in light of our continued move towards an outsourced supply chain model. They do not represent changes of accounting policy but are viewed by management as a more appropriate allocation of costs in order to increase control and accountability within the context of our increasingly outsourced manufacturing and supply chain activities. If this new organization had been in place for fiscal 2004, our reported gross margin as a percentage of revenues would have been approximately two percentage points higher than the actual reported gross margin. Similarly, R&D expenses in the same period would have been approximately £225 million or £30 million higher than the actual reported R&D expenses.



In the first quarter of fiscal 2005, we expect a combination of lower sales volumes and less favorable business mix to lead to a slight reduction in gross margin as a percentage of revenue. By the final quarter, we expect our planned cost savings to enable us to generate an adjusted gross margin as a percentage of revenue in the mid-thirties. This phasing translates to a full year target gross margin as a percentage of revenue in the region of 33% (assuming constant currency exchange rates).

•

To maximize conversion of our operating result into operating cash flow.




We will continue to focus on operating cash generation through improved operational performance and continued tight management of working capital.

Results of operations

Basis of presentation

        Our consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The discussion and analysis below of our consolidated results of operations and financial condition are based upon these financial statements.

37

Results of operations—Consolidated

        The following table presents our results of operations for the three years ended March 31:

38

Revenues:

        The following table sets forth our revenues by geographical region of destination for the three years ended March 31, 2004:

Comparison of fiscal 2004 to fiscal 2003

        During fiscal 2004, our major telecommunications customers have invested a lower level of capital expenditure in their networks than in the previous twelve-month period and this has been a significant contributing factor to the overall £348 million or 19% year-on-year decline in total revenues from £1,801 million to £1,453 million.

        We have, however, seen increasing stabilization of demand throughout the course of fiscal 2004. This was evidenced by three quarters of modest sequential revenue growth from the second to fourth quarters of the financial year, as well as a marked reduction in the quarterly decline in revenues compared to the corresponding quarters of the previous year, with a 7% decline in the fourth quarter ended March 31, 2004 (compared to the fourth quarter ended March, 31 2003) compared to a 32% decline in the first quarter ended June 30, 2003 (compared to the first quarter ended June 30, 2002).

        Within EMEA, which accounted for more than half of the overall reduction, revenues fell by £231 million or 20% in fiscal 2004 to £937 million compared with £1,168 million in fiscal 2003. Network Equipment revenues showed a decline as a result of lower level of equipment sales to BT as our major customer has minimized spend on its optical transmission network, where we remain BT's main supplier, in favor of its broadband access deployment. We were not a supplier of access equipment in BT's initial broadband deployment plans but have been selected to participate as a key supplier of broadband access equipment in BT's 21st Century Network project. The improvement in sales performance in Germany was driven by an increase in sales of fixed wireless access equipment to mobile operators as these customers rolled out 3G mobile networks. Sales of Network Services declined due to the completion of a long-term service contract in the Middle East. This was further compounded by the winding down of service activities towards completion of a wireless consultancy contract in the region.

        Revenues in the United States fell by £73 million or 17% in fiscal 2004 compared with £424 million fiscal 2003. In local currency (U.S. Dollars), the revenue decline was approximately 10%. The main cause of the decline was a reduction in sales of wireless software and services due to weaker market conditions. Revenues in U.S. Dollars of BBRS equipment were higher than the previous year,

39

however this increase was more than offset by the unfavorable foreign exchange impact as well as a reduced level of services activity year on year as contracts with legacy enterprise customers came to completion and were not renewed. Sales of OPP equipment were higher than the previous year but this was more than offset by the decline in OPP services sales.

        In APAC, revenues decreased by £25 million or 19% in fiscal 2004 to £107 million compared with £132 million in fiscal 2003. Major factors contributing to the decline in our ongoing business in the region included the renewal at lower contractual volumes of our optical networks frame contract in Malaysia; reduced sales from our Hong Kong based legacy infrastructure operations; the completion of the North West Ring optical transmission project in China in the previous financial year; and a lower level of sales in Australia as a result of an alternative carrier entering financial receivership.

        In CALA, revenues decreased by £18 million or 29% in fiscal 2004 to £44 million compared with £62 million in fiscal 2003. This was primarily as a result of the very low level of sales recorded in the three months ended June, 30 2003 as political, regulatory and economic issues led network operators to freeze capital expenditure. Levels of spend amongst major operators in the region remained at very low levels throughout the remainder of the financial year.

