##### Table of Contents



As filed with the Securities and Exchange
Commission on September 25, 2003








SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 20-F

|           |  |                                                                                                                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                                                                                 
|o          |  | REGISTRATION STATEMENT PURSUANT TO SECTION
    12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
    OR                                                                                       
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended March 31, 2003
    OR                                                    
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from           to           
    Commission File Number 333-12430



---

Marconi plc

(Exact name of Registrant as specified in its
charter)




---

ENGLAND AND WALES

(Jurisdiction of incorporation or
organization)


New Century Park

P.O. Box 53


Coventry


Warwickshire CV3 1HJ


United Kingdom


(Address of principal executive
office)




---

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:

None



---

Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:

$900,000,000 7 3/4% Bonds due 2010 of
Marconi Corporation plc


$900,000,000 8 3/8% Bonds due 2030 of
Marconi Corporation plc




---

Indicate the number of outstanding shares of each
of the issuers classes of capital or common stock as of
March 31, 2003:

2,793,011,951 Ordinary Shares of 5p each


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 x                  NO o

Indicate
by check mark which financial statement item the registrant has
elected to follow.


ITEM
17 o                  ITEM
18 x









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TABLE OF CONTENTS



|                                                |                                                                                       |  |  |  |  |  |  | 
|----------------------------------------------- | ------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PRESENTATION OF FINANCIAL AND OTHER INFORMATION
|PART I                                         
|                                                | Item 1: Identity of Directors, Senior Management and Advisers                        
|                                                | Item 2: Offer Statistics and Expected Timetable                                      
|                                                | Item 3: Key Information                                                              
|RISK FACTORS                                   
|EXCHANGE RATE INFORMATION                      
|                                                | Item 4: Information on the Company                                                   
|HISTORY AND DEVELOPMENT OF THE COMPANY         
|BUSINESS OVERVIEW                              
|PROPERTY, PLANT AND EQUIPMENT                  
|                                                | Item 5: Operating and Financial Review and Prospects                                 
|                                                | Item 6: Directors, Senior Management and Employees                                   
|                                                | Item 7: Major Shareholders and Related Party Transactions                            
|MAJOR SHAREHOLDERS                             
|RELATED PARTY TRANSACTIONS                     
|                                                | Item 8: Financial Information                                                        
|LEGAL PROCEEDINGS                              
|                                                | Item 9: The Offer and Listing                                                        
|                                                | Item 10. Additional Information                                                      
|MATERIAL CONTRACTS                             
|EXCHANGE CONTROLS                              
|TAXATION                                       
|DOCUMENTS ON DISPLAY                           
|                                                | Item 11: Quantitative and Qualitative Disclosures about Market Risk                  
|                                                | Item 12: Description of Securities other than Equity Securities                      
|PART II                                        
|                                                | Item 13: Defaults, Dividend Arrearages and Delinquencies                             
|                                                | Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds
|                                                | Item 15: Disclosure Controls and Procedures                                          
|                                                | Item 16A: Reserved                                                                   
|                                                | Item 16B: Reserved                                                                   
|                                                | Item 16C: Principal Accountant Fees and Services                                     
|PART III                                       
|                                                | Item 17: Financial Statements                                                        
|                                                | Item 18: Financial Statements                                                        
|SIGNATURES                                     
|EXHIBIT 4.1                                    
|EXHIBIT 4.2                                    
|EXHIBIT 4.9                                    
|EXHIBIT 4.16                                   
|EXHIBIT 4.17                                   
|EXHIBIT 4.18                                   
|EXHIBIT 4.20                                   
|EXHIBIT 4.21                                   
|EXHIBIT 4.22                                   
|EXHIBIT 4.23                                   
|EXHIBIT 4.24                                   
|EXHIBIT 4.25                                   
|EXHIBIT 4.26                                   
|EXHIBIT 4.27                                   
|EXHIBIT 4.28                                   
|EXHIBIT 12.1                                   
|EXHIBIT 12.2                                   
|EXHIBIT 13.1                                   



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##### Table of Contents



TABLE OF CONTENTS

|           |  |                                                                                  |     |      |     | 
|---------- |  | -------------------------------------------------------------------------------- | --- | ---- | --- | 
|           |  |                                                                                  |     | Page
|           |  |                                                                                  |     |     
|Part I     |  |                                                                                  |     |     
|Item 1:    |  | Identity of Directors, Senior Management and
    Advisers                        |     |      | 2   | 
|Item 2:    |  | Offer Statistics and Expected Timetable                                          |     |      | 2   | 
|Item 3:    |  | Key Information                                                                  |     |      | 3   | 
|Item 4:    |  | Information on the Company                                                       |     |      | 8   | 
|Item 5:    |  | Operating and Financial Review and Prospects                                     |     |      | 25  | 
|Item 6:    |  | Directors, Senior Management and Employees                                       |     |      | 53  | 
|Item 7:    |  | Major Shareholders and Related Party Transactions                                |     |      | 63  | 
|Item 8:    |  | Financial Information                                                            |     |      | 71  | 
|Item 9:    |  | The Offer and Listing                                                            |     |      | 78  | 
|Item 10:   |  | Additional Information                                                           |     |      | 79  | 
|Item 11:   |  | Quantitative and Qualitative Disclosures about
    Market Risk                   |     |      | 104 | 
|Item 12:   |  | Description of Securities other than Equity
    Securities                       |     |      | 104 | 
|Part II    |  |                                                                                  |     |     
|Item 13:   |  | Defaults, Dividend Arrearages and Delinquencies                                  |     |      | 105 | 
|Item 14:   |  | Material Modifications to the Rights of Security
    Holders and Use of Proceeds |     |      | 105 | 
|Item 15:   |  | Disclosure Controls and Procedures                                               |     |      | 105 | 
|Item 16A   |  | Reserved                                                                         |     |      | 105 | 
|Item 16B   |  | Reserved                                                                         |     |      | 105 | 
|Item 16C   |  | Principal Accountant Fees and Services                                           |     |      | 106 | 
|Part III   |  |                                                                                  |     |      |     | 
|Item 17:   |  | Financial Statements*                                                            |     |      | 107 | 
|Item 18:   |  | Financial Statements                                                             |     |      | 107 | 
|Item 19:   |  | Exhibits                                                                         |     |      | 107 | 
|Signatures |  |                                                                                  | 110 |     

* We have responded to Item 18 in lieu
of responding to this Item.

i



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PRESENTATION OF FINANCIAL AND OTHER
INFORMATION

On May 19, 2003, Marconi plc and Marconi
Corporation plc concluded the financial restructuring of the
Marconi group. The financial restructuring was effected through
separate schemes of arrangement under the U.K. Companies Act
1985 for each of Marconi plc and Marconi Corporation plc. As a
result of the restructuring, Marconi Corporation plc became the
new parent company of the Marconi group and Marconi plc ceased
to be a member of the Marconi group. Marconi plc no longer
conducts any business and does not intend to revive any business
operations. In this annual report, the terms we,
us, our, Marconi, the
Company refer to Marconi plc and, prior to May 19,
2003, its subsidiaries and joint ventures, as the context
requires.

Under the terms of the Marconi plc scheme of
arrangement, all of the assets of Marconi plc, other than those
necessary to fund the administration of the scheme, will be
distributed to its creditors over time in accordance with the
scheme of arrangement. We expect to liquidate or dissolve
Marconi plc after the completion of these distributions to
its creditors. While Marconi plc shares, and ADRs
representing Marconi plc shares, remain outstanding
following the effectiveness of the financial restructuring, we
believe that there will be no circumstances under which any
additional value will be returned to shareholders of
Marconi plc. As that is the case, we believe Marconi plc
shares and ADRs are effectively worthless.

Marconi 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 annual 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 annual report regarding our former 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 competed. Unless otherwise specified or the context otherwise
requires, market share and market data are based on fiscal 2003
sales.

Our fiscal year ends on March 31. Unless
otherwise specified, all references in this annual report to our
fiscal year refer to a twelve-month financial period ending
March 31. For example, fiscal 2003 represents the fiscal
year beginning on April 1, 2002 and ending on
March 31, 2003.

The consolidated financial statements contained
in this annual report have been prepared in accordance with
accounting principles generally accepted in the United States,
known as U.S. GAAP. Other than in Item 5:
Operating and Financial Review and Prospects and our
consolidated financial statements beginning on page F-1,
all segment information is presented solely on a U.S. GAAP
basis.

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

The information concerning equity affiliates
contained in this annual 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 annual 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 annual report,
the translations of U.K. pounds sterling amounts into
U.S. dollars, where indicated, have been made at the rate
of U.S.$1.5790 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, 2003. The Noon Buying Rate on
September 23, 2003 was U.S.$1.6560 per £1.00.

1



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##### Table of Contents






PART I




Item 1: Identity of Directors,
Senior Management and Advisers

This item is not applicable.




Item 2: Offer Statistics and
Expected Timetable

This item is not applicable.

2



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Item 3: Key
Information

SELECTED CONSOLIDATED FINANCIAL
INFORMATION

The selected historical consolidated financial
information presented below as at and for each of the five years
ended March 31, 1999 through 2003, has been derived from
our audited consolidated financial statements prepared in
accordance with U.S. GAAP.

On May 19, 2003, we and Marconi Corporation
plc concluded the financial restructuring of the Marconi group
through two separate schemes of arrangement under
the U.K. Companies Act 1985. As a result of the restructuring,
Marconi Corporation plc became the new parent holding company of
the Marconi group, replacing us, and we ceased to be a member of
the Marconi group. Additional details on the restructuring are
included elsewhere in this document.

The information below has been restated for the
following business disposals that have been treated as
discontinued operations under U.S. GAAP:



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile (disposed in fiscal 2003);                                                                                                                                                                                       
|
| |  | Medical Systems and Data Systems businesses
    (disposed in fiscal 2002); and                                                                                                                                          
|
| |  | Marconi Electronic Systems (MES), the
    international aerospace, naval shipbuilding, defense electronics
    and defense systems business (separated and subsequently merged
    with BAE Systems plc in fiscal 2000).

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 5:
Operating and Financial Review and Prospects.

3



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SELECTED CONSOLIDATED FINANCIAL
INFORMATION  (continued)


|                                                                                                                                                                       |                        |                                            |        |       |       |      |        |       |       |      |        |       |       |  |        |       |       |  |       |       |       |  |       |       |       | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------ | ------ | ----- | ----- | ---- | ------ | ----- | ----- | ---- | ------ | ----- | ----- |  | ------ | ----- | ----- |  | ----- | ----- | ----- |  | ----- | ----- | ----- | 
|                                                                                                                                                                       |                        |                                           
|                                                                                                                                                                       |                        | At and for the fiscal year ended March 31,
|                                                                                                                                                                       |                        | 2003                                       |        |      
|                                                                                                                                                                       |                        | $(2)                                       |        | 2003  |       | 2002 |        | 2001  |       | 2000 |        | 1999 
|                                                                                                                                                                       |                        |                                            |        | £     |       | £    |        | £     |       | £    |        | £    
|                                                                                                                                                                       |                        |                                           
|                                                                                                                                                                       |                        |                                           
|                                                                                                                                                                       |                        |                                           
|                                                                                                                                                                       |                        | (in millions, except share data)          
|STATEMENT OF OPERATIONS DATA:                                                                                                                                          |                        |                                            |        |       |       |      |        |       |       |      |        |       |       |  |        |       |       |  |       |       |       |  |       |      
|Revenues                                                                                                                                                               |                        |                                            |        |       |       |      |        |       |       |      |        |       |       |  |        |       |       |  |       |       |       |  |       |      
|                                                                                                                                                                       | Network Equipment      |                                            |        | 1,786 |       |      |        | 1,131 |       |      |        | 1,812 |       |  |        | 3,268 |       |  |       | 2,535 |       |  |       | 1,343 |      
|                                                                                                                                                                       | Network Services       |                                            |        | 1,173 |       |      |        | 743   |       |      |        | 969   |       |  |        | 1,016 |       |  |       | 543   |       |  |       | 244   |      
|                                                                                                                                                                       | Other                  |                                            |        | 35    |       |      |        | 22    |       |      |        | 465   |       |  |        | 637   |       |  |       | 824   |       |  |       | 815   |      
|                                                                                                                                                                       |                        |                                           
|                                                                                                                                                                       |                        | Total                                      |        |       | 2,994 |      |        |       | 1,896 |      |        |       | 3,246 |  |        |       | 4,921 |  |       |       | 3,902 |  |       |       | 2,402 | 
|                                                                                                                                                                       |                        |                                           
|Operating (loss)/income(1)                                                                                                                                             |                        |                                            | (960   | )     |       |      | (608   | )     |       |      | (6,392 | )     |       |  | (52    | )     |       |  | (380  | )     |       |  | 271   |      
|Other (expense)/income, net                                                                                                                                            |                        |                                            | (465   | )     |       |      | (295   | )     |       |      | (143   | )     |       |  | 310    |       |       |  | (106  | )     |       |  | 972   |      
|(Loss)/income from continuing operations before
    income taxes, minority interest, cumulative effect of changes in
    accounting principles and extraordinary items |                        |                                            | (1,425 | )     |       |      | (903   | )     |       |      | (6,535 | )     |       |  | 258    |       |       |  | (486  | )     |       |  | 1,243 |      
|(Loss)/income from continuing operations before
    cumulative effects of changes in accounting principles and
    extraordinary items                                 |                        |                                            | (1,193 | )     |       |      | (756   | )     |       |      | (6,260 | )     |       |  | 101    |       |       |  | (451  | )     |       |  | 811   |      
|Cumulative effects of changes in accounting
    principles(4)                                                                                                          |                        |                                            |       |       |       |      |       |       |       |      | (240   | )     |       |  |       |       |       |  |      |       |       |  |      |      
|Net (loss)/income                                                                                                                                                      |                        |                                            | (1,274 | )     |       |      | (807   | )     |       |      | (6,150 | )     |       |  | 180    |       |       |  | 285   |       |       |  | 1,129 |      
|(Loss)/income per share  basic
    (Loss)/income from continuing operations                                                                                           |                        |                                            | (0.43  | )     |       |      | (0.27  | )     |       |      | (2.24  | )     |       |  | 0.03   |       |       |  | (0.17 | )     |       |  | 0.30  |      
|Net (loss)/income                                                                                                                                                      |                        |                                            | (0.46  | )     |       |      | (0.29  | )     |       |      | (2.20  | )     |       |  | 0.07   |       |       |  | 0.11  |       |       |  | 0.42  |      
|(Loss)/income per share  diluted
    (Loss)/income from continuing operations                                                                                         |                        |                                            | (0.43  | )     |       |      | (0.27  | )     |       |      | (2.24  | )     |       |  | 0.03   |       |       |  | (0.17 | )     |       |  | 0.30  |      
|Net (loss)/income                                                                                                                                                      |                        |                                            | (0.46  | )     |       |      | (0.29  | )     |       |      | (2.20  | )     |       |  | 0.06   |       |       |  | 0.11  |       |       |  | 0.41  |      
|Cash dividends declared per common share
    (3)                                                                                                                       |                        |                                            |        |       |       |      |        |       |       |      |        |       |       |  |        |       |       |  |       |       |       |  |       |      
|                                                                                                                                                                       | £ per share            |                                            |        |      |       |      |        |      |       |      |        |      |       |  |        | £0.05 |       |  |       | £0.11 |       |  |       | £0.12 |      
|                                                                                                                                                                       | $ equivalent per share |                                            |        |      |       |      |        |      |       |      |        |      |       |  |        | $0.08 |       |  |       | $0.17 |       |  |       | $0.20 |      
|BALANCE SHEET DATA:                                                                                                                                                    |                        |                                            |        |       |       |      |        |       |       |      |        |       |       |  |        |       |       |  |       |       |       |  |       |      
|Total assets                                                                                                                                                           |                        |                                            | 4,912  |       |       |      | 3,111  |       |       |      | 4,925  |       |       |  | 11,683 |       |       |  | 9,426 |       |       |  | 7,699 |      
|Net assets/(liabilities)                                                                                                                                               |                        |                                            | (3,947 | )     |       |      | (2,500 | )     |       |      | (1,493 | )     |       |  | 4,805  |       |       |  | 4,468 |       |       |  | 5,874 |      
|Capital stock                                                                                                                                                          |                        |                                            | 1,926  |       |       |      | 1,220  |       |       |      | 1,203  |       |       |  | 946    |       |       |  | 622   |       |       |  | 414   |      
|Shares issued and outstanding (millions)                                                                                                                               |                        |                                            | 2,793  |       |       |      | 2,793  |       |       |      | 2,793  |       |       |  | 2,785  |       |       |  | 2,724 |       |       |  | 2,677 |      

Notes:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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 consolidated financial statements contained
    elsewhere herein.                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (2) | 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 = $1.5790, 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, 2003. These
    translated 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



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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL
INFORMATION  (continued)




| |     |                                                                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Dividend payments were made out of net income,
    which included income from discontinued operations.                                                                                                                                                                                                                                   
|
| | (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



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##### Table of Contents






RISK FACTORS

As a result of our financial restructuring, we
have ceased business operations and intend to distribute our
remaining assets to our creditors.

On May 19, 2003, we concluded the financial
restructuring of the Marconi group. The financial restructuring
was effected through separate schemes of arrangement under the
U.K. Companies Act 1985 for each of Marconi plc and
Marconi Corporation plc. As a result of the restructuring,
Marconi Corporation plc became the new parent company of the
Marconi group and Marconi plc ceased to be a member of the
Marconi group. Marconi plc no longer conducts any business and
does not intend to revive any business operations.

Under the terms of the Marconi plc scheme of
arrangement, all of the assets of Marconi plc, other than those
necessary to fund the administration of the scheme, will be
distributed to its creditors over time in accordance with the
scheme of arrangement. We expect to liquidate or dissolve
Marconi plc after the completion of these distributions to
its creditors. While Marconi plc shares, and ADRs
representing Marconi plc shares, remain outstanding
following the effectiveness of the financial restructuring, we
believe that there will be no circumstances under which any
additional value will be returned to shareholders of
Marconi plc. As that is the case, we believe Marconi plc
shares and ADRs are effectively worthless.

6



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##### Table of Contents






EXCHANGE RATE INFORMATION

The noon buying rate for pounds sterling
expressed in U.S. dollars per pounds sterling on
September 23, 2003 was £1.00 = U.S.$1.6560.

The following table sets forth the high and low
noon buying rate for pounds sterling expressed in
U.S. dollars per pound sterling for each of the previous
six months:

|                             |  |      |        |     |  |  |        | 
|---------------------------- |  | ---- | ------ | --- |  |  | ------ | 
|2003                         |  | High |        | Low
|                             |  |     
|                             |  |     
|April                        |  |      | 1.6000 |     |  |  | 1.5500 | 
|May                          |  |      | 1.6484 |     |  |  | 1.5930 | 
|June                         |  |      | 1.6840 |     |  |  | 1.6278 | 
|July                         |  |      | 1.6718 |     |  |  | 1.5867 | 
|August                       |  |      | 1.6170 |     |  |  | 1.5728 | 
|September (through Sept. 23) |  |      | 1.6560 |     |  |  | 1.5732 | 

The following table sets forth the average noon
buying rate for pounds sterling expressed in U.S. dollars
per pound sterling for each of the five most recent fiscal
years, based on the noon buying rate on the last business day of
each month.

|                            |  |         |        | 
|--------------------------- |  | ------- | ------ | 
|Fiscal year ended March 31, |  | Average
|                            |  |        
|1999                        |  |         | 1.6526 | 
|2000                        |  |         | 1.6085 | 
|2001                        |  |         | 1.4737 | 
|2002                        |  |         | 1.4320 | 
|2003                        |  |         | 1.5541 | 

7



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##### Table of Contents






Item 4: Information on the
Company




HISTORY AND DEVELOPMENT OF THE
COMPANY

Until the effectiveness on May 19, 2003 of
the schemes of arrangement described below under the caption
Financial Restructuring, Marconi plc was the parent
company of Marconi Corporation plc and its subsidiaries, which
operated (and continues to operate) the business of the Marconi
group. As a result of the effectiveness of those schemes of
arrangement, Marconi plc ceased to be a member of the Marconi
group and ceased business operations. Unless the context
otherwise requires, the discussion below relates to the business
and operations of the Marconi group that was, and continues to
be, operated through the former direct and indirect subsidiaries
of Marconi plc.

Following the passage of a special resolution at
our annual general meeting on September 25, 2003, we will
be submitting a request to the registrar of companies to change
our name to M (2003) plc.

History

Early history

Marconi plc was a holding company that operated
through its direct wholly owned subsidiary Marconi Corporation
plc and Marconi Corporations direct and indirect
subsidiaries. Marconi Corporation, previously called The General
Electric Company, p.l.c., or GEC, was incorporated as a private
limited company in England in 1900 under the name The General
Electric Company (1900) Limited. GEC originally operated in
the electrical industry. The more significant events in our
development are as follows:



| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | 1960s: We expanded significantly in the
    electrical industry through acquisitions;
|
| |  | 1970s and 1980s:                                                                     



| |   |                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We acquired Videojet Systems International Inc.,
    a data systems business, Picker International Holdings Inc., a
    medical systems business, and Gilbarco Inc., a commerce systems
    business.                                        
|
| |  | We formed GEC Plessey Telecommunications Holdings
    Limited, or GPT, a 50% joint venture with The Plessey Company
    plc, subsequently increasing our stake to 60%.                                                                       
|
| |  | We formed two 50% joint ventures, GEC Alsthom
    N.V. with Alcatel S.A., and General Domestic Appliances Limited,
    now known as General Domestic Appliances Holdings Limited, with
    the General Electric Company of the United States.



| |   |       
| | - | ------
| |  | 1990s:



| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We reduced our stake in the GEC Alsthom joint
    venture to a 24% shareholding in Alstom.                                                                   
|
| |  | We acquired the minority 40% stake in GPT and
    formed Marconi Communications.                                                                             
|
| |  | We combined the GPT business with the Marconi
    telecommunications operations in Italy, Hong Kong and South
    Africa under the same management structure.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 1999: GEC separated the Marconi Electronic
    Systems business, or MES, its international aerospace, naval
    shipbuilding, defense electronics and defense systems business,
    which merged with British Aerospace plc, now known as BAE
    SYSTEMS plc, or BAE. GECs remaining businesses were
    reorganized under Marconi plc, with GEC becoming a wholly-owned
    subsidiary of Marconi plc. Shareholders of GEC became
    shareholders of Marconi plc.

Modern history

Following the separation of MES, we focused our
strategy on communications technology and services.

8



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##### Table of Contents



Acquisitions

From that time until we completed the operational
review in fiscal 2002 referred to below, we acquired a number of
business, including the following:

Fiscal 2000:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | RELTEC Corporation,                                                                                                                                                                           
|
| |  | FORE Systems,                                                                                                                                                                                 
|
| |  | the business of RDC Communications Limited,                                                                                                                                                   
|
| |  | Nokias transmission equipment business,                                                                                                                                                      
|
| |  | the public networks business of Bosch,                                                                                                                                                        
|
| |  | the Australian communications solutions business
    of Scitec, and                                                                                                                           
|
| |  | a 27% interest in Atlantic Telecom which was
    diluted in June 2000 to 19.7% as a result of Atlantic
    Telecoms acquisition of First Telecom. Atlantic Telecom is
    now in liquidation.

Fiscal 2001:



| |   |                                              
| | - | ---------------------------------------------
| |  | Metapath Software International Inc., or MSI,
|
| |  | Systems Management Specialist, Inc.,         
|
| |  | Albany Partnership Limited, and              
|
| |  | Mariposa Technology, Inc.                    

Fiscal 2002:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | a 71.9% economic interest, and 49.9% of voting
    share capital, in Easynet Group plc in July, 2001.

Reorganization and
dispositions

Following a profit warning that we made on
July 4, 2001, we undertook an operational review of our
activities, the results of which we announced in September 2001.
These results included a change in management with the
appointment of a new chief executive officer and interim
chairman. Subsequently, in December 2002, a new chairman was
appointed to our board. The review also covered our markets,
operations and scope of business and focused on adapting the
group to the changed circumstances of the telecommunications
market during the substantial decline in market demand for the
groups products and services. As a consequence of the
review, we streamlined our activities and disposed of a number
of businesses and investments, including the following:

Fiscal 2002:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our remaining 24% interest in Alstom in February
    and June 2001,                                                                                         
|
| |  | our 92% interest in ipsaris Limited, as part of
    the Easynet acquisition referred to above;                                                              
|
| |  | our remaining 1.49% interest in Lagardère
    SCA in September 2001,                                                                                        
|
| |  | Marconi Medical Systems Group in October 2001,                                                                                                              
|
| |  | a 6.5% interest in Lottomatica SpA in November
    2001 and February 2002,                                                                                  
|
| |  | Marconi Commerce Systems Group in February 2002,                                                                                                            
|
| |  | the Marconi Optical Components business in
    February 2002 for a 9% interest in Bookham Technology p.l.c.
    which was later diluted to approximately 6%,

9



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##### Table of Contents





| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | Marconi Data Systems Group in February 2002, and                                   
|
| |  | our 50% interest in General Domestic Appliances
    Holdings Limited in March 2002.

Fiscal 2003:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | our applied technologies division in July 2002,                                                              
|
| |  | our strategic communications business (Mobile) in
    August 2002,                                           
|
| |  | OTE SpA, our private mobile networks division,
    which was also known as TETRA in January 2003,            
|
| |  | our 50% interest in Ultramast Limited, a joint
    venture, in February 2003 through a capital reduction, and
|
| |  | Marconi Online, in January 2003.                                                                             

We also reorganized our businesses with effect
from March 31, 2002, into two main divisions: Core, which
focused primarily on network communications, and Capital, which
comprised certain non-Core businesses that we managed for value
and ultimately for disposal. This division is reflected in our
historical financial statements included in this annual report.
We further divided our Core business into two main business
types, Network Equipment and Network Services.

Financial Restructuring

On May 19, 2003, the Marconi group concluded
its financial restructuring. The 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 bondholders to whom our primary financial indebtedness
was owed. The second scheme of arrangement involved creditors of
Marconi plc. As a result of the restructuring, Marconi
Corporation plc became the new parent holding company of the
Marconi group, replacing us, and Marconi plc ceased to be a
member of the Marconi group.

The financial restructuring covered approximately
£4.8 billion of creditors claims, comprising
£4.0 billion of syndicated bank debt and 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 and Marconi
Corporation plc, on May 19, 2003 the creditors covered by
these schemes of arrangement received:



| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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,
    representing 99.5% of Marconi Corporation plcs issued
    ordinary share capital on May 19, 2003.                                                                                                                                                                                                        

In addition, Marconi Corporation plc issued
5 million ordinary shares, representing 0.5% of its issued
ordinary share capital upon consummation of the financial
restructuring, and warrants to subscribe for up to
50 million additional ordinary shares, equal to 5% of its
issued ordinary share capital upon consummation of the financial
restructuring, to shareholders of Marconi plc. In connection
with the restructuring Marconi Corporation plc listed its
ordinary shares on the London Stock Exchange and established an
ADR program in respect of those shares.

10



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##### Table of Contents



In connection with the financial restructuring,
our ordinary shares were delisted from the London Stock
Exchange. Under the terms of the Marconi plc scheme of
arrangement, all of the assets of Marconi plc, other than those
necessary to fund the administration of the scheme, will be
distributed to its creditors over time in accordance with the
scheme of arrangement. We expect to liquidate or dissolve
Marconi plc after the completion of these distributions to its
creditors. While Marconi plc shares, and ADRs representing
Marconi plc shares, remain outstanding following the
effectiveness of the financial restructuring, we believe that
there will be no circumstances under which any additional value
will be returned to shareholders of Marconi plc. As that is the
case, we believe Marconi plc shares and ADRs are effectively
worthless.

Prior to the financial restructuring, we had
issued options in respect of Marconi plcs shares to
Marconi 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 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 Marconi
Corporation 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 Marconi plc and Marconi Corporation plc
in relation to the ESOP derivative transactions. Under the
settlement, which was conditional on Marconi Corporation
plcs financial restructuring becoming effective, we paid a
total of £35 million to the ESOP derivative banks and
the claims of the ESOP derivative banks under the ESOP
derivative transactions were excluded from our and Marconi
Corporation plcs schemes of arrangement.

11



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##### Table of Contents






BUSINESS OVERVIEW

Until the effectiveness on May 19, 2003 of
the schemes of arrangement of Marconi plc and Marconi
Corporation plc described under the caption History and
Development of the Company  Financial
Restructuring, Marconi plc was the parent company of
Marconi Corporation plc and its subsidiaries, which operated
(and continues to operate) the business of the Marconi group. As
a result of the effectiveness of the Marconi plc and Marconi
Corporation schemes of arrangement, Marconi plc ceased to be a
member of the Marconi group and ceased its business operations.
The business of the Marconi group continues to be operated by
Marconi Corporation plc, the current parent holding company of
the Marconi group, and its subsidiaries. Marconi plc does not
intend to revive any business operations.

Prior to May 19, 2003, we, through our
former Marconi group subsidiaries, were a global vendor of
telecommunications equipment and services. Our customers
included a number of the leading telecommunications operators
throughout the world, with whom we had a large base of installed
equipment. Unless context otherwise requires, the following
discussion relates to the business of the Marconi group.

Principal operations

Our principal executive office was in Coventry
with principal operating sites of the Marconi group in:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | United Kingdom:Coventry, Beeston, Chorley,
    Camberley, Liverpool, London, Stafford and Wellingborough.                               
|
| |  | United States and Canada:Florida, Pennsylvania, Ontario,
    Georgia, Mississippi, North Carolina, Illinois, Texas, Ohio and
    Quebec.
|
| |  | Italy:Genova, Marcianise and Pisa.                                                                                                      
|
| |  | Germany:Backnang, Offenburg, Frankfurt and
    Radeberg.                                                                                
|
| |  | Spain:Madrid.                                                                                                                           
|
| |  | Australia:Melbourne and Sydney.                                                                                                         
|
| |  | China:Beijing, Guilin and Hong Kong.                                                                                                    
|
| |  | Malaysia:Daralam and Kuala Lumpur.                                                                                                      
|
| |  | New Zealand:Auckland.                                                                                                                   
|
| |  | India:New
    Delhi.                                                                                                                    
|
| |  | Saudi Arabia:Riyadh.                                                                                                                    
|
| |  | United Arab Emirates:Dubai.                                                                                                             
|
| |  | South Africa:Johannesburg.                                                                                                              
|
| |  | Brazil:Sao
    Paulo and Votorantim.                                                                                                    
|
| |  | Mexico:Naucalpan de Juarez and
    Huixquilucan Edo de Mexico.                                                                          

As of March 31, 2003, we were organized into
main divisions: Core and Capital.

Core businesses

For the purposes of our historical financial
reporting, we divided our Core activities into two main business
types: Network Equipment, comprising optical networks, BBRS,
European Access, North American Access, OPP and other network
equipment; and Network Services, comprising installation,
commissioning and maintenance and valued added services.

Our customer base included telecommunications
companies and providers of internet services for their public
networks. In addition, we counted certain large corporations,
government departments and agencies, utilities and educational
institutions for their private networks as customers.

12



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##### Table of Contents



Sales, marketing and
distribution

We sold 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 included sales and marketing organizations in
all major geographic regions. There were specialized product
marketing groups which supported these organizations internally.
In addition, we had a central marketing staff which provided
strategic direction and customer and market communications
support for these organizations externally. Each of these
regional organizations had responsibility for account
management, sales, technical support and contract negotiation.

Our distribution partners include Ericsson,
Italtel, Nokia and Siemens. We entered into a seven-year
agreement with Ericsson in July 1999 that allows Ericsson to
market the full range of our SDH equipment throughout the world.
In June 2002, we entered into an additional seven-year agreement
enabling Ericsson to source our range of next-generation DWDM
optical networking equipment as well as encompassing the
existing 1999 agreement on SDH equipment. We also entered into a
five-year agreement with Nokia in November 1999 to market our
SDH and DWDM systems.

Customers

We benefitted from the continued support of our
strong customer base which comprised mainly well-established
incumbent telecommunications operators and government agencies.

The main customers of our Network Equipment and
Network Services included:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | Europe:BT, the
    Metro City Carriers in Germany, Telecom Italia, the U.K.
    Government and Vodafone Group.
|
| |  | United States:BellSouth, Qwest, Sprint, the
    U.S. Federal Government and Verizon.                          
|
| |  | Asia-Pacific:China
    Railcom, China Telecom, China Unicom, Telkom Malaysia and
    Telstra.                 
|
| |  | Central and Latin America:Brasil Telecom, Telcel, Telecentro
    Oeste, Telefonica and Telmex.                

These customers accounted for approximately 52%
of our total sales during fiscal 2003.

Customers of our optical networks and European
Access businesses were predominantly based in Europe as well as
in the Asia-Pacific region and Central and Latin America.
Customers of our BBRS, OPP and North American Access businesses
were predominantly based in the Americas. In addition, we
provided network services to a number of customers in the
transportation and utility sectors, mainly in Europe.

Except for BT, each of our customers accounted
for less than 6% of total sales for fiscal 2003. For the same
period, BT accounted for approximately 18% of our total sales.

We entered into frame contracts with most 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 planned to
supply a customer with products and services. The length of
frame contracts varied from customer to customer and ranged from
one to five years. Some of the frame contracts established price
and volume expectations which provided us with some visibility
of expected sales during the terms of the contracts. However,
the frame contracts did 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 imposed an obligation on the
parties to negotiate in good faith to agree an extension of the
contract.

Customers were not normally contractually bound
under their frame contracts to purchase products or services
solely from us. Customers also often had the right to terminate
a frame contract after a specified notice period.
Notwithstanding the flexibility customers had in terms of the
volume and value of the orders they placed and whether they
placed those orders with us or one of our competitors, customers
often had a commercial incentive to continue to purchase all of
their requirements for specific types of products and services
from, and to have those parts of their networks serviced by us.

13



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##### Table of Contents



Network Equipment

We designed and supplied communications systems
that transmitted and switched voice, data and video traffic
predominantly in public networks. Our network equipment products
included optical networking systems, broadband and narrowband
switches, routers and aggregation devices, wireless transmission
systems and software management systems. In addition, we sold
outside plant and power products for use in communications
networks.

Aggregate sales for all of our Network Equipment
businesses for fiscal 2003 were £1,131 million,
representing 60% of our total sales, compared to
£1,812 million, or 56% of total sales, in fiscal 2002
and £3,268 million, or 66% of total sales, in fiscal
2001.

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 public network markets in which we operated
are highly competitive. Our principal competitors included
Alcatel, Cisco Systems, Ericsson, Fujitsu, Lucent Technologies,
Nortel Networks and Siemens. The primary method of competition
in the public 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, ability to
deliver in the required timescale and provide after-sales
support, financial stability and long-term viability.

A typical public 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 like, for example, the routes between two cities. The
metro network typically provides connections between the access
and core networks, for example, between a major city and the
various local exchanges or points of presence within a
particular geographic region.

Our equipment can be found in most parts of the
typical public network with:



| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | our optical products predominantly operating in
    the transport layer;    
|
| |  | our multi-service switches and softswitch in the
    switching layer; and   
|
| |  | our range of access products found in most layers
    of the access network.

Optical
Networks

Communications service providers primarily use
three technology standards, SDH, SONET and DWDM, to transmit
voice, data and video traffic over fiber optic communications
networks. DWDM is a relatively new transmission standard 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. In June 2002, we announced that we were ceasing
development of our SONET products because of continuing weak
market conditions. We had never made material sales of SONET
products. Sales of our optical networks products constituted 23%
of our total sales in both fiscal 2003 and 2002. During the
latter period, sales were predominantly in Europe and Asia, with
the remainder from the Americas.

14



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##### Table of Contents



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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Synchronous Digital Hierarchy:We were a pioneer of SDH technology
    following its introduction in the early 1990s and have continued
    to introduce next generation SDH products. We were a leading
    supplier of SDH transmission equipment within Europe and
    believed we had a tenable position in other markets including
    the Central and Latin American and Asia-Pacific regions. SDH
    contributed approximately 84% of optical networks
    businesss sales in both fiscal 2003 and 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 streamed
    between major traffic centers. We also supplied cross-connects
    to provide points of flexibility and restoration within an SDH
    network and to switch traffic streams from one transmission line
    to another.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dense Wavelength-Division Multiplexing: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 was 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. Over the
    past few years, our share of the next generation DWDM market in
    Europe grew significantly.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We had already established what we believed was a
    tenable market position with our photonic line system, or PLx.
    We had recently launched a solution-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 were developing this product specifically for ultra
    and extended long-haul DWDM networks which will have much higher
    per fiber capacity than SDH or SONET networks. In 2000, we
    launched a remotely re-configurable photonic add-drop
    multiplexer, or PMA. This product allowed traffic streams to be
    inserted and removed from a transmission ring without disturbing
    other traffic streams. We also developed a range of
    point-to-point and ring-based metro products, PMM. DWDM
    contributed approximately 14% of our optical networks
    businesss sales in both fiscal 2003 and 2002.

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, enabled us to sell
optical networks to our customers which optimized network design
and cost for those customers. Our focus on overall optical
networks solutions, rather than single product solutions,
enabled us to design more cost effective networks and to
integrate future product offerings over the life of frame
contracts.

Broadband
Routing and Switching

In 2001, we 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 continued to provide
support services to our approximately 1,000 U.S. Federal
Government, service provider and enterprise customers. Our
single largest customer of BBRS products was the
U.S. Federal Government with whom we had enjoyed a long
relationship. To date, this had resulted in an installed base of
BBRS products in U.S. Federal Government communications
networks of approximately U.S.$1.3 billion in value.

15



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##### Table of Contents



Our BBRS business contributed approximately 6% of
the total revenues in fiscal 2003 and approximately 4% in fiscal
2002. The BBRS business sales were made predominantly in
the North American market and these sales accounted for
approximately 5% of our total sales in the latter period.

Our products addressed the three principal
packet-oriented protocols in use in the current market:



| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, or 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 comprised a range of
multi-service switch-router devices that both established the
physical communication links between end points and determined
the optimal route across the network. In addition, we also
developed and sold a range of integrated access devices, or
IADs, which were cost-effective solutions supporting converged
voice, data and video transmissions over a single circuit. We
focused on the sale and support of our ASX-200BX, ASX-1000 and
ASX-4000 range of multi-service switches, while we continued the
development of our next generation BXR-48000.

We designed our switch router product platforms,
such as the ASX-4000 and BXR-48000, to support communications
traffic transmitted by ATM, IP and MPLS protocols. We designed
them to enable operators to build on their existing switching
and routing infrastructure to continue to support their legacy
services while offering the flexibility and scalability to
roll-out next generation IP, wireless and packet voice services.
We also designed them to enable 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, or Gbps, and can be
positioned either within the core, or at the edge, of service
provider networks or high-capacity private networks. Recent
developments of the ASX-4000 switch included applications to
allow service providers to transport voice traffic over packet
switched infrastructures such as ATM (VTOA) or IP (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. In March 2002, following technical trials on the first
BXR-48000 unit, the U.S. Department of Defenses Naval
Research Laboratory, or NRL, demonstrated the high performance,
high security, speed, reliability and functionality of this
product. Subsequently, in September 2002, the
U.S. Department of Defense placed a firm order for the
product. 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. In December 2002, we announced a
further sale of the BXR-48000 to a leading European financial
institution.

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

European
Access

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 designed, manufactured, sold and supported 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 had undergone significant
rationalization and, as a result, were 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 European Access business contributed
approximately 14% of our total revenues in fiscal 2003 and
approximately 11% in fiscal 2002.

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During the latter period, approximately 85% of
the European Access business sales were in EMEA, and
approximately 10% in the Asia-Pacific region, with the remainder
in Central and Latin America.


Our principal access systems products were:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital Subscriber Line Access Multiplexer, or
    DSLAM.These products are typically
    located within an operators local exchange on one end of
    the subscriber loop providing broadband internet/DSL data and
    voice services. Our access hub, which can be configured as an
    advanced high density 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 as well as
    providing conventional DSLAM functionality, such as asymmetric
    digital subscriber line, or ADSL, capabilities. This next
    generation product offers one of the highest port densities
    available in the industry and is optimized for ease of
    configuration and management. We launched our access hub
    platform in 2001 and won two major frame contracts with Telecom
    Italia and Telkom (South Africa). Wind (Italy) was also a
    customer.
|
| |  | Fixed Wireless.Our
    Skyband MDRS product family encompassed our point-to-point, or
    PtP, portfolio which offers long and short haul SDH transmission
    for services ranging from trunk networking, local access bypass
    and mobile network feeder applications. Our Skyband MDMS
    point-to-multi-point, or PtMP, portfolio offers cost-effective
    broadband wireless solutions ranging from 2.4 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 enhanced 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 included mmO2 (Germany) and E-plus (Germany).                                                                                                                                    
|
| |  | Voice Systems.We
    provided switching hardware and software to telecommunications
    and media carriers in both legacy narrowband and next generation
    networks. The three main activities were:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Narrowband Switch Support.We supplied 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | 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 was one of
    only a limited number of products offering full class 5
    capability available in the market. It could 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 installed our SoftSwitch in the
    Dubai Marina project where it delivers voice and multimedia
    services. It was also undergoing trials with a number of
    customers in the United Kingdom. In December 2002, we announced
    the sale of our SoftSwitch system to support Jersey
    Telecoms roll out of a suite of commercial and residential
    broadband services.
|
| |  | Intelligent
    Networks.As legacy narrowband services have
    evolved, operators have experienced an increasing need to
    provide additional value added services that can be billed to
    individual subscribers. These services, such as 0800 numbers,
    voicemail, call waiting and ringback, can be controlled from a
    small number of service points where data and applications can
    be stored and updated centrally. Intelligent network products
    also work with switches from other manufacturers, increasing
    their attractiveness to operators whose systems contain a range
    of products.                                                                                                                                                                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The services offered by these products provided
    differentiating capability for our customers. We therefore
    undertook directly customer-funded developments as well as
    self-funded research and development. Our voice systems
    activities primary geographical market was the United
    Kingdom where we had a strong position in the U.K. circuit
    switching market and we were an equipment

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| |                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | supplier to customers such as BT, Cable and
    Wireless, NTL and Telewest, each of which relied on us for
    upgrades and care and maintenance of installed equipment. Our
    narrowband switching products are deployed in approximately 70%
    of BTs local telephone exchanges and are central to the
    U.K. public service telephone network, or PSTN.



| |   |                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Other Access Products.We had a range of other access
    products that are deployed in our customers networks,
    including our Deep Fiber DMP product. This product brings the
    high bandwidth of the core fiber network into the access network.

North
American Access

We designed, sold and supported a range of copper
and fiber based access platforms for markets that use North
American communications standards. Our largest customers were
BellSouth and Sprint and we were one of the main suppliers of
digital loop carrier systems by market share in North America.
Our North American Access business contributed approximately 5%
of our total sales in fiscal 2003 and approximately 4% of our
total sales in fiscal 2002.

The DLC DISC*S family of products provided copper
based access for voice and data services. We had provided over
ten million lines of digital local loop equipment based on the
DISC*S platform throughout the United States and had recently
introduced a smaller footprint broadband high density version of
the platform.

Our fiber to the curb solutions support a mix of
voice, broadband data and video services to each customer. They
deploy fiber all the way to a curbside pedestal and utilized
copper or coax cables only for the short final drop to the
customers premises.

We had significantly rationalized the North
American Access business and we were managing it for value and
ultimately for disposal.

Outside
Plant and Power

We were one of the major providers of outside
plant and power products and services in North America. We were
one of the major suppliers to Qwest, Verizon BellSouth, SBC,
Sprint, AT&T and MCI. In addition, we were a supplier to
Cingular, Telcel and U.S. Cellular. We had contracts to
provide services to Bechtel in the building of wireless networks
for AT&T and Cingular. Our OPP business contributed
approximately 7% of our total revenues in fiscal 2003, and
approximately 8% in fiscal 2002.

Our OPP business had three primary product lines:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Outside Plantsupplied connection, protection and enclosure products for the
    local loop, and was 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 included 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.
|
| |  | Powersupplied 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 included large power
    systems for local exchange applications, smaller cabinet power
    systems with plug and play flexibility, modular
    power systems, custom power subsystems sold to OEMs, DC
    distribution and DC-DC conversion systems and traditional
    ringing and signaling equipment. We marketed our family of power
    products under Vortex, Lorain and other brand names. We based
    them on a single integrated platform suitable                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | for multiple wireline 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.                                                                                                           
|
| |  | Servicesprovided
    customers with software that allowed for remote monitoring and
    control of power systems as well as complete program management
    support for communications systems deployment. Additionally, we
    provided a range of customer services, including site contract
    maintenance and breakdown service, spare parts provisioning,
    equipment depot repair, and training.

The OPP businesss principal geographic
markets were in North America and Central and Latin America.

We had significantly rationalized the OPP
business and we were managing it for value and ultimately for
disposal.

Other
Network Equipment businesses

Other Network Equipment businesses contributed
approximately 3% of our total sales in fiscal 2003, and
approximately 4% in fiscal 2002. These comprised mainly the
following businesses:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Marconi Interactive Systems, or MIS:MIS manufactured payphones and
    multimedia terminals which range from an indoor desk
    top phone through to sophisticated street multimedia
    terminals which have voice telephony and internet access
    capability. The business is predominantly U.K.-based and sells
    primarily to the major public network customers such as BT,
    Telecom Italia, Singtel, Telenor, Teledanmark and, through
    Loxley Business Information Technology Company Limited,
    TelecomAsia.
|
| |  | Network Equipment  South Africa:Our operations in South Africa
    included the design, manufacture and supply of a range of
    terminal products including telephones, PABX key-systems and
    public payphones. On December 23, 2002, we disposed of our
    51% interest in our optic fiber cable and copper cable business,
    ATC (Proprietary) Limited.                                                                                                                                                                 

Network Services

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

Aggregate sales of all our Network Services
activities for fiscal 2003 were £742 million, or
approximately 39% of our total sales, compared to
£969 million or approximately 30% of total sales in
fiscal 2002 and £1,016 million or approximately 21% of
total sales in fiscal 2001.

Overview
of the Network Services market

The substantial reduction in sales of network
equipment led to corresponding reductions in the network
planning, installation and commissioning services associated
with the sales of new products. However, 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 fragmented 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
Systems, Ericsson and Lucent Technologies are extending their
service capabilities to offer total solutions that compete with
Marconi products. 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 Dimension
Data and Telindus offer a broad portfolio of services.

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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 provided, planned, built and operated support
services to both fixed line and wireless network operators in
many countries around the world. We targeted customers in the
service provider, large-scale carrier class markets
and in the government, transport and utilities sector. Our
services segment had two main sub-groupings:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Installation, Commissioning and
    Maintenance,or IC&M, which
    comprised the following activities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer Fulfillmentprovides project management, installation and commissioning,
    field engineering support and customer training. The main
    markets were the United Kingdom, North America, Germany and
    Italy. The North American activities are associated with the OPP
    business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Managed Servicessupported the installed base of our equipment worldwide through
    technical support, on-site maintenance and spares & repairs
    management. Managed services also remotely monitored, managed
    and supported customers live networks. Services were
    provided from a global network of technical assistance centers,
    or TACs, and stock hubs and network operation centers, or NOCs.
    We operated 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, which offer around-the-clock
    telephone assistance to customers. We also had 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 supported our own product range as well as
    products supplied by other communication equipment companies.
|
| |  | Operational Support
    Systemsprovided 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 were related to the
sale of our products, although we also had considerable
experience of working with equipment from other vendors.



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Value-Added Services, or
    VAS, which comprised the following
    activities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated Systemsprovided turnkey projects and plan, build and operate services
    for non-telecommunications businesses in market sectors such as
    transportation and government. The projects involved planning,
    building, operating and supporting carrier class
    telecommunications infrastructure and were generally long-term.
    The principal geographical markets were the United Kingdom,
    Germany and the Middle East.                                                                                                                                                                                                                                                                                                 
|
| |  | Wireless Servicesprovided radio frequency consulting services to both wireless
    and wireline network operators. These were 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
    enhanced our ability to offer customized, cost-effective
    solutions for network operators and service providers. In North
    America, our primary focus was on radio cell site planning and
    network optimization. In Europe, the Middle East and Africa, or
    EMEA, our principal geographical markets were the United
    Kingdom, Saudi Arabia, the Netherlands and Germany.
|
| |  | Managed Servicesprovided customer support services associated with our BBRS
    equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

We developed our services businesses over a
number of years. In EMEA, installation and commissioning
services were necessary to support equipment sales to service
providers. In North America, the business developed through
supporting the data networking and power markets. The integrated
systems activities developed organically to support complex
mission critical network projects for large enterprises.

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Capital Businesses

Our Capital businesses comprised certain
non-essential businesses that we managed for value and
ultimately for disposal. Activities in the Capital segment
included our holdings in Easynet Group Plc and Bookham
Technology plc.

On July 26, 2001, we merged our 92% interest
in ipsaris Limited into Easynet Group Plc, a U.K. registered
company listed on the London Stock Exchange. We acquired 71.9%
of the issued share capital of Easynet and control of 49.9% of
Easynets issued voting capital. Easynets share
capital comprises voting ordinary shares and non-voting
convertible shares. The closing of the Ultramast Limited capital
reduction on February 24, 2003 and the settlement of the
litigation associated with Ultramast Limited allowed us to
acquire approximately a further 1.3 million ordinary shares
in Easynet. However, these shares, together with some of the
ordinary shares we already had held, were converted into
convertible ordinary shares so that we did not own more than
49.9% of the voting ordinary shares. Our economic interest in
Easynet was 72.7% prior to the effectiveness of our scheme of
arrangement. Easynet operates an internet network and data
center infrastructures. In the United Kingdom, Easynet has a
national broadband network. We accounted for Easynet as an
affiliate in our consolidated financial statements.

On December 17, 2001, we sold our optical
components business to Bookham Technology plc in exchange for 9%
of its issued ordinary shares. Bookham is a provider of optical
components to network equipment vendors. Pursuant to a
subsequent agreement between Bookham and Nortel Networks
Corporation, our share ownership fell from 9% to approximately
6% of Bookham prior to the effectiveness of our scheme of
arrangement.

Other activities in the Capital segment included
a number of minor activities, investments and assets.

Intellectual property

Members of the Marconi group other than Marconi
plc owned a number of intellectual property rights including
patents and designs throughout the world. The Marconi group had
a number of patent and know-how and other licenses from third
parties relating to products and methods of manufacturing
products. The Marconi group had also granted patent and know-how
and other licenses to third parties.

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

We relied on patents, trademarks, trade secrets,
design rights, copyrights, confidentiality provisions and
licensing agreements to establish and protect our proprietary
technology and to protect against claims from others.
Infringement claims had been 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. In
each case, our financial condition could be materially affected.
See Item 8: Financial Information  Legal
proceedings.

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

In connection with the restructuring of the
Marconi group, the intellectual property rights owned by the
Marconi group remained with our former group. Marconi plc did
not receive, nor does it have, any ownership rights to the
intellectual property that was owned by the Marconi group prior
to the effectiveness of the schemes of arrangement of Marconi
plc and Marconi Corporation. Furthermore, Marconi plc was
released from any liabilities that it had in connection with any
Marconi group intellectual property rights and licences.

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Environmental And Other Regulations

Environmental, and employee health and
safety matters

We were subject to increasingly stringent
regulation under various U.K., U.S., 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.

One of the many environmental laws that affected
us in the United States was 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.

The Marconi group is conducting an investigation
or clean-up at approximately 20 contaminated sites, principally
in the United States including three clean-ups under obligations
imposed under CERCLA. The remaining sites are being cleaned up
voluntarily in connection with a prior property sale or
purchase, or pursuant to government directive. The Marconi group
estimated the total cost to clean up all of these sites will be
between approximately £10 million and
£20 million. A number of these and other of our
current and 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. 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 Marconi group regularly audited its
facilities compliance with employee safety and
environmental requirements. We had not incurred material capital
expenditures for environmental, health or safety matters during
the past three financial years.

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, the
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.

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PROPERTY, PLANT AND EQUIPMENT

Our registered office is located at New Century
Park, P.O. Box 53, Coventry, Warwickshire, CV3 1HJ.

We had facilities in the United Kingdom,
continental Europe, North America, Africa, Asia and Australasia.
We owned or leased all of our principal sites. Our principal
facilities immediately prior to the effectiveness of our scheme
of arrangement were as follows:

Owned property

|                       |  |                             |  |                        
|---------------------- |  | --------------------------- |  | -----------------------
|Location               |  | Building or site area sq ft |  | Principal use          
|                       |  |                            
|                       |  |                            
|122 Edward Street      |  | 45,000                      |  | Manufacturing          
|St. Thomas, Ontario    |  |                             |  |                        
|N5P 1Z2                |  |                             |  |                        
|Canada                 |  |                             |  |                        
|Hueftelaecker 1        |  | 8,762                       |  | Offices R&D            
|T Backnang             |  |                             |  |                        
|Germany                |  |                             |  |                        
|Gerberstrasse 33       |  | 714,160                     |  | Offices R&D            
|71522 Backnang         |  |                             |  |                        
|Germany                |  |                             |  |                        
|Max-Planck Str. 1      |  | 454,000                     |  | Manufacturing          
|77656 Offenburg        |  |                             |  |                        
|Germany                |  |                             |  |                        
|MAIN SITE S.P.         |  | 113,021                     |  | Manufacturing          
|Casapuzzano Marcianise |  |                             |  |                        
|Italy                  |  |                             |  |                        
|Via Ambrogio           |  | 284,899                     |  | Offices R&D            
|Negrone 1/A            |  | including                   |  |                        
|(excluding L1 floor)   |  | Via Ludovico Calda 5        |  |                        
|16153 Genova           |  |                             |  |                        
|Italy                  |  |                             |  |                        
|Via Ludovico Calda 5   |  | See Via Negrone above       |  | Offices R&D            
|16153 Genova           |  |                             |  |                        
|Italy                  |  |                             |  |                        
|Iron Road, New Era     |  | 318,289                     |  | Manufacturing & Offices
|Springs                |  |                             |  |                        
|Johannesburg 1560      |  |                             |  |                        
|South Africa           |  |                             |  |                        
|18/20 Denington Road   |  | 44,929                      |  | Offices & Services     
|Wellingborough         |  |                             |  |                        
|Northants              |  |                             |  |                        
|U.K.                   |  |                             |  |                        
|Reltec Corporation     |  | 172,004                     |  | Manufacturing          
|104 Wiley Road         |  |                             |  |                        
|La Grange              |  |                             |  |                        
|Georgia 30240          |  |                             |  |                        
|U.S.A.                 |  |                             |  |                        

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|                                                                                      |  |                             |  |                               
|------------------------------------------------------------------------------------- |  | --------------------------- |  | ------------------------------
|Location                                                                              |  | Building or site area sq ft |  | Principal use                 
|                                                                                      |  |                            
|                                                                                      |  |                            
|956 North Broadway
    Extended
    Greenville, Mississippi
    MS 38702U.S.A.        |  | 126,416                     |  | Manufacturing & Offices       
|Evergood, 325 Welcome
    Center Blvd.
    Welcome, NC 27374
    North CarolinaU.S.A. |  | 158,000                     |  | Manufacturing & Offices       
|1000 Marconi Drive
    Warrendale, PA 15086
    PennsylvaniaU.S.A.                    |  | 574,286                     |  | Manufacturing, Offices and R&D
|1122F Street
    Lorain, 44502
    OhioU.S.A.                                         |  | 311,495                     |  | Manufacturing & Offices       

Leased properties

|                                                                               |  |                             |  |                           
|------------------------------------------------------------------------------ |  | --------------------------- |  | --------------------------
|Location                                                                       |  | Building or site area sq ft |  | Principal use             
|                                                                               |  |                            
|                                                                               |  |                            
|SCALA West
    Solmsstrasse 83
    60486 FrankfurtGermany                      |  | 116,500                     |  | Offices and R&D           
|Lot 24
    Kumlim Industrial Estate
    00009, Kulm, Kedah
    DaralamMalaysia |  | 348,483                     |  | Manufacturing             
|New Century Park
    PO Box 53
    Coventry CV3 1HJUK                          |  | 618,924                     |  | Offices and R&D           
|New Horizon Park
    Waterman Road
    CoventryUK                              |  | 314,000                     |  | Offices and Manufacturing 
|13 Wilison Road
    Huyton
    Liverpool L36 6AEUK                             |  | 105,497                     |  | Warehousing & Distribution
|Edge Lane
    Liverpool L7 9NWUK                                               |  | 221,010                     |  | Offices & R&D             

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Item 5:     Operating
and Financial Review and Prospects

This discussion and analysis should be read in
conjunction with Risk Factors, the 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 were a global vendor of telecommunications
equipment and services. Our customers included a number of the
leading telecommunications operators throughout the world, with
whom we had a large base of installed equipment. Conditions in
the telecommunications market continued to deteriorate
throughout fiscal 2003, with further reductions in capital
investment by telecommunications operators. As a result, our
total revenues of £1,896 million in fiscal 2003 decreased
£1,350 million or 41.6% as compared with £3,246
million in fiscal 2002. In our Network Equipment and Network
Services segments, revenues of £1,874 million in fiscal
2003 decreased £907 million or 32.6% as compared with
£2,781 million in fiscal 2002.

We had taken extensive action to reduce the scope
of our activities and to rationalize or curtail non-core areas.
Since September 2001, we had embarked on a sequence of
substantial cost reduction programs to reduce sales and
marketing, general and administrative and research and
development costs. We achieved significant reductions in annual
expenditures through focused headcount reductions, organization
consolidation, site rationalization (including the relocation of
our U.K. corporate headquarters) and closure of sales offices
worldwide. In addition, we had also reduced discretionary
marketing spend. As a result, our total operating expense of
£982 million in fiscal 2003, which included
approximately £299 million of business restructuring
and asset impairment charges, was reduced from approximately
£6,341 million, which included approximately
£4,364 million of business restructuring and asset
impairment charges, in fiscal 2002. Excluding business
restructuring and impairment charges, operating expenses in
fiscal 2003 decreased by £1,294 million or 65% as
compared with fiscal 2002.

On May 19, 2003, the Marconi group concluded
its financial restructuring, which was effected through two
separate schemes of arrangement under the U.K. Companies Act
1985. As a result of the restructuring, Marconi plc ceased to be
a member of the Marconi group and ceased business operations.
See the additional discussion of our financial restructuring in
History and Development of the Company 
Financial Restructuring and Liquidity and Capital
Resources below. Unless the context otherwise requires,
the discussion below relates to the business and operations of
the Marconi group that was, and continues to be, operated by the
former direct and indirect subsidiaries of Marconi plc.

Basis of presentation

Our financial statements included in this annual
report were 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 were based upon these
financial statements.

The requirements of U.S. GAAP applied to our
group 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 required 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 evaluated our segment performance
using U.K. GAAP measures. Therefore, we presented our discussion
and analysis of segment revenues and operating (loss)/profit
below based upon information prepared in accordance with U.K.
GAAP.

During the period to March 31, 2003, we
divided our continuing operations into three separate segments:
the Network Equipment and Network Services segments, which
comprised what we referred to as our Core businesses, and the
Capital segment, as follows:

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| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Network Equipment segment, which comprises
    Optical Networks, Broadband Routing and Switching (BBRS),
    European Access, North American Access, Outside Plant &
    Power (OPP) and Other Network Equipment;
|
| |  | The Network Services segment which comprises
    Installation, Commissioning & Maintenance (IC&M) and
    Value-Added Services (VAS); and                                                                            
|
| |  | The Capital segment, which comprises businesses
    that we manage for value and ultimately for disposal.                                                                                                            

During fiscal 2003, the Capital segment comprised
the following: Marconi Applied Technologies, until its disposal
on July 12, 2002; Infochain, until its closure on
August 18, 2002; and Online, until its disposal on
March 5, 2003. In fiscal 2002, Capital also included GDA
and Marconi Optical Components.

Under U.K. GAAP, the Capital segment also
included: Strategic Communications, until its disposal on
August 2, 2002; TETRA, until its disposal on March 5,
2003; and our UMTS mobile activities, all of which were treated
as discontinued operations under U.S. GAAP. In addition,
the Medical and Data Systems segments are presented as
discontinued under U.S. GAAP for all years presented. We
also had an economic interest of 72.7% in Easynet Group plc,
which we included in our Capital segment. We accounted for
Easynet using the equity method of accounting.

In February 2002, we were obliged to acquire by a
put option 1,324,054 ordinary shares in Easynet for
£20 million. We disputed the legal basis of the put
option and entered into litigation with Railtrack Group. In
February 2003, the litigation with Railtrack Group was settled
and we became beneficial owners of the 1,324,054 Easynet
ordinary shares under the put option. Consequently, the
£20 million and related impairment have been reflected
in equity in loss of affiliates. The put option increased our
equity holding to 72.7% and our holding of voting shares to
51.6%. However, under the Articles of Association of Easynet and
our relationship agreement with Easynet, our voting rights in
Easynet are limited to 49.9%. Accordingly, Easynet applied in
April 2003 to the U.K. Listing Authority to cancel the 1,324,054
ordinary shares and non-voting convertible shares have been
issued to us in exchange. Since we were not able to exercise
control over Easynet at anytime, we continued to account for
Easynet using the equity method of accounting.

26



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##### Table of Contents



Results of operations 
Consolidated

The following table presents our results of
operations for the three years ended March 31, 2003
prepared in accordance with U.S. GAAP.

|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |      |   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ------------- | ----- | -------- | - | ---- | ----- | -------- | -- | - | ------ | -------- | - |  | ------ | ---- | -- |  | ----- | ---- | - |  | ---- | ---- | --
|                                                                                                                                                                        |                                          |               |       |          |   |     
|                                                                                                                                                                        |                                          | 2003          |       | 2002     |   | 2001
|                                                                                                                                                                        |                                          |               |       | % of     |   |      |       | % of     |    |   |        | % of    
|                                                                                                                                                                        |                                          | £             |       | revenues |   | £    |       | revenues |    | £ |        | revenues
|                                                                                                                                                                        |                                          |              
|                                                                                                                                                                        |                                          |              
|                                                                                                                                                                        |                                          |              
|                                                                                                                                                                        |                                          | (In millions)
|Revenues:                                                                                                                                                               |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Network Equipment                                                                                                                                                       |                                          |               | 1,131 |          |   |      |       |          |    |   | 1,812  |          |   |  |        |      |    |  | 3,268 |      |   |  |      |     
|Network Services                                                                                                                                                        |                                          |               | 743   |          |   |      |       |          |    |   | 969    |          |   |  |        |      |    |  | 1,016 |      |   |  |      |     
|Capital                                                                                                                                                                 |                                          |               | 22    |          |   |      |       |          |    |   | 465    |          |   |  |        |      |    |  | 637   |      |   |  |      |     
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|                                                                                                                                                                        |                                          |               | 1,896 |          |   |      |       |          |    |   | 3,246  |          |   |  |        |      |    |  | 4,921 |      |   |  |      |     
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Direct costs                                                                                                                                                            |                                          |               | 1,522 |          |   |      | 80.3  | %        |    |   | 3,297  |          |   |  | 101.6  | %    |    |  | 3,034 |      |   |  | 61.7 | %   
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Gross margin                                                                                                                                                            |                                          |               | 374   |          |   |      | 19.7  | %        |    |   | (51    | )        |   |  | (1.6   | %)   |    |  | 1,887 |      |   |  | 38.3 | %   
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Selling, general and administrative expenses                                                                                                                            |                                          |               | 356   |          |   |      | 18.8  | %        |    |   | 836    |          |   |  | 25.8   | %    |    |  | 783   |      |   |  | 15.9 | %   
|Research and development                                                                                                                                                |                                          |               | 290   |          |   |      | 15.3  | %        |    |   | 525    |          |   |  | 16.2   | %    |    |  | 506   |      |   |  | 10.3 | %   
|Amortization of goodwill and intangibles                                                                                                                                |                                          |               | 44    |          |   |      | 2.3   | %        |    |   | 436    |          |   |  | 13.4   | %    |    |  | 647   |      |   |  | 13.1 | %   
|Business restructuring charges                                                                                                                                          |                                          |               | 230   |          |   |      | 12.1  | %        |    |   | 396    |          |   |  | 12.2   | %    |    |  |      |      |   |  |     |     
|Impairments of long-lived assets                                                                                                                                        |                                          |               | 69    |          |   |      | 3.6   | %        |    |   | 3,968  |          |   |  | 122.1  | %    |    |  |      |      |   |  |     |     
|Other (income)/expenses                                                                                                                                                 |                                          |               | (7    | )        |   |      | (0.4  | %)       |    |   | 180    |          |   |  | 5.6    | %    |    |  | 3     |      |   |  | 0.1  | %   
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Total operating expenses                                                                                                                                                |                                          |               | 982   |          |   |      | 51.7  | %        |    |   | 6,341  |          |   |  | 195.3  | %    |    |  | 1,939 |      |   |  | 39.4 | %   
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Operating loss                                                                                                                                                          |                                          |               | (608  | )        |   |      | (32.0 | %)       |    |   | (6,392 | )        |   |  | (196.9 | %)   |    |  | (52   | )    |   |  | (1.1 | %)  
|Other income/(expense):                                                                                                                                                 |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|                                                                                                                                                                        | (Loss)/gain on sales of investments, net |               |       | (5       | ) |      |       | (0.3     | %) |   |        | 89       |   |  |        | 2.7  | %  |  |       | 461  |   |  |      | 9.4  | % 
|                                                                                                                                                                        | Impairment of investments                |               |       | (40      | ) |      |       | (2.1     | %) |   |        |         |   |  |        |     |    |  |       |     |   |  |      |     |   
|                                                                                                                                                                        | Other income                             |               |       | 34       |   |      |       | 1.8      | %  |   |        |         |   |  |        |     |    |  |       |     |   |  |      |     |   
|                                                                                                                                                                        | Interest expense, net                    |               |       | (284     | ) |      |       | (15.0    | %) |   |        | (232     | ) |  |        | (7.1 | %) |  |       | (151 | ) |  |      | (3.1 | %)
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|(Loss)/income from continuing operations before
    income taxes, minority interests, cumulative effects of changes
    in accounting principles and extraordinary gain |                                          |               | (903  | )        |   |      | (47.6 | %)       |    |   | (6,535 | )        |   |  | (201.3 | %)   |    |  | 258   |      |   |  | 5.2  | %   
|Income tax benefit/(provision)                                                                                                                                          |                                          |               | 209   |          |   |      | 11.0  | %        |    |   | 471    |          |   |  | 14.5   | %    |    |  | (17   | )    |   |  | (0.3 | %)  
|Equity in net loss of affiliates                                                                                                                                        |                                          |               | (62   | )        |   |      | (3.3  | %)       |    |   | (196   | )        |   |  | (6.0   | %)   |    |  | (137  | )    |   |  | (2.7 | %)  
|Minority interests                                                                                                                                                      |                                          |               |      |          |   |      |      |          |    |   |       |          |   |  |       |      |    |  | (3    | )    |   |  | (0.1 | %)  
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|(Loss)/income from continuing operations before
    cumulative effects of changes in accounting principles and
    extraordinary gain                                   |                                          |               | (756  | )        |   |      | (39.9 | %)       |    |   | (6,260 | )        |   |  | (192.8 | %)   |    |  | 101   |      |   |  | 2.1  | %   
|(Loss)/income from discontinued operations                                                                                                                              |                                          |               | (74   | )        |   |      | (3.9  | %)       |    |   | (64    | )        |   |  | (2.0   | %)   |    |  | 59    |      |   |  | 1.2  | %   
|Gain on sale of discontinued operations                                                                                                                                 |                                          |               | 23    |          |   |      | 1.2   | %        |    |   | 248    |          |   |  | 7.6    | %    |    |  | 20    |      |   |  | 0.4  | %   
|Extraordinary gain, net of tax of £nil                                                                                                                                  |                                          |               |      |          |   |      |      |          |    |   | 166    |          |   |  | 5.1    | %    |    |  |      |      |   |  |     |     
|Cumulative effect of changes in accounting
    principles                                                                                                               |                                          |               |      |          |   |      |      |          |    |   | (240   | )        |   |  | (7.4   | %)   |    |  |      |      |   |  |     |     
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     
|Net (loss)/income                                                                                                                                                       |                                          |               | (807  | )        |   |      | (42.6 | %)       |    |   | (6,150 | )        |   |  | (189.5 | %)   |    |  | 180   |      |   |  | 3.7  | %   
|                                                                                                                                                                        |                                          |               |       |          |   |      |       |          |    |   |        |          |   |  |        |      |    |  |       |      |   |  |      |     

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Revenues

The following table sets forth our revenues by
geographical region of destination for the three years ended
March 31, 2003 as reported under U.S. GAAP:

|                                 |                                             |               |     |          |  |      |      |          |   |   |       |          |  |  |      |       |   |  |       |       |  |  |      |       |  
|-------------------------------- | ------------------------------------------- | ------------- | --- | -------- |  | ---- | ---- | -------- | - | - | ----- | -------- |  |  | ---- | ----- | - |  | ----- | ----- |  |  | ---- | ----- | -
|                                 |                                             |               |     |          |  |     
|                                 |                                             | 2003          |     | 2002     |  | 2001
|                                 |                                             |               |     | % of     |  |      |      | % of     |   |   |       | % of    
|                                 |                                             | £             |     | revenues |  | £    |      | revenues |   | £ |       | revenues
|                                 |                                             |              
|                                 |                                             |              
|                                 |                                             |              
|                                 |                                             | (In millions)
|United Kingdom                   |                                             |               | 500 |          |  |      | 26.4 | %        |   |   | 837   |          |  |  | 25.8 | %     |   |  | 1,418 |       |  |  | 28.8 | %    
|Italy                            |                                             |               | 156 |          |  |      | 8.2  | %        |   |   | 201   |          |  |  | 6.2  | %     |   |  | 197   |       |  |  | 4.0  | %    
|Other                            |                                             |               | 512 |          |  |      | 27.0 | %        |   |   | 757   |          |  |  | 23.3 | %     |   |  | 1,170 |       |  |  | 23.8 | %    
|                                 |                                             |               |     |          |  |      |      |          |   |   |       |          |  |  |      |       |   |  |       |       |  |  |      |      
|                                 | Total Europe, Middle East and Africa (EMEA) |               |     | 1,168    |  |      |      | 61.6     | % |   |       | 1,795    |  |  |      | 55.3  | % |  |       | 2,785 |  |  |      | 56.6  | %
|United States                    |                                             |               | 519 |          |  |      | 27.4 | %        |   |   | 1,064 |          |  |  | 32.7 | %     |   |  | 1,560 |       |  |  | 31.7 | %    
|Central and Latin America (CALA) |                                             |               | 62  |          |  |      | 3.3  | %        |   |   | 118   |          |  |  | 3.7  | %     |   |  | 229   |       |  |  | 4.7  | %    
|Other                            |                                             |               | 15  |          |  |      | 0.8  | %        |   |   | 39    |          |  |  | 1.2  | %     |   |  | 16    |       |  |  | 0.3  | %    
|                                 |                                             |               |     |          |  |      |      |          |   |   |       |          |  |  |      |       |   |  |       |       |  |  |      |      
|                                 | Total Americas                              |               |     | 596      |  |      |      | 31.4     | % |   |       | 1,221    |  |  |      | 37.6  | % |  |       | 1,805 |  |  |      | 36.7  | %
|Asia-Pacific (APAC)              |                                             |               | 132 |          |  |      | 7.0  | %        |   |   | 230   |          |  |  | 7.1  | %     |   |  | 331   |       |  |  | 6.7  | %    
|                                 |                                             |               |     |          |  |      |      |          |   |   |       |          |  |  |      |       |   |  |       |       |  |  |      |      
|                                 | Total revenues                              |               |     | 1,896    |  |      |      | 100.0    | % |   |       | 3,246    |  |  |      | 100.0 | % |  |       | 4,921 |  |  |      | 100.0 | %
|                                 |                                             |               |     |          |  |      |      |          |   |   |       |          |  |  |      |       |   |  |       |       |  |  |      |      

Approximately 37%, 24% and 28% of our fiscal 2003
revenues were made in Sterling, Euros and U.S. dollars,
respectively as compared with 33%, 21% and 31%, respectively in
fiscal 2002, and 39%, 20% and 31%, respectively in fiscal 2001.

The average currency exchange rates for the Euro
to the Sterling were 1.55, 1.63 and 1.63 in fiscal 2003, 2002
and 2001, respectively. The average currency exchange rates for
the U.S. dollar to the Sterling were 1.55, 1.43 and 1.48 in
fiscal 2003, 2002 and 2001, respectively.

Comparison
of fiscal 2003 to fiscal 2002

Total revenues of £1,896 million in
fiscal 2003 reflected a decrease of £1,350 million or
42% as compared with £3,246 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. Sales in our Capital segment have
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.

Europe, the Middle East, and Africa
(EMEA) and the United States were our primary
markets on a geographic basis. The majority of our revenues in
the EMEA region were generated by our Optical Networks, while
revenues in the U.S. were generated by our access, Outside
Plant and Power (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% as compared to
£1,795 million in fiscal 2002. A large proportion of
this decline related to Optical Networks as telecom operators
have 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 £519 million,
fell by £545 million or 51% in fiscal 2003 as compared
to £1,064 million in fiscal 2002. A large proportion
of the reduction related to the Outside Plant and Power

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##### Table of Contents



business. As in EMEA, the poor general market
conditions have led to substantial reductions in capital
expenditure by U.S. telecom operators. U.S. sales of
Optical Networks in fiscal 2003 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 fiscal 2002
and the consequent reductions in capital expenditure by most of
the major telecom operators in the region.

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.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Total revenues of £3,246 million in
fiscal 2002 decreased by £1,675 million, or 34%, as
compared to £4,921 million in fiscal 2001. This
decrease was recorded across all of our major geographic regions
and was primarily the result of reduced demand in the overall
telecommunications industry where capital expenditure was
reduced in fiscal 2002 compared to the levels reported in fiscal
2001. Market conditions in the communications market continued
to deteriorate throughout fiscal 2002, with the high levels of
telecommunications operators capital investment in the
latter part of the 1990s having proved unsustainable. The
combination of a growing number of operators competing for the
same customers, overly optimistic expectations for demand
growth, and technological improvements contributed to an
oversupply of bandwidth. As a result, in calendar year 2001
capital expenditure fell significantly among wire line operators
around the world as they focused on their own profitability and
cash generation. Every supplier in the communications market was
affected by the rapid downturn in demand for telecommunications
equipment. The speed of the decline meant that our revenues
declined faster than the corresponding cost of goods sold and
operating expenses could be reduced.

The decrease in revenues in the U.K. of
£581 million or 41% and other countries in the EMEA
region of £409 million or 30% in fiscal 2002 compared
to fiscal 2001 was broadly in line with the declining market
trend for SDH, the digital transmission standard used throughout
Europe. However, this was exacerbated by the more rapid decrease
in capital expenditure by our major incumbent customers, for
example BT, compared to other operators. This reduction was less
pronounced in the other EMEA countries as compared to the U.K.
as spending by mainly European operators remained resilient.
Access Systems revenues also suffered as legacy contracts were
completed and European customers moved away from narrowband
products. The decline was partially offset by a slight increase
in revenue from maintenance contracts within Network Services.
See the further segmental discussion and analysis below.

This decline in revenues in the Americas of
£584 million or 32% in fiscal 2002 compared to fiscal
2001 was primarily due to the decline in sales of access
products, which resulted from a general downturn in customer
spending and a switch of capital expenditures to broadband
access products. The reduction in Network Equipment revenues
also had a knock-on effect on Network Services revenues. See the
detailed segmental discussion and analysis below.

Gross margin



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Gross margin of £374 million in fiscal
2003 reflects an increase of £425 million as compared
to (£51) 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

29



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##### Table of Contents



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 £355 million or 47% 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.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Gross margin of (£51) million in fiscal 2002
reflects a decrease of £1,938 million, or 102.7%, as
compared to £1,887 million in fiscal 2001. As noted
above, inventory and other charges negatively and significantly
affected gross margins in fiscal 2002, with approximately
£647 million related to inventory write-downs and other
charges and £158 million related to manufacturing
outsourcing agreements. Of the £647 million in inventory
and other charges, £556 million represented provisions
for slow-moving and obsolete inventory against a number of
product lines, primarily Optical Networks products, and
£91 million was recorded related to supplier
commitments. Of the £158 million charge relative to
outsourcing arrangements, £127 million represents
additional costs incurred as a result of our decision in fiscal
2002 to outsource certain manufacturing operations to Jabil
Circuit, Inc., with the remaining balance of
£31 million related to obligations for equipment
leasing and supply contracts under minimum purchase agreements,
which we committed to in fiscal 2002 as part of our operational
reorganization. Excluding this charge of £805 million in
fiscal 2002, gross margins declined £1,133 million or
60% in fiscal 2002 as compared with fiscal 2001.

The Network Equipment and Network Services
segments contributed approximately £1.1 billion, or
57%, of the decline in gross margins experienced in fiscal 2002,
as compared with fiscal 2001. The lower gross margins were
primarily a result of the deterioration in sales volumes
discussed above and an unfavorable product mix in fiscal 2002 as
compared with 2001. As a strong indication of this mix swing,
the relatively lower gross margins services business represented
35% of the combined Network Equipment and Network Services
revenue in fiscal 2002 as opposed to only 23% in fiscal 2001. In
addition, the speed of this deterioration in revenues was more
rapid than our ability to re-scale the cost base of our
business, which contributed further to reduced gross margins.
Businesses sold in fiscal 2002, including our commerce systems
and optical components businesses, resulted in an additional
£57 million reduction in gross margins in fiscal 2002
as compared with fiscal 2001.

Operating expenses

Selling, general and administrative
expenses



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Selling, general and administrative expenses of
£356 million, or 18.8% of revenues, in fiscal 2003,
declined by £480 million or 57% compared with
£836 million, or 25.8% of revenues, in fiscal 2002. We
achieved significant reductions in annual expenditures through
focused headcount reductions, organization 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.

30



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##### Table of Contents





| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Selling, general and administrative expenses of
£836 million, or 25.8% of revenues, in fiscal 2002
increased £53 million or 7% as compared with
£783 million, or 15.9% of revenues, in fiscal 2001. In
fiscal 2002, we recorded a provision for doubtful accounts of
£175 million in response to the deteriorating
telecommunications market conditions, which affected the
creditworthiness of some of our customers. Offsetting this
provision of £175 million were reductions in expense
in fiscal 2002, which we achieved primarily through headcount
reductions. The increase in selling, general and administrative
expenses in fiscal 2002 as a percentage of revenues is primarily
the result of the decline in our revenues, which was more rapid
than our ability to re-scale the cost base of our business.
Additionally, offsetting selling, general and administrative
expenses in fiscal 2001 were a legal claim settlement and an
adjustment of insurance-related obligations. In addition,
charges of £26 million related to compensatory stock
option plans increased £19 million in fiscal 2002,
compared to a charge of £7 million in fiscal 2001.

Research and development



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Research and development expenses of
£290 million, or 15.3% of revenues, in fiscal 2003
decreased £235 million or 44.8% as compared with
£525 million or 16.2% 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 remained 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. European Access, North American Access
and BBRS accounted for 19%, 5% and 23% of Network Equipment and
Network Services R&D spend in fiscal 2003 as compared with
22%, 9%, 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. The
remaining 13% of our R&D expenses incurred in fiscal 2003
related mainly to OPP and wireless software developments within
Network Services.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

R&D expenses of £525 million, or
16.2% of revenues, in fiscal 2002 increased
£19 million, or 3.8%, as compared with
£506 million, or 10.3% of revenues, in fiscal 2001.
The increase was primarily a result of the BBRS and Optical
Networks businesses, which increased by £22 million
and £27 million, respectively, in fiscal 2002 as
compared with fiscal 2001. These increases were driven by the
development and launch of key products such as the BXR 48000
multi-service core switch, new additions to the SmartPhoniX
range of equipment, notably ultra long haul and metro DWDM
product ranges, as well as further development of SDH technology
to produce a fourth generation SDH multiplexer. Partially
offsetting these increases was a £37 million reduction
in research and development expenditure within our access
business, which was part of our strategy to increase focus on
certain broadband access product lines, primarily fixed wireless
access and the recently launched access hub. We terminated
expenditure on areas such as Skyband WipLL.

Amortization of goodwill



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

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 2003 as compared
with £393 million or 12.1% of revenues in fiscal 2002.

31



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##### Table of Contents





| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Goodwill amortization expense of
£393 million or 12.1% of revenues in fiscal 2002
decreased £212 million or 35% as compared with
£605 million or 12.3% of revenues in fiscal 2001. The
decrease was primarily a result of impairments recorded in
fiscal 2002, which reduced the carrying value of goodwill and
the resulting amortization expense.

Amortization of intangibles



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Intangible asset amortization expense of
£44 million or 2.3% of revenues in fiscal 2003
increased by £1 million, or 2.3%, as compared with
intangible assets amortization expense of £43 million
or 1.3% of revenues in fiscal 2002.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Intangible asset amortization expense of
£43 million or 1.3% of revenues in fiscal 2002
increased by £1 million, or 2.4%, as compared with
intangible amortization expense of £42 million or 0.8%
of revenues in fiscal 2001.

Business restructuring charges



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Business restructuring charges of
£230 million or 12.1% of revenues in fiscal 2003
decreased £166 million or 42% as compared to
£396 million or 12.2% of revenues in fiscal 2002. Of
the £230 million amount recorded in fiscal 2003,
£128 million related to employee severance,
£36 million to site rationalization and
£73 million to advisors fees incurred and accrued to
complete our groups financial restructuring. These charges
were partially offset by the 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:

|                              |                                                     |            |  |           |     |          |  |            |     |           |  |     |     |  |  |    |    |  |  |    |    | 
|----------------------------- | --------------------------------------------------- | ---------- |  | --------- | --- | -------- |  | ---------- | --- | --------- |  | --- | --- |  |  | -- | -- |  |  | -- | -- | 
|                              |                                                     |           
|                              |                                                     | Utilized  
|                              |                                                     | Balance at |  | Charged   |     |          |  | Balance at
|                              |                                                     | March 31,  |  | in fiscal |     | Net cash |  | Non cash   |     | March 31,
|(in millions)                 |                                                     | 2002       |  | 2003      |     | Payments |  | Movement   |     | 2003     
|                              |                                                     |           
|                              |                                                     |           
|                              |                                                     | £          |  | £         |     | £        |  | £          |     | £        
|Business restructuring costs: |                                                     |            |  |           |     |          |  |            |     |           |  |     |     |  |  |    |    |  |  |   
|                              | Employee severance                                  |            |  | 30        |     |          |  | 128        |     |           |  | 148 |     |  |  |   |    |  |  | 10 |   
|                              | Site rationalization                                |            |  | 40        |     |          |  | 36         |     |           |  | 30  |     |  |  |   |    |  |  | 46 |   
|                              | Contractual commitments and other
    restructuring |            |  | 13        |     |          |  |           |     |           |  |    |     |  |  | 10 |    |  |  | 3  |   
|                              | Systems implementation                              |            |  | 24        |     |          |  | (7         | )   |           |  | 17  |     |  |  |   |    |  |  |   |   
|                              | Advisor fees                                        |            |  |          |     |          |  | 73         |     |           |  | 63  |     |  |  |   |    |  |  | 10 |   
|                              |                                                     |           
|                              |                                                     | Total      |  |           | 107 |          |  |            | 230 |           |  |     | 258 |  |  |    | 10 |  |  |    | 69 | 
|                              |                                                     |           



|  |                   
|- | ------------------
| | 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.
Approximately 500 employees are expected to leave in fiscal
2004. Marconi Corporation plc expects to make cash payments in
fiscal 2004 with respect to the balance of the unused charged
amount remaining at March 31, 2003.

32



---



##### Table of Contents





|  |                     
|- | --------------------
| | Site rationalization

We recorded a charge of £36 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 have been charged during
fiscal 2003 leaving a balance of £3 million at
March 31, 2003. Marconi Corporation plc expects to make
cash payments in fiscal 2004 with respect to the balance of the
unused charged amount remaining at March 31, 2003.



|  |                       
|- | ----------------------
| | Systems implementation

As discussed below, 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 £73 million that we
recorded in fiscal 2003 relative to advisor fees represents
charges from our external advisors with respect to our financial
restructuring and administration of Marconi plc. We made cash
payments totaling £63 million during fiscal 2003 and a
balance of £10 million remains at March 31, 2003.
We expect to make cash payments in fiscal 2004 with respect to
the balance of the unused charged amount remaining at
March 31, 2003. We expensed additional amounts of
approximately £39 million as incurred during fiscal
2004 but prior to the effective date of the restructuring.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Business restructuring charges were
£396 million or 12.2% of revenues in fiscal 2002, as
compared with business restructuring charges of £nil in
fiscal 2001. As a result of the sudden and significant downturn
in market conditions in the global telecommunications markets in
2001, in the first half of fiscal 2002 we announced plans to
reorganize our group into the two main reporting divisions (Core
and Capital), reduce our debt and reduce our operating cost
base. As a result, in fiscal 2002 approximately 10,000 employees
left the group under voluntary redundancy arrangements, we
closed and consolidated various sites around the world, and we
discontinued implementation of a new information technology
system.

Of the £396 million recorded in fiscal
2002, charges of £237 million related to employee
severance, £40 million related to site
rationalization, £46 million related to contractual
commitments and other restructuring charges and
£73 million related to costs for the discontinuance of
the information technology systems implementation.

33



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##### Table of Contents



The following table summarizes the activity
relative to business restructuring charges reflected as charges
to operating expenses in fiscal 2002 and the balances remaining
in other liabilities at March 31, 2002:

|                              |                                                 |           |  |          |     |            |  |           |     |  |  |   |   |  |  |    |     | 
|----------------------------- | ----------------------------------------------- | --------- |  | -------- | --- | ---------- |  | --------- | --- |  |  | - | - |  |  | -- | --- | 
|                              |                                                 |          
|                              |                                                 | Utilized 
|                              |                                                 | Charged   |  |          |     | Balance at
|                              |                                                 | in fiscal |  | Net cash |     | Non cash   |  | March 31,
|(in millions)                 |                                                 | 2002      |  | payments |     | movement   |  | 2002     
|                              |                                                 |          
|                              |                                                 |          
|                              |                                                 | £         |  | £        |     | £          |  | £        
|Business restructuring costs: |                                                 |           |  |          |     |            |  |           |     |  |  |   |   |  |  |   
|                              | Employee severance                              |           |  | 237      |     |            |  | 207       |     |  |  |  |   |  |  | 30 |    
|                              | Site rationalization                            |           |  | 40       |     |            |  |          |     |  |  |  |   |  |  | 40 |    
|                              | Contractual commitments and other Restructuring |           |  | 46       |     |            |  | 26        |     |  |  | 7 |   |  |  | 13 |    
|                              | Systems implementation                          |           |  | 73       |     |            |  | 49        |     |  |  |  |   |  |  | 24 |    
|                              |                                                 |          
|                              |                                                 | Total     |  |          | 396 |            |  |           | 282 |  |  |   | 7 |  |  |    | 107 | 
|                              |                                                 |          



|  |                   
|- | ------------------
| | Employee severance

In fiscal 2002, we recorded a charge of
£237 million to reflect the cost associated with
voluntary redundancy payments for approximately 10,000
employees. We made cash payments of £207 million in
fiscal 2002.



|  |                     
|- | --------------------
| | Site rationalization

The charge of £40 million in respect of
site rationalization in fiscal 2002 represents costs associated
with closing and consolidating various sites around the world as
part of our business reorganization.



|  |                                                    
|- | ---------------------------------------------------
| | 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.



|  |                       
|- | ----------------------
| | Systems implementation

During fiscal 2002, we planned to implement a new
global information technology system. In light of our revised
trading outlook and our continued focus on costs reduction, we
terminated the implementation. The £73 million charge
represents £43 million of capitalized external
consultancy costs associated with the implementation,
£24 million of hardware and software costs expensed,
and £6 million of other associated costs of the
project. We made cash payments of £49 million in
fiscal 2002.

Impairment of long-lived assets



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

During fiscal 2003, we recorded a charge of
£69 million related to the impairment of property,
plant and equipment as compared with a charge of
£154 million in fiscal 2002. There was no impairment
of goodwill or intangibles in fiscal 2003 as compared with a
charge of £3,814 million in fiscal 2002.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

During fiscal 2002, we recorded a charge for the
impairment of assets of £3,814 million related to
goodwill and intangibles and £154 million related to
property, plant and equipment, primarily related to Fore Systems
Inc. (£2,152 million), Reltec Corporation
(£951 million) and Metapath Software International,
Inc. (£336 million). The balance of the charge of
£529 million related to a number of smaller,
prior-year acquisitions, none individually significant. We did
not record any charges for asset impairment in fiscal 2001.

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##### Table of Contents



(Loss)/gain on sales of investments



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

We recorded a loss on the sale of investments of
£5 million or 0.3% of revenues in fiscal 2003 as
compared with a gain of £89 million or 2.7% of
revenues in fiscal 2002. In fiscal 2002, we recognized gains of
£282 million on the disposal of our investments
discussed below. These gains were partially offset by charges of
£154 million also discussed below.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Gains on the sale of investments of
£89 million or 2.7% of revenues in fiscal 2002
decreased £372 million or 81% as compared with
£461 million or 9.4% of revenues in fiscal 2001. In
fiscal 2002, we recognized gains on the disposal of our
investments in Lottomatica S.p.A., General Domestic Appliances,
Siemens Telcommunications Pty Ltd, ipsaris Limited and our
remaining stake in Alstom of approximately
£282 million in total. These gains were partially
offset by charges of £154 million related to other
investments including NetDecisions Holdings Limited, Easynet
Group plc and Atlantic Telecom Group plc. In fiscal 2001, we
recognized a net gain of £390 million on the disposal
of an 18% interest in Alstom. In addition, we recognized net
gains in the amount of £71 million on businesses
disposed of in fiscal 2001 including Avery Berkel and Woods Air
Movement.

Impairment of investments

We recorded a charge of £40 million or
2.1% of revenues in fiscal 2003 as compared with £nil in
fiscal 2002. This charge related to declines in the value of
equity securities, primarily our holdings in Arraycom and
Bookham Technology, of £38 million that we judged to
be other than temporary and a charge of £2 million
relating to the carrying value of investments in affiliates.

Other income

We recorded a gain of £34 million or
1.8% of revenues in fiscal 2003 related to adjustments to
purchase consideration in respect of prior acquisitions.

Interest expense, net



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

Net interest expense of £284 million or
15.0% of revenues in fiscal 2003 increased £52 million
or 22% as compared to £232 million or 7.1% of revenues
in fiscal 2002. The charge in fiscal 2003 related primarily to
interest on our bonds and syndicated bank debt of
£261 million. This amount included
£113 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 partly offset by net interest received on deposits,
insurance and a tax refund.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

Net interest expense of £232 million or
7.1% of revenues in fiscal 2002 increased £81 million
or 53.6%, from £151 million or 3.1% of revenues in
fiscal 2001. This increase was the result of higher average
borrowings during fiscal 2002 compared to fiscal 2001 and a full
year of interest charges related to our yankee bonds in fiscal
2002. Interest expense in both fiscal 2002 and fiscal 2001 was
primarily related to our euro and yankee bonds, which we issued
in March 2000 and September 2000, respectively.

Income tax expense



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

In fiscal 2003, our effective income tax rate was
23.1% compared to the U.K. statutory rate of 30%. This
difference was primarily due to net non-deductible expenses
(£30 million) such as business

35



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##### Table of Contents



restructuring charges and a gain related to
adjustments to purchase considerations in respect of prior
acquisitions. 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.


In comparison, the fiscal 2002 effective income
tax rate was negative 7.2% compared to the U.K. statutory rate
of 30%. The effective income tax rate in fiscal 2002 is
explained below.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

In fiscal 2002, the effective income tax rate was
negative 7.2% compared to the U.K. statutory rate of 30%. This
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. The fiscal 2001 effective rate was
6.6% compared to the U.K. statutory rate of 30%. The main reason
for the difference was a book gain versus taxable gain
(£100 million), income from investments, which attracts no
additional U.K. tax (£10 million), and a benefit for the
impact of non-UK tax rate differences (£33 million). These
amounts were partially offset by the tax effect of
non-deductible goodwill amortization (£93 million) and
taxes recorded on items no longer considered permanently
reinvested (£39 million).

Equity in loss of affiliates



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2003 to fiscal
    2002

We recognized a loss on equity in loss of
affiliates of £62 million or 3.3% of revenues in fiscal
2003 as compared with a loss of £196 million or 6.0% of
revenues in fiscal 2002. This loss in fiscal 2003 relates
primarily to losses in Easynet (£22 million) and losses in
joint ventures of £40 million. The loss of £196
million or 6.0% of revenues in fiscal 2002 was primarily a
result of our share of the net losses in Easynet. As at
December 31, 2002, Easynet had net liabilities under
U.S. GAAP of which our share was approximately £40
million. Since we have no commitment to provide further
financing to Easynet, we discontinued recording our share of
Easynets losses once we reduced the carrying value of our
investment to £nil.



| |                                             
| | --------------------------------------------
| | Comparison of fiscal 2002 to fiscal
    2001

We recognized a loss on equity in loss of
affiliates of £196 million or 6% of revenues in fiscal
2002 as compared with a loss of £137 million or 2.8%
of revenues in fiscal 2001. In fiscal 2002, the equity in loss
of affiliates recognized was primarily our share of the net
losses in Easynet, which we acquired in July 2001. In fiscal
2001, the equity in loss of affiliates was primarily due to a
loss of £146 million, representing our share of the
losses in Alstom at September 30, 2000, the date for which
the most recent U.S. GAAP financial data was available
prior to our disposal of the majority of our holdings in Alstom
in February 2001.

Minority interest

In fiscal 2003, minority interest was £nil
representing no change from fiscal 2002. In fiscal 2002,
minority interest of £nil decreased by £3 million
from £3 million in fiscal 2001. The decrease resulted
from the recognition of the net losses in businesses in which
there was a minority shareholding.

Extraordinary items

The extraordinary gain of £166 million
in fiscal 2002 relates to the repurchase of approximately
Euro 325 million of euro-bonds and U.S.$261.1 million
of yankee bonds previously issued by Marconi Corporation plc.
The bonds had a fair value (after unamortized discount) at
repurchase of approximately £375 million. There were
no repurchases in fiscal 2003 or fiscal 2001.

36



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##### Table of Contents



Cumulative effect of changes in accounting
principles

At March 31, 2001, the Marconi Employee
Trust had entered into various agreements to purchase shares of
Marconi plcs common stock 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

The requirements of U.S. GAAP applied to our
group resulted in us preparing our discussion and analysis of
segment results using information prepared in accordance with
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 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.

A reconciliation of revenue and segment operating
(loss)/profit as reported under U.K. GAAP to the amounts
presented in accordance with U.S. GAAP is set out in
note 9 of the notes to our consolidated financial
statements contained elsewhere herein.

37



---



##### Table of Contents



Segmental revenues (U.K.
GAAP)

The following table presents our revenues by
product area in accordance with U.K. GAAP for the three years
ended March 31, 2003:

|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |      |       |  
|-------------------------- | ----- | --------------------------------------------------------- | ----- | -------- | ----- | ---- | ---- | -------- | ----- | - | ----- | -------- | ----- |  | ---- | ---- | ----- | - | ----- | ----- | ----- |  | ---- | ---- | ----- | -
|                           |       |                                                           |       |          |       |     
|                           |       | 2003                                                      |       | 2002     |       | 2001
|                           |       |                                                           |       | % of     |       |      |      | % of     |       |   |       | % of    
|                           |       | £                                                         |       | revenues |       | £    |      | revenues |       | £ |       | revenues
|                           |       |                                                          
|                           |       |                                                          
|                           |       |                                                          
|                           |       | (In millions)                                            
|Network Equipment:         |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|Optical Networks           |       |                                                           | 439   |          |       |      | 23.4 | %        |       |   | 737   |          |       |  | 26.6 | %    |       |   | 1,408 |       |       |  | 32.2 | %   
|BBRS                       |       |                                                           | 142   |          |       |      | 7.6  | %        |       |   | 209   |          |       |  | 7.5  | %    |       |   | 427   |       |       |  | 9.8  | %   
|European Access(1)         |       |                                                           | 258   |          |       |      | 13.8 | %        |       |   | 361   |          |       |  | 13.0 | %    |       |   |       |       |       |  |      |     
|North American Access(1)   |       |                                                           | 95    |          |       |      | 5.1  | %        |       |   | 121   |          |       |  | 4.4  | %    |       |   | 1,524 |       |       |  | 34.8 | %   
|Outside Plant & Power(1)   |       |                                                           | 140   |          |       |      | 7.5  | %        |       |   | 247   |          |       |  | 8.9  | %    |       |   |       |       |       |  |      |     
|Other Network Equipment(1) |       |                                                           | 57    |          |       |      | 3.0  | %        |       |   | 129   |          |       |  | 4.7  | %    |       |   |       |       |       |  |      |     
|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|                           | Total |                                                           |       | 1,131    |       |      |      | 60.4     | %     |   |       | 1,804    |       |  |      | 65.1 | %     |   |       | 3,359 |       |  |      | 76.8 | %    
|Network Services:          |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|IC&M                       |       |                                                           | 370   |          |       |      | 19.7 | %        |       |   | 528   |          |       |  | 19.0 | %    |       |   | 656   |       |       |  | 15.0 | %   
|VAS                        |       |                                                           | 373   |          |       |      | 19.9 | %        |       |   | 441   |          |       |  | 15.9 | %    |       |   | 360   |       |       |  | 8.2  | %   
|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|                           | Total |                                                           |       | 743      |       |      |      | 39.6     | %     |   |       | 969      |       |  |      | 34.9 | %     |   |       | 1,016 |       |  |      | 23.2 | %    
|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|                           |       | Total Network Equipment and Network Services
    revenues |       |          | 1,874 |      |      |          | 100.0 | % |       |          | 2,773 |  |      |      | 100.0 | % |       |       | 4,375 |  |      |      | 100.0 | %
|Capital                    |       |                                                           | 40    |          |       |      |      |          |       |   | 390   |          |       |  |      |      |       |   | 540   |       |       |  |      |     
|Discontinued               |       |                                                           | 88    |          |       |      |      |          |       |   | 1,404 |          |       |  |      |      |       |   | 2,027 |       |       |  |      |     
|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     
|Total revenues             |       |                                                           | 2,002 |          |       |      |      |          |       |   | 4,567 |          |       |  |      |      |       |   | 6,942 |       |       |  |      |     
|                           |       |                                                           |       |          |       |      |      |          |       |   |       |          |       |  |      |      |       |   |       |       |       |  |      |     



| |     |                                                                                                                                                                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In fiscal 2003, we realigned our Network
    Equipment businesses. As a result, comparative information for
    certain businesses is not available for fiscal 2001. For those
    businesses, changes from fiscal 2001 to fiscal 2002 are
    discussed below in the aggregate.

Comparison of fiscal 2003 to fiscal
2002



| |                  
| | -----------------
| | Network Equipment

Overall, Network Equipment revenues in fiscal
2003 of £1,131 million, or 60.4% of total Network
Equipment and Network Services revenues in fiscal 2003,
decreased £673 million or 37.3%, as compared with
£1,804 million or 65.1% of total Network Equipment and
Network Services revenues in fiscal 2002.



|  |                 
|- | ----------------
| | Optical Networks

Optical Networks is comprised of our range of SDH
and DWDM transmission equipment as well as our network
management systems. During fiscal 2003, 75% of Optical Network
sales were generated in EMEA, 18% in APAC, 6% in CALA and only
1% in the United States following our decision to cease the
development and manufacture of our SONET product range in April
2002.

Optical Networks revenues in fiscal 2003 were
£439 million, or 23.4% of total Network Equipment and
Network Services revenues in fiscal 2003, a decline of
£298 million or 40.4% compared with
£737 million, or 26.6% of total Network Equipment and
Network Services revenues in fiscal 2002. The main reason for
this decline was the fall in sales of SDH equipment as telecom
operators reoriented their reduced capital expenditure budgets
away from the core of their networks towards the access space.
Sales of SDH and, increasingly, next generation SDH products
have been concentrated on in-fill of existing networks,
particularly in the metro areas. Sales of DWDM have also
decreased largely due to the completion of major

38



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customer roll outs in the previous year,
particularly in Italy, with no significant new deployments of
DWDM equipment initiated by our customers during the year.


EMEA accounted for over two thirds of the decline
in Optical Networks sales from fiscal 2002 to fiscal 2003. In
the U.K., the lower level of demand from BT has combined with
the financial difficulties faced by many second tier operators
to lead to a reduction in revenues. Market volumes remained
relatively stable in Italy although we have experienced some
increased pricing pressure in this territory, while elsewhere in
Europe major operators cut capital expenditure budgets during
fiscal 2003 as they continued to focus on debt reduction.



|  |     
|- | ----
| | BBRS

BBRS is primarily comprised of sales of
multi-service products such as the ASX-4000 multi-service core
switch and the smaller ASX and TNX edge switches and a range of
legacy ATM switching and routing products designed for
enterprise customers. It also includes initial sales of our new
BXR-48000. BBRS service revenues are included in Network
Services. During fiscal 2003, 65% of BBRS equipment sales were
made in the U.S., 17% in EMEA, 13% in APAC and 5% in CALA.

BBRS revenues in fiscal 2003 were
£142 million or 7.6% of total Network Equipment and
Network Services revenues in fiscal 2003, a decline of
£67 million or 32% as compared to
£209 million or 7.5% of total Network Equipment and
Network Services revenues in fiscal 2002.

Sales in fiscal 2003 to the U.S. Federal
Government increased slightly compared to fiscal 2002, but sales
in the U.S. declined overall. This was a result of a lower
level of sales to enterprise customers as we have increased our
commercial and technical resources on the service provider
market, where capital expenditure constraints have reduced the
number of significant new business opportunities during the
current fiscal year. The U.S. Federal Government remains
the largest single customer of our BBRS equipment.



|  |                
|- | ---------------
| | European Access

Our European Access business is comprised of four
main sub-groupings: Fixed Wireless Access (33% of fiscal
2003 European Access revenues), Voice Systems (27%), Access
Hub (13%) and other country-specific mature access products
(27%). EMEA accounted for 84% of European Access revenues in
fiscal 2003, with APAC and CALA representing the balance of
revenues.

In fiscal 2003, European Access revenues of
£258 million or 13.8% of total Network Equipment and
Network Services decreased £103 million or 28.5% as
compared with revenues of £361 million or 13% of total
Network Equipment and Network Services in fiscal 2002.

Reductions in capital spending by a number of
European Access customers, particularly second-tier operators in
the United Kingdom and Germany, as well as rationalization of
our legacy product lines were the primary reasons behind this
decline. Sales of Voice Systems were down as a result of the
completion of a significant software upgrade in the final
quarter of the previous year, and sales of Fixed Wireless Access
fell as many European wireless operators deferred the roll-out
of 3G mobile networks. These reductions more than offset a
strong increase in sales of our new Access Hub product platform,
where we had already recorded a number of significant frame
contract wins, particularly in Italy and South Africa.



|  |                      
|- | ---------------------
| | North American Access

Our North American Access business comprises a
portfolio of copper and fiber based digital loop carrier
equipment designed specifically for the U.S. market. Prior
to the effectiveness of our financial restructuring we were
managing this business for value and ultimately for disposal. In
fiscal 2003, North American Access revenues of
£95 million or 5.1% of total Network Equipment and
Network Services revenues declined £26 million or 21%
as compared with £121 million or 4.4% of total Network
Equipment and Network Services revenues in fiscal 2002.

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|  |    
|- | ---
| | OPP

OPP is comprised of sales of connection,
protection and enclosure products for the outside portion of
access networks as well as sales of power equipment to telecom
service providers and original equipment manufacturers. OPP
service revenues are included in Network Services. The
U.S. accounted for 91% of OPP equipment sales during fiscal
2003, with the balance generated in CALA. Prior to the
effectiveness of our financial restructuring we were managing
this business for value and ultimately for disposal.

In fiscal 2003, sales of OPP equipment amounted
to £140 million or 7.5% of total Network Equipment and
Network Services revenues, a decline of £107 million
or 43% compared with £247 million or 8.9% of total
Network Equipment and Network Services revenues in fiscal 2002.
This decline resulted from significant reductions in capital
spending by U.S. customers as well as the difficult market
conditions in CALA, particularly in the early part of fiscal 2003



|  |                        
|- | -----------------------
| | Other Network Equipment

Other Network Equipment is comprised primarily of
sales of our Interactive Systems activity as well as legacy
operations in APAC and EMEA. Revenues of £57 million
or 3.0% of total Network Equipment and Network Services revenues
in fiscal 2003 declined £72 million or 56% as compared
with £129 million or 4.7% of total Network Equipment
and Network Services revenues in fiscal 2002.



| |                 
| | ----------------
| | Network Services

Network Services revenues of
£743 million or 39.6% of total Network Equipment and
Network Services revenues in fiscal 2003 decreased
£226 million or 23.3% as compared with
£969 million in fiscal 2002 or 34.9% of total Network
Equipment and Network Services revenues. EMEA and the
U.S. accounted for 66% and 29%, respectively, of the
Network Services revenues in fiscal 2003, while the balance was
split relatively equally between APAC and CALA.



|  |     
|- | ----
| | IC&M

IC&M sales are directly related to the
installation, commissioning and maintenance portion of our
Network Equipment products. IC&M revenues in fiscal 2003
were £370 million or 19.7% of total Network Equipment
and Network Services revenues, a decline of
£158 million or 30% compared with
£528 million or 19% of total Network Equipment and
Network Services revenues in fiscal 2002. The primary reason for
the decline in revenues resulted from the lower Network
Equipment revenues in both EMEA and the U.S., discussed above.



|  |    
|- | ---
| | VAS

During fiscal 2003, VAS revenues were comprised
of three main activities:



| |   |                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Integrated systems, which provided integrated
    network solutions to non-telecom customers including government,
    transport and utility organizations;
|
| |  | BBRS services; and                                                                                                                                         
|
| |  | Wireless services which, for reporting purposes,
    consolidates our wireless network planning activities worldwide.                                      

VAS revenues in fiscal 2003 were
£373 million or 19.9% of total Network Equipment and
Network Services revenues in fiscal 2003, a decline of
£68 million or 15% compared with
£441 million or 15.9% of total Network Equipment and
Network Services revenues in fiscal 2002. Almost 75% of the
decline in fiscal 2003 as compared to fiscal 2002 related to
sales generated by businesses disposed during fiscal 2003,
particularly Systems Management Specialists, Inc.

The proportionally lower reduction in revenues in
fiscal 2003 compared to many of the other areas of our total
Network Equipment and Network Services businesses is principally
due to the long-term project

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nature of this business and our strong customer
relationships outside the telecommunications industry, including
government agencies, selected large enterprise customers and
public utilities.


Capital

Total Capital revenue of £40 million in
fiscal 2003 decreased £350 million or 89.7% as
compared with £390 million in fiscal 2002. The
decrease in revenue is primarily related to discontinued
operations with the disposal of the GDA joint venture, which
accounted for a decrease of £257 million.

Comparison of fiscal 2002 to fiscal
2001

Network
Equipment

Network Equipment revenues of
£1,804 million or 65.1% of total Network Equipment and
Network Services revenues in fiscal 2002 decreased by
£1,555 million, or 46.3%, as compared with
£3,359 million or 76.8% of total Network Equipment and
Network Services revenues in fiscal 2001.



| |   |                 
| | - | ----------------
| |  | Optical networks

Optical networks revenues of
£737 million or 26.6% of Network Equipment and Network
Services revenues in fiscal 2002 decreased by
£671 million, or 47.7% as compared to
£1,408 million or 32.5% of Network Equipment and
Network Services revenues in fiscal 2001. The decrease was due
to the significant fall in sales of SDH equipment, which
accounted for around 85% of total optical networks sales in
fiscal 2002.

Optical networks revenues of
£404 million decreased by £227 million, or
36%, in the period to September 30, 2001 as compared to
£631 million for the period to September 30,
2000. The U.K. market was hardest hit mainly due to the
significant reduction in spending by U.K. second operators
although sales to BT were also down in the period. Sales of
lower capacity SDH products (the digital transmission standard
used throughout Europe) accounted for over 75% of total optical
networks revenues in the first half of fiscal 2002 as telecom
operators sought to maximize utilization in their existing
networks rather than proceeding with new build. However, sales
of these products had decreased 47% in the period compared to
the same period in the previous year as a result of the overall
slowdown in demand for network equipment.

We launched our portfolio of DWDM equipment
during the first half fiscal 2001 and these products continued
to gain market acceptance. New orders were received in China
from China Railway for its Northwest Ring project. Sales of DWDM
equipment were sustained during the first half of fiscal 2002 at
a comparable level to the second half of fiscal 2001 of over
£50 million.

Optical networks revenues of
£333 million decreased £444 million, or
57.1%, in the second half of the year compared to
£777 million in the second half of fiscal 2001. Sales
of SDH equipment continued to decline broadly in line with the
overall market trend for SDH. This decline was offset by
increasing DWDM sales which were a result of the first shipments
of DWDM equipment to Telecom Italia under the exclusive 5-year
frame contract awarded to us in November 2000, and a number of
new customer frame contracts including Vodafone-Omnitel and
Fibernet.

In addition, during the second half of the year,
we made shipments of ultra-broadband DWDM equipment to BT under
the 5-year frame contract that we entered into in April 2001.
Given the nature of this contract, revenue relating to
ultra-broadband products will be recognized when the circuits
provided by this equipment are utilized. As none of the circuits
were utilized prior to March 31, 2002, no revenues
associated with these shipments were recognized during fiscal
2002.

The underlying decline was broadly in line with
the overall market trend for SDH, but was exacerbated by the
phasing of capital expenditure of our major incumbent customers,
who have decreased spend more rapidly and ahead of other
operators. The latter tend to be customers of our competitors.
Fluctuations in foreign exchange rates also decreased revenues
for the full year by £9 million.

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|  |     
|- | ----
| | BBRS

BBRS revenues of £209 million or 7.5%
of total Network Equipment and Network Services revenues in
fiscal 2002 decreased £218 million, or 51.1%, as
compared with £427 million or 9.9% of total Network
Equipment and Network Services revenues in fiscal 2001.
Like-for-like revenues decreased by £222 million, due
to lower sales volumes to both enterprise and telecom service
provider customers.

BBRS revenues of £113 million decreased
by £128 million, or 53.1%, million in the period to
September 30, 2001 compared to the same period in the
previous fiscal year. Sales to internet service providers and
competitive local exchange carriers, the traditional service
provider customers of this business, declined as they reduced
their capital outlays and were not replaced as rapidly as we
anticipated by sales to established operators who have longer
sales cycles. This affected our EMEA, North America and CALA
markets. Sales in Asia-Pacific increased in the first half of
fiscal 2002 compared to the similar period in fiscal 2001 as a
result of new contracts with Telecom Malaysia and CHT (Taiwan).
We also made the first shipments of our MPLS products during the
first half of fiscal 2002.

BBRS revenues of £96 million decreased
by £90 million, or 48.4%, in the second half of fiscal
2002 compared to £186 million in the same period of
fiscal 2001. This was also down 15% on the revenues achieved in
the first half of fiscal 2002. The main reasons for this decline
were the continuing capital expenditure restrictions within the
competitive local exchange carriers and internet service
providers, combined with the impact of focusing the business
towards customers requiring carrier-class networks. In addition,
we have historically sold a third partys broadband
switching equipment into the U.K. market under an original
equipment manufacturers (OEM) distribution agreement.
Sales under this agreement declined during the year as a result
of reduced customer spending and the impact of the pending
termination of this contract during the first half of fiscal
2003.

In line with our strategy adopted in fiscal 2002,
we began focusing technical and commercial resources within BBRS
towards customers requiring carrier-class networks, namely
telecommunications service providers and selected enterprise
customers such as governments and armed forces who require more
resilient switching capacity. We shipped enterprise products to
a number of customers in the year, including the
U.S. Federal Government and Delta Airlines.



|  |                                               
|- | ----------------------------------------------
| | Access systems and other Network
    Equipment

Access system revenues and other network
equipment revenues of £858 million or 30.9% of total
Network Equipment and Network Services revenues in fiscal 2002
decreased by £666 million, or 43.7%, in fiscal 2002 as
compared to £1,524 million or 34.8% of total Network
Equipment and Network Services revenues in fiscal 2001. The
decrease occurred equally across OPP, voice systems, narrowband
access products, and other network equipment. Other Network
Equipment relates primarily to our legacy operations in South
Africa and Hong Kong.

Broadband access revenues decreased 15.6% to
£65 million in the period to September 30, 2001
compared to the same period in the previous fiscal year.
Revenues were down markedly in EMEA and North America as network
operators, in particular Bell South, deferred deployment of
next-generation fiber solutions for economic reasons and instead
rolled out lower volumes of mature access products such as
copper and fiber digital loop carriers. Sales in CALA and
Asia-Pacific remained stable with new contract wins for
fiber-based products in Australia and wireless access systems in
Japan. Revenues in the second half of the fiscal year increased
slightly on the first half to £80 million and
increased £12 million, or 17.6%, compared to the
second half of fiscal 2001. Second half revenues were helped by
increasing sales of our access hub products and broadband
point-to-point radio systems, particularly to German mobile
operators for use in 2.5G and 3G networks. First sales of access
hubs were also made to Telecom Italia and Telkom South Africa.

In narrowband access, which includes our outside
plant and power and mature access products, revenues decreased
38.2% to £345 million in the period to
September 30, 2001 compared to the same period in the
previous fiscal year. Outside plant and power revenues, which
accounted for 45% of narrowband access systems sales, decreased
as a result of a general slowdown in the market for telecoms
equipment and were

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particularly affected by the rapid decline in the
North American emerging carrier market. Sales of our mature
access products, including our copper and fiber-based DISC*S
access platform, decreased during the first half as a result of
capital expenditure reductions amongst North American incumbent
local exchange carriers, particularly Bell South and Sprint.
Revenues in the second half of the fiscal year decreased by
£430 million, or 64.3%, to £239 million
compared to the same period in the previous year, and decreased
by £106 million, or 30.7%, compared to the first half
of the fiscal year. The continuing decline in capital
expenditure affected the outside plant and power and mature
access businesses. Mature access sales within our U.K. based
voice systems business were further affected as capital
expenditure was switched away from narrowband access to
broadband access products and as a result, completion of
previously awarded contracts was not replaced by new contracts.




| |                 
| | ----------------
| | Network Services

Network Services revenues of
£969 million in fiscal 2002 decreased by
£47 million, or 4.6%, as compared with
£1,016 million in fiscal 2001.

IC&M

IC&M revenues decreased by
£4 million, or 1.5%, to £271 million in the
first half of fiscal 2002 compared to £275 million for
the same period in the previous year. However, IC&M sales
were down by £110 million, or 28.9%, compared to the
second half of fiscal 2001. The sequential decrease compared to
the second half of fiscal 2001 was due to the reduction in
installation and commissioning work following the decline in
expenditure on network equipment. This decline was offset by an
increase in maintenance services as operators sought to maximize
the utilization of their existing networks. Revenues in the
second half of fiscal 2002 were £257 million, a
decrease of £124 million, or 32.5%, compared to the
second half of fiscal 2001. This represents a sequential
decrease of £14 million, or 5.2%, compared to the
revenues achieved in the first half of fiscal 2002. This further
decline was the result of the continued downturn in expenditure
on network equipment, which was partially offset by a slight
increase in demand for cable installation in the U.K.



|  |    
|- | ---
| | VAS

VAS revenues of £234 million increased
by £89 million, or 61.3%, in the first half of fiscal
2002 compared to £145 million for the same period in
the previous year. £36 million of this increase came
from the acquired businesses such as MSI, APT (both acquired in
fiscal 2001) and Northwood Technologies (acquired in fiscal
2002). Excluding the effects of these acquisitions, the key
driver of the organic growth was wireless services across all
regions but particularly in EMEA and North America. Growth in
wireless acquire, design and construct services have
been driven by the increased difficulty for operators to secure
new radio sites and increased demand for wireless network
consultancy services as operators maximize efficiency in their
existing networks and begin to plan for 2.5G and 3G networks.
Revenues in the second half of fiscal 2002 were
£207 million, a decrease of £8 million, or
3.7%, on the comparable period of fiscal 2001, and a
£27 million, or 11.5%, decrease compared to the first
half of fiscal 2002. Second half fiscal 2002 revenues were
reduced following a decrease in wireless network planning and
software sales after the higher volumes in the first half. This
was primarily a result of delayed 3G network rollouts.



| |        
| | -------
| | Capital

Total Capital revenue of £390 million
in fiscal 2002 decreased £150 million or 27.8% as
compared with £540 million in fiscal 2001. The
decrease in revenue is primarily related to discontinued
operations.

Segmental operating (loss)/profit (U.K.
GAAP)

The table below presents a summary of U.K. GAAP
segmental operating (loss)/profit (defined as operating
(loss)/profit before goodwill amortization and U.K. GAAP
operating exceptional segmental items). A reconciliation of U.K.
GAAP segmental operating (loss)/profit to operating
(loss)/profit on a U.S. GAAP

43



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basis together with a description of the
differences between U.K. and U.S. GAAP is presented in
note 9 of the notes to our consolidated financial
statements contained elsewhere herein.


|                  |  |               |      |      |  |      |      |   |  |  |     |  
|----------------- |  | ------------- | ---- | ---- |  | ---- | ---- | - |  |  | --- | -
|                  |  | 2003          |      | 2002 |  | 2001
|                  |  |              
|                  |  |              
|                  |  | £             |      | £    |  | £   
|                  |  |              
|                  |  | (in millions)
|Network Equipment |  |               | (259 | )    |  |      | (464 | ) |  |  | 442 |  
|Network Services  |  |               | 52   |      |  |      | 35   |   |  |  | 102 |  
|Capital           |  |               | (107 | )    |  |      | (138 | ) |  |  | (14 | )
|Discontinued      |  |               | (2   | )    |  |      | 104  |   |  |  | 224 |  
|                  |  |              
|                  |  |               | (316 | )    |  |      | (463 | ) |  |  | 754 |  
|                  |  |              

Comparison of fiscal 2003 to 2002



| |                  
| | -----------------
| | Network Equipment

The segment operating loss in Network Equipment
amounted to £259 million in fiscal 2003, an
improvement of £205 million or 44% compared to an
operating loss of £464 million in fiscal 2002. There
has been significant improvement in operating losses for Network
Equipment both sequentially within fiscal 2003 and compared to
fiscal 2002. We have achieved substantial cost reductions in our
supply chain, in Europe and the U.S., and across all areas of
operating expense. The cost savings have been sufficient to more
than offset the full profit impact of a 37% year-on-year decline
in Network Equipment sales volumes.



| |                 
| | ----------------
| | Network Services

The segment operating profit of
£52 million in fiscal 2003 increased
£17 million or 49% as compared with
£35 million in fiscal 2002. There has generally been
significant improvement in operating profits for Network
Services both sequentially within fiscal 2003 and compared to
fiscal 2002. Despite significant declines in Network Equipment
sales and the subsequent impact on IC&M sales, improved
resource utilization in this labor intensive area and other
ongoing cost reduction initiatives facilitated increased
profitability. The area of VAS was comparatively resilient in
terms of revenue. Thus the cost savings we achieved were able to
have a direct benefit to its profitability.



| |        
| | -------
| | Capital

The Capital segment businesses generated an
operating loss of £107 million in fiscal 2003 as
compared with an operating loss of £138 million in
fiscal 2002. This was due principally to the disposal in
February 2002 of the loss making Optical Components business.



| |                        
| | -----------------------
| | Discontinued Operations

Discontinued operations are comprised of the
Strategic Communications business (sold in August 2002) and
Medical, Data and Commerce systems businesses.

Comparison of fiscal 2002 to 2001



| |                  
| | -----------------
| | Network Equipment

The Network Equipment segment operating loss of
£464 million in fiscal 2002 decreased by
£906 million, or 205.0%, as compared with an operating
profit of £442 million in fiscal 2001. Operating
margins declined to a negative 25.7% in fiscal 2002 as compared
to a positive operating margin of 13.2% in fiscal 2001. Network
Equipment operating profit fell £396 million, or
211.8%, to a loss of £209 million in the first half of
fiscal 2002 compared to a profit of £187 million for
the same period in the previous year. This was predominantly the
result of the significantly reduced sales volumes and the
inability of the group to adjust our cost base sufficiently
rapidly in reaction to this decline. The reduced sales volumes
led to under

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utilization of assets in the supply chain and
manufacturing process, which we began to address through a cost
reduction strategy that we identified within our operational
review that we announced on September 4, 2001. The
under-utilization in the supply chain and manufacturing saw
Network Equipment gross margins fall almost 50% in the first
half of fiscal 2002 compared to the second half of the previous
fiscal year. Gross margins were also impacted by the change in
the business mix, with the decline of revenues from BBRS and
certain narrowband access products, which have historically
achieved higher than average gross margins. Research and
development costs increased 10% in the first half of fiscal 2002
compared to the equivalent period in the previous year, prior to
our change in strategy to one of focused research and
development expenditure, to concentrate in particular on new
products in optical networks and BBRS.


The Network Equipment operating profit/(loss) in
the second half of fiscal 2002 declined by
£510 million, or 200.0%, to an operating loss of
£255 million compared to an operating profit of
£255 million for the same period in fiscal 2001.
Second half fiscal 2002 operating losses were impacted by the
continuing reduction in sales volumes as well as some price
erosion on certain new contracts, previously agreed contractual
price reductions offered to customers under existing frame
contracts which we were not able to offset with corresponding
product cost reductions and the continuing change in business
mix away from higher margin BBRS and certain narrowband access
products. Second half operating loss was also impacted by
one-off marketing costs to terminate previously committed
marketing activities and programs. Research and development
expenditure also increased slightly as a result of the
development and launch of key products including the BXR-48000
multi-service core switch and new additions to our range of
photonics equipment, notably Ultra Long-Haul and Metro DWDM
product ranges as well as further development of our SDH
technology to produce a fourth generation SDH multiplexer. This
increase was partially offset by the scaling back of our access
systems business to focus more on broadband access product
lines, notably in fixed wireless and the recently launched
access hub. The operating profit of Network Equipment was
reduced due to an £8 million charge in respect of
Financial Reporting Statement (FRS)
No. 17 Retirement Benefits.



| |                 
| | ----------------
| | Network Services

The Network Services segment operating profit of
£35 million decreased by £67 million, or
65.7%, in fiscal 2002 from £102 million in fiscal
2001. Operating margins fell to 3.6% in fiscal 2002 as compared
10.0% in fiscal 2001. Network Services operating profit
decreased by £36 million, or 87.8%, to
£5 million in the first half of fiscal 2002 compared
to £41 million for the same period in fiscal 2001. The
decrease was predominantly due to the fall in profitability in
the installation and commissioning business. This
labor-intensive activity saw significant sales growth in fiscal
2001 and the business cost base was geared towards this.
As the revenues fell in line with the decreasing Network
Equipment sales, we were unable to restructure the cost base
quickly enough to prevent margin erosion.

Second half fiscal 2002 operating profit in
Network Services decreased by £31 million, or 50.8%,
to £30 million compared to £61 million for
the same period in the previous year. Although the business
began to benefit from the cost reduction initiatives put in
place during the second half of fiscal 2002, these savings were
not sufficient to compensate for the continuing fall in Network
Equipment sales. The delay in 3G rollouts by mobile operators,
particularly in the U.K., and the change in business mix in the
U.S., with higher software sales but a decline in consulting
activities, led to the under-utilization of resources in the VAS
business. This had a negative impact on second half fiscal 2002
operating income.

The operating profit of Network Services was also
reduced by a charge of £6 million (2001
£10 million) in respect of the implementation of FRS
No. 17 Retirement Benefits.



| |        
| | -------
| | Capital

The Capital segment generated an operating loss
of £138 million in fiscal 2002 as compared with an
operating loss of £14 million in fiscal 2001. The
Capital segment included several start-up businesses, including
optical components, infochain, online businesses, and ipsaris
(up to the point of our merger with Easynet in July 2001).
Losses continued to be recorded for these businesses in fiscal
2002 as they continued to incur developmental costs. Optical
components and ipsaris recognized operating losses of
£44 million up to

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the point of disposal in February 2002 and July
2001, respectively, as compared with £26 million of
losses in fiscal 2001. In addition, general corporate costs,
primarily the U.K. and regional office headquarters costs, are
reflected in the Capital segment.


General corporate costs rose substantially in the
first half of fiscal 2002 with the establishment of centralized
sales and marketing, and information technology teams. However,
these costs were addressed as part of our business
reorganization plan, which focused on company-wide cost
reduction. In fiscal 2001, general corporate costs were
partially offset by income from the sale of trademarks, the
successful settlement of a legal claim and the reduction of
obligations for insurance-related claims. No such income was
recorded in 2002.

The Capital segment operating profitability was
also impacted by the disposal of our commerce systems business
in our equity affiliate GDA in fiscal 2002, which negatively
impacted operating profit by £16 million in fiscal
2002. The disposal of our Avery Berkel business, the Woods group
and Comstar, our equity affiliate with Moscows telephone
network operator, reduced operating income in fiscal 2002 by
approximately £6 million. In our U.S. GAAP
financial statements, both GDA and Comstar are reported in
equity in net income of affiliates.

Liquidity and capital resources

Operating activities

Net cash used in operating activities of
continuing operations was £584 million in fiscal 2003.
This resulted primarily from the loss from continuing activities
of £756 million, a change of £177 million in
current and deferred taxes and a gain of £34 million
related to adjustments to purchase consideration of prior
acquisitions, partially offset by depreciation and amortization
of £169 million, impairment of long-lived assets of
£69 million, impairment of investments of
£40 million and changes in operating activities, net
of acquisitions of £15 million. The reduction in
working capital was primarily a result of the significant
decrease in sales volumes in fiscal 2003 as compared with fiscal
2002. This sales decline led to decreases in accounts
receivables of £284 million or 38% as compared with
fiscal 2002, and inventories of £296 million or 56% as
compared with fiscal 2002. The decrease in inventories was also
due to our continued focus on reducing costs in all areas of
production and overhead. In particular, we continued efforts to
restructure our supply chain to remove excess capacity and
reduce break-even points. In addition, fiscal 2003 reflected
£258 million in payments relative to business
restructuring charges.

Net cash used in operating activities of
continuing operations was £603 million in fiscal 2002.
This resulted primarily from the loss from continuing activities
of £6,260 million and a change in current and deferred
taxes of £468 million, partially offset by asset
impairments of £3,968 million, a provision for slow
moving and obsolete inventory of £805 million,
depreciation and amortization of £653 million, a
provision for doubtful accounts of £175 million,
changes in operating activities, net of acquisitions, of
£203 million, equity in net loss of affiliates of
£196 million and loss on sale of businesses and
properties of £149 million.

Net cash used in operating activities of
continuing operations was £528 million in fiscal 2001.
This resulted primarily from the changes in operating
activities, net of acquisitions, of £1,084 million, a
gain on the sale of investments in affiliates of
£557 million and changes in current and deferred taxes
of £193 million, partially offset by income from
continuing activities of £101 million, depreciation
and amortization of £824 million and the equity in net
loss of affiliates of £137 million.

Investing activities

The net cash provided by investing activities of
£411 million in fiscal 2003 was primarily due to net
cash received from the disposal of businesses of
£436 million and net proceeds received from the sale
of property, plant and equipment of £30 million,
partially offset by purchases of marketable securities of
£20 million, and the purchases of property, plant and
equipment of £35 million. The net cash proceeds
received from the disposal of businesses relates primarily to
the sale of the Strategic Communications business, which
represented net proceeds of £373 million in fiscal
2003. During fiscal 2003, the majority of

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the capital expenditures were in the Optical
Networks and BBRS businesses. The purchases of marketable
securities of £20 million relates to payments made in
fiscal 2003 relative to our Ultramast put option, which was in
litigation. The issue with Ultramast has now been resolved
through a settlement in which our investment in Ultramast has
been terminated through a capital reduction in exchange for
proceeds of £41 million, which is recorded as a gain
on sale of investment in affiliates in fiscal 2003.


The net cash provided by investing activities of
£1,118 million for fiscal 2002 was primarily due to
cash received from the disposal of businesses of
£1,001 million, net proceeds received from the sale
and purchases of investment securities of £206 million
and net proceeds received from the sale of property, plant and
equipment of £171 million, partially offset by
purchases of property, plant and equipment of
£327 million. The net cash proceeds received from the
disposal of businesses related primarily to
£729 million, £283 million and
£225 million received for our medical, data and
commerce systems businesses, respectively. The net proceeds
received from the purchases and sales of securities in fiscal
2002 came principally from the sale of securities held in Alstom
and Lagardere. The purchases of property, plant and equipment
included equipment for participation in technology trials with
key customers, test equipment that supports on-going research
and development activity, software licenses purchased as part of
the implementation of a new information technology system and
expenditures related to site and facility developments. We
subsequently wrote off the software licenses as we terminated
the implementation of the information technology project in
light of our revised financial outlook.

The net cash used in investing activities of
£150 million for fiscal 2001 was primarily due to net
cash paid for acquisitions of £377 million, the
purchases of property, plant and equipment of
£519 million and the purchases of debt and investment
securities of £131 million, partially offset by
proceeds from the sale of investments in affiliates of
£646 million and net cash received from the disposal
of businesses of £185 million. The net cash paid for
acquisitions relates primarily to the MSI (£421 million),
Mariposa (£161 million) and Splice acquisitions
(£56 million). Purchases of property, plant and
equipment include additional optical networks expenditures in
the United Kingdom and Italy, the construction of new facilities
in the U.K., information technology infrastructure and supply
chain improvements, and a program of enhancements in the
customer maintenance and support infrastructure.

Capital expenditures in the Network Equipment and
Network Services segments were £35 million,
£168 million and £283 million in fiscal
2003, 2002 and 2001, respectively. It is not practicable to
identify the capital expenditures of the Network Equipment and
Network Services segments separately as the same assets are
generally used to generate sales in each of these segments.

The Capital segment capital expenditures were
£ nil, £159 million and £236 million in
fiscal 2003, 2002 and 2001, respectively.

Financing activities

Net cash used in financing activities of
£767 million in fiscal 2003 was primarily due to cash
transferred to secured accounts of £692 million and
payments on short-term debt and term loan repayments totaling
£30 million and £45 million, respectively.

Net cash provided by financing activities of
£496 million in fiscal 2002 was primarily due to
proceeds from borrowings under term loans of
£981 million, partially offset by net repayments under
short-term borrowings of £206 million, restricted cash
transferred to secured accounts of £191 million and
dividends paid of £95 million.

Net cash provided by financing activities of
£431 million in fiscal 2001 was primarily due to
proceeds from borrowings under term loans of
£1,221 million and issuance of ordinary shares of
£36 million, partially offset by net repayments under
short-term debt of £599 million, restricted cash
transferred to secured accounts of £81 million and
dividends paid of £146 million.

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Financial Restructuring

At March 31, 2003, our cash and cash
equivalents totaled £1,159 million as compared to
£1,515 million at March 31, 2002, of which
£518 million (£504 million at March 31,
2002) was denominated in sterling, £282 million
(£726 million at March 31, 2002) in
U.S. dollars, £306 million
(£166 million at March 31, 2002) in Euro and the
balance of £53 million (£119 million at
March 31, 2002) in other currencies.

Our outstanding borrowings at March 31, 2003
were £4,031 million as compared with
£4,198 million at March 31, 2002. The
£167 million reduction primarily reflected the
repayment of local borrowings in Italy as a result of the
disposal of the Strategic Communications businesses, and a
substantial reduction in the sterling value of the U.S. -
dollar-denominated debt due to foreign exchange movements.

The financial restructuring of the Marconi group
covered approximately £4.8 billion of creditors
claims, comprising £4.0 billion of syndicated bank
debt and 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 and
Marconi Corporation plc, on May 19, 2003 the creditors
covered by these schemes of arrangement received:



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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, representing 99.5% of Marconi Corporation
    plcs issued ordinary share capital on May 19, 2003.                                                                                                                                                                                                        

In addition, on May 19, 2003, Marconi
Corporation plc issued 5 million ordinary shares,
representing 0.5% of its issued ordinary share capital upon
consummation of the financial restructuring, and warrants to
subscribe for up to 50 million additional ordinary shares,
equal to 5% of its issued ordinary share capital upon
consummation of the financial restructuring, to shareholders of
Marconi plc. In connection with the restructuring Marconi
Corporation plc listed its ordinary shares on the London Stock
Exchange and established an ADR program in respect of those
shares.

Following the financial restructuring, pursuant
to the scheme of arrangement, the remaining assets of Marconi
plc, other than those necessary to fund the administration of
the scheme, will be distributed over time to Marconi plcs
creditors, following which it is intended that Marconi plc will
be liquidated or dissolved.

Risk management

Financial instruments

In connection with the financial restructuring
process described above, we were required to manage immediate
liquidity, which included the cancellation of all outstanding
derivatives positions. Consequently, during fiscal 2003,
out-of-the-money interest rate swap arrangements with fair value
£83 million were converted to new loan agreements and
cash proceeds of £8 million were received from
unwinding in-the-money interest rate swap arrangements. At
March 31, 2003, 45% (53% at March 31, 2002) of our
interest-bearing borrowings were at fixed rates after taking
account of interest rate swaps. Of this total, 24% (43% at
March 31, 2002) were at fixed dollar rates of interest and
21% (10% at March 31, 2002) were at fixed euro rates of
interest.

Our interest expense is exposed to interest rate
movements in our floating rate debt, cash and investments. Prior
to the effectiveness of our financial restructuring we were
principally exposed to changes in short-term interest rates in
pounds sterling and U.S. dollars. A one percentage point
increase in market

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interest rates would have increased interest
income by £8 million (£8 million in fiscal
2002) and increased interest expense by £22 million
(£20 million in fiscal 2002) which, combined, would
have increased loss from continuing operations before income
taxes in fiscal 2003 by approximately £14 million
(£12 million in fiscal 2002).


Foreign exchange risk

We were a global communications company, and as
such we conducted a significant portion of our business
activities outside the United Kingdom in currencies other than
sterling. Our principal exchange rate exposures related to
U.S. dollar/ pounds sterling and euro/pounds sterling
exchange rates for both transactional and translation related
exposures. Our foreign currency management policy sought to
minimize the impact of fluctuations in exchange rates on future
cash flows and required subsidiaries to hedge firm transaction
exposures against their local currency at the time the exposure
was identified. These exposures were hedged by the use of spot
and forward exchange contracts. Due to the financial
restructuring, we did not enter into any such contracts in
fiscal 2003.

We also had overseas subsidiaries that earned
profits and whose net assets were denominated in foreign
currencies. It was our policy not to use derivatives to hedge
exposures arising from the translation of these overseas profits
and net assets into pounds sterling. However, approximately 83%
of gross borrowings were denominated in foreign currencies in
order to form a hedge for our investments in currencies other
than sterling. Of these, 61%, denominated in U.S. dollars,
formed a hedge for our investment in the U.S., and 21%,
denominated in euro, formed a hedge for our investment in the
Euro-zone.

If the pound sterling had strengthened such that
the average exchange rates used in the translation of our
overseas earnings changed by 10%, our reported income from
continuing operations would have been increased by 2.7%, in
fiscal 2003 (reduced by 0.3% in fiscal 2002).

Share price risk

The Marconi group had, in the past, issued share
options to our employees under a number of different option
plans, collectively known as the Employee Share Option Plans
(ESOP). Under these plans, options could be
satisfied by way of a transfer of existing Marconi plc ordinary
shares acquired in the market by an employee trust or other
vehicle, or, under some of the plans only, by an issue of new
Marconi plc shares. From January 2000, in order to hedge
part of the potential cost of the plans estimated at that time,
we entered into the ESOP derivative transactions with the ESOP
derivative banks to purchase a total of 40 million shares
in the future at prices which were fixed at the date of
contract. At March 31, 2003, the purchase of
38.5 million shares under these contracts was outstanding.
Our maximum exposure under the contracts was
£337 million, plus accrued finance charges. At
March 31, 2003, we had paid £214 million of
collateral, the maximum amount of collateral payable under these
ESOP derivative transactions. The remaining principal amount of
£123 million under these contracts had been the
subject of claims brought against the Group by the ESOP
derivative banks. In connection with the financial restructuring
process, we entered into a final settlement with the ESOP
derivative banks that 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.

Application of Critical Accounting
Policies

We have prepared the consolidated financial
statements included in this annual report in accordance with
U.S. GAAP. The preparation of these financial statements
requires management to make estimates, judgments, and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Management base their
estimates on historical experience and various other assumptions
that they believe are reasonable under the circumstances, the
results of which form the basis for making judgements about the
carrying value of assets and liabilities that are not

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readily apparent from other sources. Actual
results may differ from these estimates under different
assumptions or conditions. We believe that the following are
some of the more critical judgement areas in the application of
our accounting policies that affect our financial position and
results of operations.


We have discussed the application of these
critical accounting policies with our board of directors. See
Note 2 to the consolidated financial statements contained
elsewhere herein for recently issued accounting pronouncements
that have not yet been adopted by us.

Revenue recognition

We recognize revenue when all of the following
conditions are met:



| |   |                                                             
| | - | ------------------------------------------------------------
| |  | there is persuasive evidence that an arrangement
    exists;
|
| |  | delivery has occurred or services have been
    rendered;   
|
| |  | the fee is fixed or determinable; and                       
|
| |  | collectibility is reasonably assured.                       