Comparison of fiscal 2003 to fiscal 2002

        Total revenues of £1,801 million in fiscal 2003 reflected a decrease of £1,324 million or 42% as compared with £3,125 million in fiscal 2002. This decrease, observed across all major geographic zones and product lines, was primarily the result of continued reduced demand in the global market for telecommunications equipment and services, resulting in lower sales in our Network Equipment and Network Services segments. Revenues in our Other segment also declined substantially since the previous year as a result of business disposals and, in particular, the disposal of Marconi Applied Technologies in fiscal 2003 and Marconi Commerce Systems in fiscal 2002.

        EMEA and the United States are our primary markets on a geographic basis. The majority of our revenues in the EMEA region are generated by our Optical Networks business, while revenues in the United States are primarily generated by our Access, OPP and Broadband Routing and Switching ("BBRS") businesses. See the detailed segmental discussion and analysis below.

        Revenues in EMEA, of £1,168 million, fell by £627 million or 35% in fiscal 2003 as compared to £1,795 million in fiscal 2002. A large proportion of this decline related to Optical Networks as telecom operators maximized utilization in their existing networks to the detriment of new network build. Other types of Network Equipment sales also featured significant declines throughout EMEA, compared to the previous year, in particular access systems in the German market. Sales of Network Services in EMEA also fell from the previous year though were comparatively more robust than Network Equipment sales largely as a result of the phasing of long-term service contracts, particularly in the Middle East and the U.K.

        Revenues in the U.S., of £424 million, fell by £519 million or 55% in fiscal 2003 as compared to £943 million in fiscal 2002. A large proportion of the reduction related to the OPP business. As in EMEA, the poor general market conditions led to substantial reductions in capital expenditure by U.S. telecom operators. U.S. sales of Optical Networks in the year amounted to only £4 million following the Group's decision to cease development and manufacture of its SONET product range in April 2002.

        Revenues in CALA also witnessed a significant regional reduction in sales as they fell by £56 million or 47% in fiscal 2003 to £62 million as compared to £118 million in fiscal 2002. Sales were down across all products and service activities as a result of the deterioration in economic conditions and currency exchange rates compared to the prior year period and the consequent reductions in capital expenditure by most of the major telecom operators in the region.

40

        Revenues in APAC, of £132 million, fell by £98 million or 43% in fiscal 2003 as compared to £230 million in fiscal 2002. The main area of decline was Optical Networks, and this was mainly as a result of the lower levels of sales recorded in China following the completion of large network build projects in the region in fiscal 2002. There have also been delays to certain major build projects by a number of the Group's Chinese customers.

Gross margin

Comparison of fiscal 2004 to fiscal 2003

        Gross margin of £396 million in fiscal 2004 reflects an increase of £34 million as compared to £362 million in fiscal 2003. We made solid progress during the year to improve gross margins, despite the lower sales volumes. Our gross margin percentage rose from 23.4% of revenues in the first quarter to 31.5% of fiscal 2004 revenues in the final quarter of the fiscal year. This was achieved as a result of direct cost savings and initiatives to focus on higher margin product sales.

        In Network Equipment, the increase in gross margin was largely driven by significant benefits from rationalisation and procurement initiatives in our European and North American supply chain and manufacturing operations, which were more than sufficient to offset the lower sales volumes and price erosion.

        In Network Services, the improvement in the gross margin percentage was largely achieved through headcount reductions as we continued to right size our services organisation and increase its efficiency and improved profitability of long-term service contracts.

Comparison of fiscal 2003 to fiscal 2002

        Gross margin of £362 million in fiscal 2003 reflects an increase of £377 million as compared to a gross loss of £15 million in fiscal 2002. Inventory write-downs and other charges negatively and significantly affected gross margin in fiscal 2002, with approximately £647 million related to inventory write-downs and other charges and an additional £158 million related to manufacturing outsourcing agreements recorded in fiscal 2002. The continuing deterioration in market conditions resulted in an additional £25 million write-down of inventory in fiscal 2003 relative to slow moving and obsolete inventories.

        Excluding these charges of £805 million in fiscal 2002 and £25 million in fiscal 2003, gross margin declined £403 million or 51% in fiscal 2003 as compared to fiscal 2002. This decline resulted primarily from lower sales volumes, particularly for Network Equipment. This was compounded by an unfavorable sales mix where the relatively lower gross margin services business became a higher proportion of the total sales in fiscal 2003. Additionally price erosion had an impact on gross margin, particularly in the European and APAC Network Equipment areas. Partially offsetting these impacts to gross margin were significant cost savings achieved during fiscal 2003 in both the Network Equipment and Network Services segments. These cost savings principally resulted from headcount reductions and facility closures.

Selling, general and administrative expenses

Comparison of fiscal 2004 to fiscal 2003

        Selling, general and administrative expenses in fiscal 2004 of £303 million, or 20.9% of revenues, declined by £20 million or 6.2% compared with £323 million in fiscal 2003. The decline of £20 million was achieved despite the inclusion of stock option costs of £31 million in fiscal 2004 related to the new Senior Management and Employee Stock Option plans, as we have achieved significant savings as the result of a continued programme of focused headcount reductions, organizational consolidation, site rationalization and closure of sales offices worldwide. In addition, we have reduced spend on

41

professional fees incurred in the normal course of business. The headcount reductions announced in the U.K., Germany and Italy have also continued to reduce costs.

Comparison of fiscal 2003 to fiscal 2002

        Selling, general and administrative expenses in fiscal 2003 of £323 million, or 17.9% of revenues, declined by £492 million or 60% compared with £815 million, or 26.1% of revenues, in fiscal 2002. We achieved significant reductions in annual expenditures through focused headcount reductions, organizational consolidation, site rationalization (including the relocation of our U.K. corporate headquarters) and closure of sales offices worldwide. A reduced level of discretionary marketing spend also contributed to lower costs in fiscal 2003. We achieved significant savings across substantially all categories of selling, general and administrative expense in fiscal 2003 as compared with fiscal 2002.

Research and development

Comparison of fiscal 2004 to fiscal 2003

        Research and development expenditure in fiscal 2004 of £190 million, or 13.1% of revenues, decreased £84 million or 30.7% as compared with expenditure of £274 million or 15.2% of revenues in fiscal 2003. Cost savings have been made throughout the year and were achieved mainly through headcount reductions and initiatives to significantly improve efficiency of our R&D by rationalizing, consolidating and closing research and development centers around the world. Other factors contributing to the overall reduction in R&D expenditure included lower levels of spend on third party sub contractors and a reduced level of depreciation due to lower levels of capital expenditure and the write-down of development and test models.

        We have continued to focus the majority of our R&D investment in three main product areas: Optical Networks, Access Networks and BBRS and in aggregate, spend in these three areas accounted for over 80% of our R&D expenditure during fiscal 2004. During the year, an increasing proportion of R&D expenditure has been directed towards Access Networks.

        Investment in Optical Networks has focused primarily on broadening our Metro portfolio, an area of increased focus by telecoms operators. Marconi's already comprehensive range of next-generation SDH products has been further extended with the launch of the SMA1/4UC, a cost-effective and highly compact addition to our Next Generation SDH product family and by the introduction of a new optical multi-service product in our PacketSpan range, the OMS840, designed specifically for simultaneously handling a wide range of data and TDM services in the edge network. Aside from new platforms, existing SDH equipment can now be data-enabled with the development of a new range of PacketSpan plug-in data cards, enabling existing networks to deliver data services alongside traditional TDM services.

        Our increased focus in Access Networks has been concentrated on three main product platforms

•

Our multi-service access node solution, the Access Hub with the launch of new functionality enhancements including the planned launch of two new line-cards, the VDSL-combo card and a new fiber-to-the-home card over Ethernet. Both new cards offer operators significant cost saving and potential new revenue opportunities by combining voice and data services, as well as handling high definition video streams considerably faster than traditional networks;



•

Further enhancements to our carrier-grade Softswitch platform which has recently undergone successful pilot tests with both Jersey Telecom and Kingston in the U.K. and which we plan to further strengthen through our new relationship with IP communications specialists, Mitel; and



•

Fixed wireless access with the planned launch of the AXR, digital multipoint radio transmission platform.

42

        In BBRS, we have achieved significant cost savings mainly as a result of realignment of core programmes to meet specific customer demand. Almost half of the spend in fiscal 2004 related to further enhancements to our BXR-48000. The second release of this multi-service switch-router incorporates enhanced IP functionality and improved ATM capability. Other programmes are focused on adding Transparent Local Area Network Service, LAN Emulation Service, MPLS and IP VPN services to multi service switches, the release of Virtual Presence (Vipr) products, and maintenance activities throughout the product portfolio.