It is common for our sales agreements to cover
the delivery of several products and/or services. These range
from arrangements where a contract covers the delivery and
installation of equipment to more complex arrangements, which
also include training of customer personnel, sale of software
and other support services. We recognize revenue from contracts
with multiple element arrangements, such as those including
installation and commissioning services, as each element is
earned based on objective evidence of the relative fair values
of each element and when there are no undelivered elements that
are essential to the functionality of the delivered elements.

We recognize revenues and estimated profits on
long-term contracts under the percentage-of-completion method of
accounting using a cost-to-cost methodology. Significant
judgement is required in determining progress toward completion
and in estimating revenues and costs. We revise profit estimates
periodically based on changes in facts in the underlying
contract. When estimates of total contract revenues and costs
indicate a loss, we recognize a provision for the entire amount
of the contract loss in the period in which the loss becomes
foreseeable. We record advance payments received from contracts
as a liability unless there is a right of set-off against the
value of work undertaken.

Impairment of long-lived
assets

We review the carrying value of long-lived
assets, which includes identifiable intangible assets, goodwill
and property, plant and equipment, whenever indicators of
impairment exist. Indicators of impairment include, but are not
limited to:



| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A significant adverse change in the extent or
    manner in which a long-lived asset or asset group is being used
    or in its physical condition;                                                                                                
|
| |  | A current-period operating or cash flow loss
    combined with a history of operating or cash flow losses or a
    projection or forecast that demonstrates continuing losses
    associated with the use of a long-lived asset or asset group; and
|
| |  | A current expectation that, more likely than not,
    a long-lived asset or asset group will be sold or otherwise
    disposed of significantly before the end of its previously
    estimated useful life.                                        

These tests for impairment require significant
judgements in determining estimates of future cash flows and the
resulting value in use of the relevant fixed asset. Estimations
of the present value of future cash flows contain inherent
uncertainty and include estimates of market size and market
share information, growth rates, product demand and
technological development, costs of labor and supplier
purchases, working capital requirements, and discount rates to
be applied to future cash flows.

If the carrying value of a fixed asset is
considered impaired, we record an impairment charge for the
amount by which the carrying value of the asset exceeds the
higher of its net realizable value or its value-in-

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use. In fiscal 2003 and 2002, we recorded
impairment charges in relation to property, plant and equipment
of £69 million and £154 million,
respectively. In fiscal 2002, we recorded an impairment charge
relative to goodwill and intangible assets of
£3,814 million. Based upon estimates of future cash
flows that management believes to be reasonable, we determined
that no further impairment charges for goodwill and other
intangibles were required to be made in fiscal 2003.


As at March 31, 2003 the carrying value of
property, plant and equipment, goodwill and intangibles was
£263 million, £657 million and
£101 million, respectively.

Contingent liabilities

We are subject to legal proceedings and other
claims arising in the ordinary course of business. Various
claims and proceedings have been or may be instituted or
asserted against us relating to class shareholder actions and
the conduct of our business, including those pertaining to
patents, environmental, safety and health, employment and
contractual matters. We are required to assess the likelihood of
any adverse judgements or outcomes to these matters as well as
potential ranges of probable losses. We base a determination of
the amount of reserves required, if any, for these contingencies
on a careful analysis of each individual issue with the
assistance of outside legal counsel. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits,
claims or proceedings may be disposed of unfavorably to us, we
believe that the ultimate outcome of these matters will not have
a material adverse effect on our results of operations or
financial position or cash-flows, except as discussed in
Note 21 to notes to consolidated financial statements
contained elsewhere herein.

Pension and other post-retirement
benefits

As at March 31, 2003 our total pension and
post-retirement projected benefit obligation was £2,718
million compared with plan assets of £2,371 million.
Due to the substantial decline in equity markets in fiscal 2003
we recognized an additional minimum pension and post-retirement
liability of £295 million. For fiscal 2003 the pension
and post-retirement expense was £36 million. In fiscal
2004 this will be increased by the amortization of an
unrecognized actuarial loss.

Pension and other post-retirement benefits costs
and obligations are dependent on actuarial assumptions used in
calculating such amounts. These assumptions include discount
rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates, and other
factors. While we believe that the assumptions that we used are
appropriate, these assumptions may differ materially from actual
results due to changing market and economic conditions, higher
or lower withdrawal rates or longer or shorter life spans of
participants. These differences may result in a significant
impact on the amount of our future pension or post retirement
benefits expense and the resulting liability. Holding all other
assumptions constant, a 0.5% increase or decrease in the
discount rate would have increased or decreased the net loss for
fiscal 2003 by approximately £8.6 million. Likewise, a
0.5% increase or decrease in the expected return on plan assets
would have increased or decreased pre-tax loss for fiscal 2003
by £12.3 million.

Product warranties

We make provisions for estimated expenses related
to product warranties at the time we sell our products. We
establish these estimates using historical information on the
nature, frequency, and average cost of warranty claims. We
actively study trends of warranty claims and take action to
improve equipment quality and minimize warranty claims. We
believe that the warranty reserve is appropriate; however,
actual claims incurred could differ from the original estimates,
requiring adjustments to the reserve. If we were to experience
an increase in warranty claims compared with our historical
experience, or if costs of servicing warranty claims were
greater than the expectations on which our accrual had been
based, our gross margins could be adversely affected. At
March 31, 2003, we had a product warranty liability of
£44 million.

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Research and Development

We expended approximately £284 million,
or approximately 18% of revenues, on research and development,
or R&D, in our Network Equipment and Network Services
segments in fiscal 2003 and £487 million, or
approximately 15% of revenues in fiscal 2002. We funded the
entire amount.

Optical networks accounted for our largest
product portfolio and generated the largest revenue base.
Optical networks R&D expenditure accounted for almost 40% of
our total R&D expenditure during fiscal 2003 as opposed to
approximately 34% for fiscal 2002. R&D projects had been
selected on the basis that they are expected to yield a higher
overall return.

The BBRS business accounted for approximately 23%
of our total R&D expenditure in both fiscal 2003 and 2002.
Over half of this expenditure was focused on the development of
our new multi-service core switch, the BXR-48000. In November
2002, we demonstrated our ability to support the transport of
encrypted high-speed data and high definition videos streams
over the BXR-48000 using our newly developed 10 Gbps OC-192c ATM
interface card.

R&D expenditure across our European Access
and North American Access businesses combined, accounted for
approximately 24% of our total R&D expenditure in fiscal
2003 as opposed to approximately 31% in fiscal 2002. During the
first calendar quarter of 2002, we carried out an in-depth
review of our complete portfolio of access solutions. This
review was based on an evaluation of the forecast levels and
timing of returns on investment and the cash generation
potential of each product line. Following the review, we
streamlined our portfolio of access technologies and refocused
our R&D expenditure.

The remaining R&D investment in fiscal 2002
related mainly to OPP products and wireless software.

Inflation

We believe that inflation has not had a material
impact on our results of operations for the three fiscal years
ended March 31, 2003.

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Item 6: Directors, Senior
Management and Employees

DIRECTORS AND SENIOR MANAGEMENT

Directors

The current members of our board of directors are:

|                           |  |     |    |       |  |         
|-------------------------- |  | --- | -- | ----- |  | --------
|Name                       |  | Age |    | Title
|                           |  |     |    |      
|John Jameson White         |  |     | 65 |       |  | Chairman
|Christopher Charles Holden |  |     | 54 |       |  | Director
|Christopher James Shaw     |  |     | 50 |       |  | Director

The business address of John White, Christopher
Holden and Christopher Shaw is New Century Park, P.O.
Box 53, Coventry, Warwickshire, CV3 1HJ.

John Jameson
Whitewas appointed Chairman of
our board of directors in August 2003. Mr. White, who is a
solicitor, became a partner with the law firm CMS Cameron
McKenna in 1964 having joined the firm in 1957. During his
period with the firm, he became the first Chairman of the CMS
European Banking Group.

Christopher Charles
Holdenwas appointed to our board
of directors in November 2002. Mr. Holden was appointed
group financial controller in August 2002 and our interim chief
financial officer in November 2002 until he resigned his
executive position in May 2003. He became a partner with Arthur
Andersens auditing practice in 1983, having joined the
firm in 1971. During his period with the firm, he held a number
of senior international roles.

Christopher James
Shawwas appointed to our board of
directors in August 2003. Mr. Shaw became a licensed
insolvency practitioner in 1987. He has worked for KPMG LLP
since May 1989 as a senior manager in their corporate recovery
department, primarily on members voluntary liquidations.

Executive Officers

Kevin David
Smithwas appointed company
secretary in August 2003. Mr. Smith is a chartered
secretary and was previously company secretary at Kalamazoo
Computer Group plc.

Board and Management Changes

On July 31, 2002, Mr. E R Green
resigned from his group position of Executive Vice President,
Finance. On December 6, 2002, Ms. V Gentile Sachs
resigned from her group position as general counsel. On
May 19, 2003, David Clive Beck, Geoffrey William Doy,
Damian Hugh Reid and Neil David Sutcliffe resigned from their
positions with the Company. Mary Skelly resigned from her
position as company secretary in August 2003.

The Rt. Hon The Baroness Dunn resigned as a
director of the Company on April 11, 2002. Sir. William
Castell and Mr. N J Stapleton resigned as directors of the
Company on October 8, 2002. Sir Alan Rudge and Hon Raymond
G H Seitz resigned as directors of the Company on
December 16, 2002. Mr. M K Atkinson, Mr. J F
Devaney and Mr. W K Koepf were appointed as directors of
the Company on December 16, 2002 and resigned as directors
of the Company on May 19, 2003. Mr. D C Bonham
resigned as a director of the Company on May 19, 2003.
Mr. S Hare resigned as director of the Company on
November 14, 2002 and left employment on January 31,
2003. Mr. A L Thomas was appointed to the board on
May 20, 2002 and resigned on March 14, 2003.
Mr. M W J Parton and Mr. M J Donovan resigned as
directors of the Company on August 4, 2003.

53



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##### Table of Contents



Directors Emoluments

The names of our current directors appear in the
table at the beginning of this section. The following pages
contain disclosures relating to the compensation of Marconi
plcs directors in fiscal 2003 and fiscal 2002.

|                               |  |          |       |          |  |       |     |               |  |               |       |       |  |              |       |           |  |              |       |  |  |  |     |  |  |  |     |  |  |  |     |  |  |  |   | 
|------------------------------ |  | -------- | ----- | -------- |  | ----- | --- | ------------- |  | ------------- | ----- | ----- |  | ------------ | ----- | --------- |  | ------------ | ----- |  |  |  | --- |  |  |  | --- |  |  |  | --- |  |  |  | - | 
|                               |  |          |       |          |  |       |     |               |  |               |       |       |  |              |       |          
|                               |  |          |       |          |  |       |     | Excluding     |  |               |       |       |  |             
|                               |  |          |       |          |  |       |     | pension       |  | Pension       |       |       |  | Payments to 
|                               |  |          |       |          |  |       |     | Contributions |  | contributions |       |       |  | meet pension
|                               |  | Salary & |       | Other    |  |       |     | 2003          |  | 2002          |       | 2003  |  | 2002         |       | Severance |  | commitments 
|                               |  | fees     |       | benefits |  | Bonus |     | total         |  | total         |       | total |  | total        |       | payments  |  | on severance
|                               |  |         
|                               |  |         
|                               |  |         
|                               |  | (£000)  
|J F Devaney*                   |  |          | 74    |          |  |       | 6   |               |  |               |      |       |  |              | 80    |           |  |              |      |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|M W J Parton*                  |  |          | 525   |          |  |       | 95  |               |  |               | 696   |       |  |              | 1,316 |           |  |              | 681   |  |  |  | 172 |  |  |  | 177 |  |  |  |    |  |  |  |  | 
|M J Donovan*                   |  |          | 416   |          |  |       | 364 |               |  |               | 543   |       |  |              | 1,323 |           |  |              | 735   |  |  |  | 387 |  |  |  | 94  |  |  |  |    |  |  |  |  | 
|C C Holden                     |  |          | 114   |          |  |       |    |               |  |               |      |       |  |              | 114   |           |  |              |      |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|D C Bonham*                    |  |          | 180   |          |  |       |    |               |  |               |      |       |  |              | 180   |           |  |              | 174   |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|Sir. William Castell*          |  |          | 16    |          |  |       |    |               |  |               |      |       |  |              | 16    |           |  |              | 35    |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|The Rt. Hon The Baroness Dunn* |  |          | 1     |          |  |       |    |               |  |               |      |       |  |              | 1     |           |  |              | 33    |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|S Hare*                        |  |          | 312   |          |  |       | 95  |               |  |               | 394   |       |  |              | 801   |           |  |              | 433   |  |  |  | 40  |  |  |  | 25  |  |  |  | 728 |  |  |  |  | 
|M K Atkinson*                  |  |          | 21    |          |  |       |    |               |  |               |      |       |  |              | 21    |           |  |              |      |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|W K Koepf*                     |  |          | 29    |          |  |       |    |               |  |               |      |       |  |              | 29    |           |  |              |      |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|Sir. Alan Rudge*               |  |          | 21    |          |  |       |    |               |  |               |      |       |  |              | 21    |           |  |              | 40    |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|Hon Raymond G H Seitz*         |  |          | 21    |          |  |       |    |               |  |               |      |       |  |              | 21    |           |  |              | 33    |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|N J Stapleton*                 |  |          | 17    |          |  |       |    |               |  |               |      |       |  |              | 17    |           |  |              | 40    |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|A L Thomas*                    |  |          | 83    |          |  |       |    |               |  |               |      |       |  |              | 83    |           |  |              |      |  |  |  |    |  |  |  |    |  |  |  |    |  |  |  |  | 
|                               |  |         
|Total                          |  |          | 1,830 |          |  |       | 560 |               |  |               | 1,633 |       |  |              | 4,023 |           |  |              | 2,204 |  |  |  | 599 |  |  |  | 296 |  |  |  | 728 |  |  |  |  | 
|                               |  |         



| |   |                     
| | - | --------------------
| | * | no longer a director

1.   Other benefits include



| |       |                                                                                                                                                                 
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1.1) | for M J Donovan and M W J Parton the payment of
    non-pensionable earnings supplement in relation to Funded
    Unapproved Retirement Benefit Schemes (FURBS);
| | (1.2) | car allowance or cash equivalent of a car under
    the Groups car scheme;                                                                                     
| | (1.3) | life insurance cover and medical health
    insurance; and                                                                                                      
| | (1.4) | for M J Donovan, an amount payable to him
    pursuant to the termination of his GEC-USA Deferred Compensation
    Plan.                                        



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | The fees for non-executive directors were
    determined by the board. The basic fee paid (based upon two
    days service per month) during the year was £30,000
    per annum with a further £15,000 per annum paid to the
    chairman of the audit committee and £10,000 to the chairman
    of the remuneration committee. The non-executive directors may
    also be paid a fee of £1,500 per day for each additional
    day devoted to our business over and above the two days per
    month threshold.
|
| | 3. | Non-executive directors do not have service
    contracts and do not participate in any of the incentive
    arrangements open to executive directors or the groups
    pension scheme.                                                                                                                                                                                                                                                                                                                          
|
| | 4. | All directors are reimbursed all necessary and
    reasonable expenses incurred in the performance of their duties.                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 5. | Pension contributions include contributions by us
    to all pension schemes.                                                                                                                                                                                                                                                                                                                                                                                                                                     

54



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The following table shows emoluments paid or
payable to all directors and executive officers of the Company
as a group for the period to March 31, 2003.

|                                               |  |          |       |          |  |       |       |               |  |               |       |                 |  |       |       |               |  |       |       |  |  |  |     |  |  |  |     |  |  |  |   |  |  |  |   | 
|---------------------------------------------- |  | -------- | ----- | -------- |  | ----- | ----- | ------------- |  | ------------- | ----- | --------------- |  | ----- | ----- | ------------- |  | ----- | ----- |  |  |  | --- |  |  |  | --- |  |  |  | - |  |  |  | - | 
|                                               |  |          |       |          |  |       |       |               |  |               |       |                 |  |       |       |              
|                                               |  |          |       |          |  |       |       | Excluding     |  |               |       |                
|                                               |  |          |       |          |  |       |       | pension       |  | Pension       |       | Gains made on  
|                                               |  |          |       |          |  |       |       | contributions |  | contributions |       | the exercise of
|                                               |  | Salary   |       | Other    |  |       |       | 2003          |  | 2002          |       | 2003            |  | 2002  |       | share options
|(£000)                                         |  | and fees |       | benefits |  | Bonus |       | Total         |  | Total         |       | Total           |  | Total |       | Total         |  | Total
|                                               |  |         
|                                               |  |         
|Total for all directors and executive officers |  |          | 3,284 |          |  |       | 1,449 |               |  |               | 2,879 |                 |  |       | 7,612 |               |  |       | 1,983 |  |  |  | 870 |  |  |  | 304 |  |  |  |  |  |  |  |  | 
|                                               |  |         

The emoluments for all our directors and
executive officers are in respect of full years or, where
appropriate, from their dates of appointment until their date of
resignation.

Short-term incentive bonus

In fiscal 2003, executive directors as well as
some of our other employees participated in an exceptional
incentive plan, known as the Retention and Emergence Plan, with
payment related to successful completion of our restructuring.
The maximum payment under this plan was 150% of salary. The
executive directors agreed to waive the final installment
payable under this plan (37.5% of salary). Executive directors
also participated in a quarterly incentive plan with payments
due for the achievement of targets for the generation of total
cash. Payments relating to the first two quarters of fiscal
2003, were not made under this plan and the executive directors
have agreed to waive entitlement to these payments on signing
their new employment agreements with us which came into effect
May 19, 2003.

Payments in respect of the third quarter of
fiscal 2003, and for the achievement of cash generation targets
relating to the sale of businesses were made, totaling 20% of
basic salary.

Retirement benefits

All of our executive directors are members of, or
were entitled to be members of our group pension scheme, The
G.E.C. 1972 Plan (the U.K. plan). Members contribute at the rate
of 3% of salary subject to limits imposed by the U.K. Inland
Revenue. Contributions made by us during the year ended
March 31, 2003 amounted to 11.7% of salary similarly
restricted and 6.6% in fiscal 2002. We increased employers
contributions to 14.2% of salary as of April 6, 2002 but
reduced it to 8.2% on November 1, 2002. Basic salary is the
only element of remuneration that is pensionable.

The pension benefits earned by our directors
under the plan are:

|                 |  |             |    |                 |  |                  |   |                    |  |  |   |  |  |  |    | 
|---------------- |  | ----------- | -- | --------------- |  | ---------------- | - | ------------------ |  |  | - |  |  |  | -- | 
|                 |  |             |    |                 |  | Cost of pension  |   |                   
|                 |  |             |    |                 |  | benefits accrued |   |                   
|                 |  | Length of   |    | Increase in     |  | during the year  |   | Accumulated total 
|                 |  | pensionable |    | accrued pension |  | net of members  |   | accrued pension at
|                 |  | service     |    | during the year |  | contributions    |   | March 31, 2003    
|Name of Director |  | (years)     |    | £000            |  | £000             |   | £000              
|                 |  |            
|                 |  |            
|M J Donovan      |  |             | 4  |                 |  |                  | 1 |                    |  |  |  |  |  |  | 7  | 
|M W J Parton     |  |             | 12 |                 |  |                  | 2 |                    |  |  |  |  |  |  | 26 | 
|S Hare           |  |             | 14 |                 |  |                  | 2 |                    |  |  | 3 |  |  |  | 71 | 
|                 |  |            

The pension entitlement shown above is that which
would be paid annually at normal retirement age based on service
to March 31, 2003. The increase in accrued pension during
the year excludes any increase for inflation. The cost of
pension benefits accrued during the year net of members
contributions is a measure of the capital cost of providing
future pension payments and accordingly is a liability of
pension arrangements and not a sum paid or due to executive
directors.

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##### Table of Contents



Members of the plan have the option to make
contributions to our selected benefits scheme, an additional
voluntary contribution scheme. Neither the contributions to, nor
the resulting benefits from, the selected benefits scheme are
included in the above table.

Funded unapproved retirement benefit schemes, or
FURBS, were established for two of our former
directors  M J Donovan and
M W J Parton. In the case of
M W J Parton, gross contributions to the FURBS
are paid at the rate of 35% of basic salary, with 21% being paid
into the FURBS and the remaining 14% direct to
M W J Parton. The accumulated balance in the
FURBS, including investment returns, is payable to
M W J Parton on retirement.
M J Donovans FURBS is funded on a defined
benefit basis, with projected benefits, including under other
plans, of two-thirds of his final pensionable salary. The
pension will be made up from M J Donovans
benefits under the U.K. plan, the FURBS, two BAE pension
plans and any other retained benefits he may have. The current
contribution rate is 39% of his base salary, although while
M J Donovan is posted to the United States, the rate
is 46%, owing to local tax legislation. FURBS contributions for
M J Donovan are paid into the FURBS and to
M J Donovan himself in the ratio of 60:40, or as
necessary under U.S. tax law. This is because the
contributions are taxable benefits, so the payment to
M J Donovan is to offset the higher income tax charge
for which he is liable. The FURBS documents oblige us to fund an
unapproved life assurance scheme, which is to provide a lump sum
on death in service of four times basic salary and a
widows pension of four-ninths of final pensionable salary.
An additional contribution of £240,000 was paid into M J
Donovans FURBS on June 21, 2002 to make good a
deficit shown by its last actuarial valuation. The normal
retirement age is 62 for executive directors. If
M J Donovan retires on or after his fifty-fifth
birthday, there will be no actuarial reduction in the value of
his benefits. In the event of cessation of employment before
normal retirement age, or at retirement age, each of the
directors is entitled to the amount held in the FURBS
established for him.

The remuneration committee reviewed the cost of
FURBS arrangements for the executive directors and has decided
that it was not appropriate to the Marconi groups changed
circumstances following the financial restructuring of Marconi
plc and Marconi Corporation plc. Consequently, we decided to
change the basis of the FURBS provided for
M W J Parton and M J Donovan. With
effect from April 1, 2002, the FURBS for
M W J Parton was changed to a defined
contribution basis as described below. For the fiscal year ended
March 31, 2003, the only current director who had a defined
benefit FURBS was M J Donovan.

The pension benefits earned by the directors of
Marconi plc under the FURBS arrangements for the period to
March 31, 2003 are as follows:

|                 |  |             |   |                   |  |                    |   |                    |  |  |    |  |  |  |    | 
|---------------- |  | ----------- | - | ----------------- |  | ------------------ | - | ------------------ |  |  | -- |  |  |  | -- | 
|                 |  |             |   | Increase in gross |  | Net cost of        |   | Accumulated total 
|                 |  | Length of   |   | unapproved        |  | unapproved pension |   | gross unapproved  
|                 |  | pensionable |   | accrued pension   |  | benefits accrued   |   | accrued pension at
|                 |  | service     |   | during the year   |  | during the year    |   | March 31, 2003    
|Name of Director |  | (years)     |   | £000              |  | £000               |   | £000              
|                 |  |            
|                 |  |            
|M J Donovan      |  |             | 4 |                   |  |                    | 6 |                    |  |  | 30 |  |  |  | 72 | 
|                 |  |            

The pension entitlement shown above is that which
would be paid annually at normal retirement based on service to
March 31, 2003. The increase in accrued pension during the
year excludes any increase for inflation. Mr. Parton has a
defined contribution FURBS arrangement. During the year we paid
the following contributions to the trustee of the FURBS in
respect of each of the executive directors:
Mr. M J Donovan £334,778 (£63,966 in
2002); Mr. M W J Parton £110,250
(£147,000 in 2002). Periodically the actuary reviews the
contribution rates.

Mr. J C Mayo resigned as an executive
director of Marconi plc on July 6, 2001. A payment of
£428,333 was paid in respect of his defined benefit FURBS
at that time in respect of pensionable service for the period to
July 5, 2002 and in addition, a non-pensionable allowance
of £422,000 was paid in respect of Mr. Mayo on
January 24, 2003. In March 2003, a payment was made in
respect of Mr. Mayos FURBS of £898,000 in final
settlement of his FURBS entitlement.

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##### Table of Contents



Mr. R I Meakin resigned as an executive
director of Marconi plc on March 1, 2002. A payment of
£290,000 was paid in respect of his defined benefit FURBS
in April 2002 and a non-pensionable allowance of £93,000
was paid directly to Mr. Meakin. On January 14, 2003,
a further payment of £278,000 was paid in respect of his
FURBS and a non-pensionable allowance of £185,000 was paid
directly to Mr. Meakin in final settlement of his FURBS
entitlement.

Our ability to satisfy pension obligations for
executive directors subject to the earnings cap from our
approved pension scheme, rather than unapproved schemes, is
influenced by benefits payable from other approved pension
schemes from their previous employment. In respect of
Mr. Parton, benefits accrued under approved pension plan
from previous employment are lower than previously anticipated.
Consequently, a higher proportion of his accrued pension benefit
can be paid from the U.K. plan, as opposed to FURBS arrangements
and his accrued pension under the U.K. plan has been increased
as a result. His entitlement under the FURBS arrangements has
been reduced by a corresponding amount.

Directors and Other Interests in our
Company

The following table shows the interests of
directors in options over ordinary shares of 5 pence each in
Marconi plc:

|             |  |                  |           |                |  |          |     |           |  |                   |   |            |  |         |   |          |  |             |   |       |  |      |   |    |  |  |       |  |  |  |       |  |  |  |           |  |  |  |     |  |  |  |          |  |  |  |          | 
|------------ |  | ---------------- | --------- | -------------- |  | -------- | --- | --------- |  | ----------------- | - | ---------- |  | ------- | - | -------- |  | ----------- | - | ----- |  | ---- | - | -- |  |  | ----- |  |  |  | ----- |  |  |  | --------- |  |  |  | --- |  |  |  | -------- |  |  |  | -------- | 
|             |  |                  |           |                |  |          |     |           |  |                   |   |            |  |         |   |          |  |            
|             |  | At April 1, 2002 |           | Granted during |  |          |     |           |  | At March 31, 2003 |   |            |  |        
|             |  |                  |           | Average        |  | the year |     | Exercised |  | Lapsed            |   |            |  | Average |   |          |  |            
|             |  |                  |           | exercise       |  |          |     | Exercise  |  | during the        |   | during the |  |         |   | exercise |  |            
|             |  |                  |           | price          |  |          |     | price     |  | Year              |   | year       |  |         |   | price    |  | Exercisable
|             |  | No.              |           | pence          |  | No.      |     | pence     |  | No.               |   | Pence      |  | No.     |   | Pence    |  | No.         |   | pence |  | From |   | To
|             |  |                 
|             |  |                 
|M J Donovan  |  |                  | 6,299     |                |  |          | Nil |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  |      |  |  |  |      |  |  |  | 6,299     |  |  |  | Nil |  |  |  | Jun 2001 |  |  |  | Nov 2009 | 
|             |  |                  | 3,330,000 |                |  |          | 187 |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  |      |  |  |  |      |  |  |  | 3,300,000 |  |  |  | 187 |  |  |  | Nov 1999 |  |  |  | Nov 2003 | 
|S Hare       |  |                  | 12,596    |                |  |          | Nil |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  |      |  |  |  |      |  |  |  | 12,596    |  |  |  | Nil |  |  |  | Jun 2001 |  |  |  | Nov 2009 | 
|             |  |                  | 2,484,034 |                |  |          | 142 |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  | 1,036 |  |  |  | 747.5 |  |  |  | 2,482,998 |  |  |  | 142 |  |  |  | Feb 1997 |  |  |  | Nov 2003 | 
|M W J Parton |  |                  | 29,405    |                |  |          | Nil |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  |      |  |  |  |      |  |  |  | 29,405    |  |  |  | Nil |  |  |  | Jun 2001 |  |  |  | Nov 2009 | 
|             |  |                  | 4,444,958 |                |  |          | 221 |           |  |                   |  |            |  |         |  |          |  |             |  |       |  |      |  |    |  |  |      |  |  |  |      |  |  |  | 4,444,958 |  |  |  | 221 |  |  |  | Nov 1999 |  |  |  | Nov 2003 | 

Notes:



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Our directors are of the opinion that disclosure
    of the details of each grant of the options referred to in the
    above table would result in an excessively lengthy report.
    Accordingly details of all options have been aggregated. All
    options have exercise prices that exceed the market price of a
    Marconi plc share as at March 31, 2003, other than nil cost
    options granted under the Marconi Launch Share Plan and the
    Marconi Long-Term Incentive Plan. Marconi plc shares were
    de-listed from the London Stock Exchange on May 19, 2003
    and there is no listed market for those shares.
|
| | 2. | The mid-market price of a Marconi plc share as at
    March 31, 2003 was 1.75 pence with a range during the
    year of 12.55 pence to 1.27 pence.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | The options set out above relate to those granted
    under the GEC Managers 1984 Share Option Scheme, the GEC
    1997 Executive Share Option Scheme, the Marconi 1999 Stock
    Option Plan, the GEC Phantom Option Schemes, the Marconi Launch
    Share Plan, the Marconi Long-Term Incentive Plan, the GEC
    Employee 1992 Savings-Related Share Option Scheme and the
    Marconi U.K. Sharesave Plan.                                                                                                                                                                                                                                                                                                                                
|
| | 4. | Options granted under GEC Managers 1984
    Share Option Scheme, the GEC 1997 Executive Share Option Scheme,
    the Marconi 1999 Stock Option Plan, the GEC Employee 1992
    Savings-Related Share Option Scheme and the Marconi U.K.
    Sharesave Plan vested upon the courts sanctioning the Marconi
    plc Scheme of Arrangement and will lapse 6 months
    thereafter. Options granted under the GEC Phantom Option Schemes
    lapsed when Marconi Corporation plc ceased to be a subsidiary of
    Marconi plc. Options granted under the LTIP vested when Marconi
    Corporation plc ceased to be a subsidiary of Marconi plc.
    Options granted under the Marconi Launch Plan lapse on the tenth
    anniversary of the grant.

No director has or has had any interest in any
transactions which are or were unusual in their nature or
conditions or are or were significant to our business and which
were effected by us during the current or

57



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##### Table of Contents



immediately preceding financial year or during an
earlier financial year and which remain in any respect
outstanding or unperformed.


The Retention and Emergence
Plan

In order to retain key employees during our
recently completed restructuring, a retention and emergence plan
was implemented in May 2002 for sixty-three employees. Of the
sixty-three individuals, Marconi Communications Limited was the
responsible group company for thirty-seven of the individuals,
Marconi Communications Inc. for seventeen, Marconi plc for
two, including one in Australia and one in Hong Kong, Marconi
Communications GmbH for four and Marconi Communications SpA for
three. The obligations of Marconi plc were transferred to
Marconi Communications Limited in relation to the two employees
whose promise refers to Marconi plc.

The retention and emergence plan promised four
equal payments to the employees if they are still employed and
not working their notices on each payment date. Three of the
payment dates have passed and the remaining date is
August 19, 2003. The aggregate of the payments in each case
is based on a percentage of the employees salary, with the
range of percentages varying from 30% to 150%, depending on the
employees seniority.

Those employees who signed new service agreements
with Marconi Corporation plc in consideration of options under
the management plan, are to waive the last payment due under the
retention and emergence plan.

Board Practices

General

Our board currently comprises a chairman and two
directors. The current board meets when circumstances require.

Prior to May 19, 2003, which was the
effective date of our financial restructuring, the board met at
least ten times a year and held additional meetings when
circumstances required. All directors had access to information,
as required, to enable them to consider matters to be decided by
the board and its committees. Directors also received
appropriate training on appointment and then as necessary.
Directors attended an induction program which aimed to provide
an understanding of our group, our strategy, structure,
geographical spread of operations, financial position, the
industries in which we operated, its products and technologies,
people and, where appropriate, legal responsibilities of
directors. The directors had access to the advice and services
of the company secretary and there was an approved procedure by
which all directors could obtain independent professional advice
in furtherance of their duties. The board reviewed this
procedure periodically.

The board delegated certain powers and duties to
committees constituted by it and received regular reports of
their proceedings. Our company secretary acted as secretary to
all board committees. The board committees included an audit
committee, a nomination committee, a remuneration committee and
an executive committee. The audit and remuneration committees
were comprised only of non-executive directors and the quorum
for meeting was two members. The executive committee was
comprised of both executive directors as well as certain other
executive officers. The quorum for meetings was three members,
at least two of which must have been executive directors.

The audit committee comprised a chairman and at
least two other members appointed by the board and who were
non-executive directors. Michael Kent Atkinson chaired our audit
committee from December 2002 with John Francis Devaney and
Werner Karl Koepf being the other two members from that date.
The audit committee met formally at least four times a year. Its
duties included reviewing the scope, plan and results of any
audit. It met regularly with management, as well as with
internal and external auditors to review the effectiveness of
internal controls, as well as matters raised in regular reports
to the committee. The audit committee reviewed financial
announcements and annual reports prior to their submission to
our board. Our

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auditors were able to attend meetings and had the
opportunity to raise matters or concerns in the absence of
executive directors and management.


The remuneration committee comprised at least
three non-executive directors. Derek Bonham chaired the
remuneration committee with Michael Kent Atkinson, John Francis
Devaney and Werner Karl Koepf joining the committee in December
2002. The remuneration committee met formally at least twice a
year. The remuneration committee would make recommendations to
our board on the broad policy to be adopted for executive
remuneration, including the remuneration of executive directors
and the chairman. It determined the total individual
remuneration package for individual executive directors and
certain other senior executives including, where appropriate,
bonuses, pensions and incentive scheme entitlements and the
terms of individual executive directors service agreements.

The remuneration committee usually reviewed the
compensation of our chief executive officer annually. Although
payment of basic salary is not linked to performance the
committee would, when assessing the need for an increase, take
into account individual performance and skills and our
competitiveness. In assessing competitiveness, the committee
would consider comparator groups in both Europe and the United
States, but weighted towards Europe. Comparator groups included
companies in similar sectors and those with similar levels of
turnover. Performance assessment of executive directors included
both our performance and the achievement of individual
objectives.

The nomination committee met as and when required
to do so. It reviewed the board structure, considered candidates
for appointment as directors and would make appropriate
recommendations to the board. The nomination committee comprised
the chairman John Francis Devaney with Michael Kent Atkinson and
Werner Karl Koepf from December 2002. The nomination committee
recommended the appointment of directors to the board who, in
accordance with the provisions of our articles of association,
appointed directors, subject to elections at the next annual
general meeting. Directors can also be appointed by ordinary
resolution. At every annual general meeting of shareholders, any
directors who has held office for more than three years since
they were appointed, or last re-elected at a general meeting,
are required to retire from office, although a director who is
willing can be re-appointed as a director. Directors are
required to retire from office at the annual general meeting
after which he or she reaches 70 years of age, although
such a director can be re-appointed on an annual basis after
reaching 70 years of age. Directors can be removed or
suspended from office at any time by an ordinary resolution. A
director is required to resign from office if he or she ceases
to be a director by virtue of the U.K. Companies Act 1985, is
prohibited by U.K. law from being a director, becomes bankrupt,
suffers from a mental disorder, is absent from board meetings
for more than six consecutive months without permission from the
board or is requested to resign in writing by not less than
three-quarters of the other directors.

Our chief executive officer recommended executive
directors and senior executives for board approval to man our
executive committee. The executive committee normally meets
monthly. Michael William John Parton chaired the executive
committee. Its other members were Michael John Donovan,
Christopher Charles Holden, David Clive Beck, Geoffrey William
Doy, Mary Angela Skelly, Damian Hugh Reid, and Neil David
Sutcliffe. The committee approved our business plan, budget and
strategies in areas including technology, people, information
technology and corporate communications prior to submission to
the board for approval. It also approved day-to-day matters of a
routine nature.

The business risk sub-committee of the executive
committee comprised the members of the executive committee and
met at least two times a year. It established and monitored risk
management goals and objectives, embedded a risk monitoring and
assessment process throughout our business and regularly
reported on the same to the board.

The disclosure committee which worked for our
chief executive officer and chief financial officer on a
day-to-day basis had responsibility for ensuring accurate and
complete disclosure of our information that required public
disclosure and that we had a robust disclosure process in place.

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Directors statement on internal
control

The Directors had overall responsibility for the
Companys system of internal control and for reviewing its
effectiveness. Any system of internal control can only manage
and not eliminate the risk of failing to achieve business
objectives and can only provide reasonable and not absolute
assurance against material misstatement or loss.

The Company had applied a business risk
management process, which was designed to identify, evaluate and
manage the major risks faced by the Company. These risks include
strategic, operational, commercial and financial matters. As
part of this process, the Board, Audit Committee and key members
of the executive management team had received and assessed
reports and notifications of any identified weaknesses with the
system of internal control.

Business planning and financial
reporting

During fiscal 2003, an additional focus of the
board has been on the completion of the financial restructuring
of the Group. Business planning and financial reporting had
therefore concentrated on key performance indicators and
processes in support of the financial restructuring. These
included cash management, reduction in working capital, gross
margin improvement, cost reduction and delivering on the program
of disposals.

As a consequence of financial restructuring,
additional audits and reviews took place during the year in
support of the preparation of documents for the Companys
scheme of arrangement with certain of its creditors and a
prospectus for the Companys listing. These documents had
been subject to a Board review and approval.

A detailed business plan had also been prepared
during the period to support the working capital statements
required by the financial restructuring.

Financial results were monitored and reported in
accordance with Group policies and procedures. Actual results
and forecasts were reviewed each month by the Executive
Committee and reported to the Board.

Corporate process controls

Corporate review and approval procedures were in
place to cover major risk areas such as disposals, capital
expenditure, contract tenders, research and development,
litigation, industrial relations, treasury management,
insurance, taxation, outsourcing and environmental issues.

The Company had also centralized the purchase of
insurance in relation to major insurable risks in order to
improve control and reduce overall cost. The specialist function
assessed exposures and risk tolerance and selected the optimum
means of mitigating losses.

Risk management process

During fiscal 2003, there had been a particular
risk that the Company would fail to renegotiate a satisfactory
financial restructuring agreement with creditors. The Board met
48 times in fiscal 2003 to review the status of the
negotiations and to ensure that an agreement was reached with
the Groups financial creditors. External legal and
accounting advisors carried out extensive due diligence on
internal controls and risk management, following which plans to
address identified weaknesses were actioned by Group management.
In addition, the Directors had formally re-evaluated the risks
disclosed in the document posted to creditors in connection with
the Companys scheme of arrangement and in the
Companys prospectus as part of the financial restructuring
process.

The Board had put in place an organizational
structure with clearly defined lines of responsibility and
delegation of authority. Responsibilities and delegated
authorities were reviewed and revised during the year to reflect
the reduced number of Group employees and changing scope and
scale of the Groups activities.

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A Business Risk Committee operated as a
sub-committee of the Board and its members were the same as for
the Executive Committee. The sub-committee had responsibility
for reviewing the risk assessments of functional management and
for identifying the key risks facing the Group. The Business
Risk Committee formally met twice during the period. However, as
noted previously, given the inherent need to manage key risks
during the restructuring were regularly discussed in the
Executive Committee and the Board meetings throughout the period.

Review of internal controls

The Audit Committee regularly reported the
findings of its review of the effectiveness of the Groups
systems of internal control for consideration by the Board. To
review the effectiveness of internal control, the Audit
Committee met with management and the internal and external
auditors to discuss:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The key risks facing the Group and initiatives in
    place to mitigate against those risks.                                                                                                                                                  
|
| |  | The internal and external audit plans and related
    reports.                                                                                                                                                                                
|
| |  | Letters of assurance by executive management.
    These letters certify compliance with Group policies and
    procedures covering areas such as delegation of authority,
    ethical code of conduct, risk management and financial controls.
|
| |  | The operations of the Group Treasury function.                                                                                                                                                                                                

The Audit Committee met seven times during the
year.

Where any weaknesses were identified in the
system of internal control as a result of any reviews, new
procedures were put in place to strengthen them. This was a
process of continuous improvement and refinement.

The Audit Committee has considered the adequacy
of internal controls and the Directors confirm the effectiveness
of the system of internal control for fiscal 2003.

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EMPLOYEES

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

|                                 |                              |                     |    |      |  |      |    |    |  |  |    |    | 
|-------------------------------- | ---------------------------- | ------------------- | -- | ---- |  | ---- | -- | -- |  |  | -- | -- | 
|                                 |                              |                    
|                                 |                              | For the year ended,
|                                 |                              | March 31,          
|(in thousands)                   |                              | 2003                |    | 2002 |  | 2001
|                                 |                              |                    
|                                 |                              |                    
|Employees by business:           |                              |                     |    |      |  |      |    |    |  |  |    |   
|Core:                            |                              |                     |    |      |  |      |    |    |  |  |    |   
|                                 | Network Equipment            |                     |    | 13   |  |      |    | 19 |  |  |    | 24 | 
|                                 | Network Services             |                     |    | 6    |  |      |    | 8  |  |  |    | 9  | 
|                                 | Other                        |                     |    |     |  |      |    |   |  |  |    | 1  | 
|                                 |                              |                    
|                                 |                              |                     | 19 |      |  |      | 27 |    |  |  | 34 |   
|Capital                          |                              |                     | 1  |      |  |      | 3  |    |  |  | 3  |   
|                                 |                              |                    
|Continuing operations            |                              |                     | 20 |      |  |      | 30 |    |  |  | 37 |   
|Discontinued operations          |                              |                     | 1  |      |  |      | 15 |    |  |  | 15 |   
|                                 |                              |                    
|Group employees                  |                              |                     | 21 |      |  |      | 45 |    |  |  | 52 |   
|Share of joint venture employees |                              |                     |   |      |  |      | 3  |    |  |  | 4  |   
|                                 |                              |                    
|                                 |                              |                     | 21 |      |  |      | 48 |    |  |  | 56 |   
|                                 |                              |                    
|Employees by location:           |                              |                     |    |      |  |      |    |    |  |  |    |   
|                                 | United Kingdom               |                     |    | 7    |  |      |    | 17 |  |  |    | 22 | 
|                                 | The Americas                 |                     |    | 5    |  |      |    | 12 |  |  |    | 17 | 
|                                 | Rest of Europe               |                     |    | 7    |  |      |    | 15 |  |  |    | 13 | 
|                                 | Africa, Asia and Australasia |                     |    | 2    |  |      |    | 4  |  |  |    | 4  | 
|                                 |                              |                    
|                                 |                              |                     | 21 |      |  |      | 48 |    |  |  | 56 |   
|                                 |                              |                    

During fiscal 2003, we took a number of steps to
reduce our workforce as we restructured our cost base in
response to the deterioration in trading conditions we
experienced.

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Item 7: Major Shareholders and
Related Party Transactions






MAJOR SHAREHOLDERS


As at September 23, 2003, we had 193,827
registered holders of ordinary shares with addresses in the
United Kingdom. These U.K. ordinary shareholders collectively
held 2,754,950,027 ordinary shares, or approximately 98.6% of
our total issued share capital as at September 23, 2003.

As at September 23, 2003, there were 622
registered holders of our American depositary receipts. Each ADR
issued represents two ordinary shares. Of these registered ADR
holders, three 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 98,775,470 ADRs, or approximately
7.1% of our total issued share capital as at September 23,
2003.

To our knowledge, there are no holders of 5% or
more of the ordinary shares in Marconi plc as at
September 23, 2003.

To our knowledge, we are not owned or controlled,
directly or indirectly, by another corporation, by any foreign
government or by any other natural or legal person or persons,
severally or jointly.

To our knowledge, other than our recent
restructuring described herein, there are no arrangements the
operation of which may at a subsequent date result in us
undergoing a change in control.

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RELATED PARTY TRANSACTIONS

The following is a summary of certain
transactions with related parties, which were entered into or
were in effect from April 1, 2002 up to May 19, 2003,
the effective date of our financial restructuring.

All the contracts and other arrangements with
Atlantic Telecommunications/ GaMMa, Alstom, CosmoCom and
Media.Net and the joint ventures described below have been on
arms-length terms.

Atlantic Telecommunications
Limited/GaMMa

We owned 19.7% of Atlantic Telecommunications
Limited or Atlantic. Atlantic went into bankruptcy on
October 5, 2001. GaMMa acquired certain assets from
Atlantic Telecommunications Ltd, in bankruptcy. We received a
14.3% beneficial holding in GaMMa in December 2001, in
consideration of the waiver of retention of title claims against
certain assets of Atlantic, the grant of software licenses and
procurement of the assignment of the indefeasible right of use
granted by Easynet. Under the terms of the agreement with GaMMa,
Marconi Corporation plc will receive warrants equating to 1.7%
of the authorized share capital of GaMMa.

Alstom

We owned approximately 24% of Alstom until
February 2001, when we disposed of 18% through a public offering
of shares. Upon the initial public offering of Alstom in 1998,
prior to which we had a 50% stake in GEC Alstom, as it was
called prior to the initial public offering, we entered into a
transitional services agreement providing for the termination of
existing services provided by us to Alstom except that our
former group would continue to provide transitional services in
the fields of research and development, real estate management,
bulk purchasing, and environmental advice and insurance. These
transitional services were largely completed, and as a result,
among others, we no longer provide insurance services to Alstom.
We did, however, have an ongoing maintenance contract and
provided some supply works on Alstoms Northern Line. From
time to time in the ordinary course of business, we supplied
products or services to Alstom and Alstom supplied products or
services to us. In June 2001, we disposed of our remaining
interest in Alstom.

CosmoCom

As of May 19, 2003, Marconi Capital Limited
owned 5.7% of CosmoCom, Inc. CosmoCom, Inc. develops and deploys
call center products and services. Marconi Communications
International Limited, or MCIL, entered into a Value Added
Reseller Agreement with CosmoCom, Inc. on March 3, 2000, as
amended by Amendment No. 1, dated September 8, 2000,
the VAR, whereby would act as a reseller of certain CosmoCom,
Inc. products. Subject to other terms of the VAR, including the
termination provisions contained therein, MCIL was required to
purchase products and/or services of $12,000,000 over
approximately a three year period. On or about October 29,
2001, MCIL advised CosmoCom, Inc. that it was terminating the
VAR, and is making no further purchases at this time. During the
term of the VAR, CosmoCom, Inc. purchased approximately
$1.5 million of products and/or services. MCIL and CosmoCom
are currently involved in litigation wherein each party asserts
that the other party has breached the VAR.

Media.Net

We had a 10% ownership interest in Media.Net
Communications, Inc (Media.Net), a business which supplies high
speed fiber-optic networks and related products and services to
the media and entertainment industry. Our Network Equipment and
Network Services businesses supplied Media.Net with equipment
and services totaling about $0.5 million over the
15 months leading up to an October 2002 settlement whereby
the interest was returned to Media.Net in return for a one time
$0.3 million payment to us. With the settlement, we were
also granted 3 million warrants exercisable for Media.Net
preferred stock, exercisable in the event Media.Nets
monthly revenues are $1.5 million or more in any given
month prior to November 2003.

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Marconi (Malaysia) SDN BHD

Marconi Communications S.p.A., a former
subsidiary of ours, owns a 30% shareholding in Marconi
(Malaysia) SDN BHD, a business that sells and installs
telecommunications equipment. During fiscal 2003, we supplied
Network Equipment products totaling £23.1 million to
this company at arms-length terms.

Ultramast

We formed a joint venture company with Railtrack
Telecom Services Limited, or RTSL, on April 26, 2001 to
support the deployment of next generation broadband wireless
networks. Marconi and RTSL each had a 50% interest in the joint
venture company until February 2003 when we settled our
litigation with RTSL and RTSL assumed full control of Ultramast.
Albany Partnership Ltd., or APT, our former wholly owned
subsidiary, has a consultancy agreement with Ultramast to
provide it with telecommunications consultancy services to
design, construct and maintain masts for the next generation
networks. Ultramast also has an agreement with ipsaris Limited
under which ipsaris is nominated as the preferred supplier for
connectivity for the telecommunications network.

Confirmant

Confirmant is a 50-50 joint venture between
Marconi Corporation plc and Oxford Glyco Sciences (U.K.)
Limited, a wholly owned subsidiary of Oxford Glyco Sciences plc.
Confirmant was formed in June 2001 for the purpose of completing
and then offering for subscription a proteomic database and for
providing managed hosting services to the biotech sector.
Although our outstanding contracts with Confirmant have not been
formally cancelled, all members of the Confirmant board of
directors have acknowledged that they are de facto cancelled
and, therefore, we have no remaining liability under those
contracts.

Easynet Group plc

We had an investment of 72.7% of the equity share
capital of Easynet Group Plc (Easynet). However, we held 49.9%
of the voting share capital of Easynet, had 22% of board
representation, no unilateral rights or vetoes, and no
involvement in day-to-day operations of Easynet. We had supplied
ipsaris Limited, a subsidiary of Easynet, with equipment and
services on arms length terms in the past.

Financial Restructuring Arrangements

Until the completion of our financial
restructuring on May 19, 2003, Marconi plc was the parent
company of the Marconi group.

In connection with and to facilitate our
financial restructuring, we entered into a number of intra-group
restructuring arrangements with Marconi Corporation plc and
other former group companies. The two primary agreements were
the scheme implementation deed and the statement and waiver of
intercompany balances agreement.



| |                           
| | --------------------------
| | Scheme Implementation Deed

Marconi Corporation, Marconi plc, E-A Continental
Limited, Ancrane Limited, Marconi Nominees Limited, British
Sealed Beams Limited and various other former group companies
entered into the scheme implementation deed on March 27,
2003. The primary purpose of the scheme implementation deed was
to ensure that legally binding arrangements were in place to
govern the rights and obligations between Marconi Corporation
and Marconi plc in implementing our restructuring.

      Non-voting
undertakings

Ancrane Limited, a subsidiary of Marconi plc,
had various claims against Marconi Corporation and Marconi plc.
Ancrane Limited undertook not to attend or vote or to use any
other rights or powers available to it as a creditor at any of
the scheme of arrangement meetings at which it was entitled to
attend and vote. Ancrane Limited also undertook not to take any
steps to canvass, solicit or entice any

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other person, firm or company to attend and/or
vote on its behalf at any of those meetings. These arrangements
did not however prevent Ancrane Limited from submitting a claim
under either or both of the Marconi Corporation scheme of
arrangement and the Marconi plc scheme of arrangement.


Marconi Corporation had a claim against Marconi
plc and undertook not to attend or vote at the Marconi plc
scheme of arrangement meeting nor submit a form of proxy with
respect to its claim. This did not, however, prevent Marconi
Corporation from submitting a claim under the Marconi plc scheme
of arrangement.

Certain other former group companies and British
Sealed Beams Limited had various claims against Marconi
Corporation and Marconi plc and therefore also undertook not to
attend or vote at the scheme of arrangement meetings or use any
other rights or powers available to them as a scheme of
arrangement creditor to attend or vote at any of the scheme of
arrangement meetings at which they were entitled to attend and
vote.

      Ancrane
Limited/E-A Continental arrangements

E-A Continental Limited, a subsidiary of Marconi
Corporation, owed Marconi plc approximately
£219 million and had a receivable of approximately
£363 million due from Marconi Corporation. Pursuant to
a deed of assignment entered into on March 27, 2003 between
Marconi Corporation, Marconi plc and E-A Continental Limited,
Marconi Corporation agreed to the assignment by E-A Continental
Limited to Marconi plc of its £363 million receivable.
The assignment of the £363 million receivable was in
consideration for the release by Marconi plc of the
£219 million owed to Marconi plc by E-A Continental
Limited and the transfer by E-A Continental Limited to Marconi
plc of the balance of approximately £2,000,000 held on
account with HSBC. On March 27, 2003, a deed of assignment
was entered into between Marconi Corporation, Marconi plc and
Ancrane under which Marconi plc agreed to the assignment of the
£363 million receivable to Ancrane in consideration
for the issue to Marconi plc by Ancrane of a share at a premium
equal to the market value of the £363 million
receivable.

Ancrane Limited re-registered as an unlimited
company pursuant to section 49 of the U.K. Companies Act
1985 on March 25, 2003. Ancrane reduced its share capital,
including for this purpose its share premium account, to
£100 to enable it to make a repayment of capital in specie
to Marconi plc of its interest in all of its assets, save for
£100 and the benefit of a specific covenant by Marconi
Corporation, and made a repayment of such capital in specie to
Marconi plc.

      Approvals

Marconi Corporations shareholders, Marconi
plc and Marconi Nominees Limited, agreed to vote in favor of all
shareholder resolutions which were in the reasonable opinion of
the Marconi Corporation Board, necessary or desirable to give
effect to the Marconi Corporation scheme of arrangement, and to
consent in writing to each and every variation of the rights
attached to their respective shareholdings in Marconi
Corporation as may be involved in the passing and implementation
of such shareholder resolutions and to take such actions as
necessary to implement the restructuring and so as not to
frustrate, delay or interfere with the performance, approval or
implementation of the restructuring.

      BAE
Deed of Novation

In 1999, Marconi Corporation, which was, at the
time, named The General Electric Company, p.l.c., separated its
international aerospace, naval shipbuilding, defence electronics
and defence systems business and sold it to BAE. The original
transaction agreement and payment deed were entered into between
Marconi Corporation and BAE and subsequently novated from
Marconi Corporation to Marconi plc. All other transaction
documentation in relation to the sale was entered into by
Marconi plc.

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Marconi Corporation and Marconi plc agreed to
novate the transaction agreement, payment deed and various other
agreements from Marconi plc back to Marconi Corporation with
effect from the date of the effectiveness of Marconi
Corporations scheme of arrangement. Both Marconi
Corporation and Marconi plc agreed to use all reasonable
endeavours to procure that BAE entered into the novation.

In addition, Marconi plc, Marconi Corporation
and BAE agreed that no amount should be paid by Marconi plc or
Marconi Corporation to BAE in relation to certain claims made by
the parties under the BAE merger agreements and that Marconi
Corporation would reduce any amounts which may be payable to it
in the future by BAE under the BAE merger agreements by
U.S.$18,600,000.

      Finmeccanica
Guarantee

Under a share purchase agreement dated
August 2, 2002, Marconi (Bruton Street) Limited sold all of
the shares in Marconi Mobile Holdings SpA, the Italian holding
company for the strategic communications business, to
Finmeccanica SpA. A parent company guarantee in favour of
Finmeccanica SpA was required to be given as part of the share
sale, the Finmeccanica guarantee. Marconi plc was therefore
party to the share purchase agreement, as guarantor, pursuant to
which, among other things, it guaranteed the performance by
Marconi (Bruton Street) Limited of its obligations under the
share purchase agreement and the related transaction documents,
including a tax covenant, a transitional services agreement, a
custody deed and a disclosure letter.

Finmeccanica SpA, Marconi Corporation and
Marconi plc entered into a deed of novation and amendment, the
Finmeccanica guarantee deed of novation, under which, with
effect from May 19, 2003, the Finmeccanica guarantee and
all other remaining obligations of Marconi plc under the share
purchase agreement would be novated from Marconi plc to Marconi
Corporation. As a result of that novation, Marconi Corporation
became the guarantor of Marconi (Bruton Street) Limiteds
obligations under the share purchase agreement and related
transaction documentation, and assumed all other obligations of
Marconi plc under the share purchase agreement, and Marconi plc
was released from all of its obligations under the Finmeccanica
guarantee and the share purchase agreement. Marconi
Corporations obligations under the share purchase
agreement, including the Finmeccanica guarantee, were excluded
obligations for the purposes of the Marconi Corporation scheme
of arrangement.

Lemelson
Licence



| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under an agreement between Marconi plc and
    Lemelson Medical, Education and Research Foundation, Limited
    Partnership, the Lemelson Foundation Partnership, dated
    December 1, 1999, Lemelson Foundation Partnership granted
    to Marconi plc for itself and the benefit of its subsidiaries a
    non-exclusive licence for certain licensed patents relating
    principally to bar coding, the Lemelson agreement.
|
| | Marconi Corporation and Marconi plc agreed to
    novate the existing Lemelson agreement to Marconi Corporation
    and agreed to use all reasonable endeavours to procure that
    Lemelson Foundation Partnership entered into the novation.                                                                                                                                                                                  

Litigation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event that either Marconi Corporation or
    Marconi plc becomes aware of anything which is likely to give
    rise to a claim or threat of litigation to it or the other
    entity, it shall inform the other of the relevant information as
    soon as possible and shall assist, so far as reasonably
    practicable, in investigating and defending the claim. In
    addition, Marconi Corporation is entitled to require Marconi plc
    to take such steps and proceedings as Marconi Corporation
    believes is necessary to defend such proceedings and Marconi plc
    shall not admit any liability or agree any compromise of such
    actions without Marconi Corporations prior written consent.

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Marconi
Name



| |                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi Corporation agreed with effect from
    May 19, 2003 to license the Marconi name to
    Marconi plc for an initial period of twelve months. The
    licence is non-exclusive, non-transferable and royalty free.
    Marconi plc has covenanted to use the Marconi name solely
    as its corporate name and not for any other purpose.
|
| | Marconi plc agreed that it will propose a
    resolution to its shareholders to change its company name at
    each and every general meeting convened for the transaction of
    business until such resolution is passed.                                                                                                                    
|
| | The licence terminates immediately upon the
    occurrence of certain events, for example any breach of the
    licence or an order for Marconi plcs winding-up,
    administration or dissolution being made or a liquidator,
    trustee in bankruptcy or receiver being appointed for Marconi
    plc.                                     

Tax



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi Corporation agreed to surrender up to a
    maximum of £200 million of relief to Ancrane Limited
    and Marconi plc.                                                                                                                                                                                                                                                                                                                                                                            
|
| | Marconi plc also undertook to enter into an
    election with Marconi Corporation and companies in our former
    group, the effect of which was the surrender of capital losses
    of approximately £15 billion to companies in our
    former group. Marconi Corporation agreed to make payments to
    Marconi plc as and when it or a former subsidiary chooses to use
    these losses or one of the transferees of the losses is sold out
    of the Marconi group with unutilised capital losses.
|
| | Marconi Corporation agreed to pay corporation tax
    on behalf of Marconi plc and Ancrane Limited to the extent that
    it arises in their accounting periods commencing April 1,
    2003 in respect of foreign exchange movements in relation to
    Marconi Corporation plcs notes and an inter-company loan
    to Highrose Limited.                                                                                                                                                              

Highrose
Debt



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ancrane Limited and Marconi plc have agreed, with
    effect from May 19, 2003, to release Highrose Limited, a
    subsidiary of Marconi Corporation, from its obligation to repay
    an inter-company loan of approximately £24 million to
    Ancrane Limited.

Intercompany
Trade Balances



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At the date of the scheme implementation deed,
    Marconi plc was owed intra-group trade receivables from five
    Marconi Corporation subsidiaries in an aggregate amount of
    £5,540,623. Marconi plc assigned the benefit of these
    intra-group trade receivables to Marconi Corporation in
    consideration for Marconi Corporation reducing the balance of
    £165,748,102 due to it from Marconi plc by an amount of
    £19,160,663.

Counter
Indemnities and Waivers



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi Corporation agreed to indemnify Marconi
    plc for any claims, including related costs, against Marconi plc
    from Marconi Communications Limited arising as a result of any
    payment made by Marconi Communications Limited in settling
    Marconi plcs obligations under the contracts and
    termination of employment of Robert Meakin and Stephen Hare.         
|
| | Marconi Corporation also agreed to meet certain
    costs and expenses of various professional advisers in relation
    to their restructuring, and irrevocably and unconditionally
    waived any right of counter indemnity or right of reimbursement
    or other claim against Marconi plc in relation thereto, whether
    arising under contract, operation of law or otherwise.

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ESOP
Escrow Agreement Release



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Following payment by Marconi Corporation of all
    payments pursuant to the ESOP settlement agreement, Marconi plc
    agreed to unconditionally and irrevocably release all of its
    claims against its former subsidiaries to the extent that they
    relate to the ESOP derivative transactions. Upon such release by
    Marconi plc, Marconi Corporation unconditionally and irrevocably
    released any claims that it had against Marconi plc arising from
    Marconi Corporations funding of Bedell Cristin Trustees in
    respect of cash collateral calls from the ESOP derivatives banks.

Marconi
plc Waivers



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi plc irrevocably and unconditionally
    agreed to waive and release Marconi Corporation plc and each
    other company within the Marconi group from any claim it may
    have against those former group companies which arises out of
    any matter or circumstance existing on or before May 19,
    2003 other than any claim set out in the statement and waiver
    agreement that is expressed to continue, notwithstanding the
    terms of that agreement, and any other claim intended to be
    excluded by the terms of either scheme of arrangement or
    contemplated by the scheme implementation deed or the
    transactions contemplated by the scheme implementation deed.
|
| | Marconi plc agreed that the distribution of
    consideration to its creditors in respect of any guarantee or
    indemnity given by Marconi plc of any other former group company
    in connection with the schemes of arrangement, including Marconi
    plcs guarantee of Marconi Corporation Bonds that were
    outstanding prior to being compromised pursuant to the
    restructuring, will not give rise to any counter indemnity or
    right of reimbursement or other claim by Marconi plc against the
    relevant former group company.                                                                                                                                                

Statement
and Waiver



| |                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Each of Marconi plc and Marconi Corporation and
    certain other former group companies agreed to enter into the
    statement and waiver of inter-company balances agreement
    disclosed below.

Marconi
plc Scheme Expenses



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi Corporation agreed to procure the issue
    of a letter of credit, under its performance bonding facility,
    in an amount of £2 million in favor of the supervisors
    of the Marconi plc scheme of arrangement from time to time for
    them to draw on in relation to any ongoing costs. Marconi
    Corporation has agreed to waive any right to reimbursement
    against Marconi plc arising as a result of any payment made by
    Marconi Corporation as a result of any drawings by the
    supervisors under such letter of credit. In the event that
    Marconi Corporation is unable to procure the issue of the letter
    of credit, it has undertaken to provide the sum of
    £2 million for the supervisors for drawing in relation
    to any ongoing costs on similar terms to those set out in the
    scheme implementation deed and the performance bonding facility
    agreement in relation to the letter of credit.

Statement and Waiver
Agreement

To effect a clean up of existing inter-company
claims owed to or by Marconi Corporation and Marconi plc,
Marconi Corporation and Marconi plc entered into a
statement and waiver of intercompany balances agreement with
some other former Marconi group companies.

The effect of the statement and waiver agreement
was to preserve all known and stated claims existing between
(a) Marconi Corporation or Marconi plc and (b) the
participating group companies, and to waive all other claims
which arose by reference to circumstances existing prior to our
restructuring.

Under the statement and waiver agreement the
following intra-group claims were preserved as between
(a) Marconi Corporation and Marconi plc and (b) the
participating group companies:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | disclosed intra-group loan balances in existence
    as at December 31, 2002 plus interest accrued at such
    applicable commercial rate of interest as agreed between the
    parties to the respective loan;

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any intra-group loan made on or after
    January 1, 2003 in the ordinary and usual course of
    business or with certain previously agreed creditor consent,
    including interest accrued at such applicable commercial rate of
    interest as agreed between the parties to the respective loan;                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | any trading and current account liabilities in
    existence as at March 31, 2002, in the case of any
    participating group company which is a trading or an active
    non-trading company, or September 30, 2002, in the case of
    any dormant participating group company. These liabilities are
    determined by reference to the management accounts upon which
    the audited consolidated financial accounts of Marconi plc, as
    at March 31, 2002 or September 30, 2002, as
    applicable, were prepared;                                                                                                                                                                                                                   
|
| |  | any trading and current account liabilities
    incurred in the ordinary and usual course of business after
    March 31, 2002 between (a) Marconi Corporation and/or
    Marconi plc and (b) any participating group company which
    is a trading or an active non-trading company;                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | any counter indemnity or equivalent reimbursement
    obligation, which is written or is implied by law and whether or
    not contingent, arising under any financial guarantee or
    indemnity, which is written or is implied by law, and is:
    (a) in favor of any third party which is not a member of
    the Marconi group, including the issuer of any performance bond,
    bank guarantee or similar instrument, and (b) in respect of
    any contractual obligations of the provider of the counter
    indemnity or equivalent; provided that where any payment has
    been made under such a guarantee or indemnity on or before
    March 31, 2002, the resultant counter indemnity shall not
    be preserved;            
|
| |  | any counter indemnity or equivalent reimbursement
    obligation, which is written or is implied by law and whether or
    not contingent, arising under any written non-financial
    guarantee or indemnity, which is written or implied by law, and
    is: (a) in favor of any person which is not a member of the
    Marconi group, and (b) in respect of any contractual or
    implied by law obligations of the provider of the counter
    indemnity or equivalent and (c) disclosed in a schedule to
    the statement and waiver agreement; provided that where any
    payment has been made under such a guarantee or indemnity on or
    before March 31, 2002, the resultant counter indemnity
    shall not be preserved; and
|
| |  | any other claims specified in the agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

All other claims of Marconi Corporation or
Marconi plc against each participating group company and all
other claims of each participating group companies against
Marconi Corporation or Marconi plc were released after our
restructuring. The statement and waiver agreement does not
affect claims which arise out of or in relation to any matter or
circumstance arising after the financial restructuring.