Comparison of fiscal 2003 to fiscal 2002

        Research and development expenses of £274 million, or 15.2% of revenues, in fiscal 2003 decreased £209 million or 43.3% as compared with £483 million or 15.5% of revenues in fiscal 2002. The majority of the cost savings have been achieved as a result of headcount reductions and significant site rationalization, consolidation and closure initiatives, particularly in Europe, the U.S., Canada and Israel. Other factors contributing to the overall reduction in R&D expenditure included lower levels of third party and materials spend, continued reductions in the level of depreciation as a result of the write-down of development and test models relating to well-established or discontinued products and lower levels of capital expenditures. Optical Networks remains the key focus of our R&D investment, accounting for 40% of total Network Equipment and Network Services R&D expenses in fiscal 2003 as compared with 34% of total Network Equipment and Network Services R&D expenses in fiscal 2002. Major recent programs include the development and launch of our new high capacity SDH platform (MSH2K) and further enhancements to the data handling capacity of our next generation low capacity SDH platform (SMA Series 4). Our access product portfolios in Europe have been streamlined during fiscal 2003. As a result, our European Access R&D activities are now primarily focused on programs relating to our new multi-service access node, the Access Hub, and our class 5 SoftSwitch as well as the continued development of our Fixed Wireless Access range. European Access, and BBRS accounted for 19%, and 23% of Network Equipment and Network Services R&D spend in fiscal 2003 as compared with 22%, and 23% of Network Equipment and Network Services R&D spend in fiscal 2002, respectively, with greater than 50% of these expenditures focused on the further development of our multi-service core switch-router, the BXR-48000. Other ongoing R&D initiatives include further enhancements to our ASX-1000 and ASX-4000 product ranges. The remaining 18% of our R&D expenses incurred in fiscal 2003 related mainly to OPP and wireless software developments within Network Services.

Amortization of intangibles

        Intangible asset amortization expense of £44 million, or 3.0% of revenues, in fiscal 2004 is in line with the amortization expense of £44 million, or 2.4% of revenues and £43 million, or 1.3% of revenues, charged in fiscal 2003 and 2002 respectively.

Amortization of goodwill

        Effective April 1, 2002, we discontinued amortizing goodwill upon the adoption of Statement of Financial Accounting Standard No. ("SFAS") 142. As a result, there was no amortization expense in fiscal 2004 or 2003 as compared with £393 million or 12.6% of revenues in fiscal 2002.

Business restructuring charges

Comparison of fiscal 2004 to fiscal 2003:

        Business restructuring charges of £114 million or 7.8% of revenues in fiscal 2004 decreased £107 million or 48.4% as compared to £221 million or 12.3% of revenues in fiscal 2003. Of the £

43

114 million amount recorded in fiscal 2004, £63 million related to employee severance, £6 million to site rationalization and £45 million to advisors fees incurred in relation to our Financial Restructuring.

        The following table summarizes the activity relative to business restructuring charges reflected as charges to operating expenses in fiscal 2004 and the balances remaining in other liabilities at March 31, 2004:

•

Employee severance

        We recorded a charge of £63 million during fiscal 2004 associated with redundancy payments for approximately 1,600 employees. The total reduction in headcount in Network Equipment and Network Services in fiscal 2004 was approximately 5,000. The cost related to approximately 1,600 employees is included in the charge for fiscal 2004. Any other severance costs related to these headcount reductions are included in net cash payment in the table above. We expect to make cash payments in fiscal 2005 with respect to the balance remaining at March 31, 2004.

•

Site rationalization

        We recorded a charge of £6 million and made cash payments of £31 million in fiscal 2004 relative to site rationalization representing additional costs associated with closing and consolidating various sites around the world as part of our business reorganization. Approximately 50 sites were closed or disposed of during fiscal 2004, across all of our regions, of which the most significant were sites in Frankfurt and Ottawa.

•

Contractual commitments and other restructuring

        During fiscal 2004, we did not record any further charges in respect of other costs associated with our business reorganization program, but made cash payments of £2 million. Non-cash costs of £10 million were charged during fiscal 2003. We expect to make cash payments in fiscal 2005 with respect to the balance of the unused charged amount remaining at March 31, 2004.

•

Advisor fees

        The charge of £45 million that we recorded in fiscal 2004 relative to advisor fees represents charges from our external advisors with respect to our Financial Restructuring. The non-cash movement of £13 million in fiscal 2004 relates to advisor fees prepaid at March 31, 2003. We made cash payments totaling £33 million during fiscal 2004. Additional amounts in respect of ongoing scheme administration expenses will be expensed as incurred.

Comparison of fiscal 2003 to fiscal 2002:

        Business restructuring charges of £221 million or 12.3% of revenues in fiscal 2003 decreased £155 million or 41% as compared to £376 million or 12.0% of revenues in fiscal 2002. Of the £221 million amount recorded in fiscal 2003, £128 million related to employee severance, £36 million to site rationalization and £64 million to advisors fees incurred and accrued to complete our Financial

44

Restructuring. These charges were partially offset by a £7 million favorable settlement of litigation relating to an information technology systems implementation.

        The following table summarizes the activity relative to business restructuring charges reflected as charges to operating expenses in fiscal 2003 and the balances remaining in other liabilities at March 31, 2003:

•

Employee severance

        As a consequence of our objective to further reduce our annual operating cost base, we recorded a charge of £128 million during fiscal 2003 associated with redundancy payments for approximately 7,500 employees.