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Item 8: Financial
Information






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 annual
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, FORE Systems Inc., or FORE
    Systems, and 13 persons who were then directors and/or senior
    executives of FORE Systems are 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
    shareholders of FORE Systems, other than defendants and their
    respective affiliates. The action alleges that Marconi
    Corporation violated federal securities law in relation to
    Marconi Corporations tender offer for FORE Systems
    shares, FORE Systems 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 and FORE
    Systems. Millionerrors Investment Club is the representative of
    the named plaintiff class. The Complaint seeks unspecified
    damages, counsel and expert fees, other costs of the claim and
    other unspecified relief. Plaintiffs lawyers have stated that
    their damage claims would total $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 has
    been stayed and the case remanded to the district court to
    consider a settlement agreement reached among the parties. The
    settlement is subject to court approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | FORE Systems, together with six of its former
    directors and officers, are 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 FORE Systems securities during the period
    July 19, 1996 to April 1, 1997, inclusive. Robert K.
    Bell is the first named plaintiff class representative. The
    plaintiffs allege that, during this period, FORE Systems
    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 FORE Systems projected results of
    operations for fiscal 1997. The plaintiffs also allege that FORE
    Systems 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 are 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 seeks unspecified damages, counsel and
    expert fees and other costs of suit and other unspecified
    relief. The defendants have denied all allegations of
    wrongdoing. Discovery has concluded, and both plaintiffs and
    defendants have filed their respective pre-trial statements. The
    plaintiffs damages expert had initially estimated damages
    at $792 million, then $865 million and then
    $724 million. By order dated August 2, 2002, the court
    granted the defendants motion in limine to
    exclude testimony from the plaintiffs damages expert. At
    the same time, the court denied a motion to exclude testimony
    from the plaintiffs liability expert and discussed a
    proofs of claim procedure which, if liability were found, would
    follow a liability trial. The court also certified the

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | damages issue for an interlocutory appeal to the
    U.S. Court of Appeals for the Third Circuit. The plaintiffs
    did not appeal the courts decision. The parties have
    agreed to a settlement, which, if concluded, will result in the
    Marconi group not making any payment to the plaintiff class. The
    settlement is currently being documented and then will be
    subject to court approval, which will take several months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | FORE Systems 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 FORE
    Systems infringed four patents owned by Telcordia, and sought
    unspecified damages for past infringement and an injunction
    against future infringement. FORE Systems denied infringement
    and asserted the affirmative defenses of invalidity,
    unenforceability, laches, equitable estoppel, implied license,
    misuse and unclean hands. In addition, FORE Systems
    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 FORE Systems 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. Discovery in this case has closed.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Telcordia maintained its claims for infringement
    on the remaining two patents. The district court conducted a
    claim construction hearing in late August 2000 and subsequently
    entered an order construing the claims of the two remaining
    patents in suit. 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 district court
    to enter an order finding that FORE Systems had not infringed
    the two remaining patents in suit so that the case would be
    procedurally postured for appeal. FORE Systems subsequently
    moved the district court to require that Telcordia identify
    which of the construed patent claim elements it contended were
    in error and precluded Telcordia from proving infringement.
    Telcordia identified some claim elements, and, on
    September 21, 2001, the district court entered a final
    judgment of non-infringement on the two remaining patents.
|
| | Telcordia filed notice of appeal on
    October 19, 2001, and filed its opening brief on
    March 18, 2002. FORE Systems opening brief was filed
    on May 28, 2002. Telcordia filed its reply on July 23,
    2002, and FORE filed its reply on August 9, 2002. Oral
    argument in the appeal took place on February 3, 2003. In
    its decision, announced on March 27, 2003, the
    U.S. Court of Appeals for the Federal Circuit unanimously
    affirmed the district courts judgment on one of the two
    patents, and on the other patent, by a majority decision,
    remanded the case back to district court for further proceedings.                                                                                                                                                                                                                                                                                                                                                                                       



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | FORE Systems 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 FORE Systems has
    infringed two additional Telcordia patents. FORE Systems 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.
    FORE Systems has also asserted a counterclaim seeking damages
    for Telcordias infringement of a FORE Systems patent. The
    case was scheduled for trial in November 2000. However, all
    proceedings have been stayed pending the outcome of the
    proceedings in the first lawsuit described above, and discovery
    in this second case has not yet been completed.
|
| |  | 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 (the Agreements); Esprit alleges that SMS breached its
    obligations under the Agreements and is seeking at least
    $8 million. The pleadings portion and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | discovery phase between SMS and Esprit have
    commenced, and the arbitration hearing will be conducted in Los
    Angeles, California, U.S.A. Initially, the parties had agreed to
    conduct the arbitration hearing during a two week period in May,
    2003, with discovery and briefing to take place before that
    time. However, this has been delayed and the hearing is now
    scheduled to commence on October 13, 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi plc was originally a party to the
    arbitration demand under a legal theory alleging that SMS and
    Marconi plc are alter egos of one another. Esprit released
    Marconi plc from its original arbitration demand, but then
    named Marconi plc in a federal court proceeding. In
    response, Marconi plc moved to stay the federal court
    proceeding until after the arbitration between SMS and Esprit
    has concluded. The Court granted Marconi plcs motion
    to stay, and, therefore, Esprit will be permitted to proceed on
    its claims against Marconi 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.
|
| | On September 17, 2003, the parties agreed to
    settle the above proceedings for a payment by SMS to Esprit in
    the amount of U.S.$710,000.00. The parties are in the process of
    drafting settlement documentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    is 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
    Marconi 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
    $19 million in respect of both claims. Potential
    liabilities in respect of the claim against Marconi Corporation
    and Marconi plc were compromised pursuant to the
    restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Marconi Corporation, Marconi 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
    $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 and Marconi plc were compromised
    pursuant to our restructuring.
|
| |  | On October 4, 2000, Alcatel SA and Alcatel
    CIT, or Alcatel, both French companies, filed a claim against
    Marconi plc, Marconi Communications Limited and Marconi
    Communications SpA alleging infringement of two patents held by
    Alcatel group companies. Alcatel and Marconi Corporation entered
    into a mutual patent cross license agreement effective
    April 1, 2002 in respect of both companies patent
    portfolios which calls for a series of payments by Marconi plc.
    The amount of these payments has no significant effect on the
    financial position or profitability of us and the former group.
    This settled all claims brought by Alcatel. The cross license
    applies to patents and patent applications of Marconi plc and
    Alcatel filed prior to April 1, 2002. The cross license
    expires on March 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stringfellow and Plessey Precision Metals are
    defendants in an action brought in the Superior Court of
    California in May 1998. A toxic tort claim was filed by several
    thousand residents of Riverside County who live adjacent to the
    Stringfellow Acid Pits Waste Disposal Site. There are currently
    several hundred plaintiffs. The claim is still in its early
    stages and therefore, no estimate of Plesseys potential
    liability is currently available. Plessey was a minor generator
    of hazardous materials on the site compared to others involved,
    however. A case management order was entered into in early 2001
    and the case is still in the early discovery stage. The
    defendants are seeking dismissal on grounds of statutes of
    limitation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Inglis Limited and English Electric Company
    Limited, or 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 in the United States. 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 were 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 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
    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
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | On March 26, 2002 Railtrack Telecom Services
    Limited, or RTSL, now known as RT Group Telecom Services
    Limited, a joint venture partner, served a claim against Marconi
    Corporation in respect of its failure to pay in February 2002 an
    amount of £20 million plus daily interest in an amount
    of £3,287 in respect of the purported exercise by RTSL of a
    contractual option to put 1,324,054 ordinary shares in Easynet
    Group plc on to Marconi Corporation. Marconi Corporation had,
    prior to receipt of the claim, indicated its intention to claim
    or counterclaim against RTSL in respect of its acts, omissions,
    misrepresentations and breaches of its obligations to Marconi
    Corporation arising out of or in respect of certain agreements
    and transactions relating to ipsaris Limited and Ultramast
    Limited, a joint venture company in which RTSL and Marconi
    Corporation each held 50% of the shares. Marconi Corporation
    then raised its counterclaims as a complete defense and advised
    RTSL that the amount of Marconi Corporations claims
    against RTSL was greater than the claim that RTSL had brought
    against Marconi Corporation. RTSL applied for a summary judgment
    hearing which took place on July 15, 2002, on the grounds
    that Marconi Corporations claims had no real prospect of
    success. The court did not grant summary judgment in favor of
    RTSL, recognizing that Marconi Corporation might have a valid
    counterclaim which could be set off against amounts due under
    the option. However, the court did order that Marconi
    Corporation pay the disputed £20 million plus interest
    into court, reflecting the courts concerns about whether
    the counterclaim by Marconi Corporation would ultimately succeed
    and also the fact that RTSL was entitled to put the Easynet
    Group Plc shares on Marconi Corporation, and that it would be
    unfair for Marconi Corporation to acquire the shares without
    making any payment. Marconi

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | Corporation paid the required sum into court. A
    settlement of all outstanding litigation was reached with RTSL,
    subject to court approval of a capital reduction in Ultramast
    Limited. The court approved the capital reduction on
    February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Marconi Communications Limited, or MCL has
    settled claims which were brought by Alstom Transport Limited,
    or Alstom, a sub-contractor, in an arbitration brought under
    International Chamber of Commerce rules in respect of a
    sub-contract that Alstom entered into with MCL on May 26,
    1995 for the supply of certain communications equipment and
    systems for installation on the Northern Line of Londons
    underground system. Alstom requested the arbitration on
    May 25, 2001. MCL submitted a full defense. Certain
    preliminary matters were heard and an initial hearing into the
    substance of the claim took place. In a related action, Alstom
    Transport Ltd and three other Alstom subsidiaries issued
    proceedings in the English courts in September 2001 in relation
    to alleged misrepresentations or breach of warranties made by
    MCL as to the costs of operating the communications equipment
    and systems to be installed pursuant to this sub-contract.
    Settlement was reached in relation to both these claims on
    December 20, 2002. MCL will provide further products and
    services to Alstom pursuant to a revised supply contract and a
    new maintenance contract was entered into as of January 6,
    2003. Marconi Corporations obligations pursuant to these
    new contracts are guaranteed by Marconi Communications Holdings
    Limited and are the subject of collateralized performance bonds
    to a value of £2.5 million and £1 million
    respectively for the supply and maintenance contracts. The
    arbitration has also been discontinued.                                                                                                                                                       
|
| |  | Marconi Corporation was the defendant in an
    action brought by DrKW Finance Ltd, or DrKW which has now been
    settled. The claim was for £12,289,860.15 plus interest due
    or scheduled to become due under a payment plan agreement
    between Oracle Corporation U.K. Ltd, or Oracle, and Marconi
    Corporation. Oracle assigned the relevant agreement, a software
    licensing agreement, to DrKW. On October 11, 2002 DrKW
    obtained summary judgment for the full amount claimed plus
    interest. On the same day Marconi Corporation agreed a
    settlement of the claim with DrKW and DrKW agreed not to enforce
    the judgment. Marconi Corporation has complied with its
    settlement obligations and has no further liability in respect
    of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | There is an outstanding tax dispute between the
    Indian tax authorities and Marconi Corporation, 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, 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, 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,
    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. Marconi Corporation, 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.
|
| |  | Marconi plc and four of its former officers are
    defendants in a consolidated class action lawsuit pending in the
    United States District Court for the Western District of
    Pennsylvania brought on behalf of a putative class of all
    persons, other than defendants and their respective affiliates,
    who purchased American depository receipts or are United States
    residents and purchased common stock of Marconi plc between
    April 10, 2001 and July 5, 2001, inclusive. Plaintiffs
    allege that, during this period, Marconi 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 allege that on
    July 4, 2001 defendants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | belatedly disclosed that tougher trading
    conditions in the quarter ended June 30, 2001 indicated
    that Marconi plcs sales and operating profits for fiscal
    2002 would fall significantly from the levels previously
    estimated. Defendants alleged misrepresentations are 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 seek 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 does have
    jurisdiction over claims of American resident owners of ordinary
    shares and owners of ADRs. The parties have agreed to a
    settlement, which, if concluded, would result in Marconi plc
    and/or the Marconi group not making a payment to the claimants.
    The settlement agreement has been signed and submitted to the
    court for approval, which will take several months.
|
| |  | Marconi plc was the defendant in an action
    commenced by Salomon Brothers International Limited, or SBIL,
    for £15.9 million, plus interest and costs. The claim
    was related to a guarantee granted by Marconi plc to SBIL in
    respect of certain equity swap transactions entered into between
    SBIL and Bedell Cristin Trustees Limited, or Bedell Cristin, as
    trustees of the Marconi Employee Trust. The intention of the
    equity swap transactions was to hedge the exposure of the
    Marconi group to the Marconi plc share price inherent in Marconi
    employee share options. The equity swap transactions were
    governed by an ISDA master agreement between SBIL and Bedell
    Cristin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 26, 2002, SBIL served notice on
    Bedell Cristin purporting to terminate the equity swap
    transactions on the grounds of an alleged event of default in
    relation to Marconi plc. On April 8, 2002, SBIL served
    a demand on Marconi plc under its guarantee for payment of an
    early termination amount that it had calculated to represent its
    loss in relation to the equity swap transactions.
    Marconi plc declined to recognize the validity of the early
    termination of the equity swap transactions or the demand under
    its guarantee. On April 19, 2002 SBIL filed a claim form on
    Marconi plc. Marconi plc served a defence to this claim
    form.
|
| | This litigation was discontinued in accordance
    with a settlement entered into in connection with our financial
    restructuring. For more information, please see
    Item 4: Information on the Company 
    History and Development of the Company 
    History  Financial Restructuring and
    Item 7: Major Shareholders and Related Party
    Transactions  Related Party Transactions 
    Restructuring Agreements  Scheme Implementation
    Deed  ESOP Escrow Agreement Release.                                                                                                                                                                                             

Claims brought by our former group
companies

The following represent the largest outstanding
claims made on behalf of our former 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 $25,879,544 under its breach of warranty claims,
    $5,604,270.12 for prejudgment interest, and $156,702.56 for
    costs, for a total award of $31,640,516.68. Vidar may claim 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 at $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
    may claim 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.

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DIVIDEND POLICY

As a result of its scheme of arrangement, Marconi
plc does not anticipate making any dividends or distributions to
its shareholders. See Risk Factors  As a result
of our restructuring, we have ceased business operations and
intend to dispose of our remaining assets for the benefit of our
creditors.

SIGNIFICANT CHANGES

As a result of the financial restructuring of
Marconi plc and Marconi Corporation that became effective
on May 19, 2003 and is described in this report, the
financial position of Marconi plc has changed significantly.

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Item 9: The Offer and
Listing

STOCK PRICE HISTORY

Marconi plc

From November 30, 1999, the ordinary shares
of Marconi plc were listed on the London Stock Exchange. On
May 19, 2003, the ordinary shares of Marconi plc were
delisted from the London Stock Exchange. On October 17,
2000, the ADRs of Marconi plc were added to quotation on the
NASDAQ National Market, and on July 3, 2002, they were
removed from quotation on the NASDAQ National Market and began
trading on the over-the-counter bulletin board in the United
States. The following table summarizes information regarding
prices and trading of the Marconi plc ordinary shares on the
London Stock Exchange and the ADRs on the NASDAQ National Market
and the over-the-counter bulletin board for the periods
indicated:

|                                     |  |                  |         |              |  |      |        |      |  |  |       |     |  |  |       |    
|------------------------------------ |  | ---------------- | ------- | ------------ |  | ---- | ------ | ---- |  |  | ----- | --- |  |  | ----- | ---
|                                     |  |                  |         |              |  |     
|                                     |  | London Stock     |         |             
|                                     |  | Exchange         |         | ADRs        
|                                     |  | (Sterling pence) |         | (US dollars)
|                                     |  | High             |         | Low          |  | High |        | Low 
|                                     |  |                 
|                                     |  |                 
|Fiscal Year                          |  |                  |         |              |  |      |        |      |  |  |       |     |  |  |       |    
|April 1, 2000 to March 31, 2001      |  |                  | 1250.00 |              |  |      | 340.00 |      |  |  |      |     |  |  |      |    
|April 1, 2001 to March 31, 2002      |  |                  | 424.00  |              |  |      | 6.25   |      |  |  | 12.85 |     |  |  | 0.18  |    
|April 1, 2002 to March 31, 2003      |  |                  | 12.55   |              |  |      | 1.27   |      |  |  | 0.44  |     |  |  | 0.04  |    
|Fiscal Quarter                       |  |                  |         |              |  |      |        |      |  |  |       |     |  |  |       |    
|April 1, 2000 to June 30, 2000       |  |                  | 975.00  |              |  |      | 669.00 |      |  |  |      |     |  |  |      |    
|July 1, 2000 to September 30, 2000   |  |                  | 1250.00 |              |  |      | 875.00 |      |  |  |      |     |  |  |      |    
|October 1, 2000 to December 31, 2000 |  |                  | 950.00  |              |  |      | 646.00 |      |  |  | 30.00 | (*) |  |  | 18.00 | (*)
|January 1, 2001 to March 31, 2001    |  |                  | 785.00  |              |  |      | 340.00 |      |  |  | 23.50 |     |  |  | 9.53  |    
|April 1, 2001 to June 30, 2001       |  |                  | 424.00  |              |  |      | 237.00 |      |  |  | 12.85 |     |  |  | 6.75  |    
|July 1, 2001 to September 30, 2001   |  |                  | 263.00  |              |  |      | 17.00  |      |  |  | 7.75  |     |  |  | 0.50  |    
|October 1, 2001 to December 31, 2001 |  |                  | 48.90   |              |  |      | 13.00  |      |  |  | 1.48  |     |  |  | 0.40  |    
|January 1, 2002 to March 31, 2002    |  |                  | 44.00   |              |  |      | 6.25   |      |  |  | 1.33  |     |  |  | 0.18  |    
|April 1, 2002 to June 30, 2002       |  |                  | 12.55   |              |  |      | 3.95   |      |  |  | 0.44  |     |  |  | 0.12  |    
|July 1, 2002 to September 30, 2002   |  |                  | 4.10    |              |  |      | 1.27   |      |  |  | 0.14  |     |  |  | 0.05  |    
|October 1, 2002 to December 31, 2002 |  |                  | 2.54    |              |  |      | 1.43   |      |  |  | 0.09  |     |  |  | 0.04  |    
|January 1, 2003 to March 31, 2003    |  |                  | 2.44    |              |  |      | 1.56   |      |  |  | 0.09  |     |  |  | 0.05  |    
|Month                                |  |                  |         |              |  |      |        |      |  |  |       |     |  |  |       |    
|April 2003                           |  |                  | 1.80    |              |  |      | 1.59   |      |  |  | 0.06  |     |  |  | 0.05  |    
|May 2003                             |  |                  | 1.56    | (**)         |  |      | 0.60   | (**) |  |  | 0.09  |     |  |  | 0.03  |    
|June 2003                            |  |                  |        |              |  |      |       |      |  |  | 0.08  |     |  |  | 0.06  |    
|July 2003                            |  |                  |        |              |  |      |       |      |  |  | 0.18  |     |  |  | 0.07  |    
|August 2003                          |  |                  |        |              |  |      |       |      |  |  | 0.13  |     |  |  | 0.10  |    
|September 2003 (to Sept. 23, 2003)   |  |                  |        |              |  |      |       |      |  |  | 0.13  |     |  |  | 0.02  |    



|   |                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------
|*  | Represents the period October 17, 2000 to
    December 31, 2000 following the quotation of Marconi plc
    ADRs on NASDAQ.
|  
|** | To May 16, 2003, which was the last day of
    dealings in Marconi plc shares                                             

On April 11, 2003, the U.K. Financial
Services Authority released a public statement concerning a
contravention of the U.K. Listing Rules by Marconi plc in July
2001. That public statement concluded that Marconi plc had
breached paragraph 9.2(c) of the U.K. Listing Rules when it
failed to notify the Company Announcement Office without
delay of a change in its expected performance for the half
year ending September 2001 and full year ending March 2002.

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Item 10. Additional
Information

MEMORANDUM AND ARTICLES OF
ASSOCIATION

The rights of the holders of our shares are set
out in our memorandum and articles of association or are
provided for by applicable English law. A copy of our memorandum
and articles is filed as Exhibit 1.1 to this annual report.
Directions on how to obtain copies of the memorandum and
articles of association are provided under 
 Documents on Display.

The following is a summary of the material terms
of our memorandum and articles of association. The articles of
association were last amended on July 18, 2001.

General

We are registered in England and Wales,
No. 3848420. Our principal objects are set out in full in
Clause 4 of our Memorandum of Association and include carrying
on the business of, and performing all the functions of, a
holding company.

Directors

Subject to the requirements of English company
law, and so long as the director has disclosed to the board of
directors the nature and extent of any material interest:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a director may be a party to any
    transaction or arrangement with us;                                                                                             
|
| |  | a director or the directors firm may
    act in a professional capacity for us, except as auditor and
    receive payment for such services;                        
|
| |  | a director may also be a director or
    officer of or party to any transaction or arrangement with any
    company promoted by us or in which we are interested; and
|
| |  | a director will not be liable to account
    for any benefit the director may have received from that
    position or transaction or arrangement.                    

Except as otherwise provided by our articles of
association, a director must not vote at any board or committee
meeting on any resolution of the board of directors concerning a
matter in which the director and any persons connected with him
has a material interest. This prohibition does not apply if the
directors interest arises only because the resolution
concerns one or more of the following:



| |   |                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the giving of any guarantee, security or
    indemnity for money lent, or obligations incurred by the
    director or any other person at our request or for our benefit;                                                                                                                                                     
|
| |  | the giving of any guarantee, security or
    indemnity for a debt or obligation of ours or any of our
    subsidiary for which the director has assumed responsibility
    under a guarantee or indemnity or by the giving of security;                                                                                       
|
| |  | any contract arrangement, transaction or
    proposal concerning an offer of our or any of our subsidiary
    undertakings shares, debentures or other securities in
    which offer the director might be entitled to participate as a
    holder of securities;                                                            
|
| |  | any contract arrangement, transaction or
    proposal concerning any other company in which the director or
    any person connected with him is interested directly or
    indirectly and whether as an officer, shareholder, creditor or
    otherwise so long as the interest held represents less than one
    percent of:



| |     |                                                                 
| | --- | ----------------------------------------------------------------
| | (1) | the equity share capital of that company; or                    
|
| | (2) | the voting rights available to shareholders of
    that company.

79



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MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)




| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any contract arrangement, transaction or
    proposal for the benefit of our or any of our subsidiarys
    employees which awards the director any privilege or benefit
    that is not generally awarded to the employees to whom such
    arrangement relates; and
|
| |  | any contract arrangement, transaction or
    proposal concerning the purchase or maintenance of liability
    insurance for any director or officer.                                                                                                                 

As described under Item 6
 Directors, Senior Management and Employees
 Board Practices-General, the remuneration
committee makes decisions on behalf of the board of directors on
the contracts of service and remuneration packages of executive
directors and the chairman. The fees of non-executive directors
must not exceed in aggregate £500,000 per year or a larger
sum we may determine by ordinary resolution. However, subject to
this upper limit, each non-executive director is paid a fee
determined by the board. A non-executive director who serves on
any committee of the board, and by request of the board goes or
resides abroad for our purposes or who performs extra or special
services may be paid extra remuneration by way of salary,
commission or otherwise as the board determines.

The board of directors can appoint any of their
number to be directors. The remuneration of executive directors
is determined by the board and can take any form.

The board of directors have an unrestricted power
to exercise all of our powers to borrow money, guarantee,
indemnify, mortgage or charge our undertaking, property, assets
and uncalled capital and issue debentures and other securities
for any debt, liability or obligation of ours or of any third
party.

At every annual general meeting of shareholders,
one-third of the directors, or the nearest to one-third if the
number of directors is not three or a multiple of three, are
required to retire from office although a retiring director may
be re-appointed if willing to act. In addition, any director who
has been in office for more than three years since his or her
last appointment or reappointment is required to retire. Subject
to the provisions of U.K. company law and to the provisions of
the articles of association, the directors to retire at an
annual general meeting are those who have been in office the
longest. If a vacancy is not filled at a meeting at which a
director retires by rotation or otherwise then, if the retiring
director is willing to act, he or she is deemed to be
reappointed as a director unless:



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | the meeting resolves not to fill the
    vacancy; or                               
|
| |  | the resolution to reappoint the director
    concerned is put to the vote and lost.

A director is required to retire from office at
the annual general meeting after which he or she reaches
70 years of age, although that director may be reappointed
as a director on an annual basis after reaching 70 years of
age.

A director is not required to hold any shares in
our capital in order to be qualified as our director.

We are permitted to send notices of board
meetings to directors by means of electronic communication.
Resolutions of the directors may be made by means of electronic
communication.

Share Capital

Our authorized share capital is
£300,000,000. It is divided into 6,000,000,000 ordinary
shares of 5 pence each.

Our articles of association do not contain any
restrictions on the rights of non-resident or foreign
shareholders to hold or exercise voting rights attaching to our
ordinary shares.

We or the board, if authorized by shareholders,
may issue new shares with those rights and restrictions that the
shareholders or the board consider appropriate. The board may
issue up to 5% of our issued share capital for cash without
shareholder approval. In addition, the board, if authorized by
the shareholders, may

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##### Table of Contents



MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)


issue shares for cash to persons who are not
currently shareholders without first offering such shares to
existing shareholders.

The board may issue share warrants for any fully
paid shares. Any share represented by that kind of warrant is
transferable by delivery of the warrant relating to it. The
board may provide for the payment of dividends or other moneys
on the shares represented by the warrant by coupons or
otherwise. The board may determine and vary:



| |   |                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the conditions on which the share warrants
    are issued;                                                                                                        
|
| |  | the conditions on which a new warrant or
    coupon is issued in place of worn-out, defaced, lost or
    destroyed warrants or coupons;                           
|
| |  | the conditions on which the bearer will be
    entitled to attend and vote at general meetings; or                                                                
|
| |  | the conditions on which a warrant may be
    surrendered and the name of the bearer entered in the register
    in respect of the shares specified in the warrant.

The board may permit shares to be held in
uncertificated form. Uncertificated shares are traded using
CREST, which is the electronic settlement system in the United
Kingdom.

Variation of rights

If the share capital is divided into different
classes of shares, the rights of any class of shares may be
changed or taken away:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | with the written consent of the holders of
    three-quarters of the holders of shares of that class; or         
|
| |  | with the approval of an extraordinary
    resolution passed at a separate meeting of holders of those
    shares.

The quorum for a meeting to change or take away
the rights of any class of shares is two persons, present in
person or by proxy, holding one-third of the nominal amount of
the issued shares of that class. Consent to change or take away
any class of shares can be contained in an electronic
communication.

Lien and forfeiture

If we issue partly paid shares, the board has
rights to collect any amounts due for such partly paid shares.
We cannot have a lien over fully paid shares.

Transfer of shares

Our shares are freely transferable. A transfer of
shares is made by an instrument of transfer. The instrument of
transfer must be signed by or on behalf of the transferor and,
unless the share is fully paid, by or on behalf of the
transferee. The transferor remains the holder of the relevant
shares until the name of the transferee is entered in the share
register. If any shares are not represented by share
certificates, then transfers of those shares may also be made
through CREST without a written instrument in accordance with
English company law.

The board may refuse to register transfers of
shares that are not fully paid up, but only if the refusal does
not prevent dealings in the shares from taking place on an open
and proper basis.

Subject to the requirements of the London Stock
Exchange, the board may also refuse to register a transfer of
shares if:



| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | it is not deposited duly stamped, if stamp
    duty is payable, at our registered office with the relevant
    share certificate;
|
| |  | it is for more than one class of shares; and                                                                                     

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MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)




| |   |                                                           
| | - | ----------------------------------------------------------
| |  | it transfers the shares to more than four
    transferees.

If the board refuses to register a transfer of
shares, it must send the transferee notice of the refusal within
two months.

Transmission of shares

If a shareholder dies, his or her survivor, if he
was a joint shareholder, or his personal representatives, if he
was a sole shareholder, will become entitled to his shares. That
person may either decide to become the shareholder or may
nominate someone else to become a shareholder.

Alteration of share capital

Shareholders must approve increases in share
capital through an ordinary resolution. In addition, the
following changes in share capital must be approved by an
ordinary resolution of the shareholders:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | share consolidation and share splits;                                                    
|
| |  | subdivisions of shares; and                                                              
|
| |  | cancellations of shares that have not been
    taken or agreed to be taken by any person.

Reductions in our share capital, capital
redemption reserve and any share premium account must be
approved by a special resolution of the shareholders and must be
confirmed by an order of the court. In addition, U.K. company
law sets out conditions and procedures that must be followed
when reducing share capital, the capital redemption reserves and
any share premium account.

Purchase of own shares

We can purchase any issued shares provided that
we comply with English company law.

Meetings of shareholders

English company law allows shareholders to
exercise their power to decide on corporate matters at general
meetings. We are required to hold a general meeting annually, at
intervals of not more than 15 months, to:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | consider the statutory accounts and the
    reports by the auditors and the directors;
|
| |  | elect directors; and                                                                  
|
| |  | approve the appointment and remuneration of
    auditors.                             

The directors have discretion to hold
extraordinary general meetings to consider specific matters. In
addition, if done in writing, shareholders representing at least
one-tenth of all of the issued shares may request that an
extraordinary general meeting be held.

An annual general meeting and an extraordinary
general meeting called for the passing of a special resolution
are called by giving at least 21 clear days notice.
All other extraordinary general meetings are called by giving at
least 14 clear days notice.

The board may at its discretion serve any notice
that is required by the articles of association either by post
or by electronic communication. We may send notices or other
documents to shareholders by publishing them on a website,
provided that we and the shareholder have agreed that the
shareholder will have access to the website and the shareholder
is notified both of the publication of the notice of the
document on the website and of the website address.

Shareholders whose registered address is outside
the United Kingdom are entitled, so long as we agree, to receive
notices and other documents electronically.

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MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)


Accidental omission to send notice of a meeting
or to send any requisite notification in relation to the
publication of a notice of a meeting on the website, to send a
form of proxy to any person entitled to receive one, or
non-receipt of the notice, notification or proxy form shall not
invalidate proceedings at the meeting, whether or not we are
aware of the omission or the non-receipt.

The board is permitted to issue terms and
conditions relating to the use of electronic communications. If
the post in the United Kingdom is restricted, the board may give
notice by advertisement in two U.K. national newspapers. The
board may enable persons to attend general meetings by
simultaneous attendance at satellite meetings held anywhere in
the world. The shareholders present in person or by proxy at the
satellite meetings will be counted in the quorum and will be
entitled to vote provided that they can hear and see all persons
who speak and can participate in the business of the meeting and
be heard and seen by all other persons present in the same way.
In addition, the board of directors can make arrangements for
persons entitled to attend meetings to attend that meeting at a
venue situated anywhere in the world for the purposes of hearing
and viewing the proceedings. Those venues are not satellite
meetings and those persons attending at those venues are not
entitled to vote or be counted in the quorum of the meeting.

Business cannot be transacted at any meeting
unless a quorum is present. Generally, a quorum is two persons
present in person or by proxy and entitled to vote on the
business of the meeting.

A proxy may be appointed by electronic
communication if we have given an address for this purpose and
may be executed electronically if the board approves. The
appointment of proxy should be received at the address we give
at least 48 hours before the meeting. The written authority
under which a proxy appointment is executed must be delivered in
physical form to us at least 48 hours before the time appointed
for the meeting. Where two or more proxies are delivered for the
same share, we will treat the last-executed proxy as replacing
and revoking the other proxy received for that share.

A notice of revocation of a proxy appointment may
be sent either by instrument or by means of electronic
communication, regardless of how the original proxy appointment
was made.

If, after the notice of general meeting has been
sent, there is a change in the place and/or time of a general
meeting, a proxy appointment in relation to the meeting may, if
contained in an electronic communication, be received at the
address we give for receiving electronic communications at any
time at least 48 hours before the postponed time for the meeting.

Dividends

Subject to the provisions of the law of England
and Wales, the board has the discretion to determine whether to
pay an interim dividend and the amount of that dividend, but
must consider our financial position when doing so. An interim
dividend does not need to be approved by shareholders. However,
we may only pay a final dividend if recommended by the board and
approved by shareholders. The shareholders do not have the power
to approve a dividend in excess of the amount recommended by the
board.

The board also determines the date on which we
pay dividends. We pay dividends to shareholders on the register
on the record date that the directors determine, in proportion
to the amounts paid up on the shares. There are no fixed dates
on which entitlements to dividends arise. Interest is not
payable on dividends or other amounts payable concerning shares.

The board may, if it has shareholder approval,
offer shareholders the right to elect to receive shares instead
of cash dividends. The aggregate value of additional shares that
a shareholder may receive under that election is as nearly as
possible equal to but not greater than the cash amount that the
shareholder would have received.

The board may also, if it has shareholder
approval, direct that a dividend is to be satisfied wholly or
partly by the distribution of assets including paid up shares or
debentures of any other company. The board may fix the value of
assets that a shareholder may receive under such distribution
and, upon fixing such

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MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)


value, may determine that cash payments should
also be made to shareholders receiving those assets. The board
may also vest any specific assets in trustees.

A dividend that is unclaimed for 12 years
can be forfeited if the board directs and will no longer be due
to the shareholder. We may pay any unclaimed dividend or other
monies payable concerning shares into a separate account of
which we will not be a trustee. We are entitled to stop sending
dividend warrants and checks to a shareholder whose dividend
payments have not been cashed or have been returned to us on at
least two consecutive occasions, or after one such occasion
where we cannot find the shareholders new address after
making reasonable enquiries.

Dividends and other monies payable concerning
shares may be paid in cash or by check or by any other means
that the board approves so long as the shareholder agrees.

Return of capital on winding up

If we are wound up, the liquidator may, with the
approval of an extraordinary resolution and any other sanction
required by the U.K. Insolvency Act 1986:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | divide our assets among the shareholders;                                               
|
| |  | value and determine the means of division
    of such property;                         
|
| |  | vest all or part only of the assets in
    trustees for the benefit of shareholders; and
|
| |  | determine the terms of any trusts.                                                      

No shareholder will be compelled to accept any
assets on which there is a liability.

Voting

Voting at any meeting of shareholders is by a
show of hands unless a poll is demanded. On a show of hands,
each person present in person or by a corporate representative
has one vote. Proxies are not allowed to vote on a show of
hands. On a poll, each shareholder that is present in person or
by a corporate representative or by proxy has one vote for every
share held. The chairman of the meeting has a casting vote on a
show of hands and on a poll.

Only the holders of shares on which all sums
payable have been paid are entitled to attend meetings and vote.
If more than one joint holder votes, only the vote of the
shareholder whose name appears first in the register is counted.
Any shareholder that is entitled to attend and vote at a meeting
is entitled to appoint one or more proxies to attend and vote at
the meeting on his or her behalf.

A resolution put to the vote at a meeting is
decided by a show of hands unless a poll is demanded by:



| |   |                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the chairman;                                                                                                                                                                                                                                                                                 
|
| |  | at least five shareholders present in
    person or by proxy who have the right to vote at the meeting;                                                                                                                                                                                       
|
| |  | any shareholder or shareholders present in
    person or by proxy who together hold at least one-tenth of the
    votes held by shareholders who have the right to vote at the
    meeting; or                                                                                                
|
| |  | any shareholder or shareholders present in
    person or by proxy who together hold shares that confer a right
    to vote at the meeting on which an aggregate sum has been paid
    up that is equal to one-tenth of the total sum paid up on all
    the shares carrying the right to vote.

Resolutions generally require the approval of a
majority of the shareholders. Such resolutions, referred to as
ordinary resolutions, require:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | on a show of hands, a majority in number of
    the shareholders present and voting in person or through an
    authorized representative to vote in favor; or

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MEMORANDUM AND ARTICLES OF
ASSOCIATION  (continued)




| |   |                                                          
| | - | ---------------------------------------------------------
| |  | on a poll, more than 50% of the votes to be
    in favor.

However, certain resolutions, referred to as
special resolutions (such as a resolution to amend our articles
of association) or extraordinary resolutions, require a higher
majority. Such resolutions require:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | on a show of hands, at least three-quarters
    of the shareholders present and voting in person or through an
    authorized representative to vote in favor; or
|
| |  | on a poll, more than 75% of the votes to be
    in favor.                                                                                                        

Disclosure of interests in shares

Under English law, we may give written notice to
any person who we know or have reason to believe owns an
interest in our shares to request information about such
persons beneficial interest in shares. If that person does
not provide the information or if the board believes that the
information provided is false or inadequate, we may restrict
that persons voting rights. In addition, if the number of
shares held by that person exceeds 0.25% of the issued shares,
then we may also restrict the dividend and transfer rights
attaching to those shares.

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MATERIAL CONTRACTS

The following is a summary of material contracts
to which we or any member of our former group is or was a party
and which were entered into in the past two years. The exhibit
list in Item 19.  Exhibits indicates
which of these contracts are filed with this annual report and
which of these contracts have already been filed with the SEC.
Directions on how to obtain copies of these contracts are
provided under  Documents on Display.

Equity

Settlement Deed dated December 19,
2002 between RT Group Telecom Services Limited (RTSL), RT
Group plc, Marconi Corporation, Ultramast Limited, James
Smith and Nicholas Dargan.

The shares in Ultramast Limited held by Marconi
Corporation have been cancelled through a capital reduction and
a repayment of capital has been made to Marconi Corporation. The
Settlement Deed contains several indemnities: (1) Marconi
Corporation agreed to indemnify Ultramast Limited in respect of
two employees seconded from our former group; this indemnity is
capped at £300,000; (2) Marconi Corporation agreed to
indemnify RT Group Telecom Services Limited in relation to a
contract between Ente Sardo e Fognature and Ultramast Limited;
this indemnity is capped at £1.68 million; and
(3) Marconi Corporation agreed to indemnify RT Group
Telecom Services Limited and Ultramast Limited in respect of a
side letter between Marconi plc and British Waterways Board
(BWB), now known as British Waterways; this indemnity is capped
at £10 million.

Disposals Pre-Financial
Restructuring

Share Purchase Agreement dated
August 2, 2002 between Marconi (Bruton Street) Limited,
Marconi plc and Finmeccanica S.p.A.

On August 2, 2002 Marconi (Bruton Street)
Limited entered into a Share Purchase Agreement to sell its
interest in Marconi Mobile Holdings SpA to
Finmeccanica SpA for a purchase price of
571.1 million
in cash with
42.9 million
in assumed debt (net of cash on the disposed business
balance sheet). Of the
571.1 million
cash proceeds,
20 million
was withheld as security in escrow for purchaser warranty
claims. As part of the subsequent sale of OTE SpA to
Finmeccanica SpA on March 4, 2003,
4 million
of the funds held in escrow was released to our group.
4 million
was also put into a new escrow account in respect of trade
payables from our group to OTE. Marconi Mobile Holdings SpA
and its subsidiaries conducted Marconi plcs strategic
communications business. The strategic communications business
designs, manufactures and supplies communications and
information systems, primarily for defense and security
applications, including ground, naval, avionic, communications/
command and control systems. The proceeds were received in the
form of cash and in debt assumed by Finmeccanica SpA. The
transaction closed on August 2, 2002. Marconi plc
provided a guarantee for the performance of the obligations of
Marconi (Bruton Street) Limited under the Share Purchase
Agreement. Finmeccanica SpA has notified Marconi (Bruton
Street) Limited and Marconi plc that it believes it has various
claims under this Agreement. The above guarantee was novated
from Marconi plc to Marconi Corporation in connection with
our scheme of arrangement.

Stock Purchase Agreement dated
January 10, 2002 in respect of the sale of Marconi
plcs data systems subsidiaries by Marconi Systems Holdings
Inc., Marconi Corporation and AB Dick Holdings Limited to
DH Holdings Corp., Launchchange Limited and
Kollmorgen S.A.S. and a guarantee dated January 10,
2002 from Marconi plc in favor of DH Holdings Corp.,
Launchchange Limited and Kollmorgen S.A.S.

On January 10, 2002, subsidiaries of Marconi
plc entered into a Stock Purchase Agreement to sell their
interests in Marconi Data Systems Inc. and certain affiliated
entities to subsidiaries of Danaher Corporation plc for a
purchase price of approximately U.S.$400 million. The
companies sold conducted Marconi plcs ink jet
printing business. The transaction closed on February 5,
2002. Marconi plc provided a guarantee for the performance of
the obligations of Marconi Corporation, Marconi Systems
Holdings, Inc. and AB Dick Holdings Limited under the Stock
Purchase Agreement. DH Holdings Corp. has notified

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Marconi Corporation and Marconi plc that it
believes it has various claims under this agreement.
Marconi plc is no longer liable under the guarantee due to
its scheme of arrangement.


Sale and Purchase Agreement dated
December 20, 2001, as restated, for the sale of Marconi
Corporations 50 percent shareholding in General
Domestic Appliances Holdings Limited (GDA) between Merloni
Elettrodomestici S.p.A and Marconi Corporation, for a cash
consideration of
195.5 million.

The transaction, which was subject to regulatory
approval and other closing conditions, closed on March 8,
2002. Prior to completion of the transaction, Marconi plc
received a dividend of £23 million from GDA. This
comprised the annual cash dividend associated with Marconi
plcs stake in GDA, together with a special dividend
relating to the proceeds from the sale by GDA of its subsidiary,
GDA Applied Energy Limited.

Stock Purchase Agreement dated
December 20, 2001 between Marconi Corporation, Marconi
Systems Holdings Inc., DH Holdings Corp. and Launchchange
Limited.

On December 20, 2001 subsidiaries of Marconi
plc entered into a Stock Purchase Agreement to sell their
interests in Marconi Commerce Systems Inc. and Marconi
Commerce Systems Limited to subsidiaries of Danaher
Corporation plc for a purchase price of
U.S.$325 million. The companies being sold conducted our
groups fuel dispensing equipment and retail automation
businesses. The transaction closed on February 1, 2002.
Marconi plc provided a guarantee for the performance of the
obligations of its subsidiaries under the Stock Purchase
Agreement. DH Holdings Corp has notified Marconi
Corporation and Marconi plc that it believes it has various
claims under this agreement. Marconi plc is no longer
liable under this agreement due to its scheme of arrangement.

Asset Purchase Agreement dated
December 17, 2001, as amended, between Marconi Corporation,
Marconi Optical Components Limited and Bookham
Technology plc (Bookham).

On December 17, 2001 Marconi Optical
Components Limited agreed to sell the assets and liabilities of
its optical components business based at Caswell,
Northamptonshire and Chelmsford, Essex, to Bookham in exchange
for 12,891,000 ordinary shares in Bookham, equivalent to 9% of
the issued ordinary share capital of Bookham. Based on the
mid-market closing share price of Bookham on December 14,
2001, Marconi Optical Components Limited received shares then
worth £19,723,230. The transaction closed on
February 1, 2002.

Global Procurement Agreement dated
December 17, 2001 between Marconi Communications Inc. and
Bookham.

On December 17, 2001 Marconi Communications,
Inc. entered into a supply agreement with Bookham pursuant to
which Marconi Communications, Inc. agreed to purchase
£30 million of Bookhams optical components with
the benefit of a guarantee from Marconi Corporation given under
the asset purchase agreement described above.

Block Trade Agreement dated
November 28, 2001 between Marconi Mobile SpA and Salomon
Brothers International Limited under which Marconi
Mobile SpA disposed of 6,163,641 of its 11,083,625 shares
in Lottomatica S.p.A., an Italian registered company, for a
total consideration of approximately
40 million.

These sales formed part of the Marconi
groups program of disposing of certain investments in its
non-Core asset portfolio. Pursuant to the agreement, Marconi
Mobile SpA sold to Salomon Brothers International Limited
an aggregate of 6,163,641 ordinary shares in the share capital
of Lottomatica SpA, a company organized under the laws of
Italy. The purchase price was a net price of
6.52 per share
making a total consideration of
40,186,939.32.
The completion of the sale and purchase of the shares took place
on December 3, 2001. The shares were purchased by Salomon
Brothers International Limited as a block trade subject to the
rules of Consob and the Mercato Telematico
Azionario and additional matters set out in the agreement.
The remaining 4,919,984 shares were sold pursuant to De
Agostinis public offer for Lottomatica shares for a total
cash consideration of approximately
32 million
received on February 4, 2002.

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Sale Agreement relating to the sale by
Marconi Corporation of its remaining shareholding of 1.49% in
Lagardère SCA, a listed French company, to Salomon
Brothers International Limited on September 26, 2001 for
approximately
69 million.

This sale formed part of the Marconis
groups program of disposing of certain investments in the
Marconi groups non-Core asset portfolio.

Asset Sale and Leaseback Agreement dated
September 26, 2001 between Marconi Fleet Management
Limited, Inchcape Vehicle Contracts Limited and IVC Contract
Hire Limited.

On September 26, 2001 Marconi Fleet
Management Limited one of our former wholly-owned subsidiaries
entered into a sale agreement for a substantial part of its
fleet of motor vehicles with Inchcape Vehicle Contracts Limited.
Gross sale proceeds of £28.5 million, were received by
Marconi Fleet Management Limited, which on the same date entered
into a lease agreement in respect of the said vehicles with IVC
Contract Hire Limited, an associated company of Inchcape Vehicle
Contracts Limited. As part of this transaction a deed of
continuing indemnity was entered into dated September 26,
2001 between Marconi Corporation and IVC Contract Hire Limited
under which Marconi Corporation agreed to indemnify IVC Contract
Hire Limited against certain losses payable by Marconi Fleet
Management Limited resulting from or arising out of the
agreements entered into with Marconi Fleet Management on or
after September 26, 2001. This includes amounts due on
termination of all or any of the agreements or acceptance by IVC
Contract Hire Limited of repudiation by Marconi Fleet Management
Limited.

Sale and Purchase Agreement dated
July 12, 2002 between Marconi Corporation and Redwood 2002
Limited in respect of the sale of Marconi Applied Technologies
Limited, Marconi Applied Technologies Inc. and the assets
of Marconi Applied Technologies S.A. to Redwood 2002
Limited for £57 million.

The consideration for the sale to Redwood 2002
Limited, a company owned by 3i and funds associated with 3i,
comprised £50 million in cash and a
£7 million vendor loan note. The sale of Marconi
Applied Technologies Limited and Marconi Applied Technologies
Inc completed on July 12, 2002; the sale of the assets of
Marconi Applied Technologies S.A., which was subject to
French regulatory consent, completed on August 23, 2002.

Stock Purchase Agreement dated July 3,
2001, as amended, between Marconi Corporation, Marconi Systems
Holdings Inc. and Koninklijke Philips Electronics N.V.
(Philips Electronics).

On July 3, 2001 subsidiaries of
Marconi plc entered into a Stock Purchase Agreement with
Koninklijke Philips Electronics N.V. pursuant to which such
subsidiaries sold to Philips Electronics their interests in
Marconi Medical Systems Holdings, Inc. and certain
affiliates for a purchase price of U.S.$1.1 billion. The
subsidiaries being sold conducted Marconi plcs medical
imaging equipment business and its radiological supplies
distribution business. The transaction closed on
October 19, 2001. By an amendment agreement dated
July 15, 2002 the consideration was reduced to
U.S.$837 million. Marconi plc provided a guarantee for
the performance of the obligations of the subsidiaries under the
Stock Purchase Agreement. In connection with the post-closing
adjustments provided for in the Stock Purchase Agreement,
certain of the Marconi groups obligations under the Stock
Purchase Agreement have been terminated and a communications
solutions agreement, under which Philips Electronics was
obligated to make certain purchases from the Marconi group, has
been terminated. The liabilities of Marconi plc under the
guarantee were compromised under its scheme of arrangement.

Financings

Agreement dated August 6, 2002 between
Barclays Bank plc and Marconi Corporation related to the
termination of certain interest rate swap
transactions.

On August 6, 2002, Marconi Corporation and
Barclays Bank plc agreed to terminate certain interest rate
swap transactions with effect from August 7, 2002. As part
of that termination, Barclays Bank plc agreed to lend to Marconi
Corporation approximately U.S.$24.8 million in payment of
the settlement amount related to

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the termination. The loan bears interest at LIBOR
plus 2.25%. With effect from March 25, 2003, the loan is
repayable on demand. Under the terms of its financial
restructuring, the liabilities of Marconi Corporation were
compromised.


Agreement dated August 6, 2002 between
JPMorgan Chase Bank and Marconi Corporation related to the
termination of certain interest rate swap and foreign exchange
transactions.

On August 6, 2002, Marconi Corporation and
JPMorgan Chase Bank agreed to terminate certain interest rate
swap and foreign exchange transactions with effect from
August 7, 2002. As part of that termination, JPMorgan Chase
Bank agreed to lend to Marconi Corporation approximately
U.S.$56.1 million in payment of the settlement amount
related to the termination. The loan bears interest at LIBOR
plus 2.25%. With effect from March 25, 2003 the loan is
repayable on demand. Under the terms of its financial
restructuring, the liabilities of Marconi Corporation were
compromised.

Agreement dated November 4, 2002
between UBS AG (UBS) and Marconi Corporation related to the
payment of interest on certain interest rate swap
transactions.

Pursuant to this agreement Marconi Corporation
paid an amount of U.S.$4,388,542 to UBS, a true-up payment,
being a pro-rata portion, by reference to the period from
May 3, 2002 to October 15, 2002, of the contractual
payment due from Marconi Corporation to UBS under an interest
rate swap in respect of the period from May 3, 2002 to
November 4, 2002. This pro-rata payment was consistent with
the heads of terms.

Following the making of the true-up payment, UBS
unilaterally terminated the interest rate swap, as a result of
which a termination sum of U.S.$30,950,000, became payable by
Marconi Corporation to UBS. With effect from March 25,
2003, each of the unpaid portion of the contractual payment
(U.S.$531,944.11), the unpaid portion, and the termination sum
is payable on demand. The termination sum has accrued interest
from November 4, 2002 at a rate of 2.6525% per annum.

The liabilities of Marconi Corporation in respect
of the unpaid portion and the termination sum were compromised
pursuant to its financial restructuring.

Interim Performance Bond Facility dated
May 10, 2002 between HSBC Bank plc (HSBC), Barclays
Bank PLC (Barclays) and Marconi Bonding Limited (MBL) (as
amended by an Amendment Letter dated October 24, 2002,
under which JPMorgan Chase Bank (JPMorgan) acceded as a new bank
pursuant to the interim bonding facility and as further amended
by an Amendment Letter dated March 28, 2003), Counter
Indemnity Agreement between MBL and each of HSBC and Barclays
dated May 10, 2002, Security Over Cash Agreement between
MBL and each of HSBC and Barclays dated May 10, 2002,
Counter Indemnity Agreement given by MBL in favor of JPMorgan
dated October 29, 2002 and Security Over Cash Agreement
given by MBL in favor of JPMorgan dated October 29,
2002.

In May 2002 an interim bonding facility of
£60 million was provided by HSBC and Barclays under
which MBL could request bonds to be issued by those banks on
behalf of members of the Marconi group. The bonds were required
to be fully cash collateralized and security was required to be
given over all cash deposits under separate agreements between
MBL and each bank. In October 2002 the interim bonding facility
was amended to increase the facility limit to
£150 million and to introduce JPMorgan as a party to
the interim bonding facility.

Temporary Bonding Facility Agreement dated
February 8, 2002 between HSBC Bank plc (HSBC),
Barclays Bank PLC (Barclays) and Marconi Bonding Limited
(MBL) (as amended), Counter Indemnity Agreements between MBL and
each of HSBC and Barclays dated February 8, 2002, and Cash
Collateral Agreements between MBL and each of HSBC and Barclays
dated February 8, 2002.

In February 2002 a temporary bonding facility was
provided by HSBC and Barclays under which MBL could request
bonds to be issued by those banks on behalf of members of our
group. The bonds were required to be fully cash collateralized,
although security was not given over those deposits. If any bond

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issued under the facility is extended, security
must be given over the relevant deposit. The availability period
under the temporary bonding facility expired on March 29,
2002.


Purchase Agreements dated December 17,
2001 as extended on January 14, 2002 between Ancrane, a
former subsidiary of Marconi plc, Morgan Stanley & Co.
Incorporated and Morgan Stanley and Co. International Limited
for the purchase on behalf of Ancrane from various private
vendors of
500,000,000
5.625% bonds due 2005,
1,000,000,000
6.375% bonds due 2010, U.S.$900,000,000 7 3/4 percent
bonds due 2010 and U.S.$900,000,000 8 3/8% bonds due 2030
issued by Marconi Corporation.

Pursuant to these transactions during December
2001 and January 2002, Ancrane purchased in privately negotiated
transactions
67.9 million
in principal amount (13.6%) of the
500,000,000
5.625% bonds due 2005, approximately
256.7 million
in principal amount (25.7%) of the
1,000,000,000
6.375% bonds due 2010, approximately U.S.$131.0 million in
principal amount (14.6%) of the U.S.$900,000,000 7 3/4%
bonds due 2010 and approximately U.S.$130.1 million in
principal amount (14.5%) of the U.S.$900,000,000 8 3/8%
bonds due 2030 issued by Marconi Corporation. Under the terms of
the financial restructuring, the liabilities of Marconi
Corporation were compromised.

Financial Restructuring Related
Agreements

Scheme Implementation Deed dated
March 27, 2003, (SID) between Marconi plc, Marconi
Corporation, Ancrane, E-A Continental Limited, Marconi
Nominees Limited, British Sealed Beams Limited and various other
group companies.

The purpose of the SID was to put in place the
legally binding arrangements which govern the rights and
obligations between inter alia, Marconi plc and
Marconi Corporation in implementing the restructuring. Pursuant
to the SID, Marconi Corporation, Marconi plc,
E-A Continental Limited, Ancrane, Marconi Nominees Limited,
British Sealed Beams Limited and various other group companies
agreed to perform certain obligations and undertook not to do
certain acts including, but not limited to, approving all
shareholder resolutions necessary or desirable to give effect to
our restructuring, assigning or novating certain guarantee
obligations and/or license agreements, providing all reasonable
assistance and information and undertaking all reasonable acts
and deeds to give effect to the assignment of certain
intellectual property, making certain intra-group tax loss and
group relief surrenders and providing certain tax indemnities.
Ancrane also agreed to make a repayment of capital in specie to
Marconi plc of its assets, other than £100. Marconi
Corporation also agreed to procure the issue of a letter of
credit, under our performance bonding facility, in an amount of
£2 million in favor of the Marconi plc scheme
supervisors from time to time for them to draw on in relation to
Marconi plcs ongoing costs. In the event that Marconi
Corporation is unable to procure the issue of such letter of
credit, it has undertaken to provide the sum of
£2 million for the Marconi plc scheme supervisors to
draw on in relation to Marconi plcs ongoing costs on
similar terms to those set out in the scheme implementation deed
and the performance bonding facility agreement in relation to
the letter of credit. Under the terms of the restructuring, the
liabilities of Marconi Corporation were compromised. Please see
Item 7: Major Shareholders and Related Party
Transactions  Related Party Transactions 
Restructuring Arrangements  Scheme Implementation
Deed for further information.

Escrow and Distribution Agreement dated
March 27, 2003 between Marconi plc, Marconi Corporation
plc, Regent Escrow Limited, The Bank of New York, The Law
Debenture Trust Corporation plc, Ancrane, Bondholder
Communications Group and the Supervisors.

The purpose of the Escrow and Distribution
Agreement was to put in place the legally binding arrangements
which govern the holding of the financial restructuring proceeds
by the escrow trustee after it is issued or delivered on the
effective date of each restructuring and the distribution of the
restructuring proceeds to scheme creditors and designated
recipients by the distribution agent. The scheme consideration
was held by the escrow trustee on bare trust and distributed at
the direction of the supervisors and, in the case of designated
recipients, the trustees for the respective bond issues.

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Statement and waiver of intercompany
balances agreement dated on or about March 27, 2003 between
Marconi plc, Marconi Corporation and certain other group
companies.

In order to facilitate the effective
implementation of the financial restructuring, and in particular
to effect a clean up of existing inter-company claims owed to or
by Marconi Corporation and Marconi plc and certain other Marconi
group companies, Marconi Corporation and Marconi plc entered
into a statement and waiver of intercompany balances agreement
with certain other Marconi group companies, listed below.

The following Marconi group companies agreed to
participate in the statement and waiver agreement:

|                                                                                                |  |                                                  |  |                                                            |  |                                           
|----------------------------------------------------------------------------------------------- |  | ------------------------------------------------ |  | ---------------------------------------------------------- |  | ------------------------------------------
|A.B. Dick Holdings Ltd                                                                          |  | AEI Furnaces Pty Ltd                             |  | Albany Partnership Limited                                 |  | Ancrane                                   
|APT Nederlands BV                                                                               |  | APT Telecommuniciones SL                         |  | Arrow Ltd                                                  |  | Associated Automation Ltd                 
|Associated Electrical Industries (Manchester) Ltd                                               |  | Associated Electrical Industries Holdings Ltd    |  | Associated Electrical Industries International
    Limited |  | Associated Electrical Industries Limited  
|Associated Electrical Industries Ltd (Now known
    as Marconi Australia Holdings Pty. Limited) |  | Beijing Marconi Communications Technology Co Ltd |  | Bruton Street Investments Limited                          |  | Bruton Street Overseas Investments Limited
|Bruton Street Partnership                                                                       |  | Clanville Limited                                |  | Combined Electrical Manufacturers Ltd                      |  | Coppenhall Nominees Limited               
|Daymo Ltd                                                                                       |  | EA Continental Limited                           |  | Elliot Automation Continental SA                           |  | Elliott-Automation Holdings Limited       
|FF Chrestian & Co Ltd                                                                           |  | Fore Systems Limitada                            |  | Fore Systems Limited                                       |  | FS Finance Corp                           
|FS Holding Corp                                                                                 |  | GEC (Hong Kong) Limited                          |  | GEC of Pakistan Limited                                    |  | GEC Zambia Limited                        
|GPT (Nederland) BV                                                                              |  | GPT Consumer Products Ltd                        |  | GPT Middle East Limited                                    |  | GPT Payphone Systems Ltd                  
|GPT Reliance Ltd                                                                                |  | GPT Special Project Management Limited           |  | Harman Information Technology Pty Ltd                      |  | Highrose Limited                          
|Krayford Ltd                                                                                    |  | Larnerway Ltd                                    |  | Layana Limited                                             |  | Marconi (Bruton Street) Limited           
|Marconi (DGP1) Limited                                                                          |  | Marconi (DGP2) Limited                           |  | Marconi (Elliott Automation) Limited                       |  | Marconi (Fifteen) Limited                 
|Marconi (Fifty-Nine) Ltd                                                                        |  | Marconi (Fifty-Three) Ltd                        |  | Marconi (Forty-Five) Limited                               |  | Marconi (Forty-Four) Ltd                  
|Marconi (Forty-Three) Limited                                                                   |  | Marconi (Holdings) Limited                       |  | Marconi (NCP) Limited                                      |  | Marconi (Nine) Limited                    
|Marconi (Sixteen) Limited                                                                       |  | Marconi (Sixty-Nine) Limited                     |  | Marconi (Sixty-Two) Ltd                                    |  | Marconi (Thirteen) Limited                
|Marconi (Thirty-One) Limited                                                                    |  | Marconi (Thirty-Two) Limited                     |  | Marconi (TLC) Ltd                                          |  | Marconi (Twenty-Seven) Limited            
|Marconi (WCGL) Unlimited                                                                        |  | Marconi Acquisition Corp                         |  | Marconi Aerospace Unlimited                                |  | Marconi Ansty Limited                     
|Marconi Applied Tecnologies SA                                                                  |  | Marconi Australia Pty Limited                    |  | Marconi Bonding Limited                                    |  | Marconi Capital Limited                   
|Marconi Caswell Developments Limited                                                            |  | Marconi Channel Markets GmbH                     |  | Marconi Columbia SA                                        |  | Marconi Communications (CIS) Limited      
|Marconi Communications AB                                                                       |  | Marconi Communications Africa (Pty) Limited      |  | Marconi Communications Argentina SA                        |  | Marconi Communications Asia Limited       
|Marconi Communications B.V. (Netherlands)                                                       |  | Marconi Communications BVBA                      |  | Marconi Communications Canada Holdings Inc.                |  | Marconi Communications Canada Inc         
|Marconi Communications China Limited                                                            |  | Marconi de Mexico SA de CV                       |  | Marconi Communications do Brasil Ltda                      |  | Federal Inc Marconi Communications        

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|                                                             |  |                                                         |  |                                                               |  |                                                          
|------------------------------------------------------------ |  | ------------------------------------------------------- |  | ------------------------------------------------------------- |  | ---------------------------------------------------------
|Marconi Communications                                       |  | Marconi Communications                                  |  | Marconi Communications                                        |  | Marconi Communications                                   
|Global Networks Limited                                      |  | GmbH (Germany)                                          |  | GmbH (Switzerland)                                            |  | Holdings GmbH (Germany)                                  
|Marconi Communications Holdings Inc.                         |  | Marconi Communications Holdings Limited                 |  | Marconi Communications Inc                                    |  | Marconi Communications International Holdings
    Limited
|Marconi Communications International Investments
    Limited |  | Marconi Communications International Limited            |  | Marconi Communications Investments Limited                    |  | Marconi International Limited                            
|Marconi Communications Limited (Canada)                      |  | Marconi Communications Limited (Ireland)                |  | Marconi Communications Limited (U.K.)                         |  | Marconi Communications North America Inc.                
|Marconi Communications Optical Fibres Limited                |  | Marconi Communications Optical Networks Corp            |  | Marconi Communications Optical Networks Limited
    (Ireland) |  | Marconi Communications Overseas Services Limited         
|Marconi Communications Real Estate GmbH                      |  | Marconi Communications SA (France)                      |  | Marconi Communications SARL                                   |  | Marconi Communications Software Systems
    GmbH & Co KG 
|Marconi Communications Software Systems
    Ver. GmbH        |  | Marconi Communications South Africa Pty Limited         |  | Marconi Communications South East Asia Pte Ltd                |  | Marconi Communications Technology Inc                    
|Marconi Communications Telemulti Limitada                    |  | Marconi Communications SpA                              |  | Marconi Corporation plc                                       |  | Marconi Defense Overseas Limited                         
|Marconi Finance Inc.                                         |  | Marconi Finance plc                                     |  | Marconi Fleet Management Limited                              |  | Marconi G.M. Limited                                     
|Marconi Holdings SpA                                         |  | Marconi Iberia SA                                       |  | Marconi Inc                                                   |  | Marconi India Limited                                    
|Marconi Information Systems Limited                          |  | Marconi Insurance Limited                               |  | Marconi International SpA                                     |  | Marconi Middle East (Saudi Arabia)                       
|Marconi Middle East LLC (Dubai)                              |  | Marconi Mobile Access SpA                               |  | Marconi Mobile Systems Limited                                |  | Marconi New Zealand Limited                              
|Marconi Nominees Limited                                     |  | Marconi Optical Components Limited                      |  | Marconi Photonica Limited                                     |  | Marconi plc                                              
|Marconi Projects Hong Kong Ltd                               |  | Marconi Property Ltd                                    |  | Marconi Software International Inc                            |  | Marconi Software Solutions Limited                       
|Marconi Sud SpA                                              |  | Marconi Telecommunications India Private Ltd            |  | Marconi Venezuela CA                                          |  | MarconiCom Limited                                       
|McMichael Limited                                            |  | Metapath Software International (Australia)
    Pty Ltd |  | Metapath Software International (France) SA                   |  | Metapath Software International (Hong Kong)
    Limited  
|Metapath Software International (India)                      |  | Metapath Software International (U.S) Inc               |  | Metapath Software International AB                            |  | Metapath Software International Brasil Ltda              
|Private Limited Metapath Software
    International Inc.     |  | Metapath Software International Limited                 |  | Metapath Software International Nominees Limited              |  | Metropolitan-Vickers Electrical Co Ltd                   
|Micro Scope Limited                                          |  | MNI Tecnologiase e Sistemas de
    Communicacao SA      |  | Mobile Systems (Holdings) Ltd                                 |  | Mobile Systems (U.K.) Ltd                                
|Mobile Systems Group Ltd                                     |  | Mobile Systems International Holdings Limited           |  | Mobile Systems Services Ltd                                   |  | MSI Cellular Investments (One) Ltd                       
|Netscient Limited                                            |  | Northwood Technologies Inc.                             |  | Northwood Technologies Limited                                |  | Palmaz Ltd                                               
|Photonica Limited                                            |  | Photoniqa Limited                                       |  | Pyford Limited                                                |  | Rainford Group Trustees Ltd                              

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|                                  |  |                                        |  |                                                                                                        |  |                                            
|--------------------------------- |  | -------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | -------------------------------------------
|Rainford Racks Ltd                |  | RELTEC (Coventry) Ltd                  |  | RELTEC Mexico SA de CV (now known as Marconi
    Communications, S.A. de C.V.)                         |  | RELTEC Services (U.K.) Limited             
|Robert Stephenson & Hawthorns Ltd |  | Ronaldi Ltd                            |  | Salplex Ltd                                                                                            |  | SNC Composants & Cie                       
|Styles & Mealing Limited          |  | Systems Management Specialists Inc     |  | TCL Projects Limited                                                                                   |  | Telephone Cables Limited                   
|Tetrel Limited                    |  | The English Electric Company, Limited  |  | The General Electric Company of Singapore Private
    Limited (Now known as Marconi Singapore Pte Ltd) |  | The Kingsway Housing Association Ltd       
|The M-O Valve Co Ltd              |  | The Rotary Engineering Company Limited |  | The Vulcan Foundry Ltd                                                                                 |  | Woods of Colchester Housing Society Limited
|Yeslink Unlimited                 |  | Zipbond Ltd                            |  |                                                                                                        |  |                                            

Please see Item 7: Major Shareholders
and Related Party Transactions  Related Party
Transactions  Restructuring Arrangement 
Statement and Waiver Agreement for further information.

Deed of Novation dated March 26, 2003
between Marconi Corporation, Marconi plc and BAE SYSTEMS plc
(BAE).

Under this deed, all obligations under the MES
transaction were novated from Marconi plc to Marconi
Corporation with effect from May 19, 2003. In addition,
Marconi plc, Marconi Corporation and BAE have agreed that
no amount should be paid by Marconi plc or Marconi
Corporation to BAE in relation to certain claims made by the
parties under the MES transaction and that Marconi Corporation
will reduce any amounts which may be payable to it in the future
by BAE under the MES transaction by U.S.$18,600,000.

Assumption Agreement and Consent dated
March 26, 2003 between Marconi Corporation, Marconi plc and
Lemelson Medical Education and Research Foundation, Limited
Partnership (the Lemelson agreement).

Under this agreement, the Lemelson agreement was
novated from Marconi plc to Marconi Corporation.

Deed of Novation and Amendment dated
March 26, 2003 between Marconi Corporation, Marconi plc and
Finmeccanica SpA (Finmeccanica).

Pursuant to this deed, all obligations of Marconi
plc under the share purchase agreement dated August 2, 2002
between Marconi plc, as guarantor, Marconi (Bruton Street)
Limited, as vendor, and Finmeccanica, as purchaser, were novated
to Marconi Corporation with effect from May 19, 2003.

Sponsors Agreement dated
March 31, 2003 between the Marconi Corporation plc, Marconi
plc, Lazard Brothers & Co. and Morgan Stanley & Co.
Limited.

Under the sponsors agreement, Lazard and
Morgan Stanley agreed to act as joint sponsors for Marconi
Corporation plc in connection with admission of its
ordinary shares to the London Stock Exchange. Marconi
Corporation plc and Marconi plc have given Lazard and
Morgan Stanley certain representations and warranties regarding,
inter alia, the accuracy of information contained in the
restructuring disclosure documentation. Marconi Corporation plc
and Marconi plc also gave certain indemnities in relation to the
financial restructuring and other indemnities on customary terms
against certain liabilities in connection with the accuracy of
information contained in the restructuring documentation and
certain other documents in connection with admission.

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ESOP Escrow Agreement dated
December 13, 2002 between Marconi Corporation, Marconi plc,
HSBC Bank plc and Barclays Bank PLC (Barclays).

The ESOP Escrow Agreement implements the
substantive provisions of the ESOP term sheet concluded on
August 28, 2002 and provided the basis on which two escrow
accounts could be funded and held pending agreement or
determination of Barclays claims, if any, against certain
former operating subsidiaries of Marconi plc in relation to
certain potential liabilities. Which escrow account was
established depended on whether the restructuring was successful
or not. The ESOP Escrow Agreement:



| |   |                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | sets out the terms on which approximately
    £145 million will be held in escrow and creates a
    framework for resolving Barclays entitlement, if any, to
    the balance of such cash;                                                                                                                  
|
| |  | provides for a number of detailed assumptions to
    assist a court with that determination;                                                                                                                                                                                                                 
|
| |  | sets out the terms, if our restructuring had not
    become effective, on which a certain amount of cash would be
    paid into escrow in accordance with the interim security
    arrangements and created a framework for resolving
    Barclays entitlement, if any, to the balance of such cash;
    and
|
| |  | provides for the release of any claims that
    Marconi plc or Barclays may have against each of the former
    operating subsidiaries under certain funding letters entered
    into by the operating subsidiaries.                                                                                         

The terms of the ESOP Escrow Agreement dealing
with the money to be held in escrow have been superseded by the
ESOP settlement agreement referred to below. In other respects
the ESOP Escrow Agreement continues to apply.

ESOP Settlement Agreement dated
March 26, 2003 between Marconi plc, Marconi Corporation,
HSBC Bank plc (HSBC), Barclays, Salomon Brothers International
Limited (SBIL), UBS AG (UBS) and Bedell Cristin Trustees Limited
(BCT).

On March 26, 2003, Marconi Corporation and
Marconi plc reached agreement with the ESOP derivative banks for
a settlement of their ESOP derivative related claims against the
Marconi group. Under the terms of the settlement, Marconi
Corporation paid a total of £35 million to the ESOP
derivative banks in full and final settlement of their
respective ESOP related claims against the Marconi group.

Memorandum of Understanding dated
March 25, 2003 between the Marconi Corporation, Marconi plc
and the United States Pension Benefit Guaranty Corporation
(PBGC).

Marconi Corporation and Marconi plc entered into
a legally binding Memorandum of Understanding with the PBGC
under which the PBGC agreed (a) that it would not take any
action in connection with the financial restructurings of
Marconi Corporation plc and Marconi plc to involuntarily
terminate either of the two tax-qualified defined benefit
pension plans sponsored by Greensboro Associates, Inc., an
indirect wholly owned subsidiary of Marconi Corporation, or the
U.S. pension plans, and (b) that it would withdraw any
contingent claims filed by the PBGC under the Marconi plc
restructuring as of May 19, 2003. Under the Memorandum of
Understanding with the PBGC, (a) Marconi Corporation or the
contributing employers to the U.S. pension plans will make
annual contributions to the U.S. pension plans in an amount
equal to each U.S. pension plans respective minimum
funding requirements under the applicable, United States
statutes, including ERISA, and the U.S. Internal Revenue
Code, or, if greater, the respective U.S. pension
plans normal cost, plus an additional U.S.$9 million
per annum payable in quarterly installments of U.S.$2.25 million
commencing as of June 30, 2003, but only to the extent
deductible, (b) Marconi Corporation will provide a
guarantee to the PBGC of the obligations of its subsidiaries in
the United States with respect to (x) such
subsidiaries respective obligations to make contributions
to the U.S. pension plans as provided in clause (a) of
this sentence and, (y) any liability owing to the
U.S. pension plans or to the PBGC if either or both of the
U.S. pension plans should terminate while such guarantee is
in effect. To the extent that any required annual contributions
in excess of annual normal cost would result in a credit balance
under either of the U.S. pension plans which could
otherwise be used to satisfy minimum funding requirements, the
Memorandum of Understanding with the PBGC significantly limits
such usage.

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The Memorandum of Understanding with the PBGC
provides that if Marconi Corporation intends to sell any of its
business units in the United States to a third-party purchaser
whose debt immediately following the consummation of such
transaction is not then rated investment grade, no proposed
transfer of assets and liabilities of the U.S. pension
plans to a pension plan of the third-party purchaser may be made
without the consent of the PBGC. To the extent that any sale of
a business unit will not include the transfer of the assets and
liabilities of the applicable U.S. pension plan to a
pension plan of the purchaser of such business unit, Marconi
Corporation will cause a portion of the proceeds of such
business unit sale equal to the net shortfall, if any, under the
applicable U.S. pension plan which is attributable to such
business unit to be contributed to the applicable
U.S. pension plan upon completion of such business unit
sale, with the amount to be contributed based on the then
applicable PBGC safe harbor assumptions used for plan
termination purposes, subject to any applicable limitations
under ERISA or the U.S. Internal Revenue Code with respect
to deductibility of such contributions or otherwise. The
Memorandum of Understanding with the PBGC also requires that one
of the U.S. pension plans be fully funded or transferred to
a purchaser of a business unit upon the occurrence of certain
business unit sales.