•

Site rationalization

        We recorded a charge of £36 million and made cash payments of £40 million in fiscal 2003 relative to site rationalization representing additional costs associated with closing and consolidating various sites around the world as part of our business reorganization. In fiscal 2002, we recorded a charge of £40 million. These site closures and consolidations were all commenced prior to December 15, 2002.

•

Contractual commitments and other restructuring

        During fiscal 2002, we recorded a charge of £46 million in respect of other costs associated with our business reorganization program. We made cash payments of £26 million during fiscal 2002 and recorded a non-cash charge of £7 million, leaving a balance at March 31, 2002 of £13 million. Of this balance, non-cash costs of £10 million were charged during fiscal 2003 leaving a balance of £3 million at March 31, 2003.

•

Systems implementation

        We had planned to implement a new global information technology system. However, in light of our revised trading outlook and our continued focus on cost reduction, we terminated the implementation in fiscal 2002. During fiscal 2003, we revised our previous estimate of the overall costs, leading to the release of £7 million from the amounts accrued in fiscal 2002.

•

Advisor Fees

        The charge of £64 million that we recorded in fiscal 2003 relative to advisor fees represents charges from our external advisors with respect to our Financial Restructuring. We made cash payments totaling £63 million during fiscal 2003 and a balance of £1 million remained at March 31, 2003.

Impairment of long-lived assets

        During fiscal 2004, we recorded a charge of £Nil in relation to the impairment of property, plant and equipment, compared with charges of £69 million and £154 million in fiscal 2003 and 2002 respectively. The charges in fiscal 2003 and 2002 primarily related to tangible property, plant and equipment that was no longer being used following site rationalization and closures.

45

        There was no impairment of goodwill or intangibles in fiscal 2004 or 2003. In fiscal 2002 goodwill and intangibles were impaired by £3,814. The impairment related primarily to Fore Systems, Inc (£2,152 million), Reltec Corporation (£951 million) and Metapath Software International, Inc (£336 million). The remaining impairment was related to a number of smaller prior year acquisitions, none of which were individually significant.

Loss on sale of businesses

        During fiscal 2002, we recorded a loss on sale of businesses of £93 million, primarily related to the disposal of ipsaris, the trade and assets of Marconi Optical Components Ltd, and part disposal of Marconi Communications South Africa (pty) Ltd.

Other income/(expense)

        During fiscal 2004 we recorded income of £39 million as compared to income of £10 million in fiscal 2003. Other income in fiscal 2004 primarily consists of approximately £31 million of foreign exchange transaction gains relating to the Financial Restructuring and approximately £8 million of gains on the sale of property, plant and equipment. In fiscal 2003, other income consists of £10 million of gains on the sale of property, plant and equipment. In fiscal 2002 we recorded a charge of £114 million. which included £95 million of losses on equity forward contracts (see Cumulative effect of changes in accounting principles below), £9 million of gains on the sale of property, plant and equipment and other charges related primarily to foreign currency transaction movements, patents and royalty fees.

Gain on equity forward contract

        On May 19, 2003, we paid £35 million in cash to the ESOP derivative banks to settle our liability to them and recognized a gain of £123 million on the release of this liability.

Gain on extinguishment of liabilities

        During fiscal 2004 we recorded a gain of £2,695 million on the extinguishment of liabilities related to our Financial Restructuring as compared with £Nil in fiscal 2003. This gain represents the excess of approximately £4.8 billion of creditors claims extinguished over the fair value, less issuance costs, of the cash, new debt, and new equity issued to those creditors. The total gain was allocated to the statement of operations to the extent that it related to the extinguishment of third party liabilities.

Gain/(loss) on sales of investments, net

        We recorded a gain on the sale of investments, net, of £12 million in fiscal 2004 as compared with a loss of £5 million in fiscal 2003 and a gain of £81 million in fiscal 2002. The net gain in fiscal 2004 related primarily to gains on the sale of our investments in Bookham (approximately £6 million), GAMMA (approximately £4 million) and receipt of £4 million of deferred consideration in relation to the sale of General Domestic Appliances ("GDA"), offset by approximately £2 million of losses on sales of other investments, none of which were individually significant. The gain of £81 million in fiscal 2002 included gains on the disposal of investments in Lottomatica S.p.A, GDA, Siemens Telecommunications Pty Ltd, ipsaris Limited and Alstom, offset by charges relating to other investments including NetDecisions Holdings Limited, Easynet and Atlantic Telecom Group plc.

Impairment of investments

        We recorded an 'other than temporary' impairment of £3 million related to a number of unlisted investments in fiscal 2004, as compared with a charge of £40 million in fiscal 2003. Of the charge of £40 million in fiscal 2003, £38 million related to impairment of investments in securities, and £2 million related to impairment of investments in affiliates. The £38 million impairment of investments in

46

securities relates primarily to Arraycom (£18 million), Highspeed Office (£4 million), African Renaissance Holdings (£3 million) and £8 million related to an "other-than-temporary" decline in the value of equity securities, primarily Bookham. No impairment charges were recorded in fiscal 2002.

Provision for related party receivable

        We recorded a provision of £299 million or 16.6% of revenues in fiscal 2003 related to amounts due to us from M (2003) plc, which we did not consider to be recoverable due to the terms of our Financial Restructuring.

Interest expense, net

Comparison of fiscal 2004 to fiscal 2003

        Net interest expense of £89 million or 6.1% of revenues in fiscal 2004 decreased £230 million or 72% as compared to £319 million in fiscal 2003. The year-on-year reduction reflects the higher level of debt prior to our Financial Restructuring. The interest charge of £106 million in fiscal 2004 includes £37 million in respect of the mark-to-market valuation of the embedded derivative within our Junior and Senior Notes and £36 million of amortization charges in relation to the debt discount and debt issue costs associated with the Notes. The balance relates to accrued interest on the Notes (from May 1, 2003) and interest charges on other bank debt. The interest charges are partially offset by £17 million of interest earned on cash deposits and a foreign exchange gain of £12 million arising on certain borrowings.

Comparison of fiscal 2003 to fiscal 2002

        Net interest expense of £319 million or 17.7% of revenues in fiscal 2003 increased £81 million or 34% as compared to £238 million or 7.6% of revenues in fiscal 2002. The charge in fiscal 2003 related primarily to interest on our bonds and syndicated bank debt of £289 million. This amount included £115 million of accrued but unpaid interest that was subsequently included as claims in our scheme of arrangement and compromised in our Financial Restructuring. The interest charges were partially offset by net interest received on deposits, insurance and a tax refund.

Income tax expense

Fiscal 2004

        In fiscal 2004, our effective income tax rate was negative 1% compared to the UK statutory rate of 30%. This difference was primarily due to the gain on extinguishment of liabilities not giving rise to any taxable amounts and the release of tax provisions of £20 million in respect of prior years following our Scheme of Arrangement. A full valuation allowance has been recorded against deferred tax assets arising during the year on net operating losses, provisions and other expenses, and pension and post retirement benefits.

        Based on our long-term financial modelling and underlying assumptions, and taking into account local tax regulations and restrictions currently in force we estimate that we should be able to utilize approximately £200 million of these deferred tax assets over an approximate time period of ten years. However, a full valuation allowance has been provided at the balance sheet date in accordance with Statement of Accounting Standards No. 109 "Accounting for Income Taxes". A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

47

Fiscal 2003

        In fiscal 2003, our effective income tax rate was positive 17.1% compared to the U.K. statutory rate of 30%. This difference was primarily due to net non-deductible expenses (£138 million) such as business restructuring charges and provisions for a related party receivable. This amount was partially offset by the release of tax provisions in respect of prior years following progress to resolve historic U.S. and U.K. tax issues and audits. In addition, the valuation allowance recorded against losses and other deferred tax assets increased by £126 million to £841 million.

Fiscal 2002

        In fiscal 2002, our effective income tax rate was positive 7.3% compared to the U.K. statutory rate of 30%. This difference was primarily due to non-deductible goodwill amortization and goodwill impairment charges of £1,276 million and a valuation allowance recorded against losses and other deferred tax assets of £715 million. These amounts were partially offset by the benefit of non-UK tax rate differences (£177 million), taxes recorded on items no longer considered permanently reinvested (£63 million) and other non taxable items (£242 million) such as book gains versus taxable gains and a U.S. GAAP difference relating to the treatment of realized gains and losses on the sale of investments that attracts no additional tax.

Gain on sale of affiliates

        The gain on sale of affiliates of £95 million in fiscal 2004 relates to a gain on the sale of our share in Easynet of approximately £94 million and a gain on the sale of Confirmant Limited ("Confirmant") of approximately £1 million. There were no sales of affiliates in fiscal 2003 or 2002.

Equity in loss of affiliates

        We recorded net losses of affiliates of £nil in fiscal 2004. Our share of approximately £2 million of the losses of Confirmant prior to its disposal on November 12, 2003, were offset by a £2 million tax credit related to a tax refund from another affiliate received during fiscal 2004. We did not record our share of the losses in Easynet until the date of disposal in July and September 2003 as we had no commitment to provide further financing to Easynet and the carrying value of our investment in Easynet was £nil at March 31, 2003. In fiscal 2003, we recognized losses of affiliates of £62 million related primarily to our share of the losses of Easynet of £22 million and losses in joint ventures of £40 million related to Ultramast (£35 million) and Confirmant (£5 million). Losses of affiliates of £196 million in fiscal 2002 related primarily to our share of the losses of Easynet.