The Memorandum of Understanding with the PBGC
further provides that Marconi Corporation will consent to
jurisdiction in the United States federal district courts and
will agree as a contractual matter to be jointly and severally
liable with its U.S. subsidiaries which are participating
employers in the U.S. pension plans with respect to its
obligations under the PBGC Memorandum of Understanding.

As part of its obligations under the Memorandum
of Understanding with the PBGC, Marconi Corporation will
provide, or cause its U.S. subsidiaries to provide, certain
specific information relevant to the U.S. pension plans to
the PBGC on a regular basis during the term of the Memorandum of
Understanding.

Marconi Corporations obligation under this
Memorandum of Understanding with the PBGC with respect to any
U.S. pension plan will cease on the earliest to occur of
(a) the date that a U.S. pension plan is terminated in
a standard termination under ERISA, or (b) on May 20,
2008 when either (x) such U.S. pension plan has been
fully funded on a termination basis for two consecutive years
ending on or after the expiration of such five-year period or
(y) Marconi Corporations debt is rated investment
grade. If Marconi Corporation is acquired at any time while the
Memorandum of Understanding with the PBGC remains in effect and
the acquirors debt is rated investment grade immediately
following such sale, the PBGC will agree to review the
acquisition of Marconi Corporation in good faith to determine
whether the need for its Memorandum of Understanding with
Marconi Corporation and Marconi plc still exists and whether
such Memorandum of Understanding may then be terminated.

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EXCHANGE CONTROLS

There are currently no decrees or regulations
under the laws of the United Kingdom restricting the import or
export of capital or affecting the remittance of dividends or
other payments to holders of Marconi plc ordinary shares or
American depositary shares who are non-residents of the United
Kingdom.

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TAXATION

United States Federal Income
Taxation

The following summary describes material
U.S. federal income tax consequences that may be relevant
to the acquisition, ownership and disposition of our ordinary
shares and/or ADRs. This summary addresses only
U.S. federal income tax considerations for holders that
acquire our ordinary shares and/or ADRs as a result of the
transactions described in this document and that will hold our
ordinary shares and/or ADRs as capital assets. This summary does
not purport to be a comprehensive description of all the tax
considerations that may be relevant to a decision to acquire our
ordinary shares and/or ADRs. In particular, this summary does
not address tax considerations applicable to holders that may be
subject to special tax rules including, without limitation, the
following: (a) financial institutions; (b) insurance
companies; (c) dealers or traders in securities or
currencies; (d) tax-exempt entities; (e) persons that
will hold our ordinary shares and/or ADRs as part of a
hedging or conversion transaction or as
a position in a straddle or as part of a
synthetic security or other integrated transaction
for U.S. federal income tax purposes; (f) persons that
have a functional currency other than the
U.S. dollar; (g) persons that own (or are deemed to
own) 5% or more (by voting power) of our share capital;
(h) regulated investment companies; and (i) persons
who hold our ordinary shares and/or ADRs through partnerships or
other pass-through entities. Further, this summary does not
address alternative minimum tax consequences or the indirect
effects on the holders of equity interests in a holder of our
ordinary shares and/or ADRs.

This summary is based on the Internal Revenue
Code of 1986, as amended (the Code), U.S. Treasury
regulations and judicial and administrative interpretations
thereof, and the Convention Between the Government of the United
States of America and the Government of the United Kingdom of
Great Britain and Northern Ireland for the Avoidance of Double
Taxation and the Prevention of Fiscal Evasion with Respect to
Taxes on Income and Capital Gains signed on July 24, 2001,
with an amending protocol signed July 19, 2002, or the new
treaty, replacing a treaty between the United States of America
and the United Kingdom signed on December 31, 1975, or the
old treaty, in each case as in effect and available on the date
of this document. All of the foregoing are subject to change,
which change could apply retroactively and could affect the tax
consequences described below.

Prospective holders should consult their own
tax advisor with respect to the U.S. federal, estate,
state, local, gift and other tax consequences of acquiring,
owning and disposing of our ordinary shares and/or
ADRs.

U.S. Holders should also review the
discussion below under United Kingdom Taxation for
the U.K. tax consequences to a U.S. holder of our ordinary
shares and/or ADRs.

For purposes of this summary a
U.S. holder is a beneficial owner of our
ordinary shares and/or ADRs that is, for U.S. federal
income tax purposes: (a) a citizen or resident of the
United States; (b) a corporation or other entity treated as
a corporation for U.S. tax purposes, created or organized
in or under the laws of the United States or any state thereof,
including the District of Columbia; (c) an estate, the
income of which is subject to U.S. federal income taxation
regardless of its source; or (d) a trust if (i) a
court within the United States is able to exercise primary
supervision over its administration and (ii) one or more
U.S. persons have the authority to control all of the
substantial decisions of such trust. If a partnership holds our
ordinary shares or ADRs, the consequences to a partner will
generally depend upon the status of the partner and upon the
activities of the partnership. A partner of a partnership
holding our ordinary shares or ADRs should consult its tax
advisor. A Non-US holder is a beneficial owner of
our ordinary shares or ADRs that is not a U.S. holder.

The Marconi plc Shares and/or ADRs

The U.S. Treasury Department has expressed
concern that depositaries for depositary receipts, or other
intermediaries between the holders of shares of an issuer and
the issuer, may be taking actions that are inconsistent with the
claiming of U.S. foreign tax credits by U.S. holders
of such receipts or shares.

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Accordingly, the analysis regarding the
availability of a U.S. foreign tax credit for U.K. taxes
and sourcing rules described below could be affected by future
actions taken by the U.S. Treasury Department.


Distributions

Subject to the discussion
 Passive Foreign Investment Company
considerations, the gross amount of any distributions of
cash or property, including any amounts withheld in respect of
any applicable withholding tax and the tax credit amount, as
described below, that are actually or constructively received by
a U.S. holder with respect to our ordinary shares and/or
ADRs will be a dividend includible in gross income of a
U.S. holder as ordinary income to the extent of our current
and accumulated earnings and profits as determined under
U.S. federal income tax principles. Dividends paid on our
ordinary shares and/or ADRs generally will constitute income
from sources outside the United States and will not be eligible
for the dividends received deduction.

A distribution to a U.S. holder in excess of
our current and accumulated earnings and profits will be treated
first as a non-taxable return of capital to the extent of that
U.S. holders adjusted tax basis in our ordinary
shares or ADRs, as the case may be, and any distribution in
excess of such basis will constitute capital gain from the sale
or exchange of property, and will be long-term capital gain
(taxable at a reduced rate for individual holders, trusts or
estates) if our ordinary shares or ADRs, as applicable, were
held for more than one year.

We do not maintain our calculations of our
earnings and profits under U.S. federal income tax
principles. Therefore, a U.S. holder should expect that a
distribution will generally be treated as a dividend even if
that distribution would otherwise be treated as a non-taxable
return of capital or as capital gain under the rules described
above. The amount of any distribution of property other than
cash will be the fair market value of the property on the date
of the distribution.

Under recently enacted U.S. legislation, the
new U.S. tax legislation, certain dividends received by
individual U.S. Holders after December 31, 2002, will
be subject to a maximum income tax rate of 15%. This reduced
income tax rate is only applicable to dividends paid by
qualified corporations and only with respect to
shares held by a qualified U.S. holder (i.e., an
individual) for a minimum holding period (generally,
61 days during the 120-day period beginning 60 days
before the ex-dividend date). We may not be considered a
qualified corporation under the new U.S. tax legislation if
we are characterised as a passive foreign investment company, as
described below under Passive Foreign Investment Company
Considerations. Accordingly, if we are a passive foreign
investment company, dividends paid by us to individual
U.S. holders on shares held for the minimum holding period
would not be eligible for a reduced income tax rate. Under the
new U.S. tax legislation, the reduced tax rate for
qualified dividends is scheduled to expire on December 31,
2008, unless further extended by Congress. Each prospective
holder should consult its own tax advisor regarding the
implications of the new U.S. tax legislation and whether
our shares would be considered an investment in a passive
foreign investment company.

The gross amount of any distribution paid in
foreign currency will be included in the gross income of a
U.S. holder in an amount equal to the U.S. dollar
value of the foreign currency calculated by reference to the
exchange rate in effect on the date received by the
U.S. holder, regardless of whether the foreign currency is
converted into U.S. dollars. If the foreign currency is
converted into U.S. dollars on the date of receipt, a
U.S. holder generally should not be required to recognize
foreign currency gain or loss in respect of the dividend. If the
foreign currency received as a dividend is not converted into
U.S. dollars on the date of receipt, a U.S. holder
will have a basis in the foreign currency equal to its
U.S. dollar value on the date of receipt. Any gain or loss
on a subsequent conversion or other disposition of the foreign
currency will be treated as ordinary income or loss, and will
generally be income or loss from sources within the United
States for foreign tax credit limitation purposes.

A U.S. holder that elects application of the
old treaty, that is a United States resident for the purposes of
the old treaty and that receives a dividend on our ordinary
shares and/or ADRs generally is entitled to receive a payment
from the U.K. Inland Revenue equal to the amount of the tax
credit that a U.K. individual would be eligible to receive with
respect to an identical dividend, the Tax Credit Amount, subject
to a reduction for

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U.K. withholding taxes of up to a maximum of 15%
of the sum of the dividend and tax credit amount, or the U.K.
withholding tax. As of April 6, 1999, the Tax Credit Amount
is equal to one-ninth of the cash dividend paid on our ordinary
shares and/or ADRs and the U.K. Withholding Tax will exactly
equal the Tax Credit Amount. As a result, and because of the
U.K. Withholding Tax, U.S. holders will not receive any net
payment under the old treaty.


If the old treaty applies, a U.S. holder
that receives a dividend on our ordinary shares and/or ADRs may
elect to include the Tax Credit Amount as an additional
distribution by filing an election on IRS Form 8833 with
the U.S. holders U.S. federal income tax return
for the relevant year. If a U.S. Holder makes the election,
the U.S. holder will be subject to U.S. taxation on
the sum of the dividend and the Tax Credit Amount. A
U.S. holder will also, in such a case, be treated as paying
U.K. Withholding Tax equal to the Tax Credit Amount that,
subject to generally applicable limitations, is eligible for
credit against such U.S. Holders U.S. federal
income tax liability or, at the U.S. holders
election, may be deducted in computing taxable income. Foreign
tax credits will not be allowed for withholding taxes imposed in
respect of certain short-term or hedged positions in securities
or in respect of arrangements in which a U.S. holders
expected economic profit, after non-U.S. taxes, is
insubstantial.

The new treaty does not provide for payment of
the Tax Credit Amount. Therefore, if a U.S. holder that
receives a dividend on our ordinary shares and/or ADRs does not
elect to apply the old treaty, the U.S. holder would need
to calculate the foreign tax credit it may be entitled to
receive with respect to any foreign withholding taxes paid on
such dividend under the Code and the accompany Treasury
regulations. See  United Kingdom
Taxation  Taxation of Dividends below for
treatment of withholding taxes with respect to dividends on our
ordinary shares and/or ADRs. Subject to certain conditions and
limitations, foreign country income tax withheld on dividends
may be deducted from taxable income or credited against a
U.S. holders U.S. federal income tax liability.
Foreign tax credits will not be allowed for withholding taxes
imposed in respect of certain short-term or hedged positions in
securities or in respect of arrangements in which a
U.S. holders expected economic profit, after
non-U.S. taxes, is insubstantial.

For purposes of calculating the foreign tax
credit, dividends paid on our ordinary shares and/or ADRs will
be treated as income from sources outside the United States and
will generally constitute passive income or, in the
case of certain U.S. holders, financial services
income. In certain circumstances, a U.S. holder that
(i) has held ordinary shares or ADRs for less than a
specified minimum period during which it is not protected from
risk of loss or (ii) is obligated to make payments related
to the dividends, will not be allowed a foreign tax credit for
U.K. withholding taxes imposed on dividends paid on our ordinary
shares or ADRs, as the case may be. If we are considered a
qualified corporation under the new U.S. tax legislation,
then the amount of the qualified dividend income paid by us to a
U.S. holder that is subject to the reduced dividend income
tax rate and that is taken into account for the purposes of
calculating the U.S. holders U.S. foreign tax
credit limitation must be reduced by the rate differential
portion of such dividend (which, assuming a
U.S. holder in the highest income tax bracket, would
generally require a reduction of the dividend amount by
approximately 57.14%). Each prospective holder should consult
its own tax advisor regarding the implication of the new
U.S. tax legislation on the calculation of
U.S. foreign tax credits.

Subject to the discussion under 
Backup withholding and information reporting, a
Non-U.S. holder generally will not be subject to
U.S. federal income or withholding tax on dividends
received on our ordinary shares and/or ADRs unless that income
is effectively connected with the conduct by that
Non-U.S. holder of a trade or business within the United
States.

However, we do not expect to pay a dividend in
the foreseeable future.

Sale or other disposition of Marconi plc
Shares and/or ADRs

Subject to the discussion
Taxation  Passive Foreign Investment Company
considerations, a U.S. holder will generally
recognize a gain or loss for U.S. federal income tax
purposes upon the sale or exchange of our ordinary shares and/or
ADRs in an amount equal to the difference between the
U.S. dollar value of the amount realized from such sale or
exchange and the U.S. holders tax basis in those
ordinary shares or ADRs, as the case may be. That gain or loss
will be a capital gain or loss and will be long-term

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capital gain (taxable at a reduced rate for
individuals, trusts or estates) if our ordinary shares or ADRs,
as appropriate, were held for more than one year. Any such gain
or loss would generally be treated as from sources within the
United States. The deductibility of capital losses is subject to
significant limitations.


To the extent U.S. holders receive our
ordinary shares and/or ADRs pursuant to our restructuring, any
gain arising from the sale or other disposition of our ordinary
shares and/or ADRs may be characterized as ordinary income to
the extent of any accrued market discount attributable to those
ordinary shares and/or ADRs. Prospective holders should
consult their own tax advisors regarding the applicability of
the market discount rules under the Code to each of their own
individual circumstances and the U.S. federal income tax
consequences relating to the sale or other disposition of our
ordinary shares and/or ADRs with accrued market discount.

A U.S. holder that receives foreign currency
on the sale or other disposition of our ordinary shares and/or
ADRs will realize an amount equal to the U.S. dollar value
of the foreign currency on the date of sale (or in the case of
cash basis and electing accrual basis taxpayers, the
U.S. dollar value of the foreign currency on settlement
date). If a U.S. holder receives foreign currency upon a
sale or exchange of our ordinary shares and/or ADRs, gain or
loss, if any, recognized on the subsequent sale, conversion or
disposition of that foreign currency will be ordinary income or
loss, and will generally be income or loss from sources within
the United States for foreign tax credit limitation purposes.
However, if such foreign currency is converted into
U.S. dollars on the date received by the U.S. holder,
a cash basis or electing accrual U.S. holder should not
recognize any gain or loss on such conversion.

When a U.S. holders basis in the
common shares includes any amount recognized under the passive
foreign investment company rules (described below) and the
U.S. holder recognizes a loss on the transaction with
respect to such amounts that exceeds certain specified
thresholds, the U.S. holder may be required to specifically
disclose certain information with respect to the transaction on
its tax return under recently issued tax disclosure regulations.
U.S. holders should consult their own tax advisors as to
the applicability of these disclosure regulations.

Subject to the discussion under
Taxation  Backup withholding and information
reporting, a Non-US holder generally will not be subject
to U.S. federal income or withholding tax on any gain
realized on the sale or exchange of our ordinary shares and/or
ADRs unless: (a) that gain is effectively connected with
the conduct by that Non-U.S. holder of a trade or business
in the United States, (b) in the case of any gain realized
by an individual Non-U.S. holder, that holder is present in
the United States for 183 days or more in the taxable year
of the sale or exchange and certain other conditions are met, or
(c) the Non-U.S. holder is subject to tax pursuant to
provisions of the Code applicable to certain expatriates.

Redemption of Marconi plc Shares and/or
ADRs

Subject to the discussion
 Passive Foreign Investment Company
considerations, our redemption of our ordinary shares
and/or ADRs will be treated as a sale of our redeemed ordinary
shares or ADRs, as the case may be, by the U.S. holder
(which is taxable as described under Taxation 
Sale or other disposition of Marconi plc Shares and/or
ADRs) or in certain circumstances, as a distribution to
the U.S. holder (which is taxable as described under
Taxation  Distributions).

Passive Foreign Investment Company
considerations

A corporation organized outside the United States
generally will be classified as passive foreign investment
company, or a PFIC, for U.S. federal income tax purposes in
any taxable year in which either: (a) at least 75% of its
gross income is passive income, or (b) on
average at least 50% of the gross value of its assets is
attributable to assets that produce passive income
or are held for the production of passive income. Passive income
for this purpose generally includes dividends, interest,
royalties, rents and gains from commodities and securities
transactions. In determining whether it is a PFIC a foreign
corporation is required to take into account a pro rata portion
of the income and assets of each corporation in which it owns,
directly or indirectly, at least a 25% interest.

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Because we have ceased operations, it is
uncertain whether we will be characterized as a PFIC for
U.S. federal income tax purposes. If we were to receive
passive income, we may be considered a PFIC. Because this is a
factual determination made annually at the end of the taxable
year, there can be no assurance that we will not be considered a
PFIC for any future taxable year. If we were a PFIC in any year,
special, possibly materially adverse, consequences would, as
discussed below, result for U.S. holders.

If we are a PFIC in any year during which a
U.S. holder owns our ordinary shares and/or ADRs the
U.S. holder will be subject to additional taxes on any
excess distributions received from us and any gain realized from
the sale or other disposition of our ordinary shares and/or ADRs
(whether or not we continue to be a PFIC). A U.S. holder
has an excess distribution to the extent that distributions on
our ordinary shares and/or ADRs during a taxable year exceed
125% of the average amount received during the three preceding
taxable years (or, if shorter, the U.S. holders
holding period). To compute the tax on the excess distributions
or any gain, (a) the excess distribution or the gain is
allocated ratably over the U.S. holders holding
period, (b) the amount allocated to the current taxable
year and any year before we became a PFIC is taxed as ordinary
income in the current year, and (c) the amount allocated to
other taxable years is taxed at the highest applicable marginal
rate in effect for each year and an interest charge is imposed
to recover the deemed benefit from the deferred payment of the
tax attributable to each year.

Some of the rules with respect to distributions
and dispositions described above may be avoided if a
U.S. holder makes a valid mark-to-market
election (in which case, subject to certain limitations, the
U.S. holder would essentially be required to take into
account the difference, if any, between the fair market value
and the adjusted tax basis of our ordinary shares or ADRs, as
the case may be, at the end of a taxable year as ordinary income
(or, subject to certain limitations, ordinary loss), in
calculating its income for such year). In addition, gains from
an actual sale or other disposition of our ordinary shares or
ADRs will be treated as ordinary income, and any losses will be
treated as ordinary losses to the extent of any
mark-to-market gains for prior years. A
mark-to-market election is only available to
U.S. holders in any tax year that the PFIC stock is
considered regularly traded on a qualified
exchange within the meaning of applicable
U.S. Treasury regulations. PFIC stock is regularly
traded if, among other requirements, it is traded on at
least 15 days during each calendar quarter. Prospective
holders should consult their own tax advisers as to whether our
ordinary shares and/or ADRs would qualify for the mark-to-market
election and whether such election is advisable.

The foregoing rules with respect to distributions
and dispositions may be avoided if a U.S. holder is
eligible for and timely makes a valid QEF election
(in which case the U.S. holder would be required to include
in income on a current basis its pro rata share of our ordinary
income and net capital gains). In order to be able to make the
QEF election, we would be required to provide a U.S. holder
with certain information. We may decide not to provide the
required information

Each U.S. holder of our ordinary shares
and/or ADRs must make an annual return on IRS Form 8621,
reporting distributions received and gains realized with respect
to each PFIC in which it holds a direct or indirect interest.

When a U.S. holders basis in our
shares includes amount recognized under the PFIC rules and the
U.S. holder recognizes a loss on the transaction with
respect to such amounts that exceeds certain specified
thresholds, the U.S. holder may be required to specifically
disclose certain information with respect to the transaction on
its tax return under recently issued tax disclosure regulations.
U.S. holders should consult their own tax advisors as to
the applicability of these disclosure regulations.

Prospective holders are urged to consult their
own tax advisors regarding whether an investment in our ordinary
shares or ADRs will be treated as an investment in PFIC stock
and the consequences of an investment in a PFIC.

Backup withholding and information
reporting

Backup withholding and information reporting
requirements may apply to certain payments to U.S. holders
of dividends on our ordinary shares and/or ADRs and to the
proceeds of a sale or redemption of

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our ordinary shares or ADRs. We, our agent, a
broker, or any paying agent, as the case may be, may be required
to withhold tax from any payment that is subject to backup
withholding at a maximum rate of 28% of such payment if the
U.S. holder fails (a) to furnish the
U.S. holders taxpayer identification number,
(b) to certify that the U.S. holder is not subject to
backup withholding or (c) to otherwise comply with the
applicable requirements of the backup withholding rules. The
backup withholding rate may be subject to change each year.
Certain U.S. holders, including, among others,
corporations, are not subject to the backup withholding and
information reporting requirements. Non-US holders who hold our
ordinary shares or ADRs through a U.S. broker or agent or
through the U.S. office of a non-US broker or agent may be
required to comply with applicable certification procedures to
establish that they are not U.S. holders in order to avoid
the application of such information reporting requirements and
backup withholding. Backup withholding is not an additional tax.
Any amounts withheld under the backup withholding rules from a
payment to a holder generally may be claimed as a credit against
such holders U.S. federal income tax liability
provided that the required information is furnished timely to
the IRS.


Prospective holders should consult their
own tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining this
exemption.

United Kingdom Taxation

The following generally applies to
U.S. shareholders.

The following summary describes certain U.K. tax
consequences for certain holders of our ordinary shares and/or
ADRs. It applies only to persons who are US
shareholders as that term is defined below. It is intended
to apply only to U.S. shareholders who are the beneficial
owners of our ordinary shares and/or ADRs, and who hold them as
investments. It may not apply to certain classes of holders,
such as dealers in securities.

This summary is based on current U.K. law and
U.K. Inland Revenue practice at the date hereof.

This summary is not intended to be comprehensive,
and prospective holders of our ordinary shares and ADRs are
recommended to consult their professional advisers to determine
their tax position.

US Shareholders

For the purposes of this summary, you will be a
US shareholder if you are:



| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the beneficial owner of the shares or ADRs and of
    any dividends paid with respect to the shares or ADRs;                                                                                                                           
|
| |  | an individual resident of the U.S., a
    U.S. corporation, or a partnership, estate or trust to the
    extent your income is subject to taxation in the U.S. in
    your hands or in the hands of your partners or beneficiaries; and
|
| |  | not also a resident of the U.K. for U.K. tax
    purposes or carrying on a business in the U.K. through a
    permanent establishment.                                                                                                 

UK/US double tax treaty

On July 24, 2001, the governments of the
U.S. and the U.K. agreed the terms of a new double tax
treaty (the new treaty), which was amended by a
protocol agreed on July 19, 2002 and which came into force
on March 31, 2003. The new treaty replaces the previous
double tax treaty agreed between the U.S. and the U.K. (the
old treaty). In general, U.S. shareholders will
be entitled to the benefits of the new treaty, subject to
various limitations. However, the provisions of the old treaty
may still be relevant for some U.S. shareholders. If you
are in any doubt as to whether you are entitled to benefits
under either the new treaty or the old treaty, you should
consult your own tax advisers.

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Taxation of dividends

Under current U.K. taxation legislation, no tax
is required to be withheld at source from cash dividends paid on
our ordinary shares and/or ADRs.

A U.S. shareholder that elects application
of the old treaty, that is a U.S. resident for the purposes
of the old treaty and that receives a dividend on our ordinary
shares and/or ADRs is, in principle, entitled to receive a
payment from the U.K. Inland Revenue equal to the amount of the
tax credit which is usually available to U.K. residents, less a
withholding tax levied on that payment. The tax credit is one
ninth of the amount of the dividend, that is, 10% of the
aggregate of the dividend and the tax credit. However, in
practice, U.S. shareholders will not receive any payment
from the U.K. Inland Revenue in respect of the tax credit
because the old treaty provides for a U.K. withholding tax
greater than the amount of the U.K. tax credit. The withholding
tax, however, is treated as fully satisfied by the amount
withheld from the tax credit.

Under the new treaty, U.S. shareholders will
not be entitled to receive any payment from the U.K. Inland
Revenue in respect of any tax credit on dividends paid on our
ordinary shares and/or ADRs.

Taxation of capital gains

A U.S. shareholder who is not resident, and
in the case of an individual also not ordinarily resident, in
the U.K. for U.K. tax purposes will not be liable for U.K.
taxation on capital gains realized on the disposal of his or her
shares or ADRs unless at the time of the disposal:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the U.S. shareholder carries on a trade,
    profession or vocation in the U.K. through a branch, agency or,
    for companies with accounting periods beginning on or after
    January 1, 2003, permanent establishment; and                          
|
| |  | the shares or ADRs are or have been used, held or
    acquired for the purposes of the trade, profession, vocation,
    branch, agency or, for companies with accounting periods
    beginning on or after January 1, 2003, permanent
    establishment.

A U.S. shareholder who is an individual and
who has ceased to be resident or ordinarily resident for tax
purposes in the U.K. on or after March 17, 1998 and
continues not to be resident or ordinarily resident in the U.K.
for a period of less than five years of assessment and who
disposes of his shares or ADRs during that period will also be
liable on his return to the U.K. to U.K. tax on capital gains,
subject to any available exemption or relief, even though he or
she is not resident or ordinarily resident in the U.K. at the
time of the disposal. There are special rules for individuals
who leave the U.K. part way through a year of assessment.

UK stamp duty and stamp duty reserve tax
(SDRT)

UK stamp duty or SDRT is payable upon the
transfer or issue of shares to, or to a nominee or agent of, a
person whose business is or includes issuing depositary receipts
or providing clearance services. For this purpose, the current
rate of stamp duty and SDRT is 1.5%, rounded up, in the case of
stamp duty, to the nearest £5. The rate is applied, in each
case, to the amount or value of the consideration or, in some
circumstances, to the value of the shares.

Provided that the instrument of transfer is not
executed in the U.K. and remains at all subsequent times outside
the U.K., no U.K. stamp duty will be payable on the transfer of
ADRs. An agreement to transfer ADRs will not give rise to a
liability to SDRT.

The purchase of shares, as opposed to ADRs, may
give rise to a charge to U.K. stamp duty or SDRT at the rate of
0.5%, rounded up, in the case of stamp duty, to the nearest
£5. The rate is applied to the price payable for the shares
at the time of the transfer or agreement to transfer. SDRT is
generally the liability of the purchaser who usually pays U.K.
stamp duty.

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DOCUMENTS ON DISPLAY

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.




Item 11: Quantitative and
Qualitative Disclosures about Market Risk

Please see Item 5: Operating and
Financial Review and Prospects  Risk Management.




Item 12: Description of
Securities other than Equity Securities

This item is not applicable.

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PART II






Item 13: Defaults, Dividend
Arrearages and Delinquencies


In connection with the financial restructuring of
Marconi plc and Marconi Corporation, Marconi Corporation did not
repay amounts that came due under its banking facility on
March 25, 2003 and Marconi plc did not pay on its guarantee
of such facility. On March 23, 2003, Marconi Corporation
also failed to make interest payments due on its 7 3/4%
Bonds due 2010 and its 8 3/8% Bonds due 2030, and on
March 31, 2003, Marconi Corporation failed to make interest
payments due on its 5.625% Bonds due 2005 and its 6.375% Bonds
due 2030. Marconi plc also did not pay on its guarantees of
those bonds. These defaults were not cured but the debts,
including accrued but unpaid interest, were retired pursuant to
the Marconi plc and Marconi Corporation schemes of arrangement,
which became effective on May 19, 2003. Accordingly, no
amounts remained in arrears.




Item 14: Material Modifications
to the Rights of Security Holders and Use of
Proceeds

Pursuant to the Marconi plc and Marconi
Corporation schemes of arrangement, our creditors, including the
holder of Marconi Corporations 7 3/4% Bonds due 2010
and our 8 3/8% Bonds due 2030 that were guaranteed by
Marconi plc, received a mixture of cash, new senior guaranteed
notes and new junior guaranteed notes issued by Marconi
Corporation and new ordinary shares in Marconi Corporation.
Please see Item 4: Information on the
Company  History and Developments of the
Company  History  Restructuring for
additional information with respect to our financial
restructuring. Further detail with respect to these schemes of
arrangement can be found in the scheme document that Marconi
Corporation plc furnished under cover of Form 6-K on
March 31, 2003, which is incorporated herein by reference.




Item 15: Disclosure Controls and
Procedures

Within the 90 days prior to the filing date
of this annual report, we performed an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness and design and operation of our
disclosure controls and procedures. Based upon that evaluation,
which will be used as input for further improvement actions, the
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective (as
defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934). Since the date of the evaluation, there have been no
significant changes in our internal controls or in other factors
that could significantly affect the controls. Therefore, no
corrective actions were taken.




Item 16A: Reserved






Item 16B: Reserved



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Item 16C: Principal Accountant
Fees and Services

The following table provides information on fees
paid to our accountants and auditors for certain services in the
past two fiscal years.

|                         |  |                   |      |      |  |  |      | 
|------------------------ |  | ----------------- | ---- | ---- |  |  | ---- | 
|                         |  |                  
|                         |  | Fiscal year ended
|                         |  | March 31,        
|(£ millions)             |  | 2003              |      | 2002
|                         |  |                  
|                         |  |                  
|Deloitte & Touche        |  |                   |      |      |  |  |      | 
|Audit                    |  |                   | 1    |      |  |  | 2    | 
|Audit-related            |  |                   | 13   |      |  |  | 4    | 
|Tax and other compliance |  |                   | 2    |      |  |  | 2    | 
|Business Support         |  |                   | 1    |      |  |  | 3    | 
|                         |  |                  
|Total Deloitte & Touche  |  |                   | 17   |      |  |  | 11   | 
|Arthur Andersen          |  |                   |      |      |  |  |      | 
|Internal Audit           |  |                   | 1.6  |      |  |  | 12.5 | 
|                         |  |                  
|TOTAL FEES               |  |                   | 18.6 |      |  |  | 23.5 | 
|                         |  |                  

Audit services of £1 million are the
costs of the annual audit. Audit-related services include
£7.2 million of costs incurred during the financial
restructuring process, including the reporting accountants
work in relation to the filing of the prospectus and scheme
documents required by U.K. law in connection with the Marconi
plc and Marconi Corporation schemes of arrangement and listing
of Marconi Corporation shares on the London Stock Exchange,
£4.1 million of costs in relation to the disposal of
the Marconi Mobile Holdings S.p.A. business, and
£1.2 million in relation to quarterly and half year
review and audit procedures. Tax and other compliance services
principally relates to tax compliance work performed. Business
support services principally relate to accounting advisory
services in relation to the application of U.K. and
U.S. GAAP.

106



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##### Table of Contents






PART III




Item 17:Financial
Statements

Financial statements are being furnished pursuant
to the instructions of Item 18 of Form 20-F.




Item 18:Financial
Statements

Marconi Corporation plc is furnishing
consolidated financial statements beginning at page F-1.

Item 19:Exhibits

| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ------ |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.1*** |  |  | Memorandum and Articles of Association of
    Marconi plc                                                                                                                                                                                                                                                                                                                                                                          
| | 2.1   |  |  | Specimen ordinary share certificate of
    Marconi plc                                                                                                                                                                                                                                                                                                                                                                             
| | 2.2   |  |  | Deposit Agreement dated as of September 6,
    2000 Between Marconi plc and The Bank of
    New York, as depositary, and Owners and beneficial holders
    of American Depositary Receipts                                                                                                                                                                                                                                         
| | 2.3   |  |  | American Depositary Receipt of Marconi plc
    (included in Exhibit 2.2)                                                                                                                                                                                                                                                                                                                                                           
| | 2.4  |  |  | Marconi Corporation and Marconi plcs
    Proposals in Relation to Schemes of Arrangement under
    Section 425 of the UK Companies Act 1985, dated
    March 31, 2003 between Marconi Corporation,
    Marconi plc and their respective scheme Creditors.                                                                                                                                                                         
| | 4.01*  |  |  | ESOP Escrow Agreement dated December 13,
    2002 between Marconi Corporation, Marconi plc,
    HSBC Bank plc and Barclays Bank PLC                                                                                                                                                                                                                                                                                                
| | 4.02*  |  |  | Settlement Deed dated December 19, 2002
    between RT Group Telecom Services Limited, RT Group
    plc, Marconi Corporation, Ultramast Limited, James Smith
    and Nicholas Dargan                                                                                                                                                                                                                                               
| | 4.03** |  |  | Share Purchase Agreement dated August 2,
    2002 between Marconi (Bruton Street) Limited, Marconi plc
    and Finmeccanica SpA                                                                                                                                                                                                                                                                                                    
| | 4.04** |  |  | Stock Purchase Agreement dated January 10,
    2002 in respect of the sale of Marconi plcs data
    systems subsidiaries by Marconi Systems Holdings Inc., Marconi
    Corporation and AB Dick Holdings Limited to
    DH Holdings Corp., Launchchange Limited and
    Kollmorgen S.A.S. and a guarantee dated January 10,
    2002 from Marconi plc in favor of DH Holdings Corp.,
    Launchchange Limited and Kollmorgen S.A.S.
| | 4.05** |  |  | Sale and Purchase Agreement dated
    December 20, 2001, as Restated, for the sale of Marconi
    Corporations 50% Shareholding in General Domestic
    Appliances Holdings Limited Between Merloni Elettrodomestici SpA
    and Marconi Corporation, for a cash consideration of
    195.5 million                                                                                                                              
| | 4.06** |  |  | Stock Purchase Agreement dated December 20,
    2001 between Marconi Corporation, Marconi Systems Holdings Inc.,
    DH Holdings Corp. and Launchchange Limited                                                                                                                                                                                                                                                                    
| | 4.07** |  |  | Asset Purchase Agreement dated December 17,
    2001, as Amended, between Marconi Corporation, Marconi Optical
    Components Limited and Bookham Technology plc                                                                                                                                                                                                                                                                   
| | 4.08** |  |  | Global Procurement Agreement dated
    December 17, 2001 between Marconi Communications Inc. and
    Bookham Technology plc                                                                                                                                                                                                                                                                                                        
| | 4.09*  |  |  | Block Trade Agreement dated November 28,
    2001 between Marconi Mobile SpA and Salomon Brothers
    International Limited under which Marconi Mobile SpA disposed of
    6,163,641 of its 11,083,625 shares in Lottomatica SpA, an
    Italian Registered company, for a total consideration of
    approximately
    40 million                                                                                                
| | 4.10** |  |  | Sale Agreement relating to the sale by Marconi
    Corporation of its remaining shareholding of 1.49% in
    Lagardère SCA, a listed French company, to Salomon
    Brothers International Limited on September 26, 2001 for
    approximately
    69 million                                                                                                                                                                     
| | 4.11** |  |  | Asset Sale and Leaseback Agreement dated
    September 26, 2001 Between Marconi Fleet Management
    Limited, Inchcape Vehicle Contracts Limited and
    IVC Contract Hire Limited                                                                                                                                                                                                                                                 

107



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| |         |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ------- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.12**  |  |  | Sale and Purchase Agreement dated July 12,
    2002 between Marconi Corporation and Redwood 2002 Limited
    in respect of the sale of Marconi Applied Technologies Limited,
    Marconi Applied Technologies Inc. and the assets of Marconi
    Applied Technologies S.A. to Redwood 2002 Limited for
    £57 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 4.13*** |  |  | Stock Purchase Agreement dated July 3, 2001,
    as amended, between Marconi Corporation, Marconi Systems
    Holdings Inc. and Koninklijke Philips Electronics N.V.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 4.14**  |  |  | Agreement dated August 6, 2002 between
    Barclays Bank PLC and Marconi Corporation related to the
    termination of certain Interest rate swap transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 4.15**  |  |  | Agreement dated August 6, 2002 between
    JPMorgan Chase Bank and Marconi Corporation related to the
    termination of Certain interest rate swap and foreign exchange
    transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4.16*   |  |  | Agreement dated November 4, 2002 between
    UBS AG and Marconi Corporation related to the payment of
    interest on certain interest rate swap transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.17*   |  |  | Interim Performance Bond Facility Agreement dated
    May 10, 2002 between HSBC Bank plc (HSBC), Barclays
    Bank PLC (Barclays) and Marconi Bonding Limited (MBL) (as
    amended by an Amendment Letter dated October 24, 2002,
    under which JPMorgan Chase Bank (JPMorgan) acceded as a new bank
    Pursuant to the interim bonding facility and as further Amended
    by an Amendment Letter dated March 28, 2003), Counter
    Indemnity Agreement between MBL and each of HSBC and Barclays
    dated May 10, 2002, Security Over Cash Agreement Between
    MBL and each of HSBC and Barclays dated May 10, 2002,
    Counter Indemnity Agreement given by MBL in favor of JPMorgan
    dated October 29, 2002 and Security Over Cash Agreement
    given by MBL in favor of JPMorgan dated October 29, 2002
| | 4.18*   |  |  | Temporary Bonding Facility Agreement dated
    February 8, 2002 between HSBC Bank plc (HSBC), Barclays
    Bank PLC (Barclays) and Marconi Bonding Limited (MBL) (as
    amended), Counter Indemnity Agreements between MBL and each of
    HSBC and Barclays dated February 8, 2002, and Cash
    Collateral Agreements between MBL and each of HSBC and Barclays
    dated February 8, 2002                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4.19**  |  |  | Purchase Agreement dated December 17, 2001
    as extended on January 14, 2002 between Ancrane, a
    subsidiary of Marconi plc, Morgan Stanley & Co.
    Incorporated and Morgan Stanley and Co. International Limited
    for the purchase on behalf of Ancrane from various private
    vendors of
    500,000,000
    5.625% Bonds due 2005,
    1,000,000,000
    6.375% bonds due 2010, U.S.$900,000,000 7 3/4% bonds due
    2010 and U.S.$900,000,000 8 3/8% bonds due 2030 issued by
    Marconi Corporation                                                                                                                                                                                                                                                                                                  
| | 4.20*   |  |  | Scheme Implementation Deed dated March 27,
    2003, between Marconi plc, Marconi Corporation, Ancrane,
    E A Continental Limited, Marconi Nominees Limited,
    British Sealed Beams Limited and various other group companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 4.21*   |  |  | Escrow and Distribution Agreement dated
    March 27, 2003 between Marconi plc, Marconi
    Corporation plc, Regent Escrow Limited, The Bank of
    New York, The Law Debenture Trust Corporation plc,
    Ancrane, Bondholder Communications Group and the Supervisors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 4.22*   |  |  | Statement and waiver of intercompany balances
    agreement Dated on or about March 27, 2003 between Marconi
    plc, Marconi Corporation and certain other group companies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 4.23*   |  |  | Deed of Novation dated March 26, 2003
    between Marconi Corporation, Marconi plc and BAE
    SYSTEMS plc                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 4.24*   |  |  | Assumption Agreement and Consent dated
    March 26, 2003 between Marconi Corporation,
    Marconi plc and Lemelson Medical Education and Research
    Foundation, Limited Partnership                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 4.25*   |  |  | Deed of Novation and Amendment dated
    March 26, 2003 between Marconi Corporation,
    Marconi plc and Finmeccanica SpA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 4.26*   |  |  | Sponsors Agreement dated March 31,
    2003 between Marconi Corporation plc, Marconi plc, Lazard
    Brothers & Co. and Morgan Stanley & Co. Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

108



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| |       |  |  |                                                                                                                                                                                                                     
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4.27* |  |  | ESOP Settlement Agreement dated March 26,
    2003 between Marconi plc, Marconi Corporation,
    HSBC Bank plc, Barclays, Salomon Brothers International
    Limited, UBS AG and Bedell Cristin Trustees Limited    
| | 4.28* |  |  | Memorandum of Understanding dated March 25,
    2003 between the Marconi Corporation, Marconi plc and the
    United States Pension Benefit Guaranty Corporation                                                    
| | 6.1*  |  |  | Computation of Earnings Per Share of
    Marconi plc (incorporated by reference to Note 19 of
    the Notes to the Consolidated Financial Statements included in
    this annual Report)                            
| | 8.1*  |  |  | List of principal subsidiaries and other
    associated Companies of Marconi plc (incorporated by
    Reference to Note 22 of the Notes to the Consolidated
    Financial Statements included in this Annual Report)
| | 12.1* |  |  | Certification required by Rule 13a-14(a) or
    Rule 15d-14(a), as adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                           
| | 12.2* |  |  | Certification required by Rule 13a-14(a) or
    Rule 15d-14(a), as adopted Pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                           
| | 13.1* |  |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted Pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.                                                                                     



| |     |                                                                                                                                         
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------
| | *   | Filed with this annual report.                                                                                                          
|
| | **  | Incorporated by reference to the Annual Report on
    Form 20-F (File No. 0-30294) filed with the SEC on
    September 30, 2002.        
|
| | *** | Incorporated by reference to the Annual Report on
    Form 20-F (File No. 0-30294) filed with the SEC on
    September 28, 2001.        
|
| |    | Incorporated by reference to the Registration
    Statement on Form 20-F (File No. 0-30924) filed with
    the SEC on September 5, 2000.
|
| |   | Incorporated by reference to the Report under
    cover of Form 6-K (File No. 0-30924) furnished to the
    SEC on March 31, 2003.      

109



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##### Table of Contents






SIGNATURES

The registrant hereby certifies that it meets all
the requirements for filing on Form 20-F and that it has
duly caused and authorized the undersigned to sign this annual
report on its behalf.



| |            
| | -----------
| | MARCONI PLC



| |     |              
| | --- | -------------
| | By: | /s/ K D SMITH

| |                          
| | -------------------------
| |                          
| | Name: Kevin David Smith  
| | Title:  Company Secretary
| | Date:  September 25, 2003

110



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

Marconi plc and subsidiaries

Consolidated financial statements as of
March 31, 2003 and 2002 and

for the three years ended March 31,
2003


|                                                                 |  |      |     | 
|---------------------------------------------------------------- |  | ---- | --- | 
|                                                                 |  | Page
|                                                                 |  |     
|Independent auditors report                                     |  |      | F-2 | 
|Consolidated balance sheets                                      |  |      | F-3 | 
|Consolidated statements of operations                            |  |      | F-4 | 
|Consolidated statements of cash flows                            |  |      | F-5 | 
|Consolidated statements of other comprehensive
    (loss)/income |  |      | F-7 | 
|Consolidated statements of shareholders
    (deficit)/equity    |  |      | F-8 | 
|Notes to consolidated financial statements                       |  |      | F-9 | 

F-1



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the board of directors and shareholders of
Marconi plc:

We have audited the accompanying consolidated
balance sheets of Marconi plc and its subsidiaries and joint
ventures (together the Company) as of March 31,
2003 and 2002 and the related consolidated statements of
operations, cash flows, other comprehensive (loss)/income, and
shareholders (deficit)/equity for each of the three fiscal
years in the period ended March 31, 2003 (expressed in
pounds sterling). These consolidated financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, such consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of the Company as of
March 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three fiscal
years in the period ended March 31, 2003 in conformity with
accounting principles generally accepted in the United States of
America.

As stated in note 2, Summary of significant
accounting policies, effective April 1, 2002, the Company
adopted Statement of Financial Accounting Standard No. 142,
Goodwill and Other Intangible Assets.

Our audits also comprehended the translation of
certain pounds sterling amounts into U.S. Dollars and, in
our opinion, such translation has been made in conformity with
the basis described in note 2. Such U.S. Dollar
amounts are presented solely for the convenience of readers in
the United States of America.

/s/ Deloitte & Touche LLP




Deloitte & Touche LLP

Birmingham, England


25 September, 2003


F-2



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##### Table of Contents



Marconi plc and subsidiaries

CONSOLIDATED BALANCE SHEETS

|                                                   |                                                                                     |           |        |        |   |      |        |        |   |  |        |        |  
|-------------------------------------------------- | ----------------------------------------------------------------------------------- | --------- | ------ | ------ | - | ---- | ------ | ------ | - |  | ------ | ------ | -
|                                                   |                                                                                     |          
|                                                   |                                                                                     | March 31,
|                                                   |                                                                                     | 2003      |        |       
|(in millions, except share data)                   |                                                                                     | U.S.$     |        | 2003   |   | 2002
|                                                   |                                                                                     |           |        | £      |   | £   
|                                                   |                                                                                     |          
|                                                   |                                                                                     |          
|ASSETS                                             |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|Current assets                                     |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|                                                   | Cash and cash equivalents                                                           |           |        | 308    |   |      |        | 195    |   |  |        | 1,243  |  
|                                                   | Restricted cash                                                                     |           |        | 1,522  |   |      |        | 964    |   |  |        | 272    |  
|                                                   | Investment in securities                                                            |           |        | 25     |   |      |        | 16     |   |  |        | 53     |  
|                                                   | Accounts receivable, net                                                            |           |        | 730    |   |      |        | 462    |   |  |        | 746    |  
|                                                   | Inventories, net                                                                    |           |        | 369    |   |      |        | 234    |   |  |        | 530    |  
|                                                   | Prepaid expenses and other current assets                                           |           |        | 199    |   |      |        | 126    |   |  |        | 183    |  
|                                                   | Net assets of discontinued operations                                               |           |        |       |   |      |        |       |   |  |        | 325    |  
|                                                   |                                                                                     |          
|Total current assets                               |                                                                                     |           | 3,153  |        |   |      | 1,997  |        |   |  | 3,352  |       
|Property, plant and equipment, net                 |                                                                                     |           | 415    |        |   |      | 263    |        |   |  | 478    |       
|Investments in affiliates                          |                                                                                     |           | 28     |        |   |      | 18     |        |   |  | 116    |       
|Goodwill                                           |                                                                                     |           | 1,038  |        |   |      | 657    |        |   |  | 679    |       
|Intangibles, net                                   |                                                                                     |           | 160    |        |   |      | 101    |        |   |  | 145    |       
|Other non-current assets                           |                                                                                     |           | 118    |        |   |      | 75     |        |   |  | 155    |       
|                                                   |                                                                                     |          
|TOTAL ASSETS                                       |                                                                                     |           | 4,912  |        |   |      | 3,111  |        |   |  | 4,925  |       
|                                                   |                                                                                     |          
|LIABILITIES AND SHAREHOLDERS
    (DEFICIT)/EQUITY |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|Current liabilities                                |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|                                                   | Short-term debt                                                                     |           |        | 3,466  |   |      |        | 2,195  |   |  |        | 2,338  |  
|                                                   | Current maturities of long-term debt                                                |           |        | 2,852  |   |      |        | 1,806  |   |  |        | 41     |  
|                                                   | Accounts payable                                                                    |           |        | 257    |   |      |        | 163    |   |  |        | 326    |  
|                                                   | Accrued expenses and other current liabilities                                      |           |        | 1,655  |   |      |        | 1,048  |   |  |        | 1,568  |  
|                                                   | Net liabilities of discontinued operations                                          |           |        | 19     |   |      |        | 12     |   |  |        |       |  
|                                                   |                                                                                     |          
|Total current liabilities                          |                                                                                     |           | 8,249  |        |   |      | 5,224  |        |   |  | 4,273  |       
|Long-term debt                                     |                                                                                     |           | 47     |        |   |      | 30     |        |   |  | 1,819  |       
|Deferred income taxes                              |                                                                                     |           | 8      |        |   |      | 5      |        |   |  | 5      |       
|Other liabilities                                  |                                                                                     |           | 555    |        |   |      | 352    |        |   |  | 321    |       
|                                                   |                                                                                     |          
|Total liabilities                                  |                                                                                     |           | 8,859  |        |   |      | 5,611  |        |   |  | 6,418  |       
|Commitments and contingencies (Note 10)            |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|Minority interests                                 |                                                                                     |           | 5      |        |   |      | 3      |        |   |  | 9      |       
|Shareholders (deficit)/equity                     |                                                                                     |           |        |        |   |      |        |        |   |  |        |       
|                                                   | Ordinary shares, £0.05 par value;                                                   |           |        |        |   |      |        |        |   |  |        |        |  
|                                                   | Authorized: 6,000,000,000 shares in 2003 and 2002;                                  |           |        |        |   |      |        |        |   |  |        |        |  
|                                                   | Issued and outstanding: 2,793,011,951 and
    2,792,638,820 shares in 2003 and 2002 |           |        | 221    |   |      |        | 140    |   |  |        | 140    |  
|                                                   | Additional paid-in capital                                                          |           |        | 1,705  |   |      |        | 1,080  |   |  |        | 1,063  |  
|                                                   | Accumulated deficit                                                                 |           |        | (5,433 | ) |      |        | (3,441 | ) |  |        | (2,634 | )
|                                                   | Accumulated other comprehensive loss                                                |           |        | (445   | ) |      |        | (282   | ) |  |        | (71    | )
|                                                   |                                                                                     |          
|Total shareholders deficit                        |                                                                                     |           | (3,952 | )      |   |      | (2,503 | )      |   |  | (1,502 | )     
|                                                   |                                                                                     |          
|TOTAL LIABILITIES AND SHAREHOLDERS
    DEFICIT    |                                                                                     |           | 4,912  |        |   |      | 3,111  |        |   |  | 4,925  |       
|                                                   |                                                                                     |          

See notes to consolidated financial statements.

F-3



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##### Table of Contents



Marconi plc and subsidiaries

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                                                                                                        |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |       |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------- | ------ | ----- | - | ---- | ----- | ----- | - |  | ------ | ----- | - |  | ----- | ----- | -
|                                                                                                                                                                        |                                                                                             |                            
|                                                                                                                                                                        |                                                                                             | Fiscal year ended March 31,
|                                                                                                                                                                        |                                                                                             | 2003                        |        |      
|                                                                                                                                                                        |                                                                                             | U.S.$                       |        | 2003  |   | 2002 |       | 2001 
|(in millions, except share data)                                                                                                                                        |                                                                                             |                             |        | £     |   | £    |       | £    
|                                                                                                                                                                        |                                                                                             |                            
|                                                                                                                                                                        |                                                                                             |                            
|Revenue:                                                                                                                                                                |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | Network equipment                                                                           |                             |        | 1,786 |   |      |       | 1,131 |   |  |        | 1,812 |   |  |       | 3,268 |  
|                                                                                                                                                                        | Network services                                                                            |                             |        | 1,173 |   |      |       | 743   |   |  |        | 969   |   |  |       | 1,016 |  
|                                                                                                                                                                        | Other                                                                                       |                             |        | 35    |   |      |       | 22    |   |  |        | 465   |   |  |       | 637   |  
|                                                                                                                                                                        |                                                                                             |                            
|                                                                                                                                                                        |                                                                                             |                             | 2,994  |       |   |      | 1,896 |       |   |  | 3,246  |       |   |  | 4,921 |      
|Direct costs                                                                                                                                                            |                                                                                             |                             | 2,403  |       |   |      | 1,522 |       |   |  | 3,297  |       |   |  | 3,034 |      
|                                                                                                                                                                        |                                                                                             |                            
|                                                                                                                                                                        | Gross margin                                                                                |                             |        | 591   |   |      |       | 374   |   |  |        | (51   | ) |  |       | 1,887 |  
|Operating expenses:                                                                                                                                                     |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | Selling, general and administrative                                                         |                             |        | 562   |   |      |       | 356   |   |  |        | 836   |   |  |       | 783   |  
|                                                                                                                                                                        | Research and development                                                                    |                             |        | 458   |   |      |       | 290   |   |  |        | 525   |   |  |       | 506   |  
|                                                                                                                                                                        | Amortization of goodwill and intangibles                                                    |                             |        | 70    |   |      |       | 44    |   |  |        | 436   |   |  |       | 647   |  
|                                                                                                                                                                        | Purchased in-process research and development                                               |                             |        |      |   |      |       |      |   |  |        |      |   |  |       | 32    |  
|                                                                                                                                                                        | Business restructuring charges                                                              |                             |        | 363   |   |      |       | 230   |   |  |        | 396   |   |  |       |      |  
|                                                                                                                                                                        | Impairment of long-lived assets                                                             |                             |        | 109   |   |      |       | 69    |   |  |        | 3,968 |   |  |       |      |  
|                                                                                                                                                                        | (Gain)/loss on sale of businesses, net                                                      |                             |        | (8    | ) |      |       | (5    | ) |  |        | 64    |   |  |       | (45   | )
|                                                                                                                                                                        | Other (income)/expenses                                                                     |                             |        | (3    | ) |      |       | (2    | ) |  |        | 116   |   |  |       | 16    |  
|                                                                                                                                                                        |                                                                                             |                            
|Total operating expenses                                                                                                                                                |                                                                                             |                             | 1,551  |       |   |      | 982   |       |   |  | 6,341  |       |   |  | 1,939 |      
|                                                                                                                                                                        |                                                                                             |                            
|Operating loss                                                                                                                                                          |                                                                                             |                             | (960   | )     |   |      | (608  | )     |   |  | (6,392 | )     |   |  | (52   | )    
|Other income/(expense):                                                                                                                                                 |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | (Loss)/gain on sale of investments, net                                                     |                             |        | (8    | ) |      |       | (5    | ) |  |        | 89    |   |  |       | 461   |  
|                                                                                                                                                                        | Impairment of investments                                                                   |                             |        | (63   | ) |      |       | (40   | ) |  |        |      |   |  |       |      |  
|                                                                                                                                                                        | Other income                                                                                |                             |        | 54    |   |      |       | 34    |   |  |        |      |   |  |       |      |  
|                                                                                                                                                                        | Interest income                                                                             |                             |        | 71    |   |      |       | 45    |   |  |        | 40    |   |  |       | 44    |  
|                                                                                                                                                                        | Interest expense                                                                            |                             |        | (519  | ) |      |       | (329  | ) |  |        | (272  | ) |  |       | (195  | )
|                                                                                                                                                                        |                                                                                             |                            
|(Loss)/income from continuing operations before
    income taxes, minority interests, cumulative effects of changes
    in accounting principles and extraordinary gain |                                                                                             |                             | (1,425 | )     |   |      | (903  | )     |   |  | (6,535 | )     |   |  | 258   |      
|                                                                                                                                                                        | Income tax benefit/(provision)                                                              |                             |        | 330   |   |      |       | 209   |   |  |        | 471   |   |  |       | (17   | )
|                                                                                                                                                                        | Equity in net loss of affiliates                                                            |                             |        | (98   | ) |      |       | (62   | ) |  |        | (196  | ) |  |       | (137  | )
|                                                                                                                                                                        | Minority interests                                                                          |                             |        |      |   |      |       |      |   |  |        |      |   |  |       | (3    | )
|                                                                                                                                                                        |                                                                                             |                            
|(Loss)/income from continuing operations, before
    cumulative effects of changes in accounting principles and
    extraordinary gain                                  |                                                                                             |                             | (1,193 | )     |   |      | (756  | )     |   |  | (6,260 | )     |   |  | 101   |      
|Discontinued operations:                                                                                                                                                |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | (Loss)/income from discontinued operations, net
    of tax of £2 (2002, £36, and 2001, £57) |                             |        | (117  | ) |      |       | (74   | ) |  |        | (64   | ) |  |       | 59    |  
|                                                                                                                                                                        | Gain on sale of discontinued operations, net of
    tax of £nil                             |                             |        | 36    |   |      |       | 23    |   |  |        | 248   |   |  |       | 20    |  
|                                                                                                                                                                        | Extraordinary gain, net of tax of £nil                                                      |                             |        |      |   |      |       |      |   |  |        | 166   |   |  |       |      |  
|Cumulative effect of changes in accounting
    principles, net of tax of £nil                                                                                           |                                                                                             |                             |       |       |   |      |      |       |   |  | (240   | )     |   |  |      |      
|                                                                                                                                                                        |                                                                                             |                            
|Net (loss)/income                                                                                                                                                       |                                                                                             |                             | (1,274 | )     |   |      | (807  | )     |   |  | (6,150 | )     |   |  | 180   |      
|                                                                                                                                                                        |                                                                                             |                            
|Earnings per share  basic                                                                                                                                              |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | (Loss)/income from continuing operations                                                    |                             |        | (0.43 | ) |      |       | (0.27 | ) |  |        | (2.24 | ) |  |       | 0.03  |  
|                                                                                                                                                                        | (Loss)/income from discontinued operations                                                  |                             |        | (0.05 | ) |      |       | (0.03 | ) |  |        | (0.02 | ) |  |       | 0.03  |  
|                                                                                                                                                                        | Gain on sale of discontinued operations                                                     |                             |        | 0.02  |   |      |       | 0.01  |   |  |        | 0.09  |   |  |       | 0.01  |  
|                                                                                                                                                                        | Extraordinary gain, net of tax of £nil                                                      |                             |        |      |   |      |       |      |   |  |        | 0.06  |   |  |       |      |  
|                                                                                                                                                                        | Cumulative effect of changes in accounting
    principles                                   |                             |        |      |   |      |       |      |   |  |        | (0.09 | ) |  |       |      |  
|                                                                                                                                                                        |                                                                                             |                            
|Net (loss)/income                                                                                                                                                       |                                                                                             |                             | (0.46  | )     |   |      | (0.29 | )     |   |  | (2.20  | )     |   |  | 0.07  |      
|                                                                                                                                                                        |                                                                                             |                            
|Earnings per share  diluted                                                                                                                                            |                                                                                             |                             |        |       |   |      |       |       |   |  |        |       |   |  |       |      
|                                                                                                                                                                        | (Loss)/income from continuing operations                                                    |                             |        | (0.43 | ) |      |       | (0.27 | ) |  |        | (2.24 | ) |  |       | 0.03  |  
|                                                                                                                                                                        | (Loss)/income from discontinued operations                                                  |                             |        | (0.05 | ) |      |       | (0.03 | ) |  |        | (0.02 | ) |  |       | 0.02  |  
|                                                                                                                                                                        | Gain on sale of discontinued operations                                                     |                             |        | 0.02  |   |      |       | 0.01  |   |  |        | 0.09  |   |  |       | 0.01  |  
|                                                                                                                                                                        | Extraordinary gain, net of tax of £nil                                                      |                             |        |      |   |      |       |      |   |  |        | 0.06  |   |  |       |      |  
|                                                                                                                                                                        | Cumulative effect of changes in accounting
    principles                                   |                             |        |      |   |      |       |      |   |  |        | (0.09 | ) |  |       |      |  
|                                                                                                                                                                        |                                                                                             |                            
|Net (loss)/income                                                                                                                                                       |                                                                                             |                             | (0.46  | )     |   |      | (0.29 | )     |   |  | (2.20  | )     |   |  | 0.06  |      
|                                                                                                                                                                        |                                                                                             |                            

See notes to consolidated financial statements.

F-4



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##### Table of Contents



Marconi plc and subsidiaries

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                  |                                           |                             |        |      |   |      |      |      |   |  |        |      |   |  |      |      |  
|----------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | --------------------------- | ------ | ---- | - | ---- | ---- | ---- | - |  | ------ | ---- | - |  | ---- | ---- | -
|                                                                                                                  |                                           |                            
|                                                                                                                  |                                           | Fiscal year ended March 31,
|                                                                                                                  |                                           | 2003                        |        |     
|                                                                                                                  |                                           | U.S.$                       |        | 2003 |   | 2002 |      | 2001
|(in millions)                                                                                                     |                                           |                             |        | £    |   | £    |      | £   
|                                                                                                                  |                                           |                            
|                                                                                                                  |                                           |                            
|Cash flows from operating
    activities:                                                                         |                                           |                             |        |      |   |      |      |      |   |  |        |      |   |  |      |     
|Net (loss)/income                                                                                                 |                                           |                             | (1,274 | )    |   |      | (807 | )    |   |  | (6,150 | )    |   |  | 180  |     
|Adjustments to reconcile net (loss)/income to net
    cash used in operating activities of continuing operations: |                                           |                             |        |      |   |      |      |      |   |  |        |      |   |  |      |     
|Loss/(income) from discontinued operations                                                                        |                                           |                             | 117    |      |   |      | 74   |      |   |  | 64     |      |   |  | (59  | )   
|Gain on sale of discontinued operations                                                                           |                                           |                             | (36    | )    |   |      | (23  | )    |   |  | (248   | )    |   |  | (20  | )   
|Extraordinary gain                                                                                                |                                           |                             |       |      |   |      |     |      |   |  | (166   | )    |   |  |     |     
|Cumulative effect of changes in accounting
    principles                                                         |                                           |                             |       |      |   |      |     |      |   |  | 240    |      |   |  |     |     
|Loss on equity forward contracts                                                                                  |                                           |                             |       |      |   |      |     |      |   |  | 95     |      |   |  |     |     
|Loss/(gain) on sale of businesses and properties                                                                  |                                           |                             | 5      |      |   |      | 3    |      |   |  | 149    |      |   |  | (45  | )   
|(Gain)/loss on sale of debt and marketable equity
    securities                                                  |                                           |                             |       |      |   |      |     |      |   |  | (26    | )    |   |  | 96   |     
|Loss/(gain) on sale of investments in affiliates                                                                  |                                           |                             | 8      |      |   |      | 5    |      |   |  | (63    | )    |   |  | (557 | )   
|Charge arising on sale of accounts receivable                                                                     |                                           |                             |       |      |   |      |     |      |   |  |       |      |   |  | 3    |     
|Stock compensation                                                                                                |                                           |                             | 22     |      |   |      | 14   |      |   |  | 26     |      |   |  | 7    |     
|Impairment of long-lived assets                                                                                   |                                           |                             | 109    |      |   |      | 69   |      |   |  | 3,968  |      |   |  |     |     
|Impairment of investments                                                                                         |                                           |                             | 63     |      |   |      | 40   |      |   |  |       |      |   |  |     |     
|Depreciation and amortization                                                                                     |                                           |                             | 267    |      |   |      | 169  |      |   |  | 653    |      |   |  | 824  |     
|Purchased in-process research and development                                                                     |                                           |                             |       |      |   |      |     |      |   |  |       |      |   |  | 32   |     
|Provision for doubtful accounts                                                                                   |                                           |                             | (16    | )    |   |      | (10  | )    |   |  | 175    |      |   |  | 48   |     
|Provision for allowance for inventory write off                                                                   |                                           |                             | 39     |      |   |      | 25   |      |   |  | 805    |      |   |  |     |     
|Other income                                                                                                      |                                           |                             | (54    | )    |   |      | (34  | )    |   |  |       |      |   |  |     |     
|(Profit)/loss on disposal of property, plant and
    equipment                                                    |                                           |                             | (14    | )    |   |      | (9   | )    |   |  | (85    | )    |   |  | 20   |     
|Change in current and deferred taxes                                                                              |                                           |                             | (280   | )    |   |      | (177 | )    |   |  | (468   | )    |   |  | (193 | )   
|Equity in net loss of affiliates                                                                                  |                                           |                             | 98     |      |   |      | 62   |      |   |  | 196    |      |   |  | 137  |     
|Dividends received from affiliates                                                                                |                                           |                             |       |      |   |      |     |      |   |  | 29     |      |   |  | 80   |     
|Change in minority interests                                                                                      |                                           |                             |       |      |   |      |     |      |   |  |       |      |   |  | 3    |     
|Changes in operating assets and liabilities, net
    of the effect of acquisitions:                               |                                           |                             |        |      |   |      |      |      |   |  |        |      |   |  |      |     
|                                                                                                                  | Accounts receivable                       |                             |        | 216  |   |      |      | 137  |   |  |        | 479  |   |  |      | (415 | )
|                                                                                                                  | Proceeds from sale of accounts receivable |                             |        |     |   |      |      |     |   |  |        |     |   |  |      | 170  |  
|                                                                                                                  | Inventories                               |                             |        | 360  |   |      |      | 228  |   |  |        | 151  |   |  |      | (704 | )
|                                                                                                                  | Prepaid expenses and other assets         |                             |        | (33  | ) |      |      | (21  | ) |  |        | (36  | ) |  |      | (69  | )
|                                                                                                                  | Accounts payable                          |                             |        | (276 | ) |      |      | (175 | ) |  |        | (231 | ) |  |      | (74  | )
|                                                                                                                  | Accrued expenses and other liabilities    |                             |        | (243 | ) |      |      | (154 | ) |  |        | (160 | ) |  |      | 8    |  
|                                                                                                                  |                                           |                            
|Net cash used in operating activities                                                                             |                                           |                             | (922   | )    |   |      | (584 | )    |   |  | (603   | )    |   |  | (528 | )   
|                                                                                                                  |                                           |                            

See notes to consolidated financial statements.

F-5



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##### Table of Contents



|                                                                  |                                              |                             |        |      |  |      |        |      |  |  |       |     |   |  |       |       |  
|----------------------------------------------------------------- | -------------------------------------------- | --------------------------- | ------ | ---- |  | ---- | ------ | ---- |  |  | ----- | --- | - |  | ----- | ----- | -
|                                                                  |                                              |                            
|                                                                  |                                              | Fiscal year ended March 31,
|                                                                  |                                              | 2003                        |        |     
|                                                                  |                                              | U.S.$                       |        | 2003 |  | 2002 |        | 2001
|(in millions)                                                     |                                              |                             |        | £    |  | £    |        | £   
|                                                                  |                                              |                            
|                                                                  |                                              |                            
|Cash flows from investing
    activities:                         |                                              |                             |        |      |  |      |        |      |  |  |       |     |   |  |       |      
|Maturities and sales of debt and marketable
    equity securities |                                              |                             |       |      |  |      |       |      |  |  | 317   |     |   |  | 39    |      
|Purchases of debt and marketable equity securities                |                                              |                             | (31    | )    |  |      | (20    | )    |  |  | (111  | )   |   |  | (131  | )    
|Proceeds from the sale of investments in
    affiliates           |                                              |                             |       |      |  |      |       |      |  |  | 150   |     |   |  | 646   |      
|Purchases of property, plant and equipment                        |                                              |                             | (55    | )    |  |      | (35    | )    |  |  | (327  | )   |   |  | (519  | )    
|Proceeds from the sale of property, plant and
    equipment       |                                              |                             | 47     |      |  |      | 30     |      |  |  | 171   |     |   |  | 12    |      
|Change in other non-current assets                                |                                              |                             |       |      |  |      |       |      |  |  |      |     |   |  | (5    | )    
|Net cash paid for investments in affiliates                       |                                              |                             |       |      |  |      |       |      |  |  | (65   | )   |   |  |      |      
|Cash received from disposals                                      |                                              |                             | 688    |      |  |      | 436    |      |  |  | 1,001 |     |   |  | 185   |      
|Net cash paid for acquisitions                                    |                                              |                             |       |      |  |      |       |      |  |  | (18   | )   |   |  | (377  | )    
|                                                                  |                                              |                            
|Net cash provided by/(used in) investing
    activities           |                                              |                             | 649    |      |  |      | 411    |      |  |  | 1,118 |     |   |  | (150  | )    
|                                                                  |                                              |                            
|Cash flows from financing
    activities:                         |                                              |                             |        |      |  |      |        |      |  |  |       |     |   |  |       |      
|Short-term debt repayments, net                                   |                                              |                             | (47    | )    |  |      | (30    | )    |  |  | (206  | )   |   |  | (599  | )    
|Term loan (repayments)/borrowings, net                            |                                              |                             | (71    | )    |  |      | (45    | )    |  |  | 981   |     |   |  | 1,221 |      
|Dividends paid                                                    |                                              |                             |       |      |  |      |       |      |  |  | (95   | )   |   |  | (146  | )    
|Issuance of ordinary shares                                       |                                              |                             |       |      |  |      |       |      |  |  | 7     |     |   |  | 36    |      
|Restricted cash transferred to secured accounts                   |                                              |                             | (1,093 | )    |  |      | (692   | )    |  |  | (191  | )   |   |  | (81   | )    
|                                                                  |                                              |                            
|Net cash (used in)/provided by financing
    activities           |                                              |                             | (1,211 | )    |  |      | (767   | )    |  |  | 496   |     |   |  | 431   |      
|                                                                  |                                              |                            
|Net cash (used in)/provided by discontinued
    operations        |                                              |                             | (127   | )    |  |      | (80    | )    |  |  | 40    |     |   |  | 37    |      
|Effects of exchange rate changes on cash and cash
    equivalents |                                              |                             | (44    | )    |  |      | (28    | )    |  |  | (9    | )   |   |  | 30    |      
|Net (decrease)/increase in cash and cash
    equivalents          |                                              |                             | (1,655 | )    |  |      | (1,048 | )    |  |  | 1,042 |     |   |  | (180  | )    
|Cash and cash equivalents, beginning of year                      |                                              |                             | 1,963  |      |  |      | 1,243  |      |  |  | 201   |     |   |  | 381   |      
|                                                                  |                                              |                            
|Cash and cash equivalents, end of year                            |                                              |                             | 308    |      |  |      | 195    |      |  |  | 1,243 |     |   |  | 201   |      
|                                                                  |                                              |                            
|Supplemental disclosure of cash flow
    activity:                |                                              |                             |        |      |  |      |        |      |  |  |       |     |   |  |       |      
|Cash payments for interest                                        |                                              |                             | 212    |      |  |      | 134    |      |  |  | 275   |     |   |  | 156   |      
|Cash (repayment)/payment for income taxes                         |                                              |                             | (49    | )    |  |      | (31    | )    |  |  |      |     |   |  | 118   |      
|Acquisitions:                                                     |                                              |                             |        |      |  |      |        |      |  |  |       |     |   |  |       |      
|                                                                  | Tangible assets acquired                     |                             |        |     |  |      |        |     |  |  |       | 1   |   |  |       | 63    |  
|                                                                  | Liabilities assumed                          |                             |        |     |  |      |        |     |  |  |       | (2  | ) |  |       | (115  | )
|                                                                  | Intangible assets generated                  |                             |        |     |  |      |        |     |  |  |       | (22 | ) |  |       | 1,009 |  
|                                                                  | Deferred consideration                       |                             |        |     |  |      |        |     |  |  |       | 41  |   |  |       | (101  | )
|                                                                  | Issuance of ordinary shares for acquisitions |                             |        |     |  |      |        |     |  |  |       |    |   |  |       | (479  | )
|                                                                  |                                              |                            
|Total cash paid for acquisitions                                  |                                              |                             |       |      |  |      |       |      |  |  | 18    |     |   |  | 377   |      
|                                                                  |                                              |                            

During the fiscal year ended March 31, 2002,
the Company received shares in various businesses as
consideration for the disposal of ipsaris, Marconi Optical
Components, and Marconi Communications South Africa. Such
consideration was fair valued at £245 million.

See notes to consolidated financial statements.

F-6



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##### Table of Contents



Marconi plc and subsidiaries

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE
(LOSS)/INCOME

|                                                                          |                                                                                                                    |                             |        |      |   |      |        |      |   |  |        |      |   |  |     |     | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------ | ---- | - | ---- | ------ | ---- | - |  | ------ | ---- | - |  | --- | --- | 
|                                                                          |                                                                                                                    |                            
|                                                                          |                                                                                                                    | Fiscal year ended March 31,
|                                                                          |                                                                                                                    | 2003                        |        |     
|                                                                          |                                                                                                                    | U.S.$                       |        | 2003 |   | 2002 |        | 2001
|(in millions)                                                             |                                                                                                                    |                             |        | £    |   | £    |        | £   
|                                                                          |                                                                                                                    |                            
|                                                                          |                                                                                                                    |                            
|Other comprehensive income:                                               |                                                                                                                    |                             |        |      |   |      |        |      |   |  |        |      |   |  |     |    
|Net (loss)/income                                                         |                                                                                                                    |                             | (1,274 | )    |   |      | (807   | )    |   |  | (6,150 | )    |   |  | 180 |    
|Other comprehensive (loss)/income:                                        |                                                                                                                    |                             |        |      |   |      |        |      |   |  |        |      |   |  |     |    
|                                                                          | Unrealized gains/(losses) on derivative
    Instruments                                                            |                             |        | 35   |   |      |        | 22   |   |  |        | (23  | ) |  |     |    | 
|                                                                          | Accumulated translation adjustments, (net of
    income tax and reclassification adjustments)                      |                             |        | 98   |   |      |        | 62   |   |  |        | (66  | ) |  |     | 256 | 
|                                                                          | Unrealized (losses)/gains on investments, (net of
    income tax and reclassification adjustments)                 |                             |        |     |   |      |        |     |   |  |        |     |   |  |     | 117 | 
|                                                                          | Minimum pension liability, (net of income tax of
    £nil)                                                         |                             |        | (466 | ) |      |        | (295 | ) |  |        |     |   |  |     |    | 
|                                                                          |                                                                                                                    |                            
|Other comprehensive (loss)/income                                         |                                                                                                                    |                             | (1,607 | )    |   |      | (1,018 | )    |   |  | (6,239 | )    |   |  | 553 |    
|                                                                          |                                                                                                                    |                            
|Disclosure of tax and reclassification
    amounts:                       |                                                                                                                    |                             |        |      |   |      |        |      |   |  |        |      |   |  |     |    
|Unrealized gains/(losses) on derivative
    instruments, net of tax of £1 |                                                                                                                    |                             | 35     |      |   |      | 22     |      |   |  | (18    | )    |   |  |    |    
|                                                                          | Cumulative effect of accounting change, net of
    tax of £1                                                       |                             |        |     |   |      |        |     |   |  |        | (2   | ) |  |     |    | 
|                                                                          | Less: reclassification adjustment for loss
    included in net (loss)/income, net of tax of £1                     |                             |        |     |   |      |        |     |   |  |        | (3   | ) |  |     |    | 
|                                                                          |                                                                                                                    |                            
|                                                                          | Unrealized gains/(losses) on derivative
    Instruments                                                            |                             |        | 35   |   |      |        | 22   |   |  |        | (23  | ) |  |     |    | 
|                                                                          |                                                                                                                    |                            
|                                                                          | Accumulated translation adjustments, net of tax
    of £nil                                                        |                             |        | 98   |   |      |        | 62   |   |  |        | (111 | ) |  |     | 256 | 
|                                                                          | Less: reclassification adjustment for gains
    included in net (loss)/income, net of tax of £nil (2002,
    £nil) |                             |        |     |   |      |        |     |   |  |        | 45   |   |  |     |    | 
|                                                                          |                                                                                                                    |                            
|                                                                          | Net translation adjustments                                                                                        |                             |        | 98   |   |      |        | 62   |   |  |        | (66  | ) |  |     | 256 | 
|                                                                          |                                                                                                                    |                            
|                                                                          | Unrealized (gains)/losses on investments, net of
    tax of £nil (2002, £77 and 2001, £50)                         |                             |        |     |   |      |        |     |   |  |        | (217 | ) |  |     | 117 | 
|                                                                          | Less: reclassification adjustment for gains
    included in net (loss)/income, net of tax of £nil (2002,
    £77)  |                             |        |     |   |      |        |     |   |  |        | 217  |   |  |     |    | 
|                                                                          |                                                                                                                    |                            
|                                                                          | Net unrealized gains on investments                                                                                |                             |        |     |   |      |        |     |   |  |        |     |   |  |     | 117 | 
|                                                                          |                                                                                                                    |                            

See notes to consolidated financial statements.

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Marconi plc and subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
(DEFICIT)/EQUITY

|                                   |                                                          |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        |        |    |  
|---------------------------------- | -------------------------------------------------------- | ------------------------ | ------------- | ---------- | - | --------- | --- | ------------- |  | ------------- | ----- | ------ | -- | ----- | ------ | ------ | - |  | ---- | ---- | - |  | -- | - | -- | - | ------ | ------ | -- | -
|                                   |                                                          |                          |               |            |   |           |     |               |  | Accumulated   |       |        |    |      
|                                   |                                                          |                          |               | Additional |   | Retained  |     | other         |  |               |       |       
|                                   |                                                          | Ordinary shares          |               | paid-in    |   | earnings/ |     | comprehensive |  | Treasury      |       |       
|(in £ millions, except share data) |                                                          | Shares                   |               | Amount     |   | capital   |     | (deficit)     |  | income/(loss) |       | Shares |    | Total
|                                   |                                                          |                         
|                                   |                                                          |                         
|As of March 31, 2000               |                                                          |                          | 2,723,996,450 |            |   |           | 136 |               |  |               | 486   |        |    |       | 3,577  |        |   |  | (138 | )    |   |  |    |   |    |   | 4,061  |       
|                                   | Net income                                               |                          |               |            |   |           |     |               |  |               |       |        |    |       |        | 180    |   |  |      |      |   |  |    |   |    |   |        | 180    |   
|                                   | Equity forward contracts                                 |                          |               |            |   |           |     |               |  |               |       | (215   | )  |       |        |        |   |  |      |      |   |  |    |   |    |   |        | (215   | ) 
|                                   | Dividends paid (£ 0.05 per share)                        |                          |               |            |   |           |     |               |  |               |       |        |    |       |        | (146   | ) |  |      |      |   |  |    |   |    |   |        | (146   | ) 
|                                   | Issuance of ordinary shares under share option
    plans |                          |               | 11,580,041 |   |           |     | 1             |  |               |       | 35     |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 36     |   
|                                   | Issuance of ordinary shares for acquisitions             |                          |               | 49,613,405 |   |           |     | 2             |  |               |       | 484    |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 486    |   
|                                   |                                                          | Treasury shares acquired |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      |      |   |  |    |   | (8 | ) |        |        | (8 | )
|                                   |                                                          | Deferred compensation    |               |            |   |           |     |               |  |               |       |        | 25 |       |        |        |   |  |      |      |   |  |    |   |    |   |        |        | 25 |  
|                                   | Unrealized gains on investments, net of tax              |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | 117  |   |  |    |   |    |   |        | 117    |   
|                                   | Translation adjustments                                  |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | 256  |   |  |    |   |    |   |        | 256    |   
|                                   |                                                          |                         
|As of March 31, 2001               |                                                          |                          | 2,785,189,896 |            |   |           | 139 |               |  |               | 815   |        |    |       | 3,611  |        |   |  | 235  |      |   |  | (8 | ) |    |   | 4,792  |       
|                                   | Net loss                                                 |                          |               |            |   |           |     |               |  |               |       |        |    |       |        | (6,150 | ) |  |      |      |   |  |    |   |    |   |        | (6,150 | ) 
|                                   | Dividends paid (£ 0.05 per share)                        |                          |               |            |   |           |     |               |  |               |       |        |    |       |        | (95    | ) |  |      |      |   |  |    |   |    |   |        | (95    | ) 
|                                   | Equity forward contracts                                 |                          |               |            |   |           |     |               |  |               |       | (25    | )  |       |        |        |   |  |      |      |   |  |    |   |    |   |        | (25    | ) 
|                                   | Issuance of ordinary shares under share option
    plans |                          |               | 7,218,035  |   |           |     | 1             |  |               |       | 7      |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 8      |   
|                                   | Issuance of ordinary shares for acquisitions             |                          |               | 230,889    |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        |        |   
|                                   | Sale of treasury shares                                  |                          |               |            |   |           |     |               |  |               |       | (8     | )  |       |        |        |   |  |      |      |   |  |    | 8 |    |   |        |       |   
|                                   | Deferred compensation                                    |                          |               |            |   |           |     |               |  |               |       | 34     |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 34     |   
|                                   | Fair value movements on derivative instruments           |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | (21  | ) |  |    |   |    |   |        | (21    | ) 
|                                   | Unrealized holding gains on investments, net of
    tax  |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | (217 | ) |  |    |   |    |   |        | (217   | ) 
|                                   | Translation adjustments                                  |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | (66  | ) |  |    |   |    |   |        | (66    | ) 
|                                   | Cumulative effect of accounting
    change  EITF 00-19  |                          |               |            |   |           |     |               |  |               |       | 240    |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 240    |   
|                                   | Cumulative effect of accounting
    change  SFAS 133    |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | (2   | ) |  |    |   |    |   |        | (2     | ) 
|                                   |                                                          |                         
|As of March 31, 2002               |                                                          |                          | 2,792,638,820 |            |   |           | 140 |               |  |               | 1,063 |        |    |       | (2,634 | )      |   |  | (71  | )    |   |  |   |   |    |   | (1,502 | )     
|                                   | Net loss                                                 |                          |               |            |   |           |     |               |  |               |       |        |    |       |        | (807   | ) |  |      |      |   |  |    |   |    |   |        | (807   | ) 
|                                   | Issuance of ordinary shares under share option
    plan  |                          |               | 461,777    |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        |        |   
|                                   | Acquisition and retirement of ordinary shares            |                          |               | (88,646    | ) |           |     |               |  |               |       |        |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        |        |   
|                                   | Fair value movements on derivative instruments           |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | 22   |   |  |    |   |    |   |        | 22     |   
|                                   | Stock-based compensation                                 |                          |               |            |   |           |     |               |  |               |       | 14     |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 14     |   
|                                   | Shares issued by equity method investee                  |                          |               |            |   |           |     |               |  |               |       | 3      |    |       |        |        |   |  |      |      |   |  |    |   |    |   |        | 3      |   
|                                   | Translation adjustments                                  |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | 62   |   |  |    |   |    |   |        | 62     |   
|                                   | Minimum pension liability                                |                          |               |            |   |           |     |               |  |               |       |        |    |       |        |        |   |  |      | (295 | ) |  |    |   |    |   |        | (295   | ) 
|                                   |                                                          |                         
|As of March 31, 2003               |                                                          |                          | 2,793,011,951 |            |   |           | 140 |               |  |               | 1,080 |        |    |       | (3,441 | )      |   |  | (282 | )    |   |  |   |   |    |   | (2,503 | )     
|                                   |                                                          |                         

See notes to consolidated financial statements.

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Marconi plc and subsidiaries

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.   Nature of Business and
basis of preparation:

Nature of business

On May 19, 2003, Marconi plc (the Company)
and its former subsidiary Marconi Corporation plc concluded a
financial restructuring (the Financial
Restructuring), which was effected through two separate
schemes of arrangement under the U.K. Companies Act 1985. One
scheme of arrangement involved the creditors of Marconi
Corporation plc, except for certain excluded categories of
creditors, but including the syndicate banks and bondholders to
whom our primary financial indebtedness was owed. The second
scheme of arrangement involved creditors of Marconi plc. As a
result of the Financial Restructuring, Marconi Corporation plc
became the new parent holding company of the Marconi group,
replacing us, and Marconi plc ceased to be a member of the
Marconi group. Additional information on the Financial
Restructuring can be found in note 23, Subsequent events.

Prior to May 19, 2003, the Company, through
its former Marconi group subsidiaries was a multi-regional
vendor of telecommunications equipment and services. The Company
was organized into two main divisions: Core and Capital. The
Core business included the provision of optical networks,
broadband routing and switching, broadband access, outside plant
and power, other network equipment and associated installation,
maintenance and other value-added services. The Companys
customers included telecommunications companies and providers of
internet services for their public networks and some large
corporations, government departments and agencies, utilities and
educational institutions for their private networks. The Capital
business comprised certain non-core businesses that were managed
for value and ultimately for disposal. These included an
investment in Easynet Group plc as well as a number of other
minor activities, investments and assets with whom the Company
has a base of installed equipment.

Basis of preparation

The accompanying consolidated financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. During fiscal
2003, the Company met its day-to-day working capital
requirements through syndicated banking facilities, certain
bilateral bank facilities and its own cash resources. As shown
in the consolidated financial statements, during fiscal 2003,
the Company incurred losses from continuing operations before
income taxes, minority interests, cumulative effects of changes
in accounting principles and extraordinary gain of £903
million and, as of the fiscal year then ended, its current
liabilities exceeded its current assets by
£3,227 million, and its shareholders deficit was
£2,503 million. Following the Financial Restructuring
concluded on May 19, 2003, which resulted in, amongst other
things, a significant reduction in the Companys external
debt, all of the Companys remaining assets, other than
assets necessary to fund the cost of administering its scheme of
arrangement, will be distributed to the Companys creditors
over time in accordance with its scheme of arrangement.

2.   Summary of significant
accounting policies

Basis of consolidation

The accompanying consolidated financial
statements include the accounts of Marconi plc and its
subsidiaries that are more than 50% owned and controlled.
Investments in affiliates in which the Company exercises
significant influence but not control (generally those with a
20-50% ownership interest) are accounted for under the equity
method of accounting. Investments in non-listed entities in
which the Company has less than a 20% ownership interest are
accounted for under the cost method. All intercompany balances
and transactions have been eliminated upon consolidation.

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Use of estimates

The preparation of the consolidated financial
statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America
(U.S. GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used for, but not limited to, the accounting for doubtful
accounts, inventory reserves, depreciation and amortization,
sales returns, warranty costs, taxes, certain accruals,
payables, long-term contract profit estimates, employee
benefits, long-lived asset impairment calculations and
contingencies. Actual results could differ from these estimates.

Income taxes

The Company recognizes deferred tax assets and
liabilities using enacted tax rates to calculate temporary
differences between the tax basis of assets and liabilities and
the financial statement carrying amounts. The Company recognizes
a valuation allowance against such deferred tax assets when it
is more likely than not that such assets will not be
recovered. During fiscal years 2003 and 2002 all deferred tax
assets, without offsetting liabilities in the same jurisdiction,
were fully reserved.

Foreign currency

The consolidated financial statements are
presented in U.K. pounds sterling. The functional currency of
each of Marconi plcs subsidiaries is the local currency in
which each subsidiary is located. Transactions in currencies
other than the functional currency are translated at the
exchange rate in effect at the date of each transaction.
Differences in exchange rates during the period between the date
a transaction denominated in a foreign currency is consummated
and the date on which it is either settled or translated are
recognized in the statement of operations.

Net income and cash flows of non-U.K. pounds
sterling subsidiaries and equity investments are translated at
the average rates of exchange during the year. The assets and
liabilities of such entities are translated at year-end rates of
exchange. Translation adjustments are included in other
comprehensive (loss)/income, as a separate component of
shareholders (deficit)/equity. Key exchange rates relative
to U.K. pounds sterling used are as follows:

|            |  |                             |      |                 |  |      |      |      |  |      |      |  |  |  |      |  |  |  |      | 
|----------- |  | --------------------------- | ---- | --------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- |  |  |  | ---- | 
|            |  |                             |      |                
|            |  | Average rates               |      | Year-end rates 
|            |  | Fiscal year ended March 31, |      | As of March 31,
|            |  | 2003                        |      | 2002            |  | 2001 |      | 2003 |  | 2002
|            |  |                            
|            |  |                            
|U.S. Dollar |  |                             | 1.55 |                 |  |      | 1.43 |      |  |      | 1.48 |  |  |  | 1.58 |  |  |  | 1.42 | 
|Euro        |  |                             | 1.55 |                 |  |      | 1.63 |      |  |      | 1.63 |  |  |  | 1.45 |  |  |  | 1.63 | 

Convenience translation

The consolidated financial statements are
presented in millions of U.K. pounds sterling. In addition, the
consolidated financial statements as of and for the fiscal year
ended March 31, 2003 are also presented in
U.S. dollars. These U.S. dollar amounts are presented
solely for the convenience of the reader at the rate of
£1.00 = $1.5790, the noon buying rate of the
U.S. Federal Reserve Bank as of March 31, 2003. This
rate may differ from the rates used in the preparation of our
consolidated financial statements. These translated 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.

Revenue

The Company recognizes revenue under Statement of
Position (SOP) 81-1, Accounting for Performance of
Construction-Type and certain Production-Type Contracts,
SOP 97-2, Software Revenue Recognition and

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SEC Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements depending
upon the terms of the contract.


Revenue from product sales of hardware and
software is recognized when: persuasive evidence of an
arrangement exists; delivery has occurred or services have been
rendered; customer acceptance has occurred; the price to the
buyer is fixed or determinable; and collectability is reasonably
assured.

Revenue from services is recognized at time of
performance and acceptance by the customer.

Revenue from multiple element contracts is
allocated based on the relative fair value of each individual
element.

Revenues and estimated profits on long-term
contracts are recognized under the percentage-of-completion
method of accounting using a cost-to-cost methodology. Profit
estimates are revised periodically based on the latest available
information. When estimates of total contract revenues and costs
indicate a loss, a provision for the entire amount of the
contract loss is recognised in the period in which the loss
becomes evident.

Revenue is reported net of sales returns and
allowances, early settlement discounts, sales rebates settled by
credit notes, volume discounts and commissions earned by
distributors.

Research and development
costs

Research and development costs are expensed as
incurred unless specifically billable to and recoverable from
customers under agreed contract terms of underlying agreements.

Cash and cash equivalents

All highly liquid investments with original
maturities of three months or less are considered to be cash
equivalents.

Restricted cash

Cash balances pledged or advanced as collateral
are considered to be restricted cash. At March 31, 2003 and
2002, the total restricted cash was £964 million and
£272 million respectively. The total restricted cash
balance consists of: £771 million (2002, £nil)
held in secured accounts, £135 million (2002,
£25 million) of cash collateral placed against bonding
facilities; £27 million (2002, £nil) of cash held
in Employee Share Option Plan (ESOP) escrow accounts;
£17 million (2002, £17 million) of cash in
insurance reserves and £14 million (2002,
£16 million) of cash deposited against secured loans
in Italy. At March 31, 2003, the Marconi Employee Trust
provided £nil as collateral against certain equity forward
contracts (2002, £214 million) This is discussed
further in Equity forward contracts within this section.

Marketable equity securities

Investments in securities are classified as
available-for-sale and recorded at fair value. Net unrealized
holding gains and losses, net of tax, are reported as a separate
component of shareholders (deficit)/equity, except where
holding losses are determined to be
other-than-temporary, whereby the losses are
reported in gains and losses on sales of investments in the
consolidated statement of operations. Gains and losses on
disposals of marketable equity securities are determined using
the specific identification method.

Inventories and contracts in
progress

Inventories are stated at the lower of cost,
including appropriate overheads, determined on a
weighted-average basis or estimated net realizable value.
Reserves are made for any losses incurred or expected to be
incurred on uncompleted contracts. Profit on long-term contracts
in progress is taken when a sale is recorded on part-delivery of
products or part-performance of services, provided that the
outcome of the contract can be assessed with reasonable
certainty. Advance payments received from customers are shown as
creditors unless there is a right of set-off against the value
of work undertaken. Progress payments received are deducted from
the value of the work carried out, any excess being included
with payments received in advance.

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Property, plant and equipment

Property, plant and equipment is stated at cost.
Cost of significant assets includes capitalized interest
incurred during the construction and development period.
Depreciation expense is computed using the straight-line method
over the estimated useful lives of the depreciable assets. The
estimated useful lives for buildings and improvements are
between 25 and 50 years and the estimated useful lives for
machinery and equipment are between 3 and 10 years.
Significant improvements which substantially extend the useful
lives of assets are capitalized. Maintenance and repairs are
charged to expense as incurred. Upon disposal of an asset, its
accumulated depreciation is deducted from the original cost and
any gain or loss is reflected in operating (loss)/income.

Impairment or disposal of long-lived
assets

The Company evaluates the carrying value of
long-lived assets whenever events or changes in circumstances
indicate that the carrying value of the asset may be impaired.
An impairment loss is recognized when estimated future cash
flows, on an undiscounted basis, expected to result from the use
of the asset, including its disposition, is less than the
carrying value of the asset. The impairment loss is calculated
by comparing the carrying value of the asset with its fair
value, which is usually estimated using discounted cash flows
expected to be generated from the assets.

During fiscal 2003 tangible fixed assets were
impaired by £69 million (2002, £154 million).

Long-lived assets are classified as held-for-sale
when certain criteria are met, which include: management
commitment to a plan to sell the assets; the availability of the
assets for immediate sale in their present condition; whether an
active program to locate buyers and other actions to sell the
assets has been initiated; whether the sale of the assets is
probable and their transfer is expected to qualify for
recognition as a completed sale within one year; whether the
assets are being marketed at reasonable prices in relation to
their fair value; and how unlikely it is that significant
changes will be made to the plan to sell the assets. The Company
measures long-lived assets to be disposed of by sale at the
lower of carrying amount and fair value less cost to sell. Fair
value is determined using quoted market prices or the
anticipated cash flows discounted at a rate commensurate with
the risk involved.

The Company classifies an asset or asset group
that will be disposed of other than by sale as held and used
until the disposal transaction occurs. The asset or asset group
continues to be depreciated based on revisions to its estimated
useful life until the date of disposal or abandonment.

Goodwill and other intangible
assets

Fiscal 2003

Beginning in fiscal 2003 with the adoption of
Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets, the Company no
longer amortizes goodwill, but instead tests for impairment on
an annual basis and at any other time if events occur or
circumstances change that would more likely than not reduce the
fair value of the reporting unit below its carrying amount.

If the carrying amount of the reporting unit
exceeds its estimated fair value, its associated goodwill is
written down to its implied fair value using a hypothetical
purchase price allocation. Any impairment loss is recorded in
the consolidated statement of operations. Measurement of the
fair value of a reporting unit is based on one or more of the
following fair value measures including: amounts at which the
unit as a whole could be bought or sold in a current transaction
between willing parties; using present value techniques of
estimated future cash flows; or using valuation techniques based
on multiples of earnings or revenue, or a similar performance
measure.

Upon adoption of SFAS 142, the Company completed
a transitional goodwill impairment test. As a result, a net book
value of £1 million of previously recognized
intangible assets related to the assembled workforce was
reclassified to goodwill. The Company has not identified any
intangible assets for which it will adopt an indefinite useful
life, nor has it revised the amortization periods for any
intangible assets.

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Intangible assets are carried at cost and are
amortized using the straight-line method over the estimated
periods to be benefited, ranging from 4 to 15 years.


Based on these evaluations, in fiscal 2003, no
impairment charge was recorded in respect of goodwill and other
intangible assets.

Periods ended March 31, 2002

Prior to fiscal 2003, goodwill was amortized
using the straight-line method over its estimated useful life.

The Company periodically evaluated the
recoverability of goodwill and other intangible assets by
comparing the net book value of such assets to expected future
cash flows, on an undiscounted basis, over the remaining
amortization period of the asset. The Company measured
impairment for enterprise level goodwill and identifiable
intangible assets and goodwill associated with long-lived assets
based on a discounted cash flow analysis. Based on these
evaluations, an impairment charge of £3,814 million
was recorded in respect of goodwill and other intangible assets
in fiscal 2002. There were no impairments to the carrying value
of goodwill and other intangible assets in fiscal 2001. This is
discussed further in notes 6 and 7.

Concentrations of credit risk

Credit risk relates to the risk of loss that the
Company would incur as a result of non-performance by
counterparties. The Company maintains credit policies with
regard to its counterparties that enable management to manage
overall credit risk. The Company generally does not obtain
collateral to support the agreements but establishes credit
limits, monitors the financial viability of counterparties and
seeks guarantees where appropriate. The Company believes that it
has established adequate reserves in regard to the risk of
non-performance by counterparties. At March 31, 2003, there
are no customers who accounted for more than 10% of the
groups trade receivables.

Derivative instruments, excluding equity
forward contracts

The Company is exposed to interest rate risk on
its borrowings, cash and investments. Its general policy has
been to maintain at least 50% of debt at fixed rates of
interest. This was achieved by entering into receive-variable
pay-fixed interest rate swaps to reduce variability of cash
flows on floating-rate debt, and entering into receive fixed,
pay-variable interest rate swaps to reduce the fair value risk
on its fixed rate bonds. As a result of the discussions relative
to the Financial Restructuring, these contracts have all been
terminated during fiscal 2003.

The Company conducts a significant proportion of
its business activities outside the United Kingdom in currencies
other than sterling. Its principal exchange rate exposures
relate to U.S. dollar/ pounds sterling and euro/pounds
sterling exchange rates for both transactional and translation
related exposures. The Company uses foreign currency exchange
contracts to manage currency rate fluctuations by generating
cash flows, which offset the foreign currency cash flows of
certain contractual and forecast payments and receipts incurred
in the ordinary course of business.

The Companys derivative financial
instruments are for purposes other than trading and are not
entered into for speculative purposes. The Companys
non-derivative financial instruments include letters of credit,
commitments to extend credit and guarantees of debt.

Equity forward contracts

The Company has, in the past, issued share
options to employees under a number of different option plans,
collectively known as the ESOP. Under these plans,
options may be satisfied by way of a transfer of existing
Company ordinary shares acquired in the market by an employee
trust or other vehicle, or, under some of the plans only, by an
issue of new Company shares.

From January 2000, in order to hedge part of the
potential cost of the plans estimated at that time, the
independent trustee of the Marconi Employee Trust (MET), Bedell
Cristin Trustees Limited (BCTL),

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entered into swap contracts with three financial
institutions (the ESOP Derivative Banks) to purchase a total of
40 million shares in the future at prices which were fixed
at the date of contract.


On June 30, 2001, the Company 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, the Company recorded a cumulative
effect of changes in accounting principles of
£240 million related to the loss on such instrument as
of the implementation date, which was previously recorded within
equity. Subsequent to the implementation date, additional market
losses of £95 million have been recorded in other
expenses in the statement of operations.

At March 31, 2003, the purchase of
38.5 million shares under these contracts was outstanding.
The maximum exposure under the contracts was
£337 million, plus accrued finance charges. Certain
contracts require BCTL to deposit cash collateral with the
relevant ESOP Derivative Banks if the share price falls to
certain levels stipulated in those contracts. The Company funds
the provision of this collateral.

At March 31, 2002, £214 million of
collateral, the maximum amount of collateral payable under these
contracts, had been paid. Agreement has been reached to settle
these contracts, which were closed out on May 19, 2003. The
agreed settlement amount is £35 million. The carrying
value at March 31, 2003 is £158 million. At
March 31, 2003, £27 million of cash balances was
held in escrow with respect to these equity forward contracts.
See Restricted cash within this section.

Fair value hedges

As part of its overall risk management strategy,
the Company used derivatives to convert its fixed-rate debt into
variable-rate debt, and to hedge its foreign currency firm
commitments. These derivatives were typically designated as fair
value hedges, to manage the interest rate risk or foreign
currency risk of the hedged item accordingly. The carrying
amount of the hedged item is adjusted for gains or losses
attributable to the hedged risk. This unrealised gain or loss is
offset by changes in the fair value of the derivative. All
hedging ineffectiveness is included in earnings in the current
period.

Hedge accounting is discontinued prospectively
when the derivative no longer qualifies as an effective hedge,
the derivative is terminated or sold, or on the sale or early
termination of the hedged item.

For fiscal 2003, the ineffective portion of all
the Companys fair value hedges was immaterial as the terms
of the hedging instruments match the terms of the underlying
hedged items. The Company does not exclude any components of the
derivative gains and losses from the assessment of hedge
effectiveness. The amount recognized in earnings for hedged firm
commitments that no longer qualified for fair value hedges was
immaterial.

Net investment hedges

The Companys policy has been to finance its
activities in the same currencies as those used for its foreign
investments in order to hedge foreign currency exposure of net
investments in foreign operations. This policy has been
implemented either by financing in the related currency or using
derivatives, such as currency swaps, which provide a synthetic
effect of a foreign currency loan, thereby reducing the exchange
risk. As a result of the Financial Restructuring, which became
effective May 19, 2003, the Company will not have any
borrowings. For further information on the Companys
Financial Restructuring, refer to note 23, Subsequent
events.

For fiscal 2003, approximately
£169 million (2002, £17 million) of net
gains related to non-derivative instruments used as net
investment hedges were included as a cumulative translation
adjustment in the statement of comprehensive (loss)/income.
These net gains principally offset the net losses recorded on
the respective net investments in foreign currencies being
hedged. The hedge instruments used by the Company did not result
in any material ineffectiveness. Their notional amounts were
similar to the net investments being hedged as of the beginning
of each quarter, and the currencies of the hedging instrument
and hedged item were the same.

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The recorded amounts of the hedging instruments
are as follows:

|              |  |              |       |              |  |  |       | 
|------------- |  | ------------ | ----- | ------------ |  |  | ----- | 
|              |  | At March 31, |       | At March 31,
|              |  | 2003         |       | 2002        
|(in millions) |  | £            |       | £           
|              |  |             
|              |  |             
|Loans         |  |              | 2,330 |              |  |  | 2,533 | 
|              |  |             

Cash flow hedges

The Company has used interest rate swaps to hedge
the uncertainty of future cash flows due to its floating rate
debt, and foreign currency forward exchange contracts that
expire in less than twelve months to hedge against the effect
that fluctuation in exchange rates may have on cash flow
associated with forecasted purchases.

Hedge accounting is discontinued prospectively
when the derivative no longer qualifies as an effective hedge or
the derivative is terminated or sold. On the sale or early
termination of the hedged item, gains and losses are immediately
reclassified to other (income)/expense.

For fiscal 2003, the total ineffectiveness of all
cash flow hedges was immaterial since most of the terms of the
hedging instruments match the terms of the underlying hedged
items. The reclassification of gains and losses into earnings
from accumulated other comprehensive income as a result of the
discontinuance of cash flow hedges because management estimated
that it was still probable that original forecasted transactions
would occur by the end of the originally specified time period
or within an additional two months thereafter was also
immaterial.

For those hedging relationships that are
designated as cash flow hedges the respective effective portion
of the gain or loss recorded in other comprehensive income until
it is necessary to be adjusted against net income in order to
offset the respective change in expected future cash flows on
the hedged transaction.

The total amount of losses in accumulated other
comprehensive income of £23 million
(£1 million related to tax) has been reclassified into
earnings during fiscal 2003 because, as a consequence of the
Financial Restructuring which occurred on May 19, 2003 it
was no longer probable at March 31, 2003 that the
forecasted transactions would occur.

Embedded derivatives

The Company has entered into various contracts
that may contain embedded derivative instruments,
implicit or explicit terms that affect some or all of the cash
flows or the value of other exchanges required by the contract
in a manner similar to a derivative instrument. According to the
requirements of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, they would need to be
bifurcated from the host contract and accounted for as a
derivative instrument. The Company has assessed the existence of
potential embedded derivatives contained in its contracts. No
material embedded derivatives in contracts were identified.

All derivatives not designated as certain hedges
are recorded on the balance sheet at fair value with all changes
in fair value being recorded as a component of income from
continuing operations during the period that such contracts
remain outstanding.

At March 31, 2003 and 2002, other current
assets included £14.9 million and
£22.4 million respectively, representing the fair
value of derivative instruments. In addition,
£67.5 million and £23.6 million were
included in accrued expenses and other current payables for
derivative liabilities at March 31, 2003 and 2002,
respectively.

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Pension and other post-retirement
benefits

The Company accounts for its defined benefit
pension plans and its non-pension post-retirement benefit plans
using actuarial models required by SFAS 87,
Employers Accounting for Pensions, and
SFAS 106, Employers Accounting for Post-retirement
Benefits Other Than Pensions, respectively. These models use
an attribution approach that generally spreads individual events
over the service lives of the employees in the plan. Examples of
events are plan amendments and changes in actuarial
assumptions such as discount rate, rate of compensation
increases and mortality. The principle underlying the required
attribution approach is that employees render service over their
service lives on a relatively smooth basis and, therefore, the
income statement effects of pensions or non-pension
post-retirement benefit plans are earned in, and should follow,
the same pattern.

One of the main components of the net periodic
pension calculation is the expected long-term rate of return on
plan assets. The required use of expected long-term rate of
return on plan assets may result in recognized pension income
that is greater or less than the actual returns of those plan
assets in any given year. Over time, however, the expected
long-term returns are designed to approximate the actual
long-term returns and, therefore, result in a pattern of income
and expense recognition that more closely matches the pattern of
the services provided by the employees. Differences between
actual and expected returns (to the extent that they exceed 10%
of the market value of assets at the start of the period) are
recognized in the net periodic pension calculation over the
remaining average service lifetimes of active members.

The Company uses long-term historical actual
return information, the mix of investments that comprise plan
assets, and future estimates of long-term investment returns by
reference to external sources to develop its expected return on
plan assets.

The discount rate assumptions used for pension
and non-pension post-retirement benefit plan accounting reflect
the rates available on high-quality fixed-income debt
instruments on March 31 of each year. The rate of
compensation increase is another significant assumption used in
the actuarial model for pension accounting and is determined by
the Company based upon its long-term plans for such increases.
For retiree medical plan accounting, the Company reviews
external data and its own historical trends for health care
costs to determine the health care cost trend rates.

If the unfunded accumulated benefit obligation
exceeds the fair value of the plan assets, the Company
recognizes an additional minimum liability that is at least
equal to the unfunded accumulated benefit obligation. Where an
additional minimum liability is recognized an intangible asset
is recognized up to the amount of any unrecognized prior service
cost and the balance is recognized through other comprehensive
income.

Product warranty

Provisions for estimated expenses related to
product warranties are made at the time products are sold. These
estimates are established using historical information on the
nature, frequency, and average cost of warranty claims.
Management actively studies trends of warranty claims and takes
action to improve equipment quality and minimize warranty
claims. Management believes that the warranty reserve is
appropriate; however, actual claims incurred could differ from
the original estimates, requiring adjustments to the reserve.

Sale of accounts receivable

Periodically, the Company enters into
transactions to sell certain of its trade accounts receivable
and retains a servicing obligation but does not incur a
measurable asset or liability. Losses on the sale of receivables
are based on the carrying value of the assets sold less cash
received. Expenses and losses associated with such sales are
recognized as a component of interest expense and related
financing costs.

During fiscal 2003 and 2002, the Company did not
enter into any such transactions from continuing operations.

F-16



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##### Table of Contents



Stock based compensation

The Company accounts for employee share plans
under Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees. No
compensation cost has been recognized for all ordinary shares
and share options issued under fixed plans with a price equal to
fair market value. For fixed plans, the measurement date is the
grant date. The Company has recognized compensation cost for all
ordinary shares and stock options issued with an exercise price
below fair market value at the grant date and for plans subject
to variable accounting. For variable plans, the compensation
cost is re-measured on the basis of current market value of
Marconi plc stock at the end of each reporting period. For
ordinary options, such expense is recognized over the vesting
period of the options. The Company recognizes compensation
expense for plans with performance conditions if achievement of
these conditions becomes probable.

The Company recognized compensation expense in
fiscal 2003 of approximately £14 million (2002,
£26 million and 2001, £7 million), related
to stock options issued below fair market value and those plans,
which are variable. Had compensation cost for the employee share
plans been determined consistent with the fair value methodology
of SFAS 123, Accounting for Stock-Based
Compensation, the Companys net (loss)/income would
have been as follows:

|                                                                                                                             |                         |           |    |       |   |      |     |        |   |  |      |      | 
|---------------------------------------------------------------------------------------------------------------------------- | ----------------------- | --------- | -- | ----- | - | ---- | --- | ------ | - |  | ---- | ---- | 
|                                                                                                                             |                         |          
|                                                                                                                             |                         | March 31,
|                                                                                                                             |                         | 2003      |    | 2002  |   | 2001
|(in millions, except per share data)                                                                                         |                         | £         |    | £     |   | £   
|                                                                                                                             |                         |          
|                                                                                                                             |                         |          
|Net (loss)/income:                                                                                                           |                         |           |    |       |   |      |     |        |   |  |      |     
|                                                                                                                             | As reported             |           |    | (807  | ) |      |     | (6,150 | ) |  |      | 180  | 
|Deduct: Total stock-based employee compensation
    determined under fair value based method, net of related
    tax effects |                         |           |   |       |   |      | (20 | )      |   |  | (164 | )   
|Add back: Total stock-based employee compensation
    determined under APB 25                                                |                         |           | 14 |       |   |      | 26  |        |   |  | 7    |     
|                                                                                                                             |                         |          
|                                                                                                                             | Pro forma (loss)/income |           |    | (793  | ) |      |     | (6,144 | ) |  |      | 23   | 
|                                                                                                                             |                         |          
|Pro forma (loss)/income per share:                                                                                           |                         |           |    |       |   |      |     |        |   |  |      |     
|                                                                                                                             | Basic                   |           |    | (0.28 | ) |      |     | (2.20  | ) |  |      | 0.01 | 
|                                                                                                                             | Diluted                 |           |    | (0.28 | ) |      |     | (2.20  | ) |  |      | 0.01 | 

Under SFAS 123, the fair value of each
option is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:

|                        |  |           |     |      |  |      |      |   |  |  |       |  
|----------------------- |  | --------- | --- | ---- |  | ---- | ---- | - |  |  | ----- | -
|                        |  |          
|                        |  | March 31,
|                        |  | 2003      |     | 2002 |  | 2001
|                        |  |          
|                        |  |          
|Risk-free interest rate |  |           | n/a |      |  |      | 4.41 | % |  |  | 4.89  | %
|Expected life (years)   |  |           | n/a |      |  |      | 4.9  |   |  |  | 3.5   |  
|Assumed volatility      |  |           | n/a |      |  |      | 60.0 | % |  |  | 48.5  | %
|Expected dividends      |  |           |    |      |  |      |     |   |  |  | £0.05 |  

No stock options were granted during fiscal 2003.

Other comprehensive
(loss)/income

Comprehensive (loss)/income represents the net
(loss)/income for the period plus the results of certain
shareholders (deficit)/equity changes that are not reflected in
the consolidated statements of operations.

F-17



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##### Table of Contents



The accumulated balances of other comprehensive
(loss)/income are as follows:

|                                                         |  |                |      |             |  |                |      |            |  |               |     |   |  |  |      |   |  |  |      |  
|-------------------------------------------------------- |  | -------------- | ---- | ----------- |  | -------------- | ---- | ---------- |  | ------------- | --- | - |  |  | ---- | - |  |  | ---- | -
|                                                         |  |                |      |             |  | Net unrealized |      | Minimum    |  | Accumulated  
|                                                         |  | Net unrealized |      | Accumulated |  | gains/(losses) |      | pension    |  | other        
|                                                         |  | gains/(losses) |      | translation |  | on derivative  |      | liability  |  | comprehensive
|                                                         |  | on investments |      | adjustments |  | instruments    |      | adjustment |  | income/(loss)
|                                                         |  | £              |      | £           |  | £              |      | £          |  | £            
|                                                         |  |               
|                                                         |  |               
|As of March 31, 2000                                     |  |                | 100  |             |  |                | (238 | )          |  |               |    |   |  |  |     |   |  |  | (138 | )
|Movement for the year                                    |  |                | 117  |             |  |                | 256  |            |  |               |    |   |  |  |     |   |  |  | 373  |  
|                                                         |  |               
|As of March 31, 2001                                     |  |                | 217  |             |  |                | 18   |            |  |               |    |   |  |  |     |   |  |  | 235  |  
|Cumulative effect of change in accounting
    principles |  |                |     |             |  |                |     |            |  |               | (2  | ) |  |  |     |   |  |  | (2   | )
|Movement for the year                                    |  |                | (217 | )           |  |                | (66  | )          |  |               | (21 | ) |  |  |     |   |  |  | (304 | )
|                                                         |  |               
|As of March 31, 2002                                     |  |                |     |             |  |                | (48  | )          |  |               | (23 | ) |  |  |     |   |  |  | (71  | )
|Movement for the year                                    |  |                |     |             |  |                | 62   |            |  |               | 22  |   |  |  | (295 | ) |  |  | (211 | )
|                                                         |  |               
|As of March 31, 2003                                     |  |                |     |             |  |                | 14   |            |  |               | (1  | ) |  |  | (295 | ) |  |  | (282 | )
|                                                         |  |               

Earnings per share

Earnings per share (EPS) are computed in
accordance with SFAS 128, Earnings per Share. Basic EPS
is computed by dividing consolidated net income by the weighted
average number of ordinary shares outstanding during the period.
Diluted EPS is computed by dividing consolidated net income by
the sum of the weighted average number of shares outstanding and
the weighted average number of potentially dilutive common
shares, based on the assumed exercise of dilutive share options
under the Companys stock option plans. Such potentially
dilutive common shares are excluded when the effect would be to
reduce a loss per share.

Recently issued accounting pronouncements
not yet adopted

The United States Financial Accounting Standards
Board (FASB) has issued the following standards that have yet to
be adopted by the Company:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SFAS 143, Accounting for Asset Retirement
    Obligations(SFAS 143), which requires that the present
    value of an asset retirement obligation be recorded as a
    liability in the period in which it incurs a legal obligation
    with the corresponding amount included in the basis of the asset
    and depreciated. SFAS 143 is effective for fiscal years
    beginning after June 15, 2002 and will be adopted by the
    Company with effect from April 1, 2003. The Company does
    not anticipate that SFAS 143 will have a significant impact
    on its financial position, cash flows and results of operations.                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | SFAS 145, Rescission of FASB Statements
    No. 4, 44 and 64, Amendment of FASB Statement No. 13,
    and Technical Corrections (SFAS 145), which impacts the
    reporting of gains and losses from extinguishment of debt and
    the reporting requirements for sale-leaseback transactions and
    certain lease modifications that have similar economic effects.
    SFAS 145 is effective for fiscal years beginning after
    May 15, 2002. With the exception that the gain arising on
    the extinguishment of liabilities under the Financial
    Restructuring will not be reported as an extraordinary item, the
    Company does not anticipate that SFAS 145 will have a
    significant impact on its financial position, cash flows and
    results of operations. Had SFAS 145 been in effect during
    the year ended March 31, 2002, the extraordinary gain on
    early retirement of debt of £166 million, net of tax
    of £nil, would have been reported as other income of
    £166 million.
|
| |  | SFAS 149, Amendment of Statement 133 on
    Derivative Instruments and Hedging Activities
    (SFAS 149), which amends and clarifies accounting for
    derivative instruments, including certain derivative instruments
    embedded in other contracts and for hedging activities under
    SFAS 133.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | SFAS 149 is generally effective for
    derivative instruments entered into or modified after
    June 30, 2003 and for hedging relationships designated
    after June 30, 2003. The Company does not anticipate that
    the adoption of SFAS 149 will have a significant impact on
    its financial position, cash flows and results of operations
    because after completion of the Financial Restructuring the
    Company has no trading activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | SFAS 150, Accounting for Certain Financial
    Instruments with Characteristics of both Liabilities and
    Equity (SFAS 150), which modifies the accounting for
    certain financial instruments that, under previous guidance,
    issuers could account for as equity. SFAS 150 requires that
    those instruments be classified as liabilities. SFAS 150
    also requires disclosures about alternative ways of settling
    those instruments and the capital structure of entities, whose
    shares are all mandatorily redeemable. SFAS 150 is
    effective for financial instruments entered into or modified
    after May 31, 2003, and otherwise is effective at the
    beginning of the first interim period beginning after
    June 15, 2003. The Company does not anticipate that the
    adoption of SFAS 150 will have a significant impact on its
    financial position, cash flows and results of operations because
    after completion of the Financial Restructuring the Company has
    no trading activities.
|
| |  | FASB Interpretation No. 46, Consolidation
    of Variable Interest Entities (FIN 46), which requires
    an entity to include the assets, liabilities and results of
    operations of a variable interest entity in its Consolidated
    Financial Statements, if it is the primary beneficiary of the
    variable interest entity. FIN 46 is effective immediately
    for all arrangements entered into after January 31, 2003.
    For arrangements entered into prior to January 31, 2003
    adoption is required at the beginning of the first interim or
    annual period after June 15, 2003. The Company does not
    anticipate that the adoption of FIN 46 will have a material
    impact on its financial position, cash flows and results of
    operations because after completion of the Financial
    Restructuring the Company has no trading activities.                                                                                                                                                              
|
| |  | In November 2002, the Emerging Issues Task Force
    reached a final consensus related to Revenue Arrangements
    with Multiple Deliverables (EITF 00-21). The Task Force
    agreed the effective date for the consensus will be for all
    revenue arrangements entered into in fiscal periods beginning
    after June 15, 2003, with early adoption permitted. The
    Company will adopt EITF 00-21 for its fiscal year beginning
    April 1, 2004. The Company does not anticipate that the
    adoption of EITF 00-21 will have a material impact on its
    financial position, cash flows and results of operations because
    after completion of the Financial Restructuring the Company has
    no trading activities.                                                                                                                                                                                                                                                                                                       

Financial statement
reclassifications

Certain reclassifications have been made to 2002
and 2001 balances as well as segment information, in order to
conform to the 2003 presentation.

Non-statutory accounts

The accompanying financial statements do not
comprise statutory accounts within the meaning of
Section 240 of the Companies Act 1985. The Companys
statutory accounts for fiscal 2003 prepared in accordance with
generally accepted accounting principles in the United Kingdom
(U.K. GAAP) will be delivered to the Registrar of Companies
for England and Wales.

The auditors report on those accounts was
unqualified and did not contain a statement under
Section 237(2) or 237(3) of the Companies Act 1985.

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3.   Balance sheet
information

|                                                    |                                      |           |     |      |       |  |       |      |       | 
|--------------------------------------------------- | ------------------------------------ | --------- | --- | ---- | ----- |  | ----- | ---- | ----- | 
|                                                    |                                      |          
|                                                    |                                      | March 31,
|                                                    |                                      | 2003      |     | 2002
|(in millions)                                       |                                      | £         |     | £   
|                                                    |                                      |          
|                                                    |                                      |          
|Accounts receivable, net:                           |                                      |           |     |      |       |  |       |     
|                                                    | Accounts receivable                  |           |     | 540  |       |  |       | 913  |      
|                                                    | Allowance for doubtful accounts      |           |     | (78  | )     |  |       | (167 | )    
|                                                    |                                      |          
|                                                    |                                      | Total     |     |      | 462   |  |       |      | 746   | 
|                                                    |                                      |          
|Inventories:                                        |                                      |           |     |      |       |  |       |     
|                                                    | Finished goods                       |           |     | 76   |       |  |       | 215  |      
|                                                    | Work-in-process                      |           |     | 69   |       |  |       | 148  |      
|                                                    | Raw materials                        |           |     | 89   |       |  |       | 167  |      
|                                                    |                                      |          
|                                                    |                                      | Total     |     |      | 234   |  |       |      | 530   | 
|                                                    |                                      |          
|Accrued expenses and other current
    liabilities: |                                      |           |     |      |       |  |       |     
|                                                    | Accrued income and other taxes       |           |     | 160  |       |  |       | 300  |      
|                                                    | Accrued expenses and deferred income |           |     | 182  |       |  |       | 765  |      
|                                                    | Other                                |           |     | 706  |       |  |       | 503  |      
|                                                    |                                      |          
|                                                    |                                      | Total     |     |      | 1,048 |  |       |      | 1,568 | 
|                                                    |                                      |          
|Property, plant and equipment, net:                 |                                      |           |     |      |       |  |       |     
|                                                    | Land                                 |           |     | 139  |       |  |       | 134  |      
|                                                    | Building and improvements            |           |     | 10   |       |  |       | 30   |      
|                                                    | Machinery and equipment              |           |     | 785  |       |  |       | 944  |      
|                                                    | Construction in progress             |           |     |     |       |  |       | 39   |      
|                                                    |                                      |          
|                                                    |                                      |           | 934 |      |       |  | 1,147 |     
|                                                    | Less: accumulated depreciation       |           |     | (671 | )     |  |       | (669 | )    
|                                                    |                                      |          
|                                                    |                                      | Total     |     |      | 263   |  |       |      | 478   | 
|                                                    |                                      |          

Depreciation expense for the fiscal 2003 was
£125 million (2002, £217 million and 2001,
£177 million). During fiscal 2003 the Company
capitalized £0.4 million (2002, £4 million
and 2001, £9 million) in interest expense related to
construction in progress.

During fiscal 2003 the Company disposed of land
and buildings with a net book value of £6 million for
sales proceeds of £17 million. The Company
subsequently leased back 40% of these land and buildings under a
10-year sale and leaseback agreement. The Company has a
continuing involvement in the land and buildings disposed, being
an interest in any future appreciation without risk of loss. The
Company is accounting for the 40% leased back as a financing
transaction.

During fiscal 2002 the Company disposed of land
and buildings with a net book value of £14 million for
sales proceeds of £21 million. The Company
subsequently leased these land and buildings under a 21-year
sale and leaseback agreement. The Company has a continuing
involvement in the land and buildings disposed, being an
interest in any future appreciation without risk of loss. The
Company is accounting for this transaction as a financing
transaction.

Total future lease payments under these
transactions are £38 million and the minimum amount
due for each of the next five years is £2.8 million.

During fiscal 2003 in conjunction with the
business restructuring and site rationalizations described in
note 5, Business restructuring charges, the Company
impaired property, plant and equipment by £69 million
(2002, £154 million).

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4.   Debt and credit
facilities

Short-term debt

The Companys short-term borrowings consist
primarily of bank loans and overdrafts and are unsecured.

Under the Companys 1998 syndicated credit
agreement, a group of banks committed a maximum of
4.5 billion
(approximately £2.8 billion) at March 31, 2001 on
an unsecured, revolving basis until March 25, 2003.
Effective March 22, 2002, the undrawn portion of this
facility was cancelled and the facility was placed on demand.
Under the terms of this agreement, borrowings bear interest of
0.175% per annum over London inter-bank offered rate (LIBOR).

As of March 31, 2002, the average interest
rate on borrowings under the facility was 2.71% per annum (2001,
6.21%). On April 25, 2002, the Company agreed to increase
the interest rate on the syndicated facility to 2.25% per annum
over LIBOR effective from April 1, 2002. As of
March 31, 2003, the average interest rate, reflecting the
agreed increase, on borrowings under the facility was 6.36%. No
undrawn amounts were available to the Company under outstanding
credit facilities at March 31, 2003.

For further details on the impact of the
Financial Restructuring on the short-term borrowings and credit
facilities, refer to note 23, Subsequent events.

Long-term debt

|                                     |                      |           |        |       |  |  |       |       | 
|------------------------------------ | -------------------- | --------- | ------ | ----- |  |  | ----- | ----- | 
|                                     |                      |          
|                                     |                      | March 31,
|                                     |                      | 2003      |        | 2002 
|(in millions)                        |                      | £         |        | £    
|                                     |                      |          
|                                     |                      |          
|Term loans                           |                      |           | 1,836  |       |  |  | 1,851 |      
|Finance leases                       |                      |           |       |       |  |  | 9     |      
|                                     |                      |          
|                                     | Total obligations    |           |        | 1,836 |  |  |       | 1,860 | 
|Current maturities of long-term debt |                      |           | (1,806 | )     |  |  | (41   | )    
|                                     |                      |          
|                                     | Total long-term debt |           |        | 30    |  |  |       | 1,819 | 
|                                     |                      |          

On September 19, 2000, the Company issued
for cash consideration, two unsecured yankee bonds having an
aggregate principal amount of $1.8 billion (approximately
£1.3 billion). One bond is for $900 million
(approximately £630 million) with a coupon rate of
7.75% per annum, maturing on September 15, 2010. The other
bond is for $900 million (approximately
£630 million) with a coupon rate of 8.375% per annum,
maturing on September 15, 2030. On March 17, 2003 the
Company failed to meet a scheduled interest payment on these
bonds. As a result, as at March 31, 2003, these bonds were
repayable on demand.

On March 30, 2000, the Company issued for
cash consideration two unsecured euro bonds having an aggregate
principal amount of
1.5 billion
(approximately £927 million). One bond is for
500 million
(approximately £309 million) with a coupon rate of
5.625% per annum, maturing on March 30, 2005. The other
bond is for
1,000 million
(approximately £618 million) with a coupon rate of
6.375% per annum, maturing on March 30, 2010.

Both the yankee bonds and the euro bonds were
issued by Marconi Corporation plc and are fully and
unconditionally guaranteed by the Company up to the date of the
Financial Restructuring going effective. For further details on
the impact of the recently announced Financial Restructuring on
the long-term debt, refer to note 23, Subsequent events.

During fiscal 2002, the Company repurchased
67.9 million
(£41.7 million) of euro bonds with a coupon rate of
5.625% per annum maturing on March 30, 2005,
256.7 million
(£157.5 million) of euro bonds with a coupon rate of
6.375% per annum maturing on March 31, 2010,
$131.0 million (£92.3 million) of the 7.75%
yankee bonds with a coupon rate of 7.75% per annum maturing
September 15, 2010 and

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$130.1 million (£91.6 million) of
yankee bonds with a coupon rate of 8.75% maturing
September 15, 2030. The Company recognized an extraordinary
gain on these repurchases of £166 million.


As of March 31, 2003, the Company had other
obligations of £20 million (2002,
£41 million) related to secured debenture loans.

Key covenants

The 1998 syndicated credit agreement includes
covenants and warranties and events of default. The agreement
does not contain any financial covenants, although it provides
that it is an event of default if there has been a material
adverse change in the financial condition of the Company taken
as a whole since the date of the latest annual accounts
delivered to the agent which has had or will have a material
adverse effect on the ability of Marconi Corporation plc to
comply with its payment obligations under this facility.

The following table sets forth the mandatory
reductions in principal under the terms of all long-term debt
agreements for each of the next five years based upon the
amounts outstanding at March 31, 2003:

|                                             |  |   |       | 
|-------------------------------------------- |  | - | ----- | 
|(in millions)                                |  | £
|                                             |  |  
|2004                                         |  |   | 1,806 | 
|2005                                         |  |   | 9     | 
|2006                                         |  |   | 4     | 
|2007                                         |  |   | 4     | 
|2008                                         |  |   | 3     | 
|Thereafter                                   |  |   | 10    | 
|                                             |  |   |       | 
|Long-term debt, including current maturities |  |   | 1,836 | 
|                                             |  |   |       | 

Short-term debt of approximately
£2,195 million is also repayable upon demand.

Under the terms of the Financial Restructuring,
the covenants and reductions have changed significantly. For
further details on the impact of the recently announced
Financial Restructuring on the long-term debt, refer to
note 23, Subsequent events.

5.   Business restructuring
charges

In September 2001, following the sudden and
significant downturn in trading in the global telecommunications
markets, the results of an operational review that had three
main objectives were announced. The original objectives were to
reorganize the group into two main reporting divisions; Core and
Capital, reduce group indebtedness from £4.4 billion
at August 31, 2001 to between £2.7 billion and
£3.2 billion by March 31, 2002 and reduce the
annual operating cost base. These objectives have now been
revised to reflect further operating cost base reductions during
fiscal 2004.

When management reviews the operating income
performance of the segments described in note 9, Segment
and related information disclosures, management uses U.K. GAAP
operating (loss)/profit before goodwill and intangible asset
amortization, in process research and development write-offs,
U.K. GAAP operating exceptional items, gains and losses on
business disposal and the impact of less than 50% owned
affiliates. This measure allocated to those segments does not
include business restructuring charges, which relate to the
reorganization of the business as a whole. A segmental
allocation of restructuring charges is impracticable.
Consequently, a segmental analysis has not been provided.

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The following tables show the activity by
statement of operations heading and the balances remaining in
other liabilities at March 31, 2003 and 2002 following the
implementation of actions required to achieve these objectives.

|                                                |  |            |     |         |  |                 |     |            |  |           |     |  |  |  |    |  |  |  |    | 
|----------------------------------------------- |  | ---------- | --- | ------- |  | --------------- | --- | ---------- |  | --------- | --- |  |  |  | -- |  |  |  | -- | 
|                                                |  |            |     |         |  |                 |     |           
|                                                |  |            |     | Charged |  | Utilized during |     |           
|                                                |  | Balance at |     | during  |  | fiscal 2003     |     | Balance at
|                                                |  | March 31,  |     | fiscal  |  | Net cash        |     | Non cash   |  | March 31,
|                                                |  | 2002       |     | 2003    |  | payments        |     | movement   |  | 2003     
|(in millions)                                   |  | £          |     | £       |  | £               |     | £          |  | £        
|                                                |  |           
|                                                |  |           
|Direct costs:                                   |  |            |     |         |  |                 |     |            |  |           |     |  |  |  |    |  |  |  |    | 
|Inventory write-downs and related costs         |  |            | 40  |         |  |                 |    |            |  |           | 20  |  |  |  | 20 |  |  |  |   | 
|Manufacturing outsourcing                       |  |            | 31  |         |  |                 | 21  |            |  |           | 21  |  |  |  | 23 |  |  |  | 8  | 
|Onerous contracts                               |  |            | 31  |         |  |                 | 5   |            |  |           | 30  |  |  |  |   |  |  |  | 6  | 
|                                                |  |           
|                                                |  |            | 102 |         |  |                 | 26  |            |  |           | 71  |  |  |  | 43 |  |  |  | 14 | 
|                                                |  |           
|Business restructuring costs:                   |  |            |     |         |  |                 |     |            |  |           |     |  |  |  |    |  |  |  |    | 
|Employee severance                              |  |            | 30  |         |  |                 | 128 |            |  |           | 148 |  |  |  |   |  |  |  | 10 | 
|Site rationalization                            |  |            | 40  |         |  |                 | 36  |            |  |           | 30  |  |  |  |   |  |  |  | 46 | 
|Contractual commitments and other restructuring |  |            | 13  |         |  |                 |    |            |  |           |    |  |  |  | 10 |  |  |  | 3  | 
|Systems implementation                          |  |            | 24  |         |  |                 | (7  | )          |  |           | 17  |  |  |  |   |  |  |  |   | 
|Advisor fees                                    |  |            |    |         |  |                 | 73  |            |  |           | 63  |  |  |  |   |  |  |  | 10 | 
|                                                |  |           
|                                                |  |            | 107 |         |  |                 | 230 |            |  |           | 258 |  |  |  | 10 |  |  |  | 69 | 
|                                                |  |           
|Total                                           |  |            | 209 |         |  |                 | 256 |            |  |           | 329 |  |  |  | 53 |  |  |  | 83 | 
|                                                |  |           

|                                                |  |         |       |                 |  |            |     |           |  |  |     |  |  |  |     | 
|----------------------------------------------- |  | ------- | ----- | --------------- |  | ---------- | --- | --------- |  |  | --- |  |  |  | --- | 
|                                                |  |         |       |                 |  |           
|                                                |  | Charged |       | Utilized during |  |           
|                                                |  | during  |       | fiscal 2002     |  | Balance at
|                                                |  | fiscal  |       | Net cash        |  | Non cash   |     | March 31,
|                                                |  | 2002    |       | payments        |  | movement   |     | 2002     
|(in millions)                                   |  | £       |       | £               |  | £          |     | £        
|                                                |  |        
|                                                |  |        
|Direct costs:                                   |  |         |       |                 |  |            |     |           |  |  |     |  |  |  |     | 
|Inventory write-downs and related costs         |  |         | 647   |                 |  |            | 51  |           |  |  | 556 |  |  |  | 40  | 
|Manufacturing outsourcing                       |  |         | 127   |                 |  |            | 77  |           |  |  | 19  |  |  |  | 31  | 
|Onerous contracts                               |  |         | 31    |                 |  |            |    |           |  |  |    |  |  |  | 31  | 
|                                                |  |        
|                                                |  |         | 805   |                 |  |            | 128 |           |  |  | 575 |  |  |  | 102 | 
|                                                |  |        
|Business restructuring costs:                   |  |         |       |                 |  |            |     |           |  |  |     |  |  |  |     | 
|Employee severance                              |  |         | 237   |                 |  |            | 207 |           |  |  |    |  |  |  | 30  | 
|Site rationalization                            |  |         | 40    |                 |  |            |    |           |  |  |    |  |  |  | 40  | 
|Contractual commitments and other restructuring |  |         | 46    |                 |  |            | 26  |           |  |  | 7   |  |  |  | 13  | 
|Systems implementation                          |  |         | 73    |                 |  |            | 49  |           |  |  |    |  |  |  | 24  | 
|                                                |  |        
|                                                |  |         | 396   |                 |  |            | 282 |           |  |  | 7   |  |  |  | 107 | 
|                                                |  |        
|Total                                           |  |         | 1,201 |                 |  |            | 410 |           |  |  | 582 |  |  |  | 209 | 
|                                                |  |        

Inventory write-downs and related
costs

In fiscal 2002 the inventory write-downs and
related costs charged to cost of sales in the year included
£556 million for obsolescence and slow-moving
provisions against a number of product lines, predominantly
optical networking products, and £91 million in
respect of supplier commitments. Of the £91 million
for supplier commitments, £51 million was paid out
during fiscal 2002. The remaining balance of
£40 million has been utilized during fiscal 2003.

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Manufacturing outsourcing

The charge of £21 million in respect of
manufacturing outsourcing in fiscal 2003 represents additional
net costs to Jabil Circuit Inc. arising in the year. Management
expect that the remaining balance will be paid out in fiscal
2004. In fiscal 2002 restructuring costs classified in cost of
sales includes a charge of £127 million representing
additional costs incurred as a consequence of the decision to
outsource certain manufacturing operations to Jabil Circuit Inc.
Under the terms of that agreement, the Company made payments of
£77 million during fiscal 2002.

Onerous contracts

The charge of £5 million in respect of
onerous contracts in fiscal 2003 represents certain liabilities
to which the Company is committed as a result of the operational
restructuring. This includes liabilities relating to equipment
leasing contracts and supply contracts under which we have
agreed to purchase minimum volumes of goods and services which
will offer no economic value to our business as a result of its
reduced size. Management expect that the remaining balance will
be paid out in fiscal 2004. A charge of £31 million
was recorded in fiscal 2002 in respect of these liabilities. No
amount was utilized during fiscal 2002.

Employee severance

As a consequence of the objective to reduce the
annual operating cost base, the Company recorded a charge of
£128 million during fiscal 2003 associated with
redundancy payments for approximately 7,500 employees.
Management expects that the remaining balance will be paid out
in fiscal 2004. In fiscal 2002, the Company recorded a charge of
£237 million to reflect the charges associated with
voluntary redundancy payments for approximately 10,000
employees. The Company made cash payments of
£207 million in fiscal 2002.

Site rationalization

The charge of £36 million in respect of
site rationalization in fiscal 2003 represents additional costs
associated with closing and consolidating various sites around
the world as part of the business restructuring. A charge of
£40 million was recorded in fiscal 2002. These site
closures and consolidations were all commenced prior to
December 15, 2002.

Contractual commitments and other
restructuring

During fiscal 2002 a charge of
£46 million was recorded in respect of other costs
associated with the restructuring program. Payments of
£26 million were made during fiscal 2002 and an
additional non-cash charge of £7 million recorded,
leaving a balance at March 31, 2002 of
£13 million. Of this balance, costs of
£10 million have been charged during fiscal 2003 and a
balance of £3 million remains at March 31, 2003.
Management expects these costs to be paid in fiscal 2004.

Systems implementation

During fiscal 2002 the Group planned to implement
a new global information technology system. In light of the
revised trading outlook and the continued focus on cost
reduction, the implementation was terminated. The
£73 million charge in fiscal 2002 represents
£43 million of capitalised external consultancy costs
associated with the implementation, £24 million of
hardware and software costs expensed, and £6 million
of other associated costs of the project. Payments of
£49 million were made in fiscal 2002. During fiscal
2003, the Company revised its previous estimate of the overall
costs leading to the release of £7 million from the
amounts accrued in fiscal 2002. Payments of
£17 million were made in fiscal 2003.

Advisor fees

The charge of £73 million in fiscal
2003 in respect of advisor fees represents charges from the
Companys external advisors with respect to services
rendered in fiscal 2003 related to the Financial

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Restructuring. Payments of £63 million
have been made during fiscal 2003 and a balance of
£10 million remains at March 31, 2003. Management
expects these costs to be paid in fiscal 2004. Additional
amounts of approximately £39 million are expected to
be expensed as incurred during fiscal 2004, but prior to the
effective date of the financial restructuring.


6.   Goodwill

When management reviews the operating income
performance of the segments described in note 9, Segment
and related information disclosures, management uses the U.K.
GAAP operating (loss)/profit before goodwill and intangible
asset amortization, in process research and development
write-offs, U.K. GAAP operating exceptional items, gains and
losses on business disposal and the impact of less than 50%
owned affiliates. This measure allocated to those segments does
not include goodwill amortization charges. A segmental
allocation of goodwill is impracticable. Consequently, a
segmental analysis has not been provided.

The changes in the carrying amount of goodwill
for the year ended March 31, 2003, are as follows:

|                          |                        |      |       |              |   |       |        |      |   |  |       |        |  
|------------------------- | ---------------------- | ---- | ----- | ------------ | - | ----- | ------ | ---- | - |  | ----- | ------ | -
|                          |                        |      |       | Accumulated  |   |      
|                          |                        | Cost |       | amortization |   | Total
|(in millions)             |                        | £    |       | £            |   | £    
|                          |                        |     
|                          |                        |     
|Balance at April 1, 2001  |                        |      | 4,691 |              |   |       | (960   | )    |   |  | 3,731 |       
|                          | Goodwill acquired      |      |       | 34           |   |       |        |     |   |  |       | 34     |  
|                          | Goodwill disposed of   |      |       | (135         | ) |       |        | 57   |   |  |       | (78    | )
|                          | Amortization           |      |       |             |   |       |        | (393 | ) |  |       | (393   | )
|                          | Impairment             |      |       | (2,622       | ) |       |        |     |   |  |       | (2,622 | )
|                          | Translation adjustment |      |       | (65          | ) |       |        | 72   |   |  |       | 7      |  
|                          |                        |     
|Balance at April 1, 2002  |                        |      | 1,903 |              |   |       | (1,224 | )    |   |  | 679   |       
|                          | Goodwill disposed of   |      |       | (3           | ) |       |        | 1    |   |  |       | (2     | )
|                          | Translation adjustment |      |       | (20          | ) |       |        |     |   |  |       | (20    | )
|                          |                        |     
|Balance at March 31, 2003 |                        |      | 1,880 |              |   |       | (1,223 | )    |   |  | 657   |       
|                          |                        |     

In accordance with SFAS 142, goodwill is no
longer subject to amortization, rather, it is subject to at
least an annual assessment of impairment, applying a fair-value
based test. The Company completed the SFAS 142 transitional
impairment test during the second quarter of the fiscal year and
concluded that there was no impairment of recorded goodwill. The
assessment measured the amount by which the carrying amounts of
the goodwill and intangible assets exceeded the present value of
expected future cash flows from operations. Following a similar
review in fiscal 2002 goodwill was impaired by
£2,622 million. This amount is included in the caption
Impairment of long-lived assets in the consolidated
statement of operations and explained further in note 2,
Summary of significant accounting policies. There was no
impairment of goodwill in fiscal 2001. Amortization expense for
fiscal 2002 and 2001 was £393 million and
£605 million respectively.