Gain on sale of discontinued operations

        In fiscal 2004, we recognized a gain of £135 million on the sale of discontinued operations. On February 20, 2004, we completed the sale of our NAA business for cash proceeds of £121 million, net of costs. The gain on sale of NAA was approximately £114 million (as described in Note 13 of the consolidated financial statements). The remainder of the gain on sale of discontinued operations relates to deferred consideration of £9 million on the sale in fiscal 2003 of our Strategic Communications business (part of the now fully disposed of Mobile businesses) to Finmeccannica S.p.A. and a gain on disposal of other Mobile businesses of approximately £12 million.

        In fiscal 2003, the gain of £23 million relates to the disposal of other Mobile businesses. The Strategic Communications business, which represented the majority of the mobile businesses, was sold to Finnmeccanica S.p.A for approximately £387 million in August 2002.

48

        In fiscal 2002, the gain of £248 million relates to the disposal of our data systems business for net cash proceeds of £283 million on February 5, 2002 and the sale of our medical systems business for net cash proceeds of £729 million on October 19, 2001.

Cumulative effect of changes in accounting principles

        No amounts were recorded in fiscal 2004 and fiscal 2003 in respect of Cumulative effect of changes in accounting principles.

        At March 31, 2001, the Marconi Employee Trust had entered into various agreements to purchase shares of M (2003) plc's ordinary shares from various counter parties in order to satisfy market purchase obligations related to share option plans. The contracts were recorded in temporary equity at an amount equivalent to the net cash settlement of the shares outstanding under the contracts at March 31, 2001. On June 30, 2001, we adopted Emerging Issues Task Force ("EITF") No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", which requires such instruments to be marked to market and the obligations recorded as a liability. As a result, we recorded a cumulative effect of change in accounting principle of £240 million related to the loss on such instrument as of the implementation date in fiscal 2002 (June 30, 2001), which was previously recorded within additional paid in capital.

        Subsequent to the implementation date, we recorded additional market losses of £95 million from the implementation date up to March 31, 2002 in other expenses in the statement of operations. There were no additional market losses recognized in fiscal 2003.

Results of operations—Segmental

Continuing Operations

        In connection with the contractual separation or "ring-fencing" of the U.S. based businesses that we implemented as part of our Financial Restructuring, we adopted a new reporting structure that segments our businesses along geographical lines. Commencing with the quarter ended September 30, 2003, we reported the results of our businesses based in the U.S. (North American Ring-fence or "NARF") separately from the results of our businesses based in Europe and the rest of the world other than the U.S. (Non-Ring-fenced businesses or "Non NARF"). At March 31, 2004, our reporting structure for continuing operations was as follows:

•

NARF, which mainly comprises the equipment and services activities of the U.S. based BBRS and OPP (irrespective of the country of destination of these revenues); and



•

Non NARF, which mainly comprises the European and the rest of the world businesses: Optical Networks, Access Networks, Other Network Equipment and related Network Services.

        During the period to June 30, 2003, we had divided the continuing operations into three separate segments: Network Equipment, Network Services and Other as follows:

•

The Network Equipment segment, which comprised Optical Networks, BBRS, European Access, OPP and Other Network Equipment;



•

The Network Services segment, which comprised IC&M and VAS; and



•

Other, which comprised non-core businesses, including Marconi Applied Technologies, all of which had been sold by the end of the quarter ended September 30, 2003.

        Commencing with the quarter ended September 30, 2003, we reflected segment information on both the new and old bases, as it is impracticable to restate prior period information on the basis of the new geographic segmentation, with the exception of revenue information.

49

        In certain specific cases prior to the completion of the Financial Restructuring and the implementation of the North American Ring Fence, we entered into contracts with customers for the supply of equipment or services, which now form part of the Non-Ring-fenced business but did this through entities, which now form part of NARF (or vice versa). In the analysis of revenues by product area on page    •    , these revenues are shown in the product or service area from which the revenue originated rather than through the entity that invoiced the final customer.

Discontinued Operations

        For all periods presented, the results of the following were included in Discontinued Operations until the date of their disposal.

•

The NAA business, which we disposed of in February 2004, designed, sold and supported a range of copper and fiber based access platforms for markets that used North American Communications standards.



•

The Mobile Communications businesses designed, developed, and integrated communications and information technologies into wireless communications systems for professional and military uses. We disposed of our Strategic Communications business, which was a significant part of our mobile communications business in August 2002.