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A reconciliation of net income and earnings per
common share for fiscal 2002 and 2001, as if SFAS 142 had been
adopted at the beginning of that year, follows:

|                                             |         |           |      |       |   |      |        |       |   |  |     |      | 
|-------------------------------------------- | ------- | --------- | ---- | ----- | - | ---- | ------ | ----- | - |  | --- | ---- | 
|                                             |         |          
|                                             |         | March 31,
|                                             |         | 2003      |      | 2002  |   | 2001
|(in millions)                                |         | £         |      | £     |   | £   
|                                             |         |          
|                                             |         |          
|Reported net (loss)/income                   |         |           | (807 | )     |   |      | (6,150 | )     |   |  | 180 |     
|Add back amortization of goodwill            |         |           |     |       |   |      | 393    |       |   |  | 605 |     
|                                             |         |          
|Adjusted net (loss)/income                   |         |           | (807 | )     |   |      | (5,757 | )     |   |  | 785 |     
|                                             |         |          
|Reported net (loss)/income per common share: |         |           |      |       |   |      |        |       |   |  |     |     
|                                             | Basic   |           |      | (0.29 | ) |      |        | (2.20 | ) |  |     | 0.07 | 
|                                             | Diluted |           |      | (0.29 | ) |      |        | (2.20 | ) |  |     | 0.06 | 
|                                             |         |          
|Adjusted net (loss)/income per common share: |         |           |      |       |   |      |        |       |   |  |     |     
|                                             | Basic   |           |      | (0.29 | ) |      |        | (2.06 | ) |  |     | 0.29 | 
|                                             | Diluted |           |      | (0.29 | ) |      |        | (2.06 | ) |  |     | 0.28 | 
|                                             |         |          

7.   Intangible
assets

Intangible assets subject to amortization, net of
impairment of £nil (2002, £1,192) consist of the
following:

|                              |  |           |     |              |  |      |      |              |  |  |     |  |  |  |      |  
|----------------------------- |  | --------- | --- | ------------ |  | ---- | ---- | ------------ |  |  | --- |  |  |  | ---- | -
|                              |  |          
|                              |  | March 31,
|                              |  |           |     |             
|                              |  | 2003      |     | 2002        
|                              |  |           |     | Accumulated  |  |      |      | Accumulated 
|                              |  | Cost      |     | amortization |  | Cost |      | amortization
|(in millions)                 |  | £         |     | £            |  | £    |      | £           
|                              |  |          
|                              |  |          
|Core developed technology     |  |           | 360 |              |  |      | (267 | )            |  |  | 360 |  |  |  | (225 | )
|Internally generated software |  |           | 5   |              |  |      | (3   | )            |  |  | 5   |  |  |  | (2   | )
|Trademarks                    |  |           | 1   |              |  |      |     |              |  |  | 1   |  |  |  |     |  
|Customer lists                |  |           | 6   |              |  |      | (1   | )            |  |  | 6   |  |  |  |     |  
|                              |  |          
|                              |  |           | 372 |              |  |      | (271 | )            |  |  | 372 |  |  |  | (227 | )
|                              |  |          

There was no impairment of intangible assets for
fiscal 2001.

Amortization of intangibles for fiscal 2003 was
£44 million (2002, £43 million and 2001,
£42 million). Intangible amortization expense based on
March 31, 2003 intangibles for the next five years is
expected to be:

|              |  |   |    | 
|------------- |  | - | -- | 
|(in millions) |  | £
|              |  |  
|              |  |  
|Fiscal 2004   |  |   | 44 | 
|Fiscal 2005   |  |   | 44 | 
|Fiscal 2006   |  |   | 12 | 
|Fiscal 2007   |  |   | 1  | 
|Fiscal 2008   |  |   |   | 

8.   Pension plans and other
post-retirement plans

Pension plans

The Company operates a number of defined benefit
and defined contribution pension plans on behalf of its
employees. The most significant pension plan is the GEC 1972
Plan (the Plan), a defined benefit plan

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for employees in the United Kingdom. The assets
of the Plan are held separately from the assets of the Company,
are administered by trustees and are managed professionally.


The benefits offered to a specific employee vary
based upon the location of and past business decisions made by a
specific business unit, as well as local statutory requirements.
Defined benefit pension plans, that generally provide benefits
to eligible individuals, after minimum service requirements are
met, are based on years of credit service and average earnings
of the employee. Defined contribution plans, that provide
benefits to eligible employees, are based on the value of
contributions paid into the applicable plan adjusted for
investment returns.

The Company funds its defined benefit pension
obligations at a level, which meets or exceeds local legal
requirements. Funded pension plan assets are primarily invested
in equity and debt securities.

Data with respect to benefit obligations,
excluding those related to discontinued operations, is as
follows:

|                                                                     |                                                |                  |       |                  |   |      |       |       |   |  |     |      |   |  |     |     |  
|-------------------------------------------------------------------- | ---------------------------------------------- | ---------------- | ----- | ---------------- | - | ---- | ----- | ----- | - |  | --- | ---- | - |  | --- | --- | -
|                                                                     |                                                |                  |       |                 
|                                                                     |                                                | Pension benefits |       | Pension benefits
|                                                                     |                                                | U.K. plans       |       | Overseas plans  
|                                                                     |                                                | 2003             |       | 2002             |   | 2003 |       | 2002 
|(in millions)                                                        |                                                | £                |       | £                |   | £    |       | £    
|                                                                     |                                                |                 
|                                                                     |                                                |                 
|Change in benefit obligations:                                       |                                                |                  |       |                  |   |      |       |       |   |  |     |      |   |  |     |    
|                                                                     | Benefit obligation at beginning of year        |                  |       | 2,393            |   |      |       | 2,471 |   |  |     | 215  |   |  |     | 271 |  
|                                                                     | Service cost                                   |                  |       | 26               |   |      |       | 34    |   |  |     | 7    |   |  |     | 4   |  
|                                                                     | Interest cost                                  |                  |       | 138              |   |      |       | 143   |   |  |     | 14   |   |  |     | 18  |  
|                                                                     | Plan participants contributions               |                  |       | 6                |   |      |       | 10    |   |  |     |     |   |  |     |    |  
|                                                                     | Actuarial loss/(gain)                          |                  |       | 64               |   |      |       | (91   | ) |  |     | 24   |   |  |     | 18  |  
|                                                                     | Benefits paid                                  |                  |       | (183             | ) |      |       | (174  | ) |  |     | (10  | ) |  |     | (12 | )
|                                                                     | Curtailment loss                               |                  |       |                 |   |      |       |      |   |  |     | 3    |   |  |     |    |  
|                                                                     | Settlement gain                                |                  |       |                 |   |      |       |      |   |  |     | (2   | ) |  |     |    |  
|                                                                     | Divestitures                                   |                  |       |                 |   |      |       |      |   |  |     |     |   |  |     | (81 | )
|                                                                     | Foreign currency exchange rate changes         |                  |       |                 |   |      |       |      |   |  |     | (6   | ) |  |     | (3  | )
|                                                                     |                                                |                 
|Benefit obligations at end of year                                   |                                                |                  | 2,444 |                  |   |      | 2,393 |       |   |  | 245 |      |   |  | 215 |    
|                                                                     |                                                |                 
|Change in plan assets:                                               |                                                |                  |       |                  |   |      |       |       |   |  |     |      |   |  |     |    
|                                                                     | Fair value of plan assets at beginning of year |                  |       | 2,372            |   |      |       | 2,491 |   |  |     | 178  |   |  |     | 278 |  
|                                                                     | Actual return on plan assets                   |                  |       | 19               |   |      |       | 24    |   |  |     | (17  | ) |  |     | (6  | )
|                                                                     | Employer contributions                         |                  |       | 23               |   |      |       | 21    |   |  |     |     |   |  |     |    |  
|                                                                     | Plan participants contributions               |                  |       | 6                |   |      |       | 10    |   |  |     |     |   |  |     |    |  
|                                                                     | Benefits paid                                  |                  |       | (183             | ) |      |       | (174  | ) |  |     | (10  | ) |  |     | (12 | )
|                                                                     | Divestitures                                   |                  |       |                 |   |      |       |      |   |  |     |     |   |  |     | (79 | )
|                                                                     | Foreign currency exchange rate changes         |                  |       |                 |   |      |       |      |   |  |     | (17  | ) |  |     | (3  | )
|                                                                     |                                                |                 
|Fair value of plan assets at end of year                             |                                                |                  | 2,237 |                  |   |      | 2,372 |       |   |  | 134 |      |   |  | 178 |    
|                                                                     |                                                |                 
|                                                                     | Under funded status                            |                  |       | (207             | ) |      |       | (21   | ) |  |     | (111 | ) |  |     | (37 | )
|                                                                     | Unrecognized net actuarial loss                |                  |       | 301              |   |      |       | 118   |   |  |     | 62   |   |  |     | 11  |  
|                                                                     | Unrecognized net transition obligation         |                  |       | 3                |   |      |       | 6     |   |  |     |     |   |  |     |    |  
|                                                                     |                                                |                 
|Net amount recognized                                                |                                                |                  | 97    |                  |   |      | 103   |       |   |  | (49 | )    |   |  | (26 | )  
|                                                                     |                                                |                 
|Amounts recognized in the consolidated balance
    sheet consist of: |                                                |                  |       |                  |   |      |       |       |   |  |     |      |   |  |     |    
|                                                                     | Prepaid benefit cost                           |                  |       |                 |   |      |       | 103   |   |  |     |     |   |  |     | 38  |  
|                                                                     | Accrued benefit liability                      |                  |       | (139             | ) |      |       |      |   |  |     | (108 | ) |  |     | (65 | )
|                                                                     | Accumulated other comprehensive income         |                  |       | 236              |   |      |       |      |   |  |     | 59   |   |  |     | 1   |  
|                                                                     |                                                |                 
|Net amount recognized                                                |                                                |                  | 97    |                  |   |      | 103   |       |   |  | (49 | )    |   |  | (26 | )  
|                                                                     |                                                |                 

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The actuarial assumptions used to develop the
periodic benefit cost and funded status were as follows:

|                              |                                       |                  |  |                  |  |      |  |      |  |      |  |      |  |  |  |     |  |  |  |     |  |  |  |     | 
|----------------------------- | ------------------------------------- | ---------------- |  | ---------------- |  | ---- |  | ---- |  | ---- |  | ---- |  |  |  | --- |  |  |  | --- |  |  |  | --- | 
|                              |                                       |                  |  |                 
|                              |                                       | Pension benefits |  | Pension benefits
|                              |                                       | U.K. plans       |  | Overseas plans  
|                              |                                       | 2003             |  | 2002             |  | 2001 |  | 2003 |  | 2002 |  | 2001
|(in millions)                 |                                       | %                |  | %                |  | %    |  | %    |  | %    |  | %   
|                              |                                       |                 
|                              |                                       |                 
|Weighted average assumptions: |                                       |                  |  |                  |  |      |  |      |  |      |  |      |  |  |  |     |  |  |  |     |  |  |  |    
|                              | Discount rate for pension Expense     |                  |  | 5.3              |  |      |  | 6.0  |  |      |  | 6.0  |  |  |  | 6.7 |  |  |  | 7.5 |  |  |  | 7.5 | 
|                              | Discount rate for year end disclosure |                  |  | 5.3              |  |      |  | 6.0  |  |      |  | 6.0  |  |  |  | 6.0 |  |  |  | 6.9 |  |  |  | 7.5 | 
|                              | Expected return on plan Assets        |                  |  | 5.7              |  |      |  | 6.0  |  |      |  | 7.5  |  |  |  | 8.5 |  |  |  | 8.5 |  |  |  | 9.5 | 
|                              | Rate of compensation increases        |                  |  | 4.5              |  |      |  | 4.8  |  |      |  | 5.0  |  |  |  | 4.4 |  |  |  | 4.2 |  |  |  | 5.1 | 
|                              | Rate of pension increases             |                  |  | 2.5              |  |      |  | 2.8  |  |      |  | 3.0  |  |  |  | 0.5 |  |  |  | 1.5 |  |  |  | 2.0 | 

The table below presents data with respect to net
periodic benefit expense/(income) excluding those related to
discontinued operations:

|                                                                   |                                                               |                  |    |                  |   |      |    |      |   |      |    |      |   |  |    |     |   |  |    |     |   |  |     |     |  
|------------------------------------------------------------------ | ------------------------------------------------------------- | ---------------- | -- | ---------------- | - | ---- | -- | ---- | - | ---- | -- | ---- | - |  | -- | --- | - |  | -- | --- | - |  | --- | --- | -
|                                                                   |                                                               |                  |    |                 
|                                                                   |                                                               | Pension benefits |    | Pension benefits
|                                                                   |                                                               | U.K. plans       |    | Overseas plans  
|                                                                   |                                                               | 2003             |    | 2002             |   | 2001 |    | 2003 |   | 2002 |    | 2001
|(in millions)                                                      |                                                               | £                |    | £                |   | £    |    | £    |   | £    |    | £   
|                                                                   |                                                               |                 
|                                                                   |                                                               |                 
|Components of net periodic Benefit
    Expense/(income):           |                                                               |                  |    |                  |   |      |    |      |   |      |    |      |   |  |    |     |   |  |    |     |   |  |     |    
|                                                                   | Service cost                                                  |                  |    | 26               |   |      |    | 34   |   |      |    | 37   |   |  |    | 7   |   |  |    | 4   |   |  |     | 4   |  
|                                                                   | Interest cost                                                 |                  |    | 138              |   |      |    | 143  |   |      |    | 133  |   |  |    | 14  |   |  |    | 18  |   |  |     | 19  |  
|                                                                   | Expected return on plan Assets                                |                  |    | (138             | ) |      |    | (181 | ) |      |    | (179 | ) |  |    | (13 | ) |  |    | (25 | ) |  |     | (32 | )
|                                                                   | Amortization of unrecognized transition
    liability/(asset) |                  |    | 3                |   |      |    | 3    |   |      |    | 3    |   |  |    |    |   |  |    |    |   |  |     | (2  | )
|                                                                   | Amortization of prior service Cost                            |                  |    |                 |   |      |    |     |   |      |    |     |   |  |    |    |   |  |    | 1   |   |  |     | 1   |  
|                                                                   | Amortization of actuarial Gains                               |                  |    |                 |   |      |    |     |   |      |    |     |   |  |    |    |   |  |    | (1  | ) |  |     | (4  | )
|                                                                   |                                                               |                 
|Net periodic benefit expense/(income) of defined
    benefit plans |                                                               |                  | 29 |                  |   |      | (1 | )    |   |      | (6 | )    |   |  | 8  |     |   |  | (3 | )   |   |  | (14 | )  
|Amounts recognized in respect of discontinued
    operations       |                                                               |                  |   |                  |   |      |   |      |   |      |   |      |   |  |   |     |   |  | 9  |     |   |  |    |    
|Net curtailment loss                                               |                                                               |                  |   |                  |   |      |   |      |   |      |   |      |   |  | 3  |     |   |  |   |     |   |  | 2   |    
|                                                                   |                                                               |                 
|Net periodic benefit expense/(income)                              |                                                               |                  | 29 |                  |   |      | (1 | )    |   |      | (6 | )    |   |  | 11 |     |   |  | 6  |     |   |  | (12 | )  
|                                                                   |                                                               |                 

At March 31, 2003 the projected benefit
obligation, accumulated benefit obligation, and fair value of
plan assets for pension plans which have an accumulated benefit
obligation in excess of plan assets were
£2,689 million, £2,618 million, and
£2,371 million respectively (2002,
£134 million, £134 million, and
£60 million respectively).

Other post-retirement
benefits

At March 31, 2003 no active employees and
1,730 retired employees (2002, 186 and 1,809 respectively) of
companies in the United States of America and Canada were
entitled to health care benefits after retirement.

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All of the other post retirement plans are
unfunded. The benefit cost charges and provisions for the
liability are as follows:

|                                         |                                        |                 |     |      |   |  |     |    |  
|---------------------------------------- | -------------------------------------- | --------------- | --- | ---- | - |  | --- | -- | -
|                                         |                                        |                
|                                         |                                        | Post retirement
|                                         |                                        | benefits       
|                                         |                                        | March 31,      
|                                         |                                        | 2003            |     | 2002
|(in millions)                            |                                        | £               |     | £   
|                                         |                                        |                
|                                         |                                        |                
|Change in benefit obligations:           |                                        |                 |     |      |   |  |     |   
|Benefit obligations at beginning of year |                                        |                 | 38  |      |   |  | 40  |   
|                                         | Service cost                           |                 |     |     |   |  |     | 1  |  
|                                         | Interest cost                          |                 |     | 2    |   |  |     | 3  |  
|                                         | Plan amendments                        |                 |     | (1   | ) |  |     | (1 | )
|                                         | Actuarial loss                         |                 |     | 3    |   |  |     | 4  |  
|                                         | Business acquired                      |                 |     |     |   |  |     | (5 | )
|                                         | Curtailment gain                       |                 |     | (5   | ) |  |     |   |  
|                                         | Benefits paid                          |                 |     | (4   | ) |  |     | (4 | )
|                                         | Foreign currency exchange rate changes |                 |     | (4   | ) |  |     |   |  
|                                         |                                        |                
|Benefit obligations at end of year       |                                        |                 | 29  |      |   |  | 38  |   
|Funded status                            |                                        |                 | (29 | )    |   |  | (38 | ) 
|Unrecognized net actuarial gain          |                                        |                 | (9  | )    |   |  | (12 | ) 
|Unrecognized prior service cost          |                                        |                 | (3  | )    |   |  | (5  | ) 
|                                         |                                        |                
|Net accrued benefit cost                 |                                        |                 | (41 | )    |   |  | (55 | ) 
|                                         |                                        |                

Data with respect to net periodic benefit cost is
as follows:

|                                                                         |                          |                 |    |      |   |      |   |    |   |  |   |    |  
|------------------------------------------------------------------------ | ------------------------ | --------------- | -- | ---- | - | ---- | - | -- | - |  | - | -- | -
|                                                                         |                          |                
|                                                                         |                          | Post retirement
|                                                                         |                          | benefits       
|                                                                         |                          | March 31,      
|                                                                         |                          | 2003            |    | 2002 |   | 2001
|(in millions)                                                            |                          | £               |    | £    |   | £   
|                                                                         |                          |                
|                                                                         |                          |                
|Components of net periodic benefit
    (income)/expense:                 |                          |                 |    |      |   |      |   |    |   |  |   |   
|                                                                         | Service cost             |                 |    |     |   |      |   | 1  |   |  |   | 1  |  
|                                                                         | Interest cost            |                 |    | 2    |   |      |   | 3  |   |  |   | 2  |  
|                                                                         | Amortization of net gain |                 |    | (1   | ) |      |   | (1 | ) |  |   | (1 | )
|                                                                         | Net curtailment gain     |                 |    | (5   | ) |      |   |   |   |  |   |   |  
|                                                                         |                          |                
|Net periodic benefit (income)/expense of other
    post-retirement plans |                          |                 | (4 | )    |   |      | 3 |    |   |  | 2 |   
|                                                                         |                          |                

Different assumptions were made in relation to
the cost of retiree health care benefits. For the majority of
plans, the assumptions were as follows:

In fiscal 2003, an annual rate of increase per
capita in the cost of retiree health care benefits of 12% for
2003 (decreasing gradually over the following years to 6% in
2012) was assumed for all employees and retirees. The annual
rate of increase in the cost of prescription drugs of 15% in
2003 (decreasing gradually over the following years to 6% in
2012) was assumed for all employees and retirees. In fiscal
2002, the annual rate of increase per capita in the cost of
retiree healthcare benefits (including prescription drugs) for
employees under age 65 was assumed to be 6% and for retirees
over 65 was assumed to be 7.5% for 2002 (decreasing over
the following years to 5% in 2005). In fiscal 2001, the rate for
employees under the age of 65 was assumed to be 7% and for
retirees over 65 was assumed to be 9% for 2001 (decreasing over
the following years to 5% in 2005).

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An increase of one percentage point in such
assumed rates would have increased the benefit obligation at
March 31, 2003 by approximately £2 million and
the service and interest cost components of the net periodic
benefit cost for the year then ended by approximately £nil
and £nil respectively. A decrease of one percentage point
in such assumed rates would have decreased the benefit
obligation at March 31, 2003 by approximately
£2 million and the service and interest cost
components of the net periodic benefit cost for the year then
ended by approximately £nil and £nil respectively.

Defined contribution plans

The U.S. subsidiaries of the Company operate
401(k) plans for eligible employees who contribute a percentage
of their pre-tax compensation with the Company matching these
contributions up to prescribed limits. For fiscal 2003, the
matching contributions were £7 million (2002,
£14 million and 2001, £5 million).

9.   Segment and related
information disclosures

The Companys reportable segments have been
determined based upon the nature of the products and services
offered to its customers, are managed separately and are
comprised of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Network Equipment segment develops,
    manufactures, sells and supports optical networks, transmission
    systems and network management software for customers in the
    carrier network market. It also provides to customers in the
    carrier network market a broad range of access products. In
    addition, it supplies customers in both the carrier and the
    enterprise network markets a broad range of high-performance,
    high-capacity broadband switches, which select paths for sending
    large amounts of voice and data traffic through a network.
|
| |  | The Network Services segment provides a broad
    range of support services to the communications industry
    worldwide tailored to suit customers needs. It supports
    both the Companys products and those of other network
    equipment manufacturers.                                                                                                                                                                                                                                                                                                                    
|
| |  | The Other segment contains the Companys
    other investments and businesses not included in other segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Management refers to Network Equipment and
Network Services in aggregate as the Core division and Other as
the Capital division.

Discontinued segments

During fiscal 2002, the Company disposed of both
its Data Systems and Medical Systems businesses, and on
August 2, 2002, the Company announced the disposal of its
strategic communications business, a significant portion of the
Mobile segment. Effective March 31, 2002, these segments
were classified as discontinued operations as described further
in note 12, Discontinued operations.



| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Mobile Communications segment designed,
    developed, and integrated communications and information
    technologies into wireless communications systems for
    professional and military uses.
|
| |  | The Data Systems segment 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 segment manufactured and
    designed medical imaging equipment for both diagnostic and
    therapeutic uses.                                                                     

Segmental performance

Revenues and operating profits are measured on a
segmental basis in accordance with U.K. GAAP. The principal
measurement differences between U.K. GAAP and U.S. GAAP as
related to the information reported on a segmental basis are the
result of differences in the accounting for pensions and
post-retirement benefits, reorganization costs, goodwill and
employee share options.

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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.

Management uses the U.K. GAAP operating
(loss)/profit before goodwill and intangible asset amortization,
in-process research and development write-offs, U.K. GAAP
exceptional items, gains and losses on business disposals and
the impact of 50% or less owned affiliates as its measure of
segment profitability. In the tables below, this measure is
referred to as segment operating (loss)/profit.

The following tables present the Companys
revenues, operating (loss)/income before exceptional items,
goodwill amortization and other items, and other financial data
from the Companys reportable segments presented in
accordance with U.K. GAAP and then reconciled to U.S. GAAP
financial information consolidated totals:

Analysis of reportable segments (U.K.
GAAP)

|                                             |  |          |       |               |  |             |      |   |  |  |     |  
|-------------------------------------------- |  | -------- | ----- | ------------- |  | ----------- | ---- | - |  |  | --- | -
|                                             |  |          |       | Segment       |  |            
|As of and for the year ended                 |  |          |       | operating     |  | Capital    
|March 31, 2003                               |  | Revenues |       | (loss)/profit |  | employed(3)
|(in millions)                                |  | £        |       | £             |  | £          
|                                             |  |         
|                                             |  |         
|Network equipment                            |  |          | 1,131 |               |  |             | (259 | ) |  |  |     |  
|                                             |  |          |       |               |  |             |      |   |  |  | 220 |  
|Network services                             |  |          | 743   |               |  |             | 52   |   |  |  |     |  
|Capital (net of intra segment revenue of £7) |  |          | 40    |               |  |             | (107 | ) |  |  | (27 | )
|Discontinued(1)                              |  |          | 88    |               |  |             | (2   | ) |  |  |    |  
|                                             |  |         
|Segment total  U.K. GAAP                    |  |          | 2,002 |               |  |             | (316 | ) |  |  | 193 |  
|                                             |  |         

|                                              |  |          |       |               |  |             |      |   |  |  |     | 
|--------------------------------------------- |  | -------- | ----- | ------------- |  | ----------- | ---- | - |  |  | --- | 
|                                              |  |          |       | Segment       |  |            
|As of and for the year ended                  |  |          |       | operating     |  | Capital    
|March 31, 2002                                |  | Revenues |       | (loss)/profit |  | employed(3)
|(in millions)                                 |  | £        |       | £             |  | £          
|                                              |  |         
|                                              |  |         
|Network equipment                             |  |          | 1,804 |               |  |             | (464 | ) |  |  |     | 
|                                              |  |          |       |               |  |             |      |   |  |  | 607 | 
|Network services                              |  |          | 969   |               |  |             | 35   |   |  |  |     | 
|Capital (net of intra segment revenue of £32) |  |          | 390   |               |  |             | (138 | ) |  |  | 122 | 
|Discontinued(1)                               |  |          | 1,404 |               |  |             | 104  |   |  |  | 196 | 
|                                              |  |         
|Segment total  U.K. GAAP                     |  |          | 4,567 |               |  |             | (463 | ) |  |  | 925 | 
|                                              |  |         

|                                              |  |          |       |           |  |             |     |   |  |  |       | 
|--------------------------------------------- |  | -------- | ----- | --------- |  | ----------- | --- | - |  |  | ----- | 
|                                              |  |          |       | Segment   |  |            
|As of and for the year ended                  |  |          |       | operating |  | Capital    
|March 31, 2001(2)                             |  | Revenues |       | profit    |  | employed(3)
|(in millions)                                 |  | £        |       | £         |  | £          
|                                              |  |         
|                                              |  |         
|Network equipment                             |  |          | 3,359 |           |  |             | 442 |   |  |  |       | 
|                                              |  |          |       |           |  |             |     |   |  |  | 1,977 | 
|Network services                              |  |          | 1,016 |           |  |             | 102 |   |  |  |       | 
|Capital (net of intra segment revenue of £55) |  |          | 540   |           |  |             | (14 | ) |  |  | 42    | 
|Discontinued(1)                               |  |          | 2,027 |           |  |             | 224 |   |  |  | 623   | 
|                                              |  |         
|Segment total  U.K. GAAP                     |  |          | 6,942 |           |  |             | 754 |   |  |  | 2,642 | 
|                                              |  |         



| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | For fiscal 2003 the discontinued operations
    relates to mobile and for fiscal 2002 and 2001, the discontinued
    operations is related to data systems, medical systems and
    mobile.
|
| | (2) | For fiscal 2001 the segmental data has been
    restated for the effects of Financial Reporting
    Standard 17, Retirement Benefits issued by the U.K.
    Accounting Standards Board.    

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| |     |                                                                                                                                                                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (3) | Included in capital employed are the following:
    property, plant and equipment, inventory, accounts receivable,
    prepaid expense and other current assets, other non-current
    assets, accounts payable, accrued liabilities, non-current
    liabilities, and other liabilities.

Analysis of revenue by product (U.K.
GAAP)

|                           |       |                                                           |       |       |       |      |       |       |       |  |       |       |       | 
|-------------------------- | ----- | --------------------------------------------------------- | ----- | ----- | ----- | ---- | ----- | ----- | ----- |  | ----- | ----- | ----- | 
|                           |       | 2003                                                      |       | 2002  |       | 2001
|                           |       | £                                                         |       | £     |       | £   
|                           |       |                                                          
|                           |       |                                                          
|Network Equipment:         |       |                                                           |       |       |       |      |       |       |       |  |       |      
|Optical Networks           |       |                                                           | 439   |       |       |      | 737   |       |       |  | 1,408 |      
|BBRS                       |       |                                                           | 142   |       |       |      | 209   |       |       |  | 427   |      
|European Access(1)         |       |                                                           | 258   |       |       |      | 361   |       |       |  |       |      
|North American Access(1)   |       |                                                           | 95    |       |       |      | 121   |       |       |  | 1,524 |      
|Outside Plant & Power(1)   |       |                                                           | 140   |       |       |      | 247   |       |       |  |       |      
|Other Network Equipment(1) |       |                                                           | 57    |       |       |      | 129   |       |       |  |       |      
|                           |       |                                                          
|                           | Total |                                                           |       | 1,131 |       |      |       | 1,804 |       |  |       | 3,359 |      
|Network Services:          |       |                                                           |       |       |       |      |       |       |       |  |       |      
|IC&M                       |       |                                                           | 370   |       |       |      | 528   |       |       |  | 656   |      
|VAS                        |       |                                                           | 373   |       |       |      | 441   |       |       |  | 360   |      
|                           |       |                                                          
|                           | Total |                                                           |       | 743   |       |      |       | 969   |       |  |       | 1,016 |      
|                           |       |                                                          
|                           |       | Total Network Equipment and Network Services
    revenues |       |       | 1,874 |      |       |       | 2,773 |  |       |       | 4,375 | 
|Total capital revenue      |       |                                                           | 40    |       |       |      | 390   |       |       |  | 540   |      
|Total discontinued         |       |                                                           | 88    |       |       |      | 1,404 |       |       |  | 2,027 |      
|                           |       |                                                          
|Total revenues             |       |                                                           | 2,002 |       |       |      | 4,567 |       |       |  | 6,942 |      
|                           |       |                                                          



| |     |                                                                                                                                                                     
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In fiscal 2003, we realigned our Network
    Equipment businesses. As a result, comparative information for
    certain businesses is not available for fiscal 2001.

Reconciliation of U.K. GAAP segmental
information to U.S. GAAP

Revenue

|                                     |              |      |       |      |   |      |       |      |   |  |       |        |  
|------------------------------------ | ------------ | ---- | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ------ | -
|                                     |              | 2003 |       | 2002 |   | 2001
|(in millions)                        |              | £    |       | £    |   | £   
|                                     |              |     
|                                     |              |     
|Revenue in accordance with U.K. GAAP |              |      | 2,002 |      |   |      | 4,567 |      |   |  | 6,942 |       
|Discontinued operations:             |              |      |       |      |   |      |       |      |   |  |       |       
|                                     | data systems |      |       |     |   |      |       | (175 | ) |  |       | (239   | )
|                                     | Medical      |      |       |     |   |      |       | (584 | ) |  |       | (1,112 | )
|                                     | Mobile       |      |       | (106 | ) |      |       | (355 | ) |  |       | (331   | )
|Joint ventures                       |              |      |      |      |   |      | (257  | )    |   |  | (289  | )     
|Long-term contract adjustment        |              |      |      |      |   |      | 50    |      |   |  | (50   | )     
|                                     |              |     
|Revenue in accordance with U.S. GAAP |              |      | 1,896 |      |   |      | 3,246 |      |   |  | 4,921 |       
|                                     |              |     

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Operating (loss)/income

|                                                                                                                                                                                      |                                                                                     |      |      |      |   |      |        |        |   |  |     |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---- | ---- | ---- | - | ---- | ------ | ------ | - |  | --- | ---- | -
|                                                                                                                                                                                      |                                                                                     | 2003 |      | 2002 |   | 2001
|(in millions)                                                                                                                                                                         |                                                                                     | £    |      | £    |   | £   
|                                                                                                                                                                                      |                                                                                     |     
|                                                                                                                                                                                      |                                                                                     |     
|Segmental operating (loss)/profit per U.K. GAAP                                                                                                                                       |                                                                                     |      | (316 | )    |   |      | (463   | )      |   |  | 754 |     
|                                                                                                                                                                                      | Amortization expense                                                                |      |      | (104 | ) |      |        | (433   | ) |  |     | (673 | )
|                                                                                                                                                                                      | Share of associates operating (loss)/profit                                         |      |      | (89  | ) |      |        | (181   | ) |  |     | 8    |  
|                                                                                                                                                                                      | Operating exceptional items                                                         |      |      | (358 | ) |      |        | (5,216 | ) |  |     | (32  | )
|                                                                                                                                                                                      |                                                                                     |     
|U.K. GAAP operating (loss)/profit                                                                                                                                                     |                                                                                     |      | (867 | )    |   |      | (6,293 | )      |   |  | 57  |     
|                                                                                                                                                                                      | Joint ventures and associates operating
    loss/(profit)                           |      |      | 129  |   |      |        | 178    |   |  |     | (28  | )
|                                                                                                                                                                                      | U.K. GAAP non-operating exceptional items
    included in U.S GAAP operating income |      |      |     |   |      |        | 36     |   |  |     | 39   |  
|                                                                                                                                                                                      | U.K. GAAP operating loss/(income) of discontinued
    operations                    |      |      | 70   |   |      |        | 35     |   |  |     | (129 | )
|U.S. GAAP adjustments:                                                                                                                                                                |                                                                                     |      |      |      |   |      |        |        |   |  |     |     
|                                                                                                                                                                                      | Share option plans                                                                  |      |      | (14  | ) |      |        | (31    | ) |  |     | 9    |  
|                                                                                                                                                                                      | Long-term contract adjustment                                                       |      |      |     |   |      |        | 30     |   |  |     | (30  | )
|                                                                                                                                                                                      | Pension and other post-retirement benefits                                          |      |      | 11   |   |      |        | 30     |   |  |     | 69   |  
|                                                                                                                                                                                      | Goodwill and intangible asset amortization and
    impairment Charges               |      |      | 37   |   |      |        | (298   | ) |  |     | (42  | )
|                                                                                                                                                                                      | Gain/(loss) on sale of businesses                                                   |      |      | 5    |   |      |        | (68    | ) |  |     |     |  
|                                                                                                                                                                                      | Restructuring costs                                                                 |      |      | 18   |   |      |        | (10    | ) |  |     |     |  
|                                                                                                                                                                                      | Other                                                                               |      |      | 3    |   |      |        | (1     | ) |  |     | 3    |  
|                                                                                                                                                                                      |                                                                                     |     
|U.S. GAAP operating loss                                                                                                                                                              |                                                                                     |      | (608 | )    |   |      | (6,392 | )      |   |  | (52 | )   
|                                                                                                                                                                                      | (Loss)/gain on investments, net                                                     |      |      | (45  | ) |      |        | 89     |   |  |     | 461  |  
|                                                                                                                                                                                      | Other income                                                                        |      |      | 34   |   |      |        |       |   |  |     |     |  
|                                                                                                                                                                                      | Interest income                                                                     |      |      | 45   |   |      |        | 40     |   |  |     | 44   |  
|                                                                                                                                                                                      | Interest expense                                                                    |      |      | (329 | ) |      |        | (272   | ) |  |     | (195 | )
|                                                                                                                                                                                      |                                                                                     |     
|U.S. GAAP (loss)/income from continuing
    operations before income taxes, minority interests, cumulative
    effects of changes in accounting principles and extraordinary
    gain |                                                                                     |      | (903 | )    |   |      | (6,535 | )      |   |  | 258 |     
|                                                                                                                                                                                      |                                                                                     |     

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Capital employed/ total assets

|                                                           |                                                                             |      |        |        |   |  |       |        |  
|---------------------------------------------------------- | --------------------------------------------------------------------------- | ---- | ------ | ------ | - |  | ----- | ------ | -
|                                                           |                                                                             | 2003 |        | 2002  
|(in millions)                                              |                                                                             | £    |        | £     
|                                                           |                                                                             |     
|                                                           |                                                                             |     
|Total U.K. GAAP segment capital
    employed               |                                                                             |      | 193    |        |   |  | 925   |       
|Capital employed of fixed asset investments                |                                                                             |      | 47     |        |   |  | 197   |       
|Corporate capital employed not allocated to
    segments:  |                                                                             |      |        |        |   |  |       |       
|                                                           | Goodwill                                                                    |      |        | 597    |   |  |       | 877    |  
|                                                           | Net amount due from related parties                                         |      |        | 21     |   |  |       | 17     |  
|                                                           | Tax                                                                         |      |        | (137   | ) |  |       | (290   | )
|                                                           | Net interest bearing assets and liabilities                                 |      |        | (2,780 | ) |  |       | (1,007 | )
|                                                           | Net assets of non trading entities                                          |      |        | 227    |   |  |       | 268    |  
|                                                           |                                                                             |     
|U.K. GAAP capital employed                                 |                                                                             |      | (1,832 | )      |   |  | 987   |       
|U.S. GAAP adjustments:                                     |                                                                             |      |        |        |   |  |       |       
|                                                           | Provisions for restructuring not included in U.K.
    GAAP capital employed |      |        | (355   | ) |  |       | (306   | )
|                                                           | Discontinued operations                                                     |      |        |       |   |  |       | 129    |  
|                                                           | Goodwill and intangible asset amortization and
    impairment Charges       |      |        | 161    |   |  |       | 94     |  
|                                                           | Derivatives                                                                 |      |        | (68    | ) |  |       | (23    | )
|                                                           | Pensions and other post-retirement benefits                                 |      |        | (9     | ) |  |       | (206   | )
|                                                           | Other                                                                       |      |        | (10    | ) |  |       | (23    | )
|                                                           |                                                                             |     
|                                                           |                                                                             |      | (2,113 | )      |   |  | 652   |       
|Add back credit balances included in capital
    employed: |                                                                             |      |        |        |   |  |       |       
|                                                           | Accounts payable                                                            |      |        | 163    |   |  |       | 326    |  
|                                                           | Accrued expenses and other current liabilities                              |      |        | 1,048  |   |  |       | 1,568  |  
|                                                           | Net liabilities of discontinued operations                                  |      |        | 12     |   |  |       |       |  
|                                                           | Current portion of long term debt                                           |      |        | 1,806  |   |  |       | 41     |  
|                                                           | Short-term debt                                                             |      |        | 2,195  |   |  |       | 2,338  |  
|                                                           |                                                                             |     
|Total U.S. GAAP assets                                     |                                                                             |      | 3,111  |        |   |  | 4,925 |       
|                                                           |                                                                             |     

U.K.  U.S. GAAP
adjustments

The following describes the significant U.K. GAAP
to U.S. GAAP adjustments as they relate to segment
information.



|  |                       
|- | ----------------------
| | Joint venture revenues

As required under U.K. GAAP, the segment revenue
total includes the Companys share of revenues earned by
joint ventures. Accordingly, the Companys share of joint
ventures revenue is deducted in reconciling from revenue as
reported under U.K. GAAP to the revenue recorded in the
U.S. GAAP consolidated financial statements.



|  |                                          
|- | -----------------------------------------
| | U.K. GAAP operating exceptional
    items

Under U.K. GAAP, amounts included within
operating profit may be separately disclosed if they are unusual
in size or nature and are not expected to recur. These items are
referred to as operating exceptional items. There is no
equivalent term or treatment in U.S. GAAP and the items are
included in an appropriate line item in arriving at operating
(loss)/profit.

For fiscal 2003 and 2002, the operating
exceptional items have been classified under business
restructuring charges, direct costs and long-lived asset
impairments in the consolidated statement of operations due to
the nature of the balances. For fiscal 2001, these items were
included in and relate to selling, general and administrative
expenses within the consolidated statement of operations.

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|  |                        
|- | -----------------------
| | Discontinued operations

U.K. GAAP requires disclosure as discontinued
operations any businesses ceased or disposed of before the
earlier of three months after the balance sheet date and the
approval date of the financial statements. Under U.S. GAAP,
discontinued operations also include those operations where
management has committed to a formal plan of disposal by the
balance sheet date. Under U.S. GAAP, the results of the
Mobile Communications, Medical Systems, Data Systems and MES
businesses have been presented as discontinued operations for
all years reported.



|  |                   
|- | ------------------
| | Share option plans

Under both U.K. GAAP and U.S. GAAP, share
option plans give rise to compensation expense when specified
criteria are met. The measurement date and calculation of
expense can be different, giving rise to GAAP adjustments to
compensation expense, accrued liabilities, and additional
paid-in capital as well as goodwill and amortization if such
options are issued in connection with a business combination.



|  |                              
|- | -----------------------------
| | Long-term contract adjustment

An agreement existed for the sale of equipment,
which has been installed and accepted by the customer. Under
U.K. GAAP, these types of arrangements qualify for long-term
contract accounting with revenue recorded based on work
performed under the contract. U.S. GAAP does not permit
revenue recognition in those instances where specific criteria
have not yet occurred, and where the obligation for the customer
to pay has not yet fallen due. Accordingly, adjustments arise
due to the timing differences for recognition under U.K. and
U.S. GAAP. At March 31, 2003 and 2002, there were no
cumulative differences in revenue recognized between U.K. and
U.S. GAAP.



|  |                                               
|- | ----------------------------------------------
| | Pension and other post-retirement
    benefits

Under both U.K. GAAP and U.S. GAAP pension
costs are provided for so as to provide for future pension
liabilities. However, there are differences in the prescribed
methods of valuation, which give rise to GAAP adjustments to the
pension cost and obligation or prepayment. Furthermore, under
U.K. GAAP the notional interest cost associated with the pension
and post-retirement benefit obligation is classified as interest
expense, whereas under U.S. GAAP it is classified with
employee costs.



|  |                                                                      
|- | ---------------------------------------------------------------------
| | Goodwill and intangible asset amortization and
    impairment charges

Under both U.K. and U.S. GAAP, the purchase
price of a transaction accounted for as an acquisition is based
on the fair value of the consideration. Differences in the
carrying value of goodwill arise as the result of U.S. GAAP
differences in the net assets acquired, such as the treatment of
share options issued for acquisitions and deferred taxes. Such
differences in the calculation of goodwill resulted in
differences in amortization expense. Also, effective
April 1, 2002, goodwill is no longer amortized under
U.S. GAAP but continues to be amortised for U.K. GAAP.
Differences in the impairment loss recognized arise as a result
of the differences in the carrying value of the underlying
goodwill and net assets under U.K. GAAP and U.S. GAAP.



|  |                                  
|- | ---------------------------------
| | Gain/(loss) on sale of businesses

Differences in the gain or loss on the sale of a
business arise as a result of the differences in the carrying
value of the underlying net assets under U.K. GAAP and
U.S. GAAP.



|  |                    
|- | -------------------
| | Restructuring costs

Under U.K. GAAP, provisions are recognized when
the Company has a present obligation as a result of a past
event, when it is probable that a transfer of economic benefits
will be required to settle the obligation, and when a reliable
estimate can be made of the amount of the obligation. Under
U.S. GAAP, a number of specific criteria must be met before
restructuring costs can be recognized as an expense. Among these
criteria

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is the requirement that all significant actions
arising from the restructuring plan and their completion dates
must be identified by the balance sheet date, and employees must
be notified in order for termination benefits to be accrued.
Accordingly, adjustments arise due to the timing differences for
recognition under U.K. and U.S. GAAP.




|  |            
|- | -----------
| | Derivatives

Under U.S. GAAP, the carrying amount of
certain hedged items are adjusted for gains or losses
attributable to the hedged risk. This unrealized gain is offset
by changes in the fair value of the derivative. Additionally, on
the sale or early termination of the hedged items, gains and
losses are immediately reclassified to other (income)/expense.
Under U.K. GAAP, these gains and losses are amortized until the
date of termination.

Major customers

At March 31, 2003, the Company had one
customer that accounted for 17% (2002, 12% and 2001, 17%) of
revenue.

Revenue by geography
(U.S. GAAP)

Revenue to unaffiliated customers by geographic
region is as follows:

|                                     |                                          |                      |     |       |  |      |       |       |  |  |       |       | 
|------------------------------------ | ---------------------------------------- | -------------------- | --- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                     |                                          |                     
|                                     |                                          | Year ended March 31,
|                                     |                                          | 2003                 |     | 2002  |  | 2001
|(in millions)                        |                                          | £                    |     | £     |  | £   
|                                     |                                          |                     
|                                     |                                          |                     
|Revenue by territory of destination: |                                          |                      |     |       |  |      |       |       |  |  |       |      
|United Kingdom                       |                                          |                      | 500 |       |  |      | 837   |       |  |  | 1,418 |      
|Italy                                |                                          |                      | 156 |       |  |      | 201   |       |  |  | 197   |      
|Other                                |                                          |                      | 512 |       |  |      | 757   |       |  |  | 1,170 |      
|                                     |                                          |                     
|                                     | Total Europe, Middle East, Africa (EMEA) |                      |     | 1,168 |  |      |       | 1,795 |  |  |       | 2,785 | 
|                                     |                                          |                     
|United States                        |                                          |                      | 519 |       |  |      | 1,064 |       |  |  | 1,560 |      
|Central and Latin America (CALA)     |                                          |                      | 62  |       |  |      | 118   |       |  |  | 229   |      
|Other                                |                                          |                      | 15  |       |  |      | 39    |       |  |  | 16    |      
|                                     |                                          |                     
|                                     | Total the Americas                       |                      |     | 596   |  |      |       | 1,221 |  |  |       | 1,805 | 
|                                     |                                          |                     
|Asia Pacific (APAC)                  |                                          |                      | 132 |       |  |      | 230   |       |  |  | 331   |      
|                                     |                                          |                     
|                                     | Total external revenue                   |                      |     | 1,896 |  |      |       | 3,246 |  |  |       | 4,921 | 
|                                     |                                          |                     

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|                                 |                                          |                      |     |       |  |      |       |       |  |  |       |       | 
|-------------------------------- | ---------------------------------------- | -------------------- | --- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                 |                                          |                     
|                                 |                                          | Year ended March 31,
|                                 |                                          | 2003                 |     | 2002  |  | 2001
|(in millions)                    |                                          | £                    |     | £     |  | £   
|                                 |                                          |                     
|                                 |                                          |                     
|Revenue by territory of origin:  |                                          |                      |     |       |  |      |       |       |  |  |       |      
|United Kingdom                   |                                          |                      | 692 |       |  |      | 1,058 |       |  |  | 1,918 |      
|Italy                            |                                          |                      | 230 |       |  |      | 299   |       |  |  | 401   |      
|Other                            |                                          |                      | 219 |       |  |      | 449   |       |  |  | 666   |      
|                                 |                                          |                     
|                                 | Total Europe, Middle East, Africa (EMEA) |                      |     | 1,141 |  |      |       | 1,806 |  |  |       | 2,985 | 
|                                 |                                          |                     
|United States                    |                                          |                      | 534 |       |  |      | 1,009 |       |  |  | 1,500 |      
|Central and Latin America (CALA) |                                          |                      | 57  |       |  |      | 188   |       |  |  | 174   |      
|Other                            |                                          |                      | 18  |       |  |      | 42    |       |  |  | 48    |      
|                                 |                                          |                     
|                                 | Total the Americas                       |                      |     | 609   |  |      |       | 1,239 |  |  |       | 1,722 | 
|                                 |                                          |                     
|Asia Pacific (APAC)              |                                          |                      | 146 |       |  |      | 201   |       |  |  | 214   |      
|                                 |                                          |                     
|                                 | Total external revenue                   |                      |     | 1,896 |  |      |       | 3,246 |  |  |       | 4,921 | 
|                                 |                                          |                     

No other individual country contributed more than
10% of revenue in any of the years reported.

Revenue by product
(U.S. GAAP)

Revenue by product is as follows:

|                   |                                             |                      |       |       |  |      |       |       |  |  |       |       | 
|------------------ | ------------------------------------------- | -------------------- | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                   |                                             |                     
|                   |                                             | Year ended March 31,
|                   |                                             | 2003                 |       | 2002  |  | 2001
|(in millions)      |                                             | £                    |       | £     |  | £   
|                   |                                             |                     
|                   |                                             |                     
|                   | Optical networks                            |                      |       | 439   |  |      |       | 787   |  |  |       | 1,358 | 
|                   | Access systems                              |                      |       | 493   |  |      |       | 729   |  |  |       | 1,372 | 
|                   | Broadband routing and switching             |                      |       | 142   |  |      |       | 209   |  |  |       | 427   | 
|                   | Other network equipment                     |                      |       | 57    |  |      |       | 87    |  |  |       | 111   | 
|                   |                                             |                     
|Network Equipment  |                                             |                      | 1,131 |       |  |      | 1,812 |       |  |  | 3,268 |      
|                   |                                             |                     
|                   | Value-added services                        |                      |       | 373   |  |      |       | 441   |  |  |       | 360   | 
|                   | Installation, commissioning and maintenance |                      |       | 370   |  |      |       | 528   |  |  |       | 656   | 
|                   |                                             |                     
|Network Services   |                                             |                      | 743   |       |  |      | 969   |       |  |  | 1,016 |      
|                   |                                             |                     
|                   | Total Core revenues                         |                      |       | 1,874 |  |      |       | 2,781 |  |  |       | 4,284 | 
|Capital businesses |                                             |                      | 22    |       |  |      | 465   |       |  |  | 637   |      
|                   |                                             |                     
|                   | Total external revenue                      |                      |       | 1,896 |  |      |       | 3,246 |  |  |       | 4,921 | 
|                   |                                             |                     

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Long-lived assets

Within capital employed, the balance sheet
measure reviewed by the chief operating decision maker, the only
long-lived assets included are property, plant and equipment and
other non-current assets.

Expenditure by sector on property, plant and
equipment is as follows:

|                        |       |                      |    |      |  |      |     |     |  |  |     |     | 
|----------------------- | ----- | -------------------- | -- | ---- |  | ---- | --- | --- |  |  | --- | --- | 
|                        |       |                     
|                        |       | Year ended March 31,
|                        |       | 2003                 |    | 2002 |  | 2001
|(in millions)           |       | £                    |    | £    |  | £   
|                        |       |                     
|                        |       |                     
|Network Equipment       |       |                      |    |      |  |      |     |     |  |  |     |    
|                        |       |                      | 34 |      |  |      | 168 |     |  |  | 283 |    
|Network Services        |       |                      |    |      |  |      |     |     |  |  |     |    
|Capital                 |       |                      | 1  |      |  |      | 159 |     |  |  | 236 |    
|                        |       |                     
|                        | Total |                      |    | 35   |  |      |     | 327 |  |  |     | 519 | 
|Discontinued operations |       |                      | 8  |      |  |      | 35  |     |  |  | 68  |    
|                        |       |                     
|                        | Total |                      |    | 43   |  |      |     | 362 |  |  |     | 587 | 
|                        |       |                     

The geographical split of property, plant and
equipment and goodwill and intangibles is as follows:

|               |  |                      |       |      |  |      |       |  |  |  |       | 
|-------------- |  | -------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|               |  |                     
|               |  | Year ended March 31,
|               |  | 2003                 |       | 2002 |  | 2001
|(in millions)  |  | £                    |       | £    |  | £   
|               |  |                     
|               |  |                     
|United Kingdom |  |                      | 567   |      |  |      | 638   |  |  |  | 1,192 | 
|United States  |  |                      | 249   |      |  |      | 354   |  |  |  | 4,668 | 
|Italy          |  |                      | 48    |      |  |      | 59    |  |  |  | 68    | 
|Other          |  |                      | 157   |      |  |      | 251   |  |  |  | 333   | 
|               |  |                     
|Total          |  |                      | 1,021 |      |  |      | 1,302 |  |  |  | 6,261 | 
|               |  |                     

Long-lived assets within other countries are not
individually material for any fiscal year presented.

10. Commitments and
contingencies

Legal proceedings

The Company is not and have not been engaged in,
nor, have pending, 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 these
consolidated financial statements, a significant effect on the
financial position as a whole, except as set out below. Where a
liquidated sum is claimed, a de minimis figure 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. The Company
intends to defend claims vigorously. While the Company believes
there are meritorious defenses, the duration and outcome of the
litigation are not predictable at this point.

Claims against us or group
companies

The following represents the largest outstanding
claims made against the group:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Marconi Corporation, FORE Systems Inc., or FORE
    Systems, and 13 persons who were then directors and/or senior
    executives of FORE Systems are 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
    shareholders of FORE Systems, other than defendants and their
    respective affiliates. The action alleges that Marconi
    Corporation violated federal securities law in relation to
    Marconi Corporations tender offer for FORE Systems
    shares, FORE Systems grant of share options to certain of
    the individual defendants and the treatment afforded the
    individual defendants share

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | options in that tender offer and in the merger
    agreement between Marconi Corporation and FORE Systems.
    Millionerrors Investment Club is the representative of the named
    plaintiff class. The Complaint seeks unspecified damages,
    counsel and expert fees, other costs of the claim and other
    unspecified relief. Plaintiffs lawyers have stated that their
    damage claims would total $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 has been stayed
    and the case remanded to the district court to consider a
    settlement agreement reached among the parties. The settlement
    is subject to court approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | FORE Systems, together with six of its former
    directors and officers, are 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 FORE Systems securities during the period
    July 19, 1996 to April 1, 1997, inclusive. Robert K.
    Bell is the first named plaintiff class representative. The
    plaintiffs allege that, during this period, FORE Systems
    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 FORE Systems projected results of
    operations for fiscal 1997. The plaintiffs also allege that FORE
    Systems 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 are 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 seeks unspecified damages, counsel and
    expert fees and other costs of suit and other unspecified
    relief. The defendants have denied all allegations of
    wrongdoing. Discovery has concluded, and both plaintiffs and
    defendants have filed their respective pre-trial statements. The
    plaintiffs damages expert had initially estimated damages
    at $792 million, then $865 million and then
    $724 million. By order dated August 2, 2002, the court
    granted the defendants motion in limine to
    exclude testimony from the plaintiffs damages expert. At
    the same time, the court denied a motion to exclude testimony
    from the plaintiffs liability expert and discussed a
    proofs of claim procedure which, if liability were found, would
    follow a liability trial. The court also certified the damages
    issue for an interlocutory appeal to the U.S. Court of
    Appeals for the Third Circuit. The plaintiffs did not appeal the
    courts decision. The parties have agreed to a settlement,
    which, if concluded, will result in the Marconi group not making
    any payment to the plaintiff class. The settlement is currently
    being documented and then will be subject to court approval,
    which will take several months.
|
| |  | FORE Systems 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 FORE
    Systems infringed four patents owned by Telcordia, and sought
    unspecified damages for past infringement and an injunction
    against future infringement. FORE Systems denied infringement
    and asserted the affirmative defenses of invalidity,
    unenforceability, laches, equitable estoppel, implied license,
    misuse and unclean hands. In addition, FORE Systems
    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 FORE Systems 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. Discovery in this case has closed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Telcordia maintained its claims for infringement
    on the remaining two patents. The district court conducted a
    claim construction hearing in late August 2000 and subsequently
    entered an order

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | construing the claims of the two remaining
    patents in suit. 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 district court
    to enter an order finding that FORE Systems had not infringed
    the two remaining patents in suit so that the case would be
    procedurally postured for appeal. FORE Systems subsequently
    moved the district court to require that Telcordia identify
    which of the construed patent claim elements it contended were
    in error and precluded Telcordia from proving infringement.
    Telcordia identified some claim elements, and, on
    September 21, 2001, the district court entered a final
    judgment of non-infringement on the two remaining patents.
|
| | Telcordia filed notice of appeal on
    October 19, 2001, and filed its opening brief on
    March 18, 2002. FORE Systems opening brief was filed
    on May 28, 2002. Telcordia filed its reply on July 23,
    2002, and FORE filed its reply on August 9, 2002. Oral
    argument in the appeal took place on February 3, 2003. In
    its decision, announced on March 27, 2003, the
    U.S. Court of Appeals for the Federal Circuit unanimously
    affirmed the district courts judgment on one of the two
    patents, and on the other patent, by a majority decision,
    remanded the case back to district court for further proceedings.                                                                                                                                                                            



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | FORE Systems 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 FORE Systems has
    infringed two additional Telcordia patents. FORE Systems 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.
    FORE Systems has also asserted a counterclaim seeking damages
    for Telcordias infringement of a FORE Systems patent. The
    case was scheduled for trial in November 2000. However, all
    proceedings have been stayed pending the outcome of the
    proceedings in the first lawsuit described above, and discovery
    in this second case has not yet been completed.
|
| |  | 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 (the Agreements); Esprit alleges that SMS breached its
    obligations under the Agreements and is seeking damages in range
    of U.S. $8.8 - $18.2 million. The pleadings
    portion and discovery phase between SMS and Esprit have
    commenced. The arbitration hearing will be conducted in Los
    Angeles, California, U.S.A. Initially, the parties had agreed to
    conduct the arbitration hearing during a two week period in May,
    2003, with discovery and briefing to take place before that
    time. However, this has been delayed and the hearing is now
    scheduled to commence on October 13, 2003.                                                                                                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Marconi plc was originally a party to the
    arbitration demand under a legal theory alleging that SMS and
    Marconi plc are alter egos of one another. Esprit released
    Marconi plc from its original arbitration demand, but then named
    Marconi plc in a federal court proceeding. In response, Marconi
    plc moved to stay the federal court proceeding until after the
    arbitration between SMS and Esprit has concluded. The Court
    granted Marconi plcs motion to stay, and, therefore,
    Esprit will be permitted to proceed on its claims against
    Marconi 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.
|
| | On September 17, 2003, the parties agreed to
    settle the above proceedings for a payment by SMS to Esprit in
    the amount of U.S. $710,000.00. The parties are in the
    process of drafting settlement documentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
    is 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
    Marconi 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

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | claim and injunctive relief. Gillus counsel
    has in the past stated that he is seeking a total of
    $19 million in respect of both claims. Potential
    liabilities in respect of the claim against Marconi Corporation
    and Marconi plc were compromised pursuant to its
    restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Marconi Corporation, Marconi 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
    $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 and Marconi plc were compromised
    pursuant to our restructuring.
|
| |  | On October 4, 2000, Alcatel SA and Alcatel
    CIT, or Alcatel, both French companies, filed a claim against
    Marconi plc, Marconi Communications Limited and Marconi
    Communications SpA alleging infringement of two patents held by
    Alcatel group companies. Alcatel and Marconi Corporation entered
    into a mutual patent cross license agreement effective
    April 1, 2002 in respect of both companies patent
    portfolios which calls for a series of payments by Marconi plc.
    [The amount of these payments has no significant effect on the
    financial position or profitability of us and the former group.]
    This settled all claims brought by Alcatel. The cross license
    applies to patents and patent applications of Marconi plc and
    Alcatel filed prior to April 1, 2002. The cross license
    expires on March 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Stringfellow and Plessey Precision Metals are
    defendants in an action brought in the Superior Court of
    California in May 1998. A toxic tort claim was filed by several
    thousand residents of Riverside County who live adjacent to the
    Stringfellow Acid Pits Waste Disposal Site. There are currently
    several hundred plaintiffs. The claim is still in its early
    stages and therefore, no estimate of Plesseys potential
    liability is currently available. Plessey was a minor generator
    of hazardous materials on the site compared to others involved,
    however. A case management order was entered into in early 2001
    and the case is still in the early discovery stage. The
    defendants are seeking dismissal on grounds of statutes of
    limitation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Inglis Limited and English Electric Company
    Limited, or 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 in the United States. 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 were 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 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,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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
    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
    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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On March 26, 2002 Railtrack Telecom Services
    Limited, or RTSL, now known as RT Group Telecom Services
    Limited, a joint venture partner, served a claim against Marconi
    Corporation in respect of its failure to pay in February 2002 an
    amount of £20 million plus daily interest in an amount
    of £3,287 in respect of the purported exercise by RTSL of a
    contractual option to put 1,324,054 ordinary shares in Easynet
    Group plc on to Marconi Corporation. Marconi Corporation had,
    prior to receipt of the claim, indicated its intention to claim
    or counterclaim against RTSL in respect of its acts, omissions,
    misrepresentations and breaches of its obligations to Marconi
    Corporation arising out of or in respect of certain agreements
    and transactions relating to ipsaris Limited and Ultramast
    Limited, a joint venture company in which RTSL and Marconi
    Corporation each held 50% of the shares. Marconi Corporation
    then raised its counterclaims as a complete defense and advised
    RTSL that the amount of Marconi Corporations claims
    against RTSL was greater than the claim that RTSL had brought
    against Marconi Corporation. RTSL applied for a summary judgment
    hearing which took place on July 15, 2002, on the grounds
    that Marconi Corporations claims had no real prospect of
    success. The court did not grant summary judgment in favor of
    RTSL, recognizing that Marconi Corporation might have a valid
    counterclaim which could be set off against amounts due under
    the option. However, the court did order that Marconi
    Corporation pay the disputed £20 million plus interest
    into court, reflecting the courts concerns about whether
    the counterclaim by Marconi Corporation would ultimately succeed
    and also the fact that RTSL was entitled to put the Easynet
    Group Plc shares on Marconi Corporation, and that it would be
    unfair for Marconi Corporation to acquire the shares without
    making any payment. Marconi Corporation paid the required sum
    into court. A settlement of all outstanding litigation was
    reached with RTSL, subject to court approval of a capital
    reduction in Ultramast Limited. The court approved the capital
    reduction on February 21, 2003.
|
| |  | Marconi Communications Limited, or MCL has
    settled claims which were brought by Alstom Transport Limited,
    or Alstom, a sub-contractor, in an arbitration brought under
    International Chamber of Commerce rules in respect of a
    sub-contract that Alstom entered into with MCL on May 26,
    1995 for the supply of certain communications equipment and
    systems for installation on the Northern Line of Londons
    underground system. Alstom requested the arbitration on
    May 25, 2001. MCL submitted a full defense. Certain
    preliminary matters were heard and an initial hearing into the
    substance of the claim took place. In a related action, Alstom
    Transport Ltd and three other Alstom subsidiaries issued
    proceedings in the English courts in September 2001 in relation
    to alleged misrepresentations or breach of warranties made by
    MCL as to the costs of operating the communications equipment
    and systems to be installed pursuant to this sub-contract.
    Settlement was reached in relation to both these claims on
    December 20, 2002. MCL will provide further products and
    services to Alstom pursuant to a revised supply contract and a
    new maintenance contract was entered into as of January 6,
    2003. Marconi Corporations obligations pursuant to these
    new contracts are guaranteed by Marconi Communications Holdings
    Limited and are the subject of collateralized performance bonds
    to a value of £2.5 million and £1 million
    respectively for the supply and maintenance contracts. The
    arbitration has also been discontinued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Marconi Corporation was the defendant in an
    action brought by DrKW Finance Ltd, or DrKW which has now been
    settled. The claim was for £12,289,860.15 plus interest due
    or scheduled to become due under a payment plan agreement
    between Oracle Corporation U.K. Ltd, or Oracle, and Marconi
    Corporation. Oracle assigned the relevant agreement, a software
    licensing agreement, to DrKW. On                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | October 11, 2002 DrKW obtained summary
    judgment for the full amount claimed plus interest. On the same
    day Marconi Corporation agreed a settlement of the claim with
    DrKW and DrKW agreed not to enforce the judgment. Marconi
    Corporation has complied with its settlement obligations and has
    no further liability in respect of this claim.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | There is an outstanding tax dispute between the
    Indian tax authorities and Marconi Corporation, 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, 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, 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,
    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. Marconi Corporation, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Marconi plc and four of its former officers are
    defendants in a consolidated class action lawsuit pending in the
    United States District Court for the Western District of
    Pennsylvania brought on behalf of a putative class of all
    persons, other than defendants and their respective affiliates,
    who purchased American depository receipts or are United States
    residents and purchased common stock of Marconi plc between
    April 10, 2001 and July 5, 2001, inclusive. Plaintiffs
    allege that, during this period, Marconi 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 allege that on
    July 4, 2001 defendants belatedly disclosed that tougher
    trading conditions in the quarter ended June 30, 2001
    indicated that Marconi plcs sales and operating profits
    for fiscal 2002 would fall significantly from the levels
    previously estimated. Defendants alleged
    misrepresentations are 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
    seek 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 does
    have jurisdiction over claims of American resident owners of
    ordinary shares and owners of ADRs. The parties have agreed to a
    settlement, which, if concluded, would result in Marconi plc
    and/or the Marconi group not making a payment to the claimants.
    The settlement agreement has been signed and submitted to the
    court for approval, which will take several months.
|
| |  | Marconi plc was the defendant in an action
    commenced by Salomon Brothers International Limited, or SBIL,
    for £15.9 million, plus interest and costs. The claim
    was related to a guarantee granted by Marconi plc to SBIL in
    respect of certain equity swap transactions entered into between
    SBIL and Bedell Cristin Trustees Limited, or Bedell Cristin, as
    trustees of the Marconi Employee Trust. The intention of the
    equity swap transactions was to hedge the exposure of the
    Marconi group to the Marconi plc share price inherent in Marconi
    employee share options. The equity swap transactions were
    governed by an ISDA master agreement between SBIL and Bedell
    Cristin.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 26, 2002, SBIL served notice on
    Bedell Cristin purporting to terminate the equity swap
    transactions on the grounds of an alleged event of default in
    relation to Marconi plc. On April 8,

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2002, SBIL served a demand on Marconi plc under
    its guarantee for payment of an early termination amount that it
    had calculated to represent its loss in relation to the equity
    swap transactions. Marconi plc declined to recognize the
    validity of the early termination of the equity swap
    transactions or the demand under its guarantee. On
    April 19, 2002 SBIL filed a claim form on Marconi plc.
    Marconi plc served a defence to this claim form.                      
|
| | This litigation was discontinued in accordance
    with a settlement entered into in connection with our financial
    restructuring. For more information, please see
    Item 4: Information on the Company 
    History and Development of the Company 
    History  Financial Restructuring and
    Item 7: Major Shareholders and Related Party
    Transactions  Related Party Transactions 
    Restructuring Agreements  Scheme Implementation
    Deed  ESOP Escrow Agreement Release.

Claims brought by our former group
companies

The following represent the largest outstanding
claims made on behalf of our former 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 $25,879,544 under its breach of warranty claims,
    $5,604,270.12 for prejudgment interest, and $156,702.56 for
    costs, for a total award of $31,640,516.68. Vidar may claim 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 at $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
    may claim 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.

Third party guarantees

The Company has entered into agreements that
contain features, which meet the definition of a guarantee under
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others. FIN 45 defines a guarantee to be a
contract that contingently requires the Company to make payments
(either in cash, financial instruments, other assets, common
shares of the Company or through the provision of services) to a
third party based on changes in an underlying economic
characteristic (such as interest rates or market value) that is
related to an asset, a liability or an equity security of the
other party. FIN 45 requires that upon issuance of a
guarantee, the guarantor must disclose and recognize a liability
for the fair value of the obligation it assumes under that
guarantee. The initial recognition and measurement requirement
of FIN 45 is effective for guarantees issued or modified
after December 31, 2002. As of March 31, 2003, the
fair value of the Companys guarantees that were issued or
modified after December 31, 2002 were not material.

The Company has the following major types of
guarantees that are subject to the disclosure requirements of
FIN 45.

Financial and other
guarantees

The Company and various of its subsidiaries have
undertaken, in the normal course of business, to provide support
to the joint ventures of the Company, to meet their liabilities.
These undertakings contain

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financial guarantees. A payment under these
undertakings would be required in the event of any of the joint
ventures being unable to pay its liabilities. Payment of this
funding would be required if requested by the joint ventures in
accordance with the funding agreements. The potential amount of
future payments, which the Company may be required to make under
these guarantees is £10 million.


Other guarantees relate primarily to financial
standby letters of credit, irrevocable undertakings to guarantee
payment of a specified financial obligation. The maximum
potential amount of future payments which may be required to be
made by the Company under these guarantees is
£61 million.

Purchase commitments

In the ordinary course of business the Company
enters into contracts for capital expenditures as set out below:

|              |  |                     |   |      |  |      |   |  |  |  |    | 
|------------- |  | ------------------- | - | ---- |  | ---- | - |  |  |  | -- | 
|              |  |                    
|              |  | Capital expenditure
|              |  | commitments        
|              |  | 2003                |   | 2002 |  | 2001
|(in millions) |  | £                   |   | £    |  | £   
|              |  |                    
|              |  |                    
|At March 31   |  |                     | 4 |      |  |      | 3 |  |  |  | 87 | 
|              |  |                    

Leases

The Company leases certain facilities and
equipment under operating leases, many of which contain renewal
options and escalation clauses. Total rental expense for fiscal
2003 was £34 million (2002, £43 million and
2001, £42 million).

At March 31, 2003, minimum future rental
commitments under operating leases having non-cancelable lease
terms in excess of one year are as follows:

|              |       |           |    |       |    |       |   |    |   |  |    |     |    | 
|------------- | ----- | --------- | -- | ----- | -- | ----- | - | -- | - |  | -- | --- | -- | 
|              |       | Land and  |    | Other |    |      
|              |       | buildings |    | items |    | Total
|(in millions) |       | £         |    | £     |    | £    
|              |       |          
|              |       |          
|Fiscal 2004   |       |           | 15 |       |    |       | 4 |    |   |  | 19 |    
|              |       | 2005      |    |       | 17 |       |   |    | 4 |  |    |     | 21 | 
|              |       | 2006      |    |       | 15 |       |   |    | 1 |  |    |     | 16 | 
|              |       | 2007      |    |       | 13 |       |   |    | 1 |  |    |     | 14 | 
|              |       | 2008      |    |       | 11 |       |   |    |  |  |    |     | 11 | 
|Thereafter    |       |           | 47 |       |    |       |  |    |   |  | 47 |    
|              |       |          
|              | Total |           |    | 118   |    |       |   | 10 |   |  |    | 128 |   
|              |       |          

11. Business combinations

The Company made no acquisitions during fiscal
2003. The following table presents information about
acquisitions by the Company during fiscal 2002 and 2001. All of
these acquisitions were accounted for under the purchase method
of accounting.

The aggregate impact of the acquisitions in
fiscal 2002 and fiscal 2001 was not material to net sales, net
loss, or basic earnings per share.

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|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |             |     |    |  |  |     |     |  |  |   |  |  |  |     |  |  |  |      |  | 
|----------- | ----------------- | ----------- | ---- | -------- |  | -------- | --- | ---------- |  | ----------- | --- | ----------- |  | ------------------------------ | --- | ---------- |  | ----------- | --- | -- |  |  | --- | --- |  |  | - |  |  |  | --- |  |  |  | ---- |  | 
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                               
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  | Amortization period (in years)
|            |                   | Acquisition |      | Purchase |  |          |     | Existing   |  | Other       |     | IPRD        |  |                                |     | Existing   |  |            
|            |                   | date        |      | price    |  | Goodwill |     | technology |  | intangibles |     | (after tax) |  | Goodwill*                      |     | technology |  | Other      
|            |                   |             |      | £        |  | £        |     | £          |  | £           |     |             |  |                                |     |            |  | intangibles
|            |                   |            
|            |                   |            
|Fiscal 2002 |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |             |     |    |  |  |     |     |  |  |   |  |  |  |     |  |  |  |      | 
|Northwood   |                   |             | 5/01 |          |  |          | 19  |            |  |             | 16  |             |  |                                | 2   |            |  |             | 1   |    |  |  | n/a |     |  |  | 7 |  |  |  | 4   |  |  |  | 5    | 
|Telit       |                   |             | 4/01 |          |  |          | 11  |            |  |             | 13  |             |  |                                | 1   |            |  |             | 1   |    |  |  | n/a |     |  |  | 7 |  |  |  | 4   |  |  |  | 5    | 
|Other       |                   |             |      |          |  |          | 3   |            |  |             | 5   |             |  |                                | n/a |            |  |             | n/a |    |  |  | n/a |     |  |  | 7 |  |  |  | n/a |  |  |  | n/a  | 
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |            
|            | Fiscal 2002 Total |             |      |          |  |          |     | 33         |  |             |     | 34          |  |                                |     | 3          |  |             |     | 2  |  |  |     | n/a |  |  |   |  |  |  |     |  |  |  |      |  | 
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |            
|Fiscal 2001 |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |             |     |    |  |  |     |     |  |  |   |  |  |  |     |  |  |  |      | 
|Metapath    |                   |             | 6/00 |          |  |          | 500 |            |  |             | 400 |             |  |                                | 21  |            |  |             | 20  |    |  |  | 28  |     |  |  | 7 |  |  |  | 4   |  |  |  | 5-10 | 
|Mariposa    |                   |             | 6/00 |          |  |          | 200 |            |  |             | 161 |             |  |                                | 10  |            |  |             | 4   |    |  |  | 4   |     |  |  | 7 |  |  |  | 5   |  |  |  | 5-10 | 
|Other       |                   |             |      |          |  |          | 300 |            |  |             | 268 |             |  |                                | 64  |            |  |             | 35  |    |  |  | n/a |     |  |  | 7 |  |  |  | 7   |  |  |  | 7    | 
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |            
|            | Fiscal 2001 Total |             |      |          |  |          |     | 1,000      |  |             |     | 829         |  |                                |     | 95         |  |             |     | 59 |  |  |     | 32  |  |  |   |  |  |  |     |  |  |  |      |  | 
|            |                   |             |      |          |  |          |     |            |  |             |     |             |  |                                |     |            |  |            



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| | * | Amortization of goodwill ceased effective
    April 1, 2002 following the adoption of SFAS 142.

Northwood is a leading provider of radio planning
and engineering software.

Telit is a company involved in the development of
products for the public mobile network infrastructure. Following
an impairment review in fiscal 2002, an impairment charge of
approximately £13 million was recognized against
goodwill and other intangible assets of Telit, and included
within the (loss)/income from discontinued operations. As a
result, the remaining net book value of the goodwill and
intangible assets associated with Telit at March 31, 2002
was £nil and this was included in the net assets of
discontinued operations at March 31, 2002.

In addition, reductions to goodwill and other
intangibles arising in respect of prior-year acquisitions
totalling £20 million were recorded in fiscal 2002,
which related primarily to purchase price adjustments made
during 2002.

Metapath Software International, Inc. (Metapath)
is a global provider of business and operational support systems
(OSS) software used by the wireless telecommunications industry
to launch and support mobile voice and data services. Following
an impairment review in fiscal 2002, an impairment charge of
approximately £336 million was recognized against
goodwill and other intangible assets of Metapath. The remaining
net book value of the goodwill and intangible assets associated
with Metapath at March 31, 2002 was £18 million.

Mariposa Technology, Inc. (Mariposa) is a leading
provider of integrated access devices (IADs) for carrier-managed
services, virtual private networks and private enterprise
networks. Following an impairment review in fiscal 2002, an
impairment charge of approximately £151 million was
recognized against goodwill and other intangible assets of
Mariposa. The remaining net book value of the goodwill and
intangible assets associated with Mariposa at March 31,
2002 was £nil.

An impairment charge of approximately
£168 million was recognized against goodwill and other
intangible assets recorded in respect of other acquisitions made
in fiscal 2001. Following the impairment charge, the remaining
net book value of goodwill and intangible assets relating to
these other acquisitions was £39 million.

Purchased in-process research and
development

Included in the purchase price allocation for the
above acquisitions was purchased in-process research and
development. For each acquisition, a fair market appraisal was
performed to assess and allocate a value to purchased in-process
research and development. The value allocated represents the
estimated fair value based on risk-adjusted future cash flows
generated from the products that would result from each of the
in-process projects. Estimated future after-tax cash flows of
each project, on a product by product basis, were based on
managements estimates of revenue less operating expenses,
cash flow adjustments, income taxes

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and charges for the use of contributory assets.
Future cash flows were also adjusted for the value contributed
by any core technology and development efforts that were
completed post acquisition.


Revenues were estimated based on relevant market
size and growth factors, expected industry trends, individual
product sale cycles, the estimated life of each products
underlying technology and historical pricing. Estimated
operating expenses include cost of goods sold, selling, general
and administrative expenses and research and development
expenses.

The estimated research and development expenses
include costs to maintain the products once they have been
introduced into the market and are generating revenues and costs
to complete the purchased in-process research and development.
Operating expense estimates were consistent with historical
margins and expense levels for similar products.

The discount rates used to discount the projected
net revenues were based on a weighted-average cost of capital
relative to each acquisition and the telecommunications
industry, as well as the product-specific risk associated with
the purchased in-process research and development products.
Product-specific risk includes the stage of completion of each
project, the complexity of development work completed to date
and the likelihood of achieving technological feasibility and
market acceptance.

Fiscal 2003

The Company made no acquisitions during fiscal
2003.

Fiscal 2002

No in-process research and development was
identified in respect of fiscal 2002 acquisitions, as none of
the acquisitions had significant products that had not reached
technological feasibility.

Fiscal 2001

During fiscal 2001, the Company recorded a
£32 million charge in respect of purchased in-process
research and development using the techniques described above,
based on information available at the time of acquisition.

|                                      |  |        |    |          |  |          |    |  |  |  |       | 
|------------------------------------- |  | ------ | -- | -------- |  | -------- | -- |  |  |  | ----- | 
|                                      |  |        |    |          |  | Discount
|                                      |  |        |    | Overall  |  | factor  
|                                      |  | IPR&D  |    | progress |  | applied 
|                                      |  | charge |    | %        |  | %       
|(in millions, except %)               |  | £      |    |          |  |         
|                                      |  |       
|                                      |  |       
|Mariposa Technologies Inc.            |  |        | 4  |          |  |          | 40 |  |  |  | 22    | 
|Metapath Software International, Inc. |  |        | 28 |          |  |          | 21 |  |  |  | 18-25 | 
|                                      |  |        |    |          |  |          |    |  |  |  |       | 
|                                      |  |        | 32 |          |  |          |    |  |  |  |       | 
|                                      |  |        |    |          |  |          |    |  |  |  |       | 

12. Discontinued operations

During fiscal 2002 the Company established a
formal plan for the disposal of the various businesses
comprising the mobile segment. The strategic communication
business, which represents the majority of the segment, was sold
to Finmeccanica S.p.A for approximately £387 million
in August 2002. The proceeds were received in the form of cash
and debt assumed by Finmeccanica S.p.A. On February 5,
2002, the Company completed the sale of its data systems
business for net cash proceeds of £283 million.

On October 19, 2001, the Company completed
the sale of its medical systems business for net cash proceeds
of £729 million.

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Accordingly, the results of these businesses have
been shown as discontinued operations for all years presented. A
summary of operating results of the medical, data systems and
mobile segments is presented below:

|                                                            |  |                      |     |      |  |      |       |   |  |  |       |  
|----------------------------------------------------------- |  | -------------------- | --- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                            |  |                     
|                                                            |  | Year ended March 31,
|                                                            |  | 2003                 |     | 2002 |  | 2001
|(in millions)                                               |  | £                    |     | £    |  | £   
|                                                            |  |                     
|                                                            |  |                     
|Revenues                                                    |  |                      | 106 |      |  |      | 1,114 |   |  |  | 1,682 |  
|Operating (loss)/income                                     |  |                      | (70 | )    |  |      | (35   | ) |  |  | 123   |  
|(Loss)/income before income taxes and minority
    interest |  |                      | (71 | )    |  |      | (28   | ) |  |  | 116   |  
|Income tax provision and minority interest                  |  |                      | (3  | )    |  |      | (36   | ) |  |  | (57   | )
|Net (loss)/income from discontinued operations              |  |                      | (74 | )    |  |      | (64   | ) |  |  | 59    |  

Net assets of discontinued operations are as
follows:

|                                                        |                                                |                           |     |      |    |  |     |     |     | 
|------------------------------------------------------- | ---------------------------------------------- | ------------------------- | --- | ---- | -- |  | --- | --- | --- | 
|                                                        |                                                |                          
|                                                        |                                                | March 31,                
|                                                        |                                                | 2003                      |     | 2002
|(in millions)                                           |                                                | £                         |     | £   
|                                                        |                                                |                          
|                                                        |                                                |                          
|Assets:                                                 |                                                |                           |     |      |    |  |     |    
|                                                        | Cash and cash equivalents                      |                           |     | 2    |    |  |     | 73  |    
|                                                        | Accounts receivable                            |                           |     | 2    |    |  |     | 234 |    
|                                                        | Inventories                                    |                           |     |     |    |  |     | 190 |    
|                                                        | Prepaid expense and other current assets       |                           |     |     |    |  |     | 65  |    
|                                                        |                                                |                          
|                                                        |                                                | Total current assets      |     |      | 4  |  |     |     | 562 | 
|                                                        | Property, plant and equipment, net             |                           |     |     |    |  |     | 63  |    
|                                                        | Goodwill and intangibles, net                  |                           |     |     |    |  |     | 123 |    
|                                                        | Other non-current assets                       |                           |     |     |    |  |     | 67  |    
|                                                        |                                                |                          
|                                                        | Total assets                                   |                           |     | 4    |    |  |     | 815 |    
|                                                        |                                                |                          
|Liabilities:                                            |                                                |                           |     |      |    |  |     |    
|                                                        | Accounts payable                               |                           |     | 10   |    |  |     | 186 |    
|                                                        | Short-term borrowings                          |                           |     |     |    |  |     | 57  |    
|                                                        | Accrued expenses and other current liabilities |                           |     | 6    |    |  |     | 161 |    
|                                                        |                                                |                          
|                                                        |                                                | Total current liabilities |     |      | 16 |  |     |     | 404 | 
|                                                        | Long-term debt                                 |                           |     |     |    |  |     | 15  |    
|                                                        | Other liabilities                              |                           |     |     |    |  |     | 68  |    
|                                                        | Minority interests                             |                           |     |     |    |  |     | 3   |    
|                                                        |                                                |                          
|                                                        |                                                | Total liabilities         |     |      | 16 |  |     |     | 490 | 
|                                                        |                                                |                          
|Net (liabilities)/assets of discontinued
    operations |                                                |                           | (12 | )    |    |  | 325 |    
|                                                        |                                                |                          

13. Investments in affiliates

Fiscal 2003

At March 31, 2003, the Company had two
investments, which it accounted for using the equity method,
Easynet Group plc (Easynet) and Confirmant. At March 31,
2002 Ultramast was also accounted for using the equity method.

In February 2003, the Company completed the
disposition of Ultramast through a capital reduction and settled
all litigation associated with Ultramast. As a result, the
Company acquired an additional 1.3 million ordinary shares
in Easynet, which increased its equity holding to 72.7% and its
holding of voting shares to 51.6%. Under the Articles of
Association of Easynet and the Companys Relationship
Agreement with

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Easynet, the Companys voting rights are
limited to 49.9%. Accordingly, despite ownership of a
majority-voting shareholder, the Company determined that it did
not control Easynet in the period and the Company continues to
account for its investment in Easynet using the equity method of
accounting. In addition to the Easynet shares, the Company also
received cash proceeds of £41 million reflecting a
gain on disposal of £14 million.


As at December 31, 2002, Easynet has net
liabilities under U.S. GAAP of approximately
£39 million. Consequently, the Company discontinued
recording its share of the losses of Easynet because it has no
commitment to provide further funding to Easynet.

Fiscal 2002

In March 2002, the Company disposed of its 50%
stake in General Domestic Appliances Holdings Limited (GDA) for
cash consideration of £113 million, recognizing a
profit of £35 million on the transaction. At
March 31, 2001, the Company held a 50% share of GDA for
which it accounted under the equity method. At this time, there
was no difference between the carrying value and the underlying
equity in net assets of GDA. GDA was not listed so a market
value cannot be provided.

In July 2001, the Company sold its interest in
ipsaris (a subsidiary) and received a 71.9% equity holding in
and a 49.9% holding in the voting shares in Easynet. As the
Company had 22% of board representation, no unilateral rights or
vetoes, and no involvement in day-to-day operations, the Company
determined that control did not exist, but that significant
influence did exist, and therefore accounted for its investment
using the equity method. The consideration was determined based
on the fair value of the shares received of
£217 million and a loss on disposal of
£185 million was recorded.

Easynet has a December 31 year-end. As
it is a company listed on The London Stock Exchange, no interim
period results are available. Therefore the results from the
date of acquisition to December 31 have been used to record
the equity share of Easynet results. No material events occurred
in the intervening period.

In June 2001, the Company disposed of its
remaining stake in Alstom SA, a publicly traded company which
specializes in the contracting of infrastructure construction
projects for power generation, power transmission and
distribution and railway transportation, for cash consideration
of £235 million, recording a gain on disposal of
£214 million.

In April 2001, the Company invested
£65 million in a 50% equity stake in Ultramast
Limited, a joint venture with Railtrack Telecom Services
Limited. The Company has determined that it does not exercise
control, but that significant influence does exist, and has
therefore accounted for its investment using the equity method.

Dividends received from equity investments for
fiscal year 2003 were £nil (2002, £29 million,
2001, £80 million).

Fiscal 2001

In February 2001, the Company sold approximately
76% of its approximate 24% ownership in Alstom SA in a private
placement for proceeds of £631 million. As a result,
the investment ceased to be accounted for under the equity
method. The carrying value at the time of the sale was
£95 million based on the most recently available
U.S. GAAP financial statements for Alstom at
September 30, 2000 and related foreign exchange
adjustments, resulting in a gain on sale of
£536 million. At March 31, 2001, the investment
has been treated as an available-for-sale investment, with
changes in market value shown in unrealized gains and losses
within shareholders equity.

In February 2001 the Company sold its 25%
interest in Xcert International for proceeds of
£15 million, recognizing a loss on disposal of
£6 million.

In June 2000, Atlantic Telecom Group plc
(Atlantic), in which the Company originally acquired a 27%
stake, issued shares to acquire First Telecom Group plc, and the
Companys shareholding in Atlantic was diluted to 19.7%. As
a result of the acquisition and subsequent board reorganization,
the Company ceased to

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participate in day-to-day decision making at
Atlantic, which was not technologically dependent upon the
Company. The Company also ceased to have the right to appoint
more than 20% of the board of Atlantic. Based on this, the
Company deemed it appropriate as at March 31, 2001 to
reclassify the investment as an available-for-sale trade
investment, with changes in market value shown in unrealized
gains and losses, net of tax, within shareholders equity.
During fiscal 2002, the value of this investment was written
down to £nil, following Atlantic being placed into
administration.


In December 2000, the Company sold its 50%
interest in Comstar for proceeds of £43 million,
recognizing a profit on disposal of £19 million.

Summarized financial information for
investment in affiliates is as follows:

|                   |                         |           |     |      |  |  |     |     | 
|------------------ | ----------------------- | --------- | --- | ---- |  |  | --- | --- | 
|                   |                         |          
|                   |                         | March 31,
|                   |                         | 2003      |     | 2002
|(in millions)      |                         | £         |     | £   
|                   |                         |          
|                   |                         |          
|Balance sheet data |                         |           |     |      |  |  |     |    
|                   | Current assets          |           |     | 139  |  |  |     | 294 | 
|                   | Non-current assets      |           |     | 81   |  |  |     | 129 | 
|                   |                         |          
|Total assets       |                         |           | 220 |      |  |  | 423 |    
|                   |                         |          
|                   | Current liabilities     |           |     | 94   |  |  |     | 120 | 
|                   | Non-current liabilities |           |     | 118  |  |  |     | 119 | 
|                   |                         |          
|Total liabilities  |                         |           | 212 |      |  |  | 239 |    
|                   |                         |          

|                             |  |           |     |      |  |      |      |   |  |  |     | 
|---------------------------- |  | --------- | --- | ---- |  | ---- | ---- | - |  |  | --- | 
|                             |  |          
|                             |  | March 31,
|                             |  | 2003      |     | 2002 |  | 2001
|(in millions)                |  | £         |     | £    |  | £   
|                             |  |          
|                             |  |          
|Statement of operations data |  |           |     |      |  |      |      |   |  |  |     | 
|Revenues                     |  |           | 89  |      |  |      | 291  |   |  |  | 270 | 
|Operating (loss)/income      |  |           | (74 | )    |  |      | (276 | ) |  |  | 16  | 
|Net (loss)/income            |  |           | (81 | )    |  |      | (240 | ) |  |  | 10  | 

14. Investment in securities

All marketable securities are classified as
available-for-sale and reported at fair value as follows:

|                |                   |          |  |            |  |            |  |            |  |  |  |   |  |  |  |    | 
|--------------- | ----------------- | -------- |  | ---------- |  | ---------- |  | ---------- |  |  |  | - |  |  |  | -- | 
|                |                   |          |  | Gross      |  | Gross      |  |           
|                |                   | Carrying |  | unrealized |  | unrealized |  | Estimated 
|                |                   | value    |  | gains      |  | losses     |  | fair value
|(in millions)   |                   | £        |  | £          |  | £          |  | £         
|                |                   |         
|                |                   |         
|March 31, 2003: |                   |          |  |            |  |            |  |            |  |  |  |   |  |  |  |   
|                | Equity securities |          |  | 16         |  |            |  |           |  |  |  |  |  |  |  | 16 | 
|                |                   |         
|March 31, 2002: |                   |          |  |            |  |            |  |            |  |  |  |   |  |  |  |   
|                | Equity securities |          |  | 53         |  |            |  |           |  |  |  |  |  |  |  | 53 | 
|                |                   |         

During fiscal 2003, an impairment charge of
£38 million (2002, £nil, and 2001, £nil) was
recorded in the statement of operations related to declines in
value of equity securities judged to be other than temporary.

Proceeds from the sale of investment in
securities were £289 million and
£638 million for fiscal 2002 and 2001, respectively.
The Company realized gains on the sales of these investments in
the amount of £41 million and £20 million
for fiscal 2002 and 2001 respectively.

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15. Shareholders equity

Holders of ordinary shares in the Company are
entitled to one vote per share on matters to be voted on by the
shareholders, and to receive dividends when and as declared by
the board. Shareholders are not entitled to pre-emptive rights
and have no subscription, redemption or conversion privileges.
The ordinary shares do not have cumulative voting rights. The
rights, preferences and privileges of holders of ordinary shares
are subject to the rights of the holders of shares of any series
of preferred shares issued or that may be issued in the
future. See note 23, Subsequent events, for changes
in the Companys ordinary shares post March 31, 2003.

16. Employee stock option plans

The Company accounted for employee stock option
plans under APB 25 and had nine plans under which it granted
options: the GEC Employee 1992 Savings-Related Share Option
Plan, the GEC 1984 Managers Share Option Plan, the GEC
1997 Executive Share Option Plan, the Marconi 1999 Stock Option
Plan, the Marconi U.K. Sharesave Plan, the Marconi International
Sharesave Plan, the Marconi Launch Share Plan, the Marconi Long
Term Incentive Plan and the Marconi Phantom Option Plan. In
addition, during fiscal 2002, the Company granted options in its
ADRs under the Marconi Employee Stock Purchase Plan for
the Companys employees in North America.

As of March 31, 2003, the Company had
granted options under the following eight plans in respect of
the acquisitions of Reltec, Mariposa, MSI and Northwood
Technologies; the 1998 Equity Participation Plan of Reltec
Corporation, the amended and restated 1995 Stock Purchase and
Option Plan for employees of Reltec Holdings Inc., and
subsidiaries, the MSI 1995 Stock Option Plan, the MSI 1999 Stock
Option Plan, the MSIH Stock Option Plan, the Mariposa
Technology, Inc. 1998 Employee Incentive Plan and the Marconi
Restricted Share Plan.

Under the terms of the stock option plans,
employees have been granted rights to purchase ordinary shares
and/or phantom options. The terms of the grant vary and each of
the main plans is described below.

Savings related plans



| |                                
| | -------------------------------
| | The Marconi U.K. Sharesave Plan

All employees of participating U.K. companies in
the Company including full-time executive directors are eligible
to participate in the U.K. sharesave plan. Under this plan,
participants are granted options to purchase shares with an
exercise price not less than 80% of the market value of a
Company ordinary share on the trading day immediately before the
invitation day (as defined in the rules of the plan). In order
to participate, each employee must enter into a savings contract
with a specified financial institution under which they agree to
make monthly contributions, which must not exceed £250 per
month in aggregate. The savings contracts typically expire on
the third or fifth anniversary of the date of grant. The plan is
compensatory and compensation expense is recorded over the
vesting period. At March 31, 2003, 2,295,287
Marconi plc shares were outstanding to be purchased under
the plan. Additional shares available for grant are governed by
total dilution limits applicable to several plans.

The
Marconi International Sharesave Plan

The international sharesave plan, at the
discretion of the board of directors of Marconi plc permits
employees of the Company who are resident outside the U.K. to
participate in a share option plan that is substantially similar
to the U.K. sharesave plan. Unlike the U.K. sharesave plan,
under the international sharesave plan the savings contracts may
not generate the exact amount required to exercise the options
because of currency fluctuations and interest rate differences.
Additional cash may be required when the options are exercised,
however, any excess savings generated cannot be used to purchase
additional shares.

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The
Marconi International Sharesave Plan  Italian
Appendix

All employees and executive directors whose
remuneration is subject to taxation in Italy are eligible to
participate in the Italian Appendix of the International
Sharesave Plan. Under the Italian Appendix of the International
Sharesave Plan, participants can exercise options to purchase
shares with an exercise price not less than the market value of
a Company ordinary share averaged over the 30 trading days
immediately before the date of grant. Upon exercise,
participants will be gifted such number of additional shares as
can be purchased on the market with 10% of their total
accumulated savings and interest. In order to participate, each
employee must enter into a savings contract with a specified
financial institution under which they agree to make monthly
contributions, which must not exceed the Italian Lira/Euro
equivalent of £250 per month in aggregate. At
March 31, 2003, 1,340,174 Marconi plc shares were
outstanding to be purchased under the plan.

The
Marconi Employee Stock Purchase Plan for Employees in North
America

All employees of participating U.S. and
Canadian companies are eligible to participate in the Stock
Purchase Plan. Employees may purchase shares with after-tax
payroll deductions at the end of an Offering Period, at a price
not less than 85% of the lower of the closing price of a share
on the Offering Date and the closing price of a share on the
Purchase Date (as defined in the rules of the Plan). No employee
may purchase shares pursuant to the Stock Purchase Plan at a
rate, which exceeds U.S.$25,000 in any calendar year or such
lower limit as Marconi plc may specify from time to time. This
plan is non-compensatory in nature.

Non-savings related plans

The
Marconi 1999 Share Option Plan

All employees and full-time executive directors
are eligible to be granted options under the option plan at the
discretion of the remuneration committee. Options granted prior
to July 2001 to participants will not normally be exercisable
unless our earnings per share over a period of at least three
financial years have exceeded the growth in the U.K. Retail
Price Index by at least an average of 3% per year. Options
granted after July 2001 will become exercisable over periods and
subject to conditions defined by the remuneration committee.
Options granted under the plan in November 2001 become
progressively exercisable over four years and are subject to
conditions related to reduction in the Companys
consolidated net debt and the Companys total shareholder
return being better than that of the company at the fiftieth
percentile of FTSE 100 companies. Options entitle the
option holder to acquire Company ordinary shares at a price per
share determined by the remuneration committee, which shall not
be less than the market value of a Company share shortly before
the date of grant.

The Company applies variable plan accounting for
grants under this scheme and will recognize compensation cost if
achievement of the performance conditions become probable. At
March 31, 2003, 96,145,820 Company shares were
outstanding. Additional shares available for grant are governed
by total dilution limits applicable to several plans.

The
Marconi Long Term Incentive Plan

Under the long term incentive plan (LTIP),
participants may be granted performance-related awards entitling
them, at the end of a three-year period, to be granted a right
to call for a number of ordinary shares of the Company without
payment based on corporate performance of the business in which
they work and of the Company as a whole over that period. The
annual award is limited to a maximum value of 50% of base
salary. Any right so granted will normally become exercisable in
three equal tranches. The first tranche will become exercisable
immediately, and the second and third tranches will normally
become exercisable on the first and second anniversaries of the
date of grant. All full-time employees of the Company, directors
of the Company and executive directors of the Company are
eligible to participate in the long-term incentive plan, at the
discretion of the remuneration committee of the board of
directors of the Company. No newly issued shares may be used to
satisfy options under this plan. The Company applies variable
plan accounting for

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grants under this plan and recognizes
compensation cost when achievement of the performance conditions
becomes probable. No new shares were granted during the year. At
March 31, 2003, 617,963 Company shares were outstanding.


The
Marconi Phantom Option Plan

In June 1999, the GEC remuneration committee
adopted the phantom option plan for the purpose of granting
incentives relating to any increase in our value primarily to
executives and employees of Reltec and Fore Systems following
our acquisition of those businesses. From November 1999, the
Company has operated the phantom option plan and made awards by
reference to Company shares and previous awards (grants made
between June 1999 and November 1999 in relation to GEC Shares)
were adjusted so that they related to Company shares on a
value-for-value basis. Following the adjustment the holder of a
phantom unit was kept in the same economic position as before
through an adjustment to the exercise price and an increase in
the number of units. A phantom option is similar to a share
option except that it is a cash-based award granted in relation
to a stated number of phantom units, each of which has the same
economic value as a Company ordinary share. Upon exercise of a
phantom option, the holder is entitled to receive a cash payment
equal to the difference between the base price of the phantom
option (normally corresponding to the market value of a Company
ordinary share at the time the phantom option is granted) and
market value of a Company ordinary share on the date of
exercise. The Company may give notice to participants that it
elects to substitute options to acquire real Company ordinary
shares for phantom options. If such an election is made, a
participant will be required on exercise to pay an amount equal
to the base price of the phantom options to the Company and will
receive Company ordinary shares. Options are normally
exercisable between the third and tenth anniversaries of grant.
The Company recognizes compensation expense measured at the end
of each period as the amount by which the quoted market value of
a Company share exceeds the unit price payable by the unit
holder. The expense is recognized over the service period.
Changes, either increases or decreases, in the quoted market
value of the shares between the date of grant and the date the
phantom options are exercised result in a change in the
compensation expense to be recognized.

Where the phantom options were granted in
exchange for Reltec and Fore Systems options as part of
those business combinations, the fair value of those options was
treated as part of the respective purchase prices. Such phantom
options continue to be governed by the relevant Reltec or Fore
Systems plans under which they were originally granted. At
March 31, 2003, 55,688,165 Company shares were outstanding.

Marconi
Restricted Share Plan

The Restricted Share Plan was introduced to
enable the Company to award share based incentives to employees
of companies which the Company acquires. The Remuneration
Committee has discretion to make awards of restricted stock,
which entitle the employee to call for shares at £nil cost
once the stock has vested. The stock will vest either at certain
specified times or subject to the satisfaction of performance
conditions. In practice the performance conditions imposed
generally relate to specific integration targets or business
goals of the acquired company. Once the restrictions have ended
or the conditions been met, the restricted share vests and will
either be automatically released (in the case of
U.S. employees) or can be called for by the employee (in
all other jurisdictions). The Company applies variable plan
accounting for grants under this plan, and compensation expense
is recorded over the vesting period. At March 31, 2003,
1,793,970 Company shares were outstanding.

The
Marconi Launch Share Plan

Under this plan, employees at November 30,
1999 were, at the discretion of the board, granted the right to
receive up to 1,000 Company ordinary shares, which would be
exercisable provided that two conditions are met. The first
condition is that the market price of a Company ordinary share
must have doubled from 801.5p to £16.03 during the period
between November 30, 1999 and November 30, 2004. The
second condition is that a participant must normally remain in
employment until November 30, 2002 or, if later, at the
time that the first condition is met. The Company applies
variable plan accounting for grants under this plan and will
account for the compensation expense if the first condition is
met. At March 31, 2003, 30,818,385 Company

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shares were outstanding to be purchased under the
plan. Additional shares available for grant are governed by
total dilution limits applicable to several plans.


The
Marconi Associated Companies Share Option Plan

The associated companies option plan enables
options to be granted to executives of companies in which the
Company has a direct or indirect equity interest of between 20%
and 50%. The terms of the associated companies option plan are
substantially similar to the Marconi 1999 Share Option Plan. No
options have been granted under this plan.



| |                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Metapath Software Corporation Amended and
    Restated 1995 Stock Option Plan, the Metapath Software
    International, Inc. Amended and Restated 1999 Stock Option Plan,
    and the Mobile Systems International Holdings Limited Share
    Option Plan.

Each of these option plans had been in place over
MSI shares prior to the acquisition by the Company in June 2000.
Following the acquisition, MSI option holders who would become
employees of the Company exchanged options over MSI shares for
options over Marconi plc shares. Following the exchange the
option holder was kept in the same economic position as before
the exchange through an adjustment to the exercise price and an
increase in the number of shares under option. The option holder
was given a choice to retain their options with their existing
vesting schedule, or to elect to accept an amended vesting
schedule (vesting one third of their options on each of the
first, second and third anniversaries of the acquisition)
together with an award of restricted stock over the same number
of shares as they had shares under option. Compensation expense
is recognized on the shares that were unvested at the
acquisition date (based on the intrinsic value of the shares as
of the acquisition date) over the vesting period. The fair value
of all shares issued at the date of acquisition, less the amount
allocated to compensation expense, has been recorded as a cost
of the acquisition. Certain arrangements under the Marconi
Restricted Share Plan, the Marconi 1999 Stock Option Plan, the
MSI 1995 Plan and the MSIH Plan were modified subsequent to
acquisition. As a result, the modified arrangements became
subject to variable accounting. At March 31, 2003,
3,225,015 Company shares were outstanding.

Mariposa
Technology, Inc. 1998 Employee Incentive Plan

Prior to the acquisition by the Company in
October 2000, options had been granted under The Mariposa
Technology, Inc, 1998 Employee Incentive Plan over Mariposa
Technology, Inc, shares. Following the acquisition, option
holders who would become employees of the Company exchanged
options over Mariposa Technology, Inc, shares for options over
Company shares. Following the exchange the option holder was
kept in the same economic position as before the exchange
through an adjustment to the exercise price and an increase in
the number of shares under option. Compensation expense is
recognized on the shares that were unvested at the acquisition
date (based on the intrinsic value of the shares as of the
acquisition date) over the vesting period. The fair value of all
shares issued at the date of acquisition, less the amount
allocated to compensation expense, has been recorded as a cost
of the acquisition. At March 31, 2003, 320,684 Company
shares were outstanding.

Existing
GEC share option plans

Options plans similar to the Marconi 1999 Stock
Option Plan and the Marconi U.K. Sharesave Plan had been in
place over GEC shares. There was a non-compensatory plan known
as the 1992 Savings-Related Scheme. There was a fixed plan known
as the 1984 Managers Scheme (1984 Scheme). There
was a variable plan known as the 1997 Executive Scheme
(1997 Scheme). During fiscal 2000, option holders who would
remain employees of the Company were able to exchange options
over GEC shares for options over Company shares. Following the
exchange the option holder was kept in the same economic
position after the exchange as before the exchange through an
adjustment to the exercise price and an increase in the number
of shares under option. The exchange resulted in no change in
measurement date for either the 1992 Savings-Related Scheme or
the 1984 Scheme. As performance conditions in respect of the
1997 Scheme ceased to apply, the measurement date for this
option plan occurred. These performance conditions were the

F-54



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achievement of earnings per share targets and a
vesting period. Option holders in the three plans who would not
remain employees of the Company were able to exercise their
options. At March 31, 2003, 1,985,076 Company shares were
available to be purchased under the 1992 Savings-Related Scheme;
621,628 Company shares were outstanding under the
1984 Scheme; and 7,824,494 Company shares were outstanding
under the 1997 scheme.




| |                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The 1998 Equity Participation Plan of Reltec
    Corporation, the Amended and Restated 1995 Stock Purchase and
    Option Plan for Employees of Reltec Holdings, Inc. and
    Subsidiaries

During fiscal 2002, options originally granted
under the Marconi Phantom Option Plan, governed by the rules of
these plans, were converted to options over Company shares,
governed by the rules of these plans, and continue to be
accounted for as variable options under APB 25.

The
Northwood Technologies Inc. Stock Option Plan

Prior to the acquisition by the Company in
October 2002, Northwood Technologies Inc (Northwood) granted
options under the Northwood Technologies Inc. stock option plan
over Northwood shares. Following the acquisition by the Company,
option holders who would become employees of the Company
exchanged options over Northwood shares for options over to
70,536 Company shares. Following the exchange, the option-holder
was kept in the same economic position as before the exchange
through an adjustment to the exercise price and an increase in
the number of shares under option. Compensation expense is
recognized on the shares that were unvested at the acquisition
date (based on the intrinsic value of the shares as of the
acquisition date) over the vesting period. The fair value of all
share issued at the date of acquisition, less the amount
allocated to compensation expense, has been recorded as a cost
of the acquisition. At March 31, 2003, 65,827 Company
shares were outstanding.

Option activity under the non-savings related
plans is as follows:

|                            |                                                    |           |             |             |   |  |      |      | 
|--------------------------- | -------------------------------------------------- | --------- | ----------- | ----------- | - |  | ---- | ---- | 
|                            |                                                    |           |             | Weighted   
|                            |                                                    |           |             | average    
|                            |                                                    | Number of |             | exercise   
|                            |                                                    | shares    |             | price      
|                            |                                                    |          
|                            |                                                    |          
|Outstanding, March 31, 2000 |                                                    |           | 149,956,050 |             |   |  | 4.40 |     
|                            | Granted (weighted average fair value of
    £0.85) |           |             | 83,337,421  |   |  |      | 5.62 | 
|                            | Lapsed                                             |           |             | (11,237,767 | ) |  |      | 3.86 | 
|                            | Exercised                                          |           |             | (8,600,307  | ) |  |      | 3.58 | 
|                            |                                                    |           |             |             |   |  |      |     
|Outstanding, March 31, 2001 |                                                    |           | 213,455,397 |             |   |  | 4.98 |     
|                            | Granted (weighted average fair value of
    £0.22) |           |             | 87,502,652  |   |  |      | 0.35 | 
|                            | Lapsed                                             |           |             | (35,672,282 | ) |  |      | 6.50 | 
|                            | Exercised                                          |           |             | (7,087,202  | ) |  |      | 0.64 | 
|                            |                                                    |           |             |             |   |  |      |     
|Outstanding March 31, 2002  |                                                    |           | 258,198,565 |             |   |  | 3.32 |     
|                            | Granted                                            |           |             |            |   |  |      |     | 
|                            | Lapsed                                             |           |             | (58,148,518 | ) |  |      | 4.12 | 
|                            | Exercised                                          |           |             | (2,928,096  | ) |  |      | 0.47 | 
|                            |                                                    |           |             |             |   |  |      |     
|Outstanding March 31, 2003  |                                                    |           | 197,121,951 |             |   |  | 3.24 |     
|                            |                                                    |           |             |             |   |  |      |     

All options were granted with an exercise price
equal to the market value of shares as of date of grant, with
the exception of those granted for acquisitions and the LTIP as
noted above.

Of the total number of non-savings related
options outstanding at March 31, 2003, 70,157,746 will be
settled, if exercised, in either cash or shares purchased in the
market, and would not be dilutive if exercised. The outstanding
options related to The Launch Plan and the Marconi 1999 Stock
Option Plan of 126,964,205

F-55



---



##### Table of Contents



will be satisfied by newly issued shares and
would be dilutive if exercised. Additional information regarding
all options outstanding as of March 31, 2003 are noted in
the table below:


|             |  |                           |             |                  |  |           |      |             |  |           |      |  |  |  |            |  |  |  |      | 
|------------ |  | ------------------------- | ----------- | ---------------- |  | --------- | ---- | ----------- |  | --------- | ---- |  |  |  | ---------- |  |  |  | ---- | 
|             |  |                           |             |                  |  |           |      |            
|             |  |                           |             | Total options   
|             |  | Total options outstanding |             | exercisable     
|             |  |                           |             | Weighted average |  | Weighted  |      |             |  | Weighted 
|Range of     |  | Total                     |             | remaining        |  | average   |      |             |  | average  
|exercise     |  | number                    |             | contractual      |  | exercise  |      | Number      |  | exercise 
|prices (£)   |  | outstanding               |             | life (years)     |  | price (£) |      | exercisable |  | price (£)
|             |  |                          
|             |  |                          
|nil          |  |                           | 34,015,318  |                  |  |           | 3.35 |             |  |           | nil  |  |  |  |           |  |  |  |     | 
|0.03  0.2   |  |                           | 292,375     |                  |  |           | 2.36 |             |  |           | 0.17 |  |  |  | 292,375    |  |  |  | 0.17 | 
|0.35  0.80  |  |                           | 71,260,568  |                  |  |           | 3.66 |             |  |           | 0.35 |  |  |  | 2,481,684  |  |  |  | 0.49 | 
|1.22  2.66  |  |                           | 4,539,030   |                  |  |           | 4.23 |             |  |           | 2.12 |  |  |  | 4,153,186  |  |  |  | 2.09 | 
|2.73  4.72  |  |                           | 8,793,799   |                  |  |           | 4.96 |             |  |           | 3.53 |  |  |  | 8,776,361  |  |  |  | 3.53 | 
|4.76  6.76  |  |                           | 30,638,124  |                  |  |           | 6.89 |             |  |           | 5.81 |  |  |  | 22,137,625 |  |  |  | 5.61 | 
|6.85  12.50 |  |                           | 47,582,737  |                  |  |           | 6.89 |             |  |           | 8.28 |  |  |  | 39,341,542 |  |  |  | 8.22 | 
|             |  |                           |             |                  |  |           |      |             |  |           |      |  |  |  |            |  |  |  |      | 
|nil  12.50  |  |                           | 197,121,951 |                  |  |           | 4.96 |             |  |           | 3.24 |  |  |  | 77,182,773 |  |  |  | 6.33 | 
|             |  |                           |             |                  |  |           |      |             |  |           |      |  |  |  |            |  |  |  |      | 

17. Fair values of financial
instruments

The carrying amounts and fair values of material
financial instruments at March 31, 2003 and 2002 are as
follows:

|                                 |  |          |      |        |  |          |      |        |  |  |       |   |  |  |      |  
|-------------------------------- |  | -------- | ---- | ------ |  | -------- | ---- | ------ |  |  | ----- | - |  |  | ---- | -
|                                 |  |          |      |       
|                                 |  | 2003     |      | 2002  
|                                 |  | Carrying |      | Fair   |  | Carrying |      | Fair  
|                                 |  | amounts  |      | values |  | amounts  |      | values
|(in millions)                    |  | £        |      | £      |  | £        |      | £     
|                                 |  |         
|                                 |  |         
|Marketable securities            |  |          | 16   |        |  |          | 16   |        |  |  | 53    |   |  |  | 53   |  
|Total long-term debt*            |  |          | 30   |        |  |          | 30   |        |  |  | 1,819 |   |  |  | 593  |  
|Obligations under finance leases |  |          |     |        |  |          |     |        |  |  | 9     |   |  |  | 9    |  
|Interest rate swap agreements    |  |          |     |        |  |          |     |        |  |  | (1    | ) |  |  | (1   | )
|Equity forward contracts         |  |          | (158 | )      |  |          | (158 | )      |  |  | (375  | ) |  |  | (375 | )



| |   |                                                
| | - | -----------------------------------------------
| | * | excluding current maturities of long-term debt.

The following methods and assumptions were used
in estimating the fair values of financial instruments:

Equity forward contracts

At March 31, 2003 the carrying value and
fair value of the equity forward contracts was
£158 million. As a result of the Financial
Restructuring, which was concluded on May 19, 2003, an
agreement was reached and these equity forward contracts were
settled for £35 million. See note 2, Summary of
significant accounting policies for further discussion of these
equity forward contracts.

Cash and cash equivalents, receivables,
payables, accrued liabilities and short-term
borrowings

The carrying values of cash and cash equivalents,
receivables, payables, accrued liabilities and short-term
borrowings approximate their fair values due to the short-term
nature of the instruments.

Marketable securities, long-term debt and
finance leases

The fair value of marketable securities has been
determined using quoted market prices. The fair value of finance
leases and long-term debt, including current portion, has been
determined by discounting projected future cash flows, using
reference rates taken from the debt markets at which similar
loans would be made to

F-56



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##### Table of Contents



borrowers with similar credit ratings and for the
same maturities. In the case of the Marconi Corporation plc
bonds, which are guaranteed by Marconi plc, a fair value was
derived from traded market prices.


Interest rate swaps

The Company has entered into receive-variable,
pay-fixed agreements to effectively convert a portion of its
variable-rate debt to fixed-rate debt to reduce the risk of
incurring higher interest costs due to rising interest rates.
The Company has also entered into receive-fixed, pay-fixed
agreements to reduce fair value risk on its fixed rate bonds.
The following table summarizes the notional amounts outstanding
and weighted average interest data, based on variable rates in
effect at March 31, 2003 and 2002, for these swaps that
expire between 2005 and 2010. At March 31, 2003, there were
no such interest rate swap agreements outstanding.

|                                   |                      |                   |  |      |  |  |  |      |  
|---------------------------------- | -------------------- | ----------------- |  | ---- |  |  |  | ---- | -
|                                   |                      |                  
|                                   |                      | Fiscal year ended
|                                   |                      | March 31,        
|                                   |                      | 2003              |  | 2002
|(in millions, except percentages)  |                      | £                 |  | £   
|                                   |                      |                  
|                                   |                      |                  
|Receive-variable, pay-fixed swaps: |                      |                   |  |      |  |  |  |     
|                                   | Notional amount      |                   |  |     |  |  |  | 772  |  
|                                   | Average receive rate |                   |  |     |  |  |  | 5.97 | %
|                                   | Average pay rate     |                   |  |     |  |  |  | 2.06 | %
|Pay-variable, receive-fixed swaps: |                      |                   |  |      |  |  |  |     
|                                   | Notional amount      |                   |  |     |  |  |  | 306  |  
|                                   | Average receive rate |                   |  |     |  |  |  | 5.63 | %
|                                   | Average pay rate     |                   |  |     |  |  |  | 3.75 | %

18. Valuation and qualifying
accounts

|                                |  |           |     |            |  |               |     |             |  |           |    |   |  |  |      |   |  |  |     | 
|------------------------------- |  | --------- | --- | ---------- |  | ------------- | --- | ----------- |  | --------- | -- | - |  |  | ---- | - |  |  | --- | 
|                                |  |           |     |            |  | Effect of     |     |             |  |          
|                                |  | March 31, |     | Additions/ |  | exchange rate |     |             |  | March 31,
|                                |  | 2002      |     | (release)  |  | changes       |     | Utilization |  | 2003     
|Description                     |  | £         |     | £          |  | £             |     | £           |  | £        
|                                |  |          
|                                |  |          
|Allowance for doubtful accounts |  |           | 167 |            |  |               | (10 | )           |  |           | (7 | ) |  |  | (72  | ) |  |  | 78  | 
|Warranty reserve*               |  |           | 29  |            |  |               | 49  | (1)         |  |           | (1 | ) |  |  | (34  | ) |  |  | 43  | 
|                                |  |          
|Total                           |  |           | 196 |            |  |               | 39  |             |  |           | (8 | ) |  |  | (106 | ) |  |  | 121 | 
|                                |  |          



| |     |                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The addition of £49 million in fiscal
    2003 includes a £12 million change in liability in
    respect of the estimated pre-existing warranties at
    April 1, 2002.

|                                |  |           |    |           |  |                |     |               |  |             |    |           |  |  |   |  |  |  |      |   |  |  |     | 
|------------------------------- |  | --------- | -- | --------- |  | -------------- | --- | ------------- |  | ----------- | -- | --------- |  |  | - |  |  |  | ---- | - |  |  | --- | 
|                                |  |           |    |           |  | Net effect of  |     | Effect of     |  |             |    |          
|                                |  | March 31, |    |           |  | acquisitions   |     | exchange rate |  |             |    | March 31,
|                                |  | 2001      |    | Additions |  | less disposals |     | changes       |  | Utilization |    | 2002     
|Description                     |  | £         |    | £         |  | £              |     | £             |  | £           |    | £        
|                                |  |          
|                                |  |          
|Allowance for doubtful accounts |  |           | 64 |           |  |                | 175 |               |  |             | (3 | )         |  |  |  |  |  |  | (69  | ) |  |  | 167 | 
|Warranty reserve*               |  |           | 34 |           |  |                | 43  |               |  |             | (2 | )         |  |  |  |  |  |  | (46  | ) |  |  | 29  | 
|                                |  |          
|Total                           |  |           | 98 |           |  |                | 218 |               |  |             | (5 | )         |  |  |  |  |  |  | (115 | ) |  |  | 196 | 
|                                |  |          

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|                                |  |           |    |           |  |                |    |               |  |             |    |           |  |  |   |  |  |  |     |   |  |  |    | 
|------------------------------- |  | --------- | -- | --------- |  | -------------- | -- | ------------- |  | ----------- | -- | --------- |  |  | - |  |  |  | --- | - |  |  | -- | 
|                                |  |           |    |           |  | Net effect of  |    | Effect of     |  |             |    |          
|                                |  | March 31, |    |           |  | acquisitions   |    | exchange rate |  |             |    | March 31,
|                                |  | 2000      |    | Additions |  | less disposals |    | changes       |  | Utilization |    | 2001     
|Description                     |  | £         |    | £         |  | £              |    | £             |  | £           |    | £        
|                                |  |          
|                                |  |          
|Allowance for doubtful accounts |  |           | 20 |           |  |                | 48 |               |  |             | 12 |           |  |  | 3 |  |  |  | (19 | ) |  |  | 64 | 
|Warranty reserve*               |  |           | 43 |           |  |                | 46 |               |  |             | (5 | )         |  |  | 1 |  |  |  | (51 | ) |  |  | 34 | 
|                                |  |          
|Total                           |  |           | 63 |           |  |                | 94 |               |  |             | 7  |           |  |  | 4 |  |  |  | (70 | ) |  |  | 98 | 
|                                |  |          



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| | * | These amounts are included in accounts payable
    and other liabilities.

In light of the declining market and economic
trends the Company was experiencing, a provision against bad and
doubtful debts of £150 million was charged during
fiscal 2002. Of this amount, £10 million was
reassessed and released to the profit and loss account in fiscal
2003.

19. Earnings per share

The following table reconciles net (loss)/income
available for ordinary shareholders and the weighted average
ordinary shares outstanding for basic and diluted earnings per
ordinary share for the periods:

|                                            |                                              |           |         |         |   |      |         |         |   |  |         |         | 
|------------------------------------------- | -------------------------------------------- | --------- | ------- | ------- | - | ---- | ------- | ------- | - |  | ------- | ------- | 
|                                            |                                              |          
|                                            |                                              | March 31,
|                                            |                                              | 2003      |         | 2002    |   | 2001
|(in millions, except for per share data)    |                                              | £         |         | £       |   | £   
|                                            |                                              |          
|                                            |                                              |          
|Net (loss)/income                           |                                              |           | (807    | )       |   |      | (6,150  | )       |   |  | 180     |        
|                                            |                                              |          
|Basic (loss)/earnings per ordinary share:   |                                              |           |         |         |   |      |         |         |   |  |         |        
|                                            | Weighted average ordinary shares outstanding |           |         | 2,792.6 |   |      |         | 2,789.6 |   |  |         | 2,763.1 | 
|                                            |                                              |          
|                                            | Basic (loss)/earnings per ordinary share     |           |         | (0.29   | ) |      |         | (2.20   | ) |  |         | 0.07    | 
|                                            |                                              |          
|Diluted (loss)/earnings per ordinary share: |                                              |           |         |         |   |      |         |         |   |  |         |        
|                                            | Weighted average ordinary shares outstanding |           |         | 2,792.6 |   |      |         | 2,789.6 |   |  |         | 2,763.1 | 
|                                            | Effect of dilutive options                   |           |         |        |   |      |         |        |   |  |         | 28.2    | 
|                                            |                                              |          
|                                            |                                              |           | 2,792.6 |         |   |      | 2,789.6 |         |   |  | 2,791.3 |        
|                                            |                                              |          
|                                            | Diluted (loss)/earnings per ordinary share   |           |         | (0.29   | ) |      |         | (2.20   | ) |  |         | 0.06    | 
|                                            |                                              |          

For the fiscal years ended March 31, 2003
and 2002, the effect of share options is anti-dilutive and has
therefore been excluded from the calculation of diluted weighted
average number of shares.

20. Income taxes

The geographic analysis of (loss)/income from
continuing operations before income taxes, minority interests
and cumulative changes in accounting principles and
extraordinary gain are as follows:

|                   |  |           |      |      |  |      |        |   |  |  |      |  
|------------------ |  | --------- | ---- | ---- |  | ---- | ------ | - |  |  | ---- | -
|                   |  |          
|                   |  | March 31,
|                   |  | 2003      |      | 2002 |  | 2001
|(in millions)      |  | £         |      | £    |  | £   
|                   |  |          
|                   |  |          
|United Kingdom     |  |           | (673 | )    |  |      | (426   | ) |  |  | 587  |  
|Non-United Kingdom |  |           | (230 | )    |  |      | (6,109 | ) |  |  | (329 | )
|                   |  |          
|Total              |  |           | (903 | )    |  |      | (6,535 | ) |  |  | 258  |  
|                   |  |          

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Income tax benefit/(provision) includes:

|                      |                    |                      |  |      |     |      |  |     |     |   |  |      |      |  
|--------------------- | ------------------ | -------------------- |  | ---- | --- | ---- |  | --- | --- | - |  | ---- | ---- | -
|                      |                    |                     
|                      |                    | March 31,           
|                      |                    | 2003                 |  | 2002 |     | 2001
|(in millions)         |                    | £                    |  | £    |     | £   
|                      |                    |                     
|                      |                    |                     
|Current income taxes  |                    |                      |  |      |     |      |  |     |     |   |  |     
|                      | United Kingdom     |                      |  | 155  |     |      |  | 18  |     |   |  | (145 | )   
|                      | Non-United Kingdom |                      |  | 32   |     |      |  | (25 | )   |   |  | (43  | )   
|                      |                    |                     
|                      |                    | Total current taxes  |  |      | 187 |      |  |     | (7  | ) |  |      | (188 | )
|Deferred income taxes |                    |                      |  |      |     |      |  |     |     |   |  |     
|                      | United Kingdom     |                      |  | 29   |     |      |  | 96  |     |   |  | 33   |     
|                      | Non-United Kingdom |                      |  | (7   | )   |      |  | 382 |     |   |  | 138  |     
|                      |                    |                     
|                      |                    | Total deferred taxes |  |      | 22  |      |  |     | 478 |   |  |      | 171  |  
|                      |                    |                     
|                      |                    | Total income taxes   |  |      | 209 |      |  |     | 471 |   |  |      | (17  | )
|                      |                    |                     

The differences between the Companys tax on
profit on ordinary activities, and the statutory income tax rate
in the United Kingdom are as follows:

|                                                                    |  |           |      |      |  |      |        |   |  |  |      |  
|------------------------------------------------------------------- |  | --------- | ---- | ---- |  | ---- | ------ | - |  |  | ---- | -
|                                                                    |  |          
|                                                                    |  | March 31,
|                                                                    |  | 2003      |      | 2002 |  | 2001
|(in millions)                                                       |  | £         |      | £    |  | £   
|                                                                    |  |          
|                                                                    |  |          
|Taxes computed at the statutory rate: (30% 2003,
    2002 and 2001) |  |           | (271 | )    |  |      | (1,961 | ) |  |  | 77   |  
|Non-deductible intangible amortization and
    impairment Charge    |  |           |     |      |  |      | 1,276  |   |  |  | 93   |  
|Non-U.K. tax rate differences                                       |  |           | (9   | )    |  |      | (177   | ) |  |  | (33  | )
|Non-deductible/(non-taxable) items                                  |  |           | 30   |      |  |      | (242   | ) |  |  | (155 | )
|Changes in reinvestment position                                    |  |           |     |      |  |      | (63    | ) |  |  | 39   |  
|Valuation allowances on losses and other assets                     |  |           | 38   |      |  |      | 715    |   |  |  |     |  
|Other, net                                                          |  |           | 3    |      |  |      | (19    | ) |  |  | (4   | )
|                                                                    |  |          
|Income tax (benefit)/provision                                      |  |           | (209 | )    |  |      | (471   | ) |  |  | 17   |  
|                                                                    |  |          
|Effective tax rate                                                  |  |           | 23.1 | %    |  |      | 7.2    | % |  |  | 6.6  | %

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Deferred income tax assets/(liabilities) in the
balance sheet are as follows:

|                             |                                         |           |      |      |   |  |      |     |  
|---------------------------- | --------------------------------------- | --------- | ---- | ---- | - |  | ---- | --- | -
|                             |                                         |          
|                             |                                         | March 31,
|                             |                                         | 2003      |      | 2002
|(in millions)                |                                         | £         |      | £   
|                             |                                         |          
|                             |                                         |          
|Net deferred tax assets      |                                         |           |      |      |   |  |      |    
|                             | Net operating losses                    |           |      | 670  |   |  |      | 640 |  
|                             | Provisions and other expenses           |           |      | 90   |   |  |      | 105 |  
|                             | SFAS 133                                |           |      | 21   |   |  |      |    |  
|                             | Pension and post-retirement benefits    |           |      | 93   |   |  |      | 10  |  
|                             | Investment write-downs                  |           |      | 3    |   |  |      | 20  |  
|                             |                                         |          
|Sub total                    |                                         |           | 877  |      |   |  | 775  |    
|Valuation allowance          |                                         |           | (841 | )    |   |  | (715 | )  
|                             |                                         |          
|Sub total                    |                                         |           | 36   |      |   |  | 60   |    
|                             |                                         |          
|Net deferred tax liabilities |                                         |           |      |      |   |  |      |    
|                             | Property and equipment                  |           |      | (8   | ) |  |      | (20 | )
|                             | Intangible assets (other than goodwill) |           |      | (33  | ) |  |      | (45 | )
|                             |                                         |          
|Sub total                    |                                         |           | (41  | )    |   |  | (65  | )  
|                             |                                         |          
|Total                        |                                         |           | (5   | )    |   |  | (5   | )  
|                             |                                         |          

As of March 31, 2003 the net deferred income
tax liability of £5 million (2002,
£5 million) was presented in the balance sheet based
on tax jurisdiction as required by SFAS 109, Accounting for
Income Taxes, as a non-current deferred tax liability of
£5 million (2002, £5 million).

As of March 31, 2003 approximately
£2.3 billion of net operating losses were available to
be carried forward. A full valuation allowance has been recorded
against the deferred tax asset in relation to such losses in
2003 and 2002 due to the fact that it is more likely than not,
that such assets will not be realized. If unused,
£615 million will expire between 2007 and 2023. The
remainder of £1.6 billion does not expire.

Although the Company has in excess of
£2 billion of net operating tax losses as of
March 31, 2003, these may be unavailable to cover earlier
years that are open for or under tax audit. In addition, in some
jurisdictions the loss carry forwards will be forfeited (this
applies to the U.S.) or could be restricted (this may apply to
Germany and the U.K.) following the Companys Financial
Restructuring. There will be ongoing tax cash costs, therefore,
where losses are unavailable.

No deferred tax assets have been provided for the
undistributed losses to the extent that they are permanently
reinvested in the Companys non-U.K. operations.

The tax on discontinued operations and on the
disposal of discontinued operations is £nil.

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21. Related party transactions

The Company and its subsidiaries had sales and
purchases during the year with equity investments, joint
ventures and associates, which are not consolidated, during
fiscal 2003, 2002 and 2001. All transactions are in the ordinary
course of business. The primary transactions between the Company
and related parties are summarized as follows:

|                         |  |                |   |       |  |  |    | 
|------------------------ |  | -------------- | - | ----- |  |  | -- | 
|                         |  |               
|                         |  | Year ended    
|                         |  | March 31, 2003
|                         |  | MMFG(1)        |   | Other
|(in millions)            |  | £              |   | £    
|                         |  |               
|                         |  |               
|Statement of operations: |  |                |   |       |  |  |    | 
|Net sales                |  |                |  |       |  |  | 30 | 
|Purchases                |  |                |  |       |  |  |   | 
|Balance sheet:           |  |                |   |       |  |  |    | 
|Trade receivables        |  |                |  |       |  |  | 26 | 
|Trade payables           |  |                |  |       |  |  | 9  | 

|                         |  |                |    |       |  |  |    | 
|------------------------ |  | -------------- | -- | ----- |  |  | -- | 
|                         |  |               
|                         |  | Year ended    
|                         |  | March 31, 2002
|                         |  | MMFG(1)        |    | Other
|(in millions)            |  | £              |    | £    
|                         |  |               
|                         |  |               
|Statement of operations: |  |                |    |       |  |  |    | 
|Net sales                |  |                | 25 |       |  |  | 40 | 
|Purchases                |  |                | 1  |       |  |  | 14 | 
|Balance sheet:           |  |                |    |       |  |  |    | 
|Trade receivables        |  |                |   |       |  |  | 26 | 
|Trade payables           |  |                |   |       |  |  | 9  | 

|                         |  |                |    |       |  |  |    | 
|------------------------ |  | -------------- | -- | ----- |  |  | -- | 
|                         |  |               
|                         |  | Year ended    
|                         |  | March 31, 2001
|                         |  | MMFG(1)        |    | Other
|(in millions)            |  | £              |    | £    
|                         |  |               
|                         |  |               
|Statement of operations: |  |                |    |       |  |  |    | 
|Net sales                |  |                | 90 |       |  |  | 59 | 
|Purchases                |  |                | 1  |       |  |  | 1  | 
|Balance sheet:           |  |                |    |       |  |  |    | 
|Trade receivables        |  |                | 25 |       |  |  | 28 | 
|Trade payable            |  |                | 1  |       |  |  | 9  | 



| |     |                                                                                
| | --- | -------------------------------------------------------------------------------
| | (1) | MMFG  Marconi Medical Financial Group
    (formerly known as Picker Financial)

All the contracts and other arrangements are with
Atlantic Telecommunications Limited/ GaMMa, Alstom and the joint
ventures described below which management believe have been on
arms-length terms.

Atlantic Telecommunications Limited/
GaMMa

The Company owned 19.7% of Atlantic
Telecommunications Limited (Atlantic). Atlantic went into
administration on October 5, 2001. GaMMa acquired certain
assets from Atlantic in bankruptcy. The Company received a 14.3%
beneficial holding in GaMMa in December 2001, in consideration
of the waiver of retention of title claims against certain
assets of Atlantic, the grant of software licenses and
procurement of the assignment of the indefeasible right of use
terms granted by Easynet. Under the terms of the agreement with
GaMMa, the Company will receive warrants equating to 1.7% of the
authorized share capital of GaMMa.

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Alstom

The Company owned approximately 24% of Alstom
until February 2001, when it disposed of 18% through a public
offering of shares. Upon the initial public offering of Alstom
in 1998, prior to which we had a 50% stake in GEC Alstom, as it
was called prior to the initial public offering, the Company
entered into a transitional services agreement providing for the
termination of existing group services provided by the Company
to Alstom except that the Company would continue to provide
transitional services in the fields of research and development,
real estate management, bulk purchasing, and environmental
advice and insurance. These transitional services are now
largely completed, and as a result, among others, the Company no
longer provide insurance services to Alstom. The Company does
however, have an ongoing maintenance contract and provide some
supply works on Alstoms Northern Line. From time to time
in the ordinary course of business, the Company supplies
products or services to Alstom and Alstom supplies products or
services to the Company. In June 2001, the Company disposed of
its remaining interest in Alstom.

CosmoCom

As of June 18, 2003, Marconi Capital Limited
owned 5.7% of CosmoCom, Inc. CosmoCom, Inc. develops and deploys
call center products and services. Marconi Communications
International Limited, or MCIL, entered into a Value Added
Reseller Agreement with CosmoCom, Inc. on March 3, 2000, as
amended by Amendment No. 1, dated September 8, 2000,
the VAR, whereby would act as a reseller of certain CosmoCom,
Inc. products. Subject to other terms of the VAR, including the
termination provisions contained therein, MCIL was required to
purchase products and/or services of $12,000,000 over
approximately a three year period. On or about October 29,
2001, MCIL advised CosmoCom, Inc. that it was terminating the
VAR, and is making no further purchases at this time. During the
term of the VAR, purchased approximately $1.5 million of
products and/or services. MCIL and CosmoCom are currently
involved in litigation wherein each party asserts that the other
party has breached the VAR.

Marconi (Malaysia) SDN BHD

Marconi Communications S.p.A. owns a 30%
shareholding in Marconi (Malaysia) SDN BHD, a business that
sells and installs telecommunications equipment. During the
fiscal year ended March 31, 2003, the Company supplied
network equipment products totaling £23.1 million to
Marconi (Malaysia) SDN BHD, at arms-length terms.

Ultramast

The Company formed a joint venture company with
Railtrack Telecom Services Limited, or RTSL, on April 26,
2001 to support the deployment of next generation broadband
wireless networks. The Company and RTSL each had a
50 percent interest in the joint venture company until
February 2003 when the Company settled litigation with RTSL and
RTSL assumed full control of Ultramast. Albany Partnership Ltd.,
or APT, a wholly owned subsidiary of the Company, has a
consultancy agreement with Ultramast to provide it with
telecommunications consultancy services to design, construct and
maintain masts for the next generation networks. Ultramast also
has an agreement with ipsaris Limited under which ipsaris is
nominated as the preferred supplier for connectivity for the
telecommunications network.

Confirmant

Confirmant is a 50-50 joint venture between
Marconi Corporation plc and Oxford Glyco Sciences (U.K.)
Limited, a wholly owned subsidiary of Oxford Glyco Sciences plc.
Confirmant was formed in June 2001 for the purpose of completing
and then offering for subscription a proteomic database and for
providing managed hosting services to the biotech sector.
Although the Companys outstanding contracts with
Confirmant have not been formally cancelled, all members of the
Confirmant board of directors have acknowledged that they are de
facto cancelled and, therefore, the Company has no remaining
liability under those contracts.

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Easynet Group plc

In February 2002, the Company was obliged to
acquire by a put option 1,324,054 ordinary shares in Easynet for
£20 million. The Company disputed the legal basis of
the put option and entered into litigation with Railtrack Group.
In February 2003, the litigation with Railtrack Group was
settled and the Company became beneficial owners of the
1,324,054 Easynet ordinary shares under the put option.
Consequently, the £20 million and related impairment
have been reflected in equity in loss of affiliates. The put
option increased the equity holding to 72.7% and the holding of
voting shares to 51.6%. However, under the Articles of
Association of Easynet and a relationship agreement with
Easynet, the voting rights in Easynet are limited to 49.9%.
Accordingly, Easynet applied in April 2003 to the U.K. Listing
Authority to cancel the 1,324,054 ordinary shares and non-voting
convertible shares have been issued to the Company in exchange.
Since the Company were not able to exercise control over Easynet
at anytime, the Company have continued to account for Easynet
using the equity method of accounting.

No significant transactions with directors or
other executive officers of the Company have occurred during
fiscal 2003 and 2002. Sir Alan Rudge, a non-executive director
of the Company and non-executive chairman of MSI (acquired in
2001), held a substantial number of share options in MSI. At
completion, he received approximately $5.3 million from MSI
in respect of the cancellation of his options. Sir Alan Rudge
did not participate in that part of any board meeting, which
considered the acquisition of MSI, nor did he receive any board
papers related thereto.

During fiscal 2001, the Company made sales of
equipment and services to Atlantic totaling
£26.5 million. These sales formed part of the
consideration of £113 million given in exchange for
shares in Atlantic, which were recorded as an equity investment
in fiscal 2000.

22. Subsidiary company and equity
investee information

The following table provides information on the
principal subsidiary undertakings and other associated
companies, that the Company considers will likely have a
significant impact on the assessment of the assets and
liabilities, the financial position and/or the profits and
losses of the Company to March 31, 2003. Except where
stated otherwise, each of these companies is wholly owned by a
member of the Company and the share capital is fully paid.

|                               |                                                                         |                   |                                                                                                                            
|------------------------------ | ----------------------------------------------------------------------- | ----------------- | ---------------------------------------------------------------------------------------------------------------------------
|Name                           |                                                                         | Registered Office
|                               |                                                                         |                  
|Network Equipment and Services |                                                                         |                  
|                               | Marconi Communications Limited                                          |                   | New Century Park, PO Box 53, Coventry
    CV3 1HJ, England                                                                 
|                               | Marconi Communications S.p.A.                                           |                   | Via Ludovico Calda 5, 16153 Genoa, Italy                                                                                   
|                               | Marconi Communications, Inc.                                            |                   | c/o The Corporation Trust Company, Corporation
    Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801,
    U.S.A
|                               | Marconi Communications GmbH                                             |                   | Gerberstrasse 33, D 71522 Backnang, Germany                                                                                
|Capital                        |                                                                         |                  
|                               | Marconi Mobile S.p.A.(1)                                                |                   | Via A. Negrone 1/A, 16153 Genoa, Italy                                                                                     
|Other Associated Companies     |                                                                         |                  
|                               | Easynet Group plc (72.7% group equity share;
    49.9% voting share)(2) |                   | 44-46 Whitfield Street, London W1T 2RJ,
    England                                                                        



| |     |                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Marconi Mobile S.p.A. was sold as part of the
    disposal of Marconi Mobile Holdings S.p.A. to Finmeccanica
    S.p.A. on August 2, 2002.
|
| | (2) | See note 13, Investments in affiliates.                                                                                                   

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23. Subsequent events

Financial Restructuring

On May 19, 2003, the Company and its former
subsidiary, Marconi Corporation plc, concluded a 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 Financial Restructuring of its financial
obligations. One scheme of arrangement involved all of the
creditors of the Marconi Corporation plc, other than certain
excepted categories of creditors but including the syndicate
banks and bondholders to whom their primary financial
indebtedness was owed. The second scheme of arrangement involved
creditors of the Company. In connection with the Financial
Restructuring, we ceased to be a member of the Marconi group.

The Financial Restructuring of the Marconi group
covered approximately £4.8 billion of creditors
claims comprising £4.0 billion of syndicated bank debt
and externally held U.S. dollar and euro denominated bonds
and £800 million of related party debt. The Company
expects to recognize a gain upon the extinguishment of its
liabilities under the terms of the Financial Restructuring in
the year ending March 31, 2004.

In connection with the Financial Restructuring,
the ordinary shares of Marconi plc were delisted from the London
Stock Exchange. While Marconi plcs ordinary shares remain
outstanding, all of Marconi plcs remaining assets, other
than assets necessary to fund the cost of administering its
scheme of arrangement, will be distributed to Marconi plcs
creditors over time in accordance with its scheme of
arrangement. The current plan is that the Company will be
liquidated or dissolved in the future following the completion
of those distributions.

F-64