•

The Data Systems businesses, which we disposed of in February 2002, provided a broad range of marking and imaging equipment used in the identification, distribution, and tracking of food products, goods and printed matter.



•

The Medical Systems businesses manufactured and designed medical imaging equipment for both diagnostic and therapeutic uses.

        See note 13, Discontinued operations, of the consolidated financial statements for further information.

Segmental performance

        The requirements of U.S. GAAP applied to our group have resulted in us preparing our discussion and analysis of segment results using information prepared in accordance with generally accepted accounting principles in the United Kingdom ("U.K. GAAP"). The U.S. Financial Accounting Standards Board standard—Statement of Financial Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information"("SFAS 131") requires us to determine and review our segments as reflected in the management information systems reports that our managers use in making decisions. As we are an English company and we prepare our consolidated statutory financial statements under U.K. GAAP, our chief operating decision-maker evaluates our segment performance using U.K. GAAP measures. Therefore, we have presented our discussion and analysis of segment revenues and operating (loss)/profit below based upon information prepared in accordance with U.K. GAAP. In addition, our financial targets are determined in accordance with U.K. GAAP. Therefore, where we make reference to our previously disclosed financial targets, including our operating cost run-rate, we are referring to U.K. GAAP measures.

        In connection with our Financial Restructuring, we adopted a new reporting structure that segments our businesses along geographical lines. Commencing the quarter ended September 30, 2003, we have reported the results of our businesses based in the U.S. (North American Ring-fence or "NARF") separately from the results of our businesses based in Europe and the rest of the world other than the U.S. (Non Ring-fenced businesses or "Non NARF") as follows:

•

NARF (the U.S. parent, Marconi Communications, Inc and its subsidiaries) mainly comprises the equipment and services activities of our U.S. based businesses: Broadband Routing and

50

Switching ("BBRS") and Outside Plant & Power ("OPP") (irrespective of the country of destination of these revenues); and

•

Non-NARF (the Issuer, Marconi Corporation plc and its non U.S. subsidiaries) mainly comprises our European and the rest of the world based businesses: Optical Networks, Access Networks, Other Network Equipment and related Network Services.

        Our new segmentation is connected with the contractual separation or "ring-fencing" of our U.S. based businesses that we implemented as part of our Financial Restructuring.

        During the periods to June 30, 2003, we had divided our continuing operations into three separate segments: Network Equipment, Network Services and Other as follows:

•

The Network Equipment segment, which comprised Optical Networks, BBRS, European Access, OPP and Other Network Equipment;



•

The Network Services segment, which comprised Installation, Commissioning & Maintenance ("IC&M") and Value-Added Services ("VAS"); and



•

Other, which comprised non-core businesses, including Marconi Applied Technologies, all of which have been sold by the end of the quarter ended September 30, 2003.

        Commencing with the quarter ended September 30, 2003, we have reflected segment information on both the new (NARF and Non-NARF) and old (Network Equipment, Network Services and Other) bases, as it is impracticable for us to restate prior period information for the NARF and Non-NARF segments, with the exception of revenue information.

        In certain specific cases prior to the completion of our Financial Restructuring and the implementation of the North American Ring Fence, we entered into contracts with customers for the supply of equipment or services, which now form part of our Non Ring-fenced business but did this through legal entities, which now form part of NARF (or vice versa). In our analysis of revenues by product area on page 54, we show these revenues in the product or service area from which the revenues originated rather than through the legal entity which invoiced the final customer, and provide a detailed footnote to reconcile the product area sub-totals to the NARF and Non-NARF revenues.

        On February 20, 2004, we completed the sale of our NAA business for cash consideration of U.S.$240 million. As a result, NAA has been classified as a discontinued operation under U.S. GAAP in the attached financial statements for all periods presented.

        Revenues and operating profits are measured on a segmental basis in accordance with U.K. GAAP (defined as operating (loss)/profit of continuing operations before central costs, goodwill amortization, U.K. GAAP operating exceptional items and share option costs.

        Capital employed is also reported under U.K. GAAP. It is not practicable to identify the total capital employed of Network Equipment and Network Services separately as the same assets are, generally, used to generate sales in each of these segments. The operating results of these segments are separately reportable.

51

Analysis of reportable segments (U.K. GAAP)

New Segments:

Old Segments:

(1)

For fiscal 2004 and 2003 discontinued operations relate to the NAA and Mobile Communications businesses. In fiscal 2002, discontinued operations also include the Data Systems businesses.

52

Segmental revenues (U.K. GAAP)

        The following table presents our revenues by product area in accordance with U.K. GAAP: