As filed with the Securities and Exchange Commission on 26 May 2006



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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Form 20-F/A

|(Mark One)                                                                                         |                                                                                                         
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------
|o                                                                                                  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR SECTION 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
|OR                                                                                                
|ý                                                                                                  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                    
|For the fiscal year ended March 31, 2005                                                          
|OR                                                                                                
|o                                                                                                  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934                
|OR                                                                                                
|o                                                                                                  | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934             
|Date of event requiring this shell company report    .............................................

|                               |  |  |  |    |  | 
|------------------------------ |  |  |  | -- |  | 
|For the transition period from |  |  |  | to |  | 
|Commission file number         |  | 

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telent plc(Exact name of Registrant as specified in its charter)

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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)

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

None

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

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

Ordinary
shares of 25 pence per share.

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

None

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Indicate
the number of outstanding shares of each of the issuer's classes of capital or common stock as of March 31, 2005:

208,740,939
Ordinary Shares of 25p 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 ý    NO o

Indicate by check mark which financial statement item the registrant has elected to
follow. ITEM 17 o    ITEM 18 ý

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate
by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes o    No o



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EXPLANATORY NOTE

This Amendment No. 1 to our Annual Report on Form 20-F (the "Annual Report") for the year ended March 31, 2005 is being filed to update the financial
statements in Part III of the Annual Report as well as Exhibit 4.12 to the Annual Report to include certain pages which were inadvertently omitted from the Annual Report filed on
November 7, 2005. The Company has also made conforming updates to the exhibit index and signature page.

Pursuant
to the rules of the SEC, the Company has also amended the 20-F to contain currently-dated certifications from the Registrants' chief executive officer and chief financial
officer, as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.

i

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SECTION IIICONSOLIDATED FINANCIAL STATEMENTS

Marconi Corporation plc and subsidiaries  Consolidated financial statements as of 31 March 2005, 2004 and 2003 and  for the three years ended 31 March 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and the Shareholders of Marconi Corporation plc

We have audited the accompanying consolidated balance sheets of Marconi Corporation plc and subsidiaries as of 31 March 2005 and 2004, and the related
consolidated profit and loss account, consolidated statement of total recognised gains and losses, reconciliation of movements in equity shareholders' interests and consolidated cash flow statement
for each of the three years in the period ended 31 March 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.

We
conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its Internal
control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits also included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Marconi Corporation plc and subsidiaries as of 31 March
2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended 31 March 2005, in conformity with accounting principles generally
accepted in the United Kingdom.

Accounting
principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America.
Information relating to the nature and effect of such differences is presented in Note 30 to the consolidated financial statements.

Deloitte & Touche LLPLondon, England
28 September 2005

130

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Consolidated profit and loss account        For the year ended 31 March

|£ million, except per share data                                                                                               |                                                                           | Note |    | 2005  |       | 2004  |       | 2003   |       
|------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ---- | -- | ----- | ----- | ----- | ----- | ------ | ------
|Turnover                                                                                                                       |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               | Continuing Operations                                                     |      | 3  |       | 1,270 |       | 1,244 |        | 1,598 
|                                                                                                                               | Discontinued Operations                                                   |      | 3  |       | 67    |       | 314   |        | 404   
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Group                                                                                                                          |                                                                           | 2    |    | 1,337 |       | 1,558 |       | 2,002  |       
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Group operating (loss)/profit                                                                                                  |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               | Continuing Operations                                                     |      |    |       | (95   | )     | (249  | )      | (634  
|                                                                                                                               | Discontinued Operations                                                   |      |    |       | (4    | )     | 8     |        | (95   
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               |                                                                           | 3    |    | (99   | )     | (241  | )     | (729   | )     
|Share of operating loss of joint ventures                                                                                      |                                                                           |      |    |      |       | (2    | )     | (40    | )     
|Share of operating loss of associates                                                                                          |                                                                           |      |    |      |       | (11   | )     | (89    | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Total operating loss                                                                                                           |                                                                           | 2    |    | (99   | )     | (254  | )     | (858   | )     
|Non-operating exceptional items                                                                                                |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               | Gain/(loss) on disposal of Discontinued Operations                        |      | 4b |       | 103   |       | 75    |        | (5    
|                                                                                                                               | Gain on disposal of joint ventures and associates                         |      | 4b |       |      |       | 77    |        |      
|                                                                                                                               | Gain on disposal of fixed assets and investments in Continuing Operations |      | 4b |       |      |       | 25    |        | 26    
|                                                                                                                               | Merger/demerger items                                                     |      |    |       |      |       |      |        | 123   
|                                                                                                                               | Group share of associates' non-operating exceptional items                |      |    |       |      |       |      |        | (3    
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               |                                                                           |      |    | 103   |       | 177   |       | 141    |       
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Amounts written off investments                                                                                                |                                                                           | 4c   |    |      |       | (2    | )     | (40    | )     
|Gain on waiver of balance payable to M (2003) plc group                                                                        |                                                                           | 4d   |    |      |       | 25    |       | (315   | )     
|Net interest payable                                                                                                           |                                                                           | 5    |    |      |       | (35   | )     | (242   | )     
|Net finance expenditure                                                                                                        |                                                                           | 6    |    | (31   | )     | (82   | )     | (14    | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Loss on ordinary activities before taxation                                                                                    |                                                                           |      |    | (27   | )     | (171  | )     | (1,328 | )     
|Tax credit on loss on ordinary activities                                                                                      |                                                                           | 7a   |    | 48    |       | 19    |       | 185    |       
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Profit/(loss) on ordinary activities after taxation                                                                            |                                                                           |      |    | 21    |       | (152  | )     | (1,143 | )     
|Equity minority interests                                                                                                      |                                                                           | 8    |    |      |       | (1    | )     | (1     | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Profit/(loss) on ordinary activities attributable to the equity shareholders and retained profit/(loss) for the financial year |                                                                           |      |    | 21    |       | (153  | )     | (1,144 | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Earnings per sharebasic (in pence)                                                                                            |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               | Income/(loss) from Continuing Operations                                  |      |    |       | (38.1 | )     | (91.1 | )      | (195.7
|                                                                                                                               | Income/(loss) from Discontinued Operations                                |      |    |       | (2.0  | )     | (0.4  | )      | (3.0  
|                                                                                                                               | Gain/(loss) on sale of Discontinued Operations                            |      |    |       | 50.4  |       | 30.1  |        | (0.9  
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Net income/(loss)                                                                                                              |                                                                           |      |    | 10.3  |       | (61.4 | )     | (199.6 | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Earnings per sharediluted (in pence)                                                                                          |                                                                           |      |    |       |       |       |       |        |       
|                                                                                                                               | Income/(loss) from Continuing Operations                                  |      |    |       | (36.0 | )     | (91.1 | )      | (195.7
|                                                                                                                               | Income/(loss) from Discontinued Operations                                |      |    |       | (1.8  | )     | (0.4  | )      | (3.0  
|                                                                                                                               | Gain/(loss) on sale of Discontinued Operations                            |      |    |       | 47.5  |       | 30.1  |        | (0.9  
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       
|Net income/(loss)                                                                                                              |                                                                           |      |    | 9.7   |       | (61.4 | )     | (199.6 | )     
|                                                                                                                               |                                                                           |      |    |       |       |       |       |        |       

131

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Balance sheets        As at 31 March

|                                                        |                                   |     |  | Group |     | Company |    
|------------------------------------------------------- | --------------------------------- | --- |  | ----- | --- | ------- | ---
|
|
|Fixed assets                                            |                                   |     |  |       |     |         |    
|Goodwill                                                |                                   | 12  |  | 301   |     | 436     |    
|Tangible assets                                         |                                   | 13  |  | 116   |     | 148     |    
|Investments:                                            |                                   | 14  |  |       |     |         |    
|                                                        | Joint ventures                    |     |  |       |     |         |    
|                                                        | Share of gross assets             |     |  |       | 10  |         | 10 
|                                                        | Share of gross liabilities        |     |  |       | (10 | )       | (10
|                                                        |                                   |     |  |       |     |         |    
|                                                        |                                   |     |  |      |     |        |    
|                                                        | Associates                        |     |  |       | 3   |         | 6  
|                                                        | Other investments                 |     |  |       | 5   |         | 3  
|                                                        | Investments in Group companies    |     |  |       |     |         |    
|                                                        |                                   |     |  | 8     |     | 9       |    
|                                                        |                                   |     |  |       |     |         |    
|                                                        |                                   |     |  | 425   |     | 593     |    
|Current assets                                          |                                   |     |  |       |     |         |    
|Stocks and contracts in progress                        |                                   | 15  |  | 162   |     | 174     |    
|Debtors: amounts falling due within one year            |                                   | 16  |  | 391   |     | 388     |    
|                                                        | Of which: Securitised receivables |     |  |       | 15  |         |   
|                                                        | Non-recourse receipts             |     |  |       | (15 | )       |   
|Debtors: amounts falling due after more than one year   |                                   | 16  |  | 1     |     | 5       |    
|Cash at bank and in hand                                |                                   | 17  |  | 334   |     | 519     |    
|                                                        |                                   |     |  |       |     |         |    
|                                                        |                                   |     |  | 888   |     | 1,086   |    
|Creditors: amounts falling due within one year          |                                   | 18  |  | (507  | )   | (577    | )  
|                                                        |                                   |     |  |       |     |         |    
|Net current assets/(liabilities)                        |                                   |     |  | 381   |     | 509     |    
|Total assets less current liabilities                   |                                   |     |  | 806   |     | 1,102   |    
|Creditors: amounts falling due after more than one year |                                   | 18  |  | (28   | )   | (285    | )  
|Provisions for liabilities and charges                  |                                   | 20  |  | (145  | )   | (219    | )  
|                                                        |                                   |     |  |       |     |         |    
|Net assets before retirement benefit deficits           |                                   |     |  | 633   |     | 598     |    
|Retirement benefit scheme deficits                      |                                   | 26  |  | (228  | )   | (246    | )  
|                                                        |                                   |     |  |       |     |         |    
|Net assets after retirement benefit deficits            |                                   |     |  | 405   |     | 352     |    
|                                                        |                                   |     |  |       |     |         |    
|Capital and reserves                                    |                                   |     |  |       |     |         |    
|Called-up share capital                                 |                                   | 21a |  | 52    |     | 50      |    
|Shares to be issued                                     |                                   | 22  |  | 24    |     | 25      |    
|Share premium account                                   |                                   | 22  |  | 4     |     |        |    
|Capital reserve                                         |                                   | 22  |  | 9     |     | 9       |    
|Capital reduction reserve                               |                                   | 22  |  | 186   |     | 283     |    
|Profit and loss account                                 |                                   | 22  |  | 129   |     | (17     | )  
|                                                        |                                   |     |  |       |     |         |    
|Equity shareholders' interests                          |                                   |     |  | 404   |     | 350     |    
|Equity minority interests                               |                                   |     |  | 1     |     | 2       |    
|                                                        |                                   |     |  |       |     |         |    
|                                                        |                                   |     |  | 405   |     | 352     |    
|                                                        |                                   |     |  |       |     |         |    

132

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Consolidated cash flow statement        For the year ended 31 March

|                                                                            |  | Note |  | 2005 |   | 2004 |   | 2003 |  
|--------------------------------------------------------------------------- |  | ---- |  | ---- | - | ---- | - | ---- | -
|
|Net cash inflow from operating activities before exceptional items          |  | 23a  |  | 23   |   | 151  |   | 8    |  
|Exceptional cash outflow from operating activities                          |  | 4e   |  | (43  | ) | (166 | ) | (329 | )
|Net cash (outflow)/inflow from operating activities after exceptional items |  |      |  |      |   |      |   |      |  
|Continuing Operations                                                       |  |      |  | (8   | ) | (33  | ) | (186 | )
|Discontinued Operations                                                     |  |      |  | (12  | ) | 18   |   | (135 | )
|                                                                            |  |      |  | (20  | ) | (15  | ) | (321 | )
|Returns on investments and servicing of finance                             |  | 23b  |  | (32  | ) | (72  | ) | (164 | )
|Tax paid                                                                    |  | 23c  |  | (7   | ) | (4   | ) | 31   |  
|Capital expenditure and financial investment                                |  | 23d  |  | (32  | ) | 36   |   | (30  | )
|Acquisitions and disposals                                                  |  | 23e  |  | 169  |   | 222  |   | 433  |  
|                                                                            |  |      |  |      |   |      |   |      |  
|Cash inflow before use of liquid resources and financing                    |  |      |  | 78   |   | 167  |   | (51  | )
|Net cash inflow/(outflow) from management of liquid resources               |  | 23f  |  | 23   |   | 103  |   | (159 | )
|Cash element of scheme consideration                                        |  | 23g  |  |     |   | (340 | ) |     |  
|Net cash outflow from financing                                             |  | 23g  |  | (266 | ) | (416 | ) | (40  | )
|                                                                            |  |      |  |      |   |      |   |      |  
|Decrease in cash and net bank balances repayable on demand                  |  |      |  | (165 | ) | (486 | ) | (250 | )
|                                                                            |  |      |  |      |   |      |   |      |  

Reconciliation of net cash flow to movements in net monetary funds/(debt)        For the year ended 31 March

|                                                              |  | Note |  | 2005 |   | 2004   |   | 2003   |  
|------------------------------------------------------------- |  | ---- |  | ---- | - | ------ | - | ------ | -
|
|Decrease in cash and net bank balances repayable on demand    |  |      |  | (165 | ) | (486   | ) | (250   | )
|Net cash inflow from management of liquid resources           |  |      |  | (23  | ) | (103   | ) | 159    |  
|Net cash outflow from decrease in debt and lease financing    |  |      |  | 270  |   | 416    |   | 40     |  
|                                                              |  |      |  |      |   |        |   |        |  
|Change in net monetary funds/(debt) resulting from cash flows |  |      |  | 82   |   | (173   | ) | (51    | )
|Net debt disposed with subsidiaries                           |  |      |  |     |   |       |   | 24     |  
|Other non-cash changes                                        |  |      |  |     |   | 3,956  |   | (364   | )
|Effect of foreign exchange rate changes                       |  |      |  | 1    |   | 48     |   | 109    |  
|                                                              |  |      |  |      |   |        |   |        |  
|Movement in net monetary funds/(debt) in the year             |  |      |  | 83   |   | 3,831  |   | (282   | )
|Net monetary funds/(debt) at 1 April                          |  | 24   |  | 214  |   | (3,617 | ) | (3,335 | )
|                                                              |  |      |  |      |   |        |   |        |  
|Net monetary funds at 31 March                                |  | 24   |  | 297  |   | 214    |   | (3,617 | )
|                                                              |  |      |  |      |   |        |   |        |  

133

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Consolidated statement of total recognised gains and losses        For the year ended 31 March

|                                                                       |                                                                           | Note |  | 2005 |     | 2004 |      | 2003   |       
|---------------------------------------------------------------------- | ------------------------------------------------------------------------- | ---- |  | ---- | --- | ---- | ---- | ------ | ------
|
|Gains/(losses) on ordinary activities attributable to the shareholders |                                                                           |      |  |      |     |      |      |        |       
|                                                                       | Group                                                                     |      |  |      | 21  |      | (140 | )      | (1,015
|                                                                       | Share of joint ventures                                                   |      |  |      |    |      | (2   | )      | (40   
|                                                                       | Share of associates                                                       |      |  |      |    |      | (11  | )      | (89   
|                                                                       |                                                                           |      |  |      |     |      |      |        |       
|                                                                       |                                                                           |      |  | 21   |     | (153 | )    | (1,144 | )     
|Exchange differences on translation                                    |                                                                           |      |  | 5    |     | (3   | )    | 103    |       
|Actuarial gain/(loss) recognised on retirement benefit schemes         |                                                                           |      |  |      |     |      |      |        |       
|                                                                       | Differences between the expected and actual return on scheme assets       |      |  |      | 67  |      | 130  |        | (178  
|                                                                       | Experience gains on scheme liabilities                                    |      |  |      | 1   |      | 10   |        | 7     
|                                                                       | Changes in assumptions underlying the present value of scheme liabilities |      |  |      | (67 | )    | (44  | )      | (98   
|                                                                       |                                                                           | 26   |  | 1    |     | 96   |      | (269   | )     
|                                                                       |                                                                           |      |  |      |     |      |      |        |       
|Total recognised gains and losses                                      |                                                                           |      |  | 27   |     | (60  | )    | (1,310 | )     
|                                                                       |                                                                           |      |  |      |     |      |      |        |       

Reconciliation of movements in equity shareholders' interests        For the year ended 31 March

|                                               |  | 2005 |  | 2004   |   | 2003   |  
|---------------------------------------------- |  | ---- |  | ------ | - | ------ | -
|
|Total recognised gains and losses              |  | 27   |  | (60    | ) | (1,310 | )
|Shares to be issued                            |  | 21   |  | 25     |   |       |  
|New share capital and share premium            |  | 6    |  | 3,720  |   |       |  
|Group share of associate's shares to be issued |  |     |  |       |   | 3      |  
|                                               |  |      |  |        |   |        |  
|Total movement in the year                     |  | 54   |  | 3,685  |   | (1,307 | )
|                                               |  |      |  |        |   |        |  
|Equity shareholders' interests at 1 April      |  | 350  |  | (3,335 | ) | (2,028 | )
|                                               |  |      |  |        |   |        |  
|Equity shareholders' interests at 31 March     |  | 404  |  | 350    |   | (3,335 | )
|                                               |  |      |  |        |   |        |  

134

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Notes to the accounts

1 Accounting policies

The financial statements have been prepared in accordance with accounting standards in the UK.

The
key Group accounting policies are summarised below to facilitate the interpretation of the financial statements.

Accounting convention

The financial statements are prepared under the historical cost convention, as modified by the valuation of listed current and fixed asset investments.

Basis of consolidation

The financial statements consolidate the accounts of Marconi Corporation plc and all of its subsidiary undertakings (Group companies or subsidiaries) that are
more than 50% owned and controlled. Investments in associates and joint ventures 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 Group has less than a 20% ownership interest are accounted for
under the cost method. All inter-company balances and transactions have been eliminated upon consolidation. All Group companies' accounts have been prepared for the year ended 31 March 2005.

Turnover

Turnover excludes VAT and comprises sales to outside customers. Revenue from product sales of hardware and software is recognised when: persuasive evidence of an
arrangement exists, delivery has occurred or service has been rendered, customer acceptance has occurred, Marconi's price to the buyer is fixed or determinable, and collectability is reasonably
assured. Revenue from services is recognised at the time of performance and acceptance by the customer.

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

Revenue
on long-term contracts is recognised under the percentage-of-completion method of accounting and is calculated based on the ratio of costs
incurred to date compared with the total expected costs for that contract. 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.

Currency translation

The consolidated financial statements are prepared in UK pounds sterling. The functional currency of each of the Group's subsidiaries is the local currency in
which the subsidiary is located. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the rates at the dates of the transactions.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates ruling at that date. These translation differences are dealt with in the
profit and loss account with the exception of certain gains and losses arising under hedging transactions as described below.

135

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Profits
and losses of overseas subsidiaries, joint ventures and associates and cash flows of overseas subsidiaries are translated at the average rates of exchange during the year.
Non-sterling net assets are translated at year end rates of exchange. Key rates used are as follows:

Average rates

Year-end rates2005

2004

2003

2005

2004

2003US Dollar

1.8504

1.7023

1.5538

1.8896

1.8379

1.5807Euro

1.4632

1.4435

1.5499

1.4540

1.4956

1.4486


The
differences arising from the restatement of profits and losses and the retranslation of the opening net assets to year end rates are taken to reserves.

Acquisitions and disposals

On the acquisition of a business, including an interest in an associated undertaking, fair values are attributed to the Group's share of separate net assets.
Where the cost of acquisition exceeds the fair
values attributable to such net assets, the difference is treated as purchased goodwill capitalised in the balance sheet in the year of acquisition.

The
profit or loss on the disposal or closure of a previously acquired business includes the attributable amount of any purchased goodwill relating to that business not previously
charged to the profit and loss account.

The
results and cash flows relating to a business are included in the consolidated profit and loss account and the consolidated cash flow statement from the date of acquisition or up to
the date of disposal.

Financial instruments

Prior to the financial restructuring in May 2003, the Group used financial instruments, including derivatives (principally interest rate swaps, cancellable
interest rate swaps, currency swaps and forward foreign exchange contracts) to manage interest rate and currency exposures. In February 2005 the Group recommenced hedging of foreign currency
cash flows with forward foreign exchange contracts. The Group is reviewing its interest rate hedging policy and any requirement for interest rate hedging instruments to mitigate interest rate risks.

For
a forward foreign exchange contract to be treated as a hedge the instrument must be related to actual foreign currency assets or liabilities or to a probable commitment. It must
involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the Group's operations. Gains and losses arising on these
contracts are deferred and recognised in the profit and loss account only when the hedged transaction has itself been reflected in the Group's financial statements.

Hedges of the net investment in overseas subsidiaries

The Group's policy is to finance where possible 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 is implemented by financing in the related currency.

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Exchange
gains or losses arising on the hedging borrowings are dealt with as a movement in reserves to the extent they offset losses or gains on the hedged investment.

Interest rate risk exposure

It is current Group policy that there is no trading in financial instruments or derivatives, and that all financial instruments and derivatives are used solely
for the purpose of hedging identified exposures of the Group.

Prior
to the financial restructuring in May 2003, it was the Group's policy to hedge its exposure to movements in interest rates associated with its borrowing primarily by means
of interest rate swaps. Payments and receipts under interest rate swap agreements, specifically designated for hedging purposes, are recorded in the profit and loss account on an accruals basis. Gains
and losses arising on termination of hedging instruments, where the underlying exposure remains, are recognised in the profit and loss account over the remaining life of the hedging instrument. No
interest rate swaps were transacted between May 2003 and March 2005.

Tangible fixed assets

Property, plant, machinery, fixtures, fittings, tools and equipment are recorded at cost and depreciated on a straight-line basis over their estimated
useful lives from the time they are brought in to use. Freehold land does not bear depreciation where the original cost of purchase was separately identified. Tangible fixed assets are depreciated
using the following rates:

|Freehold buildings                      |  |  Over 25 to 50 years                                     
|--------------------------------------- |  | ----------------------------------------------------------
|Leasehold property                      |  |  Over the period of the lease or 50 years for long leases
|Plant and machinery                     |  |  10% per annum on average                                
|Fixtures, fittings, tools and equipment |  |  10% per annum                                           

Significant
improvements, which substantially extend the useful lives of assets, are capitalised. Maintenance and repairs are expensed 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.

Goodwill and other intangible assets

Purchased goodwill is capitalised and amortised on a straight-line basis over its estimated useful economic life. Each acquisition is separately
evaluated for the purposes of determining the useful economic life, up to a maximum of 20 years. The useful economic lives are reviewed annually and revised if necessary.

Impairment

Provision is made for any impairment. The Group evaluates the carrying value of tangible assets and goodwill annually and whenever events or changes in
circumstances indicate that the carrying value of these assets may be impaired. An impairment loss is recognised 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

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of
the asset with its fair value, which is usually estimated using discounted cash flows expected to be generated from the assets.

During
the years ended 31 March 2005, 2004 and 2003, tangible fixed assets and goodwill were impaired by £nil.

Leased assets

Assets held under finance leases and other similar contracts, which confer rights and obligations similar to those attached to owned assets, are capitalised as
tangible fixed assets and are depreciated over the shorter of the lease terms or their useful lives. The capital elements of future lease obligations are recorded as liabilities, while the interest
elements are charged to the profit and loss account over the period of the leases to produce a constant rate of charge on the balance of the capital repayments outstanding. Hire purchase transactions
are dealt with similarly except that assets are depreciated over their useful lives.

Rentals
under operating leases are charged on a straight-line basis over the lease term, even if the payments are not made on such a basis.

Research and development

Expenditure incurred in the year is charged against profit unless specifically chargeable to and receivable from customers under agreed contract terms. No
research and development expenditure is capitalised.

Stock

Stock is stated at the lower of cost and net realisable value. Provision is made for obsolete, slow moving or defective items where appropriate.

Contracts in progress

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. Amounts recoverable on long-term contracts, which are included in debtors, are stated at the net sales value of the
work done less amounts received as progress payments on account. Excess progress payments are included in creditors as payments received in advance. Cumulative costs incurred net of amounts
transferred to cost of sales, less provision for contingencies and anticipated future losses on contracts, are included as long-term contract balances in stock.

Warranties

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 and take the following into consideration:



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Taxation

Taxation on profit on ordinary activities is that which has been paid or becomes payable in respect of the profits for the year, after taking account of
adjustments in respect of prior period liabilities. Deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to
pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income or expenditure in
taxation computations in periods different from those in which they are included in the financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than
not that they will be recovered. Deferred tax assets and liabilities are not discounted.

Investments

Joint ventures comprise long-term investments where control is shared under a contractual arrangement. The segmental analysis of turnover, profit and
net assets excludes the Group's share of the results and net assets of joint ventures. Associates consist of long-term investments in which the Group holds a participating interest and
over which it exercises significant influence. Investments in joint ventures and associates are stated at the amount of the Group's share of net assets including goodwill derived from audited or
management accounts made up to the balance sheet date. Loss before taxation includes the Group's share of joint ventures and associates.

Other
unlisted fixed asset investments are stated at cost less provision for impairment in value, unless they have been transferred from associates at net book value. Listed fixed asset
investments are stated at market value with changes in value recognised in the profit and loss account. Current asset investments are stated at the lower of cost and net realisable value except dated
listed securities, which are stated at market value.

Pensions and other post retirement benefits

The operating cost for providing pensions and other post retirement benefits, as calculated periodically by independent actuaries, is therefore charged to the
Group's operating profit or loss in the year that the benefits are earned by employees. The financial returns expected on the pension schemes' assets are recognised in the year in which they arise as
part of finance income and the effect of the unwinding of the discounted value of the pension schemes' liabilities is treated as part of finance costs. The changes in value of the pension schemes'
assets and liabilities are reported as actuarial gains or losses as they arise in the consolidated statement of total recognised gains and losses.

The
pension schemes' surpluses, to the extent they are considered recoverable, or deficits are recognised in full and presented in the balance sheet net of any related deferred tax.

Government grants

Government grants relating to R&D activities are credited to the profit and loss account as the related expenditure is incurred.

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Share options

The costs of awarding shares under employee share plans are charged to the profit and loss account over the period to which the performance criteria relate.

Finance costs

Finance costs of debt are recognised in the profit and loss account over the term of such instruments at a constant rate on the carrying amount.

Debt

Debt is initially stated at the amount of the net proceeds after deduction of issue costs. The carrying amount is increased by the finance cost in respect of the
accounting period and reduced by payments made in the year.

Liquid resources

Liquid resources comprise term deposits with an original maturity of generally less than one year and other readily disposable current asset investments.

Financial statement reclassifications

Certain reclassifications have been made to 2004 and 2003 balances as well as segment information, in order to conform to the 2005 position.

2 Segmental analysis

From the beginning of the financial year, the Group introduced a new management structure, which split our continuing business into three segments; Optical and
Access Networks, Broadband Routing and Switching (BBRS) and Network Services.

Optical
and Access Networks comprises the activities of the Group's Optical Networks and Access Networks businesses, which now also includes our pay phones and interactive systems
activities previously reported under Other Network Equipment. Optical and Access Networks comprise the design and supply of communications systems that transmit and switch voice, data and video
traffic predominantly via public networks. BBRS comprises the equipment and services activities of the Group's North American based business which designs and supplies routing and switching products
for the transmission of voice, data and video in both public and private networks. Network Services comprises the activities of our Installation, Commissioning and Maintenance (IC&M) and Value Added
Services (VAS) businesses. Network Services generally comprises activities that supply a broad range of communications support services to telecommunications operators as well as selected large
enterprises and government agencies.

The
previous structure had been adopted to comply with the requirements of the Group's Loan Notes which required segmentation along certain geographic lines. Comparative information for
the years ended 31 March 2004 and 2003 has been restated to reflect the new segments.

Operating
profit by segment includes depreciation charges of £39 million (2004: £73 million; 2003: £135 million), of which
£23 million related to Optical and Access Networks (2004: £38 million; 2003: £64 million), £6 million related to BBRS (2004:
£10 million; 2003; £13 million) and £5 million related

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to
Network Services (2004: £7 million; 2003: £15 million). The remaining balance in 2004 and 2003 relates to Discontinued Operations.

The
operating net assets of Optical and Access Networks and Network Services cannot be separately identified as the same assets are generally used to generate sales in each of these
segments. The results of these segments are separately reportable. Central costs include £25 million of share option and related payroll costs (2004:
£31 million). Other consists of previous non-core businesses sold in the year ended 31 March 2004.

Operating
net assets/(liabilities) include tangible fixed assets, stocks, debtors, creditors (excluding borrowings and taxation) and provisions for liabilities and charges.

Analysis of segment operating profit/(loss) (before goodwill amortisation and operating exceptional items), turnover and operating net assets/(liabilities) by class of business

|                                      |  | Segment operating profit/(loss) |   | Turnover |   | Operating net
assets/(liabilities) |  
|------------------------------------- |  | ------------------------------- | - | -------- | - | ---------------------------------- | -
|
|
|Optical and Access Networks           |  | 20                              |   | (80      | ) | (226                               | )
|                                      |  |                                 |   |          |   |                                    |  
|Network Services                      |  | 15                              |   | 21       |   | 55                                 |  
|BBRS                                  |  | 25                              |   | 44       |   | (13                                | )
|Central costs                         |  | (57                             | ) | (66      | ) | (56                                | )
|Other                                 |  |                                |   | (5       | ) | (43                                | )
|                                      |  |                                 |   |          |   |                                    |  
|Continuing Operations                 |  | 3                               |   | (86      | ) | (283                               | )
|Discontinued Operations               |  | (2                              | ) | 24       |   | (25                                | )
|                                      |  |                                 |   |          |   |                                    |  
|                                      |  | 1                               |   | (62      | ) | (308                               | )
|                                      |  |                                 |   |          |   |                                    |  
|Goodwill amortisation                 |  | (91                             | ) | (98      | ) | (104                               | )
|Operating exceptional items (note 4a) |  | (9                              | ) | (81      | ) | (317                               | )
|                                      |  |                                 |   |          |   |                                    |  
|Group operating loss                  |  | (99                             | ) | (241     | ) | (729                               | )
|Joint ventures                        |  |                                |   | (2       | ) | (40                                | )
|Associates                            |  |                                |   | (11      | ) | (89                                | )
|                                      |  |                                 |   |          |   |                                    |  
|Total operating loss                  |  | (99                             | ) | (254     | ) | (858                               | )
|                                      |  |                                 |   |          |   |                                    |  

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Analysis of operating profit/(loss) (before goodwill amortisation and operating exceptional items), turnover and operating net assets/(liabilities) by territory
of origin

|                             |  | Operating profit/(loss) |   | Turnover |   | Operating net assets/(liabilities) |  
|---------------------------- |  | ----------------------- | - | -------- | - | ---------------------------------- | -
|
|
|UK (including central costs) |  | (16                     | ) | (41      | ) | (105                               | )
|Other EMEA                   |  | 4                       |   | (60      | ) | (129                               | )
|NA                           |  | 24                      |   | 24       |   | (23                                | )
|CALA                         |  | 3                       |   | (1       | ) | 3                                  |  
|APAC                         |  | (12                     | ) | (8       | ) | (29                                | )
|                             |  |                         |   |          |   |                                    |  
|Continuing Operations        |  | 3                       |   | (86      | ) | (283                               | )
|Discontinued Operations      |  | (2                      | ) | 24       |   | (25                                | )
|                             |  |                         |   |          |   |                                    |  
|                             |  | 1                       |   | (62      | ) | (308                               | )
|                             |  |                         |   |          |   |                                    |  
|Goodwill amortisation        |  | (91                     | ) | (98      | ) | (104                               | )
|Operating exceptional items  |  | (9                      | ) | (81      | ) | (317                               | )
|                             |  |                         |   |          |   |                                    |  
|Group operating loss         |  | (99                     | ) | (241     | ) | (729                               | )
|Joint ventures               |  |                        |   | (2       | ) | (40                                | )
|Associates                   |  |                        |   | (11      | ) | (89                                | )
|                             |  |                         |   |          |   |                                    |  
|Total operating loss         |  | (99                     | ) | (254     | ) | (858                               | )
|                             |  |                         |   |          |   |                                    |  

In the years ended 31 March 2005, 2004 and 2003, intrasegment revenues were £nil.

Separate
components of goodwill are identified and amortised over the appropriate useful economic life. The remaining goodwill on the balance sheet would be amortised under UK GAAP over
an average period of approximately four years.

142

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Analysis of turnover by product area

|                            |  | 2005  |  | 2004  |  | 2003 
|--------------------------- |  | ----- |  | ----- |  | -----
|
|Optical Networks            |  | 329   |  | 330   |  | 439  
|Access Networks             |  | 330   |  | 282   |  | 315  
|                            |  |       |  |       |  |      
|Optical and Access Networks |  | 659   |  | 612   |  | 754  
|                            |  |       |  |       |  |      
|IC&M                        |  | 207   |  | 182   |  | 210  
|VAS                         |  | 264   |  | 265   |  | 375  
|                            |  |       |  |       |  |      
|Network Services            |  | 471   |  | 447   |  | 585  
|                            |  |       |  |       |  |      
|BBRS equipment              |  | 89    |  | 130   |  | 142  
|BBRS services               |  | 51    |  | 55    |  | 77   
|                            |  |       |  |       |  |      
|BBRS                        |  | 140   |  | 185   |  | 219  
|                            |  |       |  |       |  |      
|Other(1)                    |  |      |  |      |  | 40   
|                            |  |       |  |       |  |      
|Continuing Operations       |  | 1,270 |  | 1,244 |  | 1,598
|Discontinued Operations     |  | 67    |  | 314   |  | 404  
|                            |  |       |  |       |  |      
|Group                       |  | 1,337 |  | 1,558 |  | 2,002
|                            |  |       |  |       |  |      

---

Sales
by Group companies to joint ventures and associates amounted to £22 million (2004: £21 million). Purchases from joint ventures and associates
amounted to £2 million (2004: £1 million).

Analysis of turnover by class of business

|                            |  | To customers in the UK |  | To customers overseas
|--------------------------- |  | ---------------------- |  | ---------------------
|
|
|Optical and Access Networks |  | 206                    |  | 156                  
|Network Services            |  | 261                    |  | 258                  
|BBRS                        |  | 2                      |  | 2                    
|Other(1)                    |  |                       |  |                     
|                            |  |                        |  |                      
|Continuing Operations       |  | 469                    |  | 416                  
|Discontinued Operations     |  |                       |  |                     
|                            |  |                        |  |                      
|                            |  | 469                    |  | 416                  
|                            |  |                        |  |                      

---

143

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Analysis of turnover by territory of destination

|           |  | 2005  |  | 2004  |  | 2003 
|---------- |  | ----- |  | ----- |  | -----
|
|UK         |  | 469   |  | 416   |  | 512  
|Other EMEA |  | 552   |  | 521   |  | 708  
|NA         |  | 195   |  | 470   |  | 548  
|CALA       |  | 45    |  | 44    |  | 72   
|APAC       |  | 76    |  | 107   |  | 162  
|           |  |       |  |       |  |      
|           |  | 1,337 |  | 1,558 |  | 2,002
|           |  |       |  |       |  |      

Analysis of total assets by class of business:

|                            |  | Year ended 31 March
|--------------------------- |  | -------------------
|
|
|Optical and Access Networks |  | 516                
|Network Services            |  | 68                 
|BBRS                        |  | 64                 
|Other                       |  |                   
|                            |  |                    
|Continuing Operations       |  | 648                
|Discontinued Operations     |  |                   
|                            |  |                    
|                            |  | 648                
|Goodwill                    |  | 301                
|Investments                 |  | 8                  
|Tax                         |  | 22                 
|Cash                        |  | 334                
|                            |  |                    
|                            |  | 1,313              
|                            |  |                    

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Analysis of total assets by territory of origin:

|                              |  | Year ended 31 March
|----------------------------- |  | -------------------
|
|
|UK (including central assets) |  | 172                
|Other EMEA                    |  | 342                
|North America                 |  | 71                 
|CALA                          |  | 8                  
|APAC                          |  | 55                 
|                              |  |                    
|                              |  | 648                
|Goodwill                      |  | 301                
|Investments                   |  | 8                  
|Tax                           |  | 22                 
|Cash                          |  | 334                
|                              |  |                    
|Total                         |  | 1,313              
|                              |  |                    

The
geographical split of tangible fixed assets and goodwill is as follows:

|        |  | Year ended March 31,
|------- |  | --------------------
|
|
|UK      |  | 222                 
|US      |  | 47                  
|Italy   |  | 23                  
|Germany |  | 76                  
|Other   |  | 49                  
|        |  |                     
|Total   |  | 417                 
|        |  |                     

Long-lived
assets within other countries are not individually material for any year presented.

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3 Group operating (loss)/profit (excluding joint ventures)

|                                  |                               | Year ended 31 March 2005 |     
|--------------------------------- | ----------------------------- | ------------------------ | ----
|
|
|Turnover                          |                               | 1,270                    |     
|Cost of sales                     |                               | (857                     | )   
|                                  |                               |                          |     
|Gross profit                      |                               | 413                      |     
|Selling and distribution expenses |                               | (142                     | )   
|                                  | Administrative expensesother |                          | (87 
|                                  | Research and development      |                          | (182
|                                  | Goodwill amortisation         |                          | (89 
|Administrative expensestotal     |                               | (358                     | )   
|Other operating income            |                               | 1                        |     
|                                  |                               |                          |     
|Operating loss                    |                               | (86                      | )   
|                                  |                               |                          |     

|
|

|                                  |                               | Year ended 31 March 2004 |     
|--------------------------------- | ----------------------------- | ------------------------ | ----
|
|
|Turnover                          |                               | 1,244                    |     
|Cost of sales                     |                               | (893                     | )   
|                                  |                               |                          |     
|Gross profit                      |                               | 351                      |     
|Selling and distribution expenses |                               | (172                     | )   
|                                  | Administrative expensesother |                          | (94 
|                                  | Research and development      |                          | (176
|                                  | Goodwill amortisation         |                          | (87 
|Administrative expensestotal     |                               | (357                     | )   
|Other operating income            |                               | 5                        |     
|                                  |                               |                          |     
|Operating (loss)/profit           |                               | (173                     | )   
|                                  |                               |                          |     

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|
|

|                                  |                               | Year ended 31 March 2003 |     
|--------------------------------- | ----------------------------- | ------------------------ | ----
|
|
|Turnover                          |                               | 1,598                    |     
|Cost of sales                     |                               | (1,263                   | )   
|                                  |                               |                          |     
|Gross profit                      |                               | 335                      |     
|Selling and distribution expenses |                               | (228                     | )   
|                                  | Administrative expensesother |                          | (104
|                                  | Research and development      |                          | (286
|                                  | Goodwill amortisation         |                          | (83 
|Administrative expensestotal     |                               | (473                     | )   
|Other operating (expense)/income  |                               | (1                       | )   
|                                  |                               |                          |     
|Operating loss                    |                               | (367                     | )   
|                                  |                               |                          |     

In
the year ended 31 March 2005, share option and related payroll costs of £25 million (2004: £31 million; 2003: £nil) are
included within selling and distribution expenses, administrative expenses and R&D costs.

After
exceptional items, cost of sales for Continuing Operations are £852 million (2004: £884 million; 2003: £1,285 million) and for
Discontinued Operations are £58 million (2004: £242 million; 2003: £330 million). Operating expenses for Continuing Operations are
£514 million (2004: £614 million; 2003: £947 million) and for Discontinued Operations are £13 million (2004:
£64 million; 2003: £170 million). Exceptional items are shown in further detail in note 4.

The
Group disposed of its Outside Plant and Power (OPP) business in the year ended 31 March 2005, its North American Access (NAA) business during the year ended 31 March
2004 and the Strategic Communications business during the year ended 31 March 2003. It is these activities which are shown as Discontinued Operations in the table above. Further information on
disposals is provided in note 25a.

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4 Exceptional items

These
items have been analysed as follows:

a Operating exceptional items

|                                                           |  |       |  | 2005 |   | 2004 |   | 2003 |  
|---------------------------------------------------------- |  | ----- |  | ---- | - | ---- | - | ---- | -
|
|Restructuring credits/(costs)included in cost of sales    |  | (i)   |  | 5    |   | 9    |   | (21  | )
|                                                           |  |       |  |      |   |      |   |      |  
|Restructuring costs                                        |  | (ii)  |  | (16  | ) | (89  | ) | (277 | )
|Decrease/(increase) in provision for litigation settlement |  | (iii) |  | 2    |   | (5   | ) |     |  
|Releases in respect of doubtful debts                      |  | (iv)  |  |     |   | 4    |   | 10   |  
|Impairment of tangible fixed assets:                       |  | (v)   |  |     |   |     |   | (36  | )
|Systems implementation costs                               |  | (vi)  |  |     |   |     |   | 7    |  
|                                                           |  |       |  |      |   |      |   |      |  
|Included in administrative expenses                        |  |       |  | (14  | ) | (90  | ) | (296 | )
|                                                           |  |       |  |      |   |      |   |      |  
|Group operating exceptional items                          |  |       |  | (9   | ) | (81  | ) | (317 | )
|Shared joint ventures' operating exceptional items         |  | (vii) |  |     |   |     |   | (32  | )
|                                                           |  |       |  |      |   |      |   |      |  
|Total operating exceptional items (excluding associates)   |  |       |  | (9   | ) | (81  | ) | (349 | )
|                                                           |  |       |  |      |   |      |   |      |  



148

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|                                             |  | 2005 |   | 2004 |   | 2003 |  
|-------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Analysis by segment                          |  |      |   |      |   |      |  
|Optical and Access Networks/Network Services |  | (11  | ) | (76  | ) | (241 | )
|BBRS                                         |  | 2    |   |     |   | (39  | )
|Other                                        |  |     |   |     |   | 13   |  
|                                             |  |      |   |      |   |      |  
|Continuing Operations                        |  | (9   | ) | (76  | ) | (267 | )
|Discontinued Operations                      |  |     |   | (5   | ) | (50  | )
|                                             |  |      |   |      |   |      |  
|                                             |  | (9   | ) | (81  | ) | (317 | )
|                                             |  |      |   |      |   |      |  
|Analysis by territory of origin              |  |      |   |      |   |      |  
|UK                                           |  | 2    |   | (22  | ) | 21   |  
|Other EMEA                                   |  | (11  | ) | (25  | ) | (235 | )
|NA                                           |  | 2    |   | (25  | ) | (82  | )
|CALA                                         |  | (1   | ) | (5   | ) | (13  | )
|APAC                                         |  | (1   | ) | (4   | ) | (8   | )
|                                             |  |      |   |      |   |      |  
|                                             |  | (9   | ) | (81  | ) | (317 | )
|                                             |  |      |   |      |   |      |  

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b Non-operating exceptional items

|                                                                          |  | 2005 |  | 2004 |  | 2003 |  
|------------------------------------------------------------------------- |  | ---- |  | ---- |  | ---- | -
|
|Gain/(loss) on disposal of Discontinued Operations                        |  | 103  |  | 75   |  | (5   | )
|Gain on disposal of joint ventures and associates                         |  |     |  | 77   |  |     |  
|Gain on disposal of fixed assets and investments in Continuing Operations |  |     |  | 25   |  | 26   |  
|Merger/demerger receipts                                                  |  |     |  |     |  | 123  |  
|Group share of associates' non-operating exceptional items                |  |     |  |     |  | (3   | )
|                                                                          |  |      |  |      |  |      |  
|Included in non-operating exceptional items                               |  | 103  |  | 177  |  | 141  |  
|                                                                          |  |      |  |      |  |      |  

In
the year ended 31 March 2005, the gain of £103 million related to the disposal of OPP. The tax charge associated with this gain is
£4 million.

In
the year ended 31 March 2004, the gain on disposal of Discontinued Operations of £75 million related to the disposal of the NAA business
(£66 million) and the recognition of deferred consideration of £9 million on the disposal of the Strategic Communications business sold in the year ended
31 March 2003. The £77 million gain on disposals of joint ventures and associates related to the gain on disposal of Easynet Group plc (£76 million)
and Confirmant Limited (£1 million). The £25 million gain on disposal of fixed assets and investments in Continuing Operations was comprised of a gain on disposal
of Marconi Mobile Access S.p.A. (also known as UMTS) of £9 million and other fixed asset investments of £22 million, partially offset by a pension settlement loss
of £6 million arising on the disposal of our interest in GDA.

In
the year ended 31 March 2003, the loss on disposal of Discontinued Operations resulted from the sale of Strategic Communications (£41 million) offset by the
release of provisions related to the disposal of the Group's Systems businesses (Medical, Commerce and Data Systems). A curtailment gain of £28 million in respect of pension
liabilities was recognised following the sale of the Group's 50% share of GDA in March 2002. The balance mainly related to gains on property disposals. Merger/demerger receipts of
£123 million related to the release of a provision due to the settlement of the ESOP derivative.

c Amounts written off investments

The change in value of the Group's investments is accounted for in line with the Group accounting policy whereby listed investments are marked to their market
value at the end of each reporting year and unlisted investments are held at the lower of cost and recoverable value.

d Gain on waiver of balance payable to M (2003) plc group

As part of the Group's financial restructuring in May 2003, Marconi Corporation plc and its subsidiaries entered into an agreement with M (2003) plc and
its direct subsidiaries to reassign and waive balances between the M (2003) plc group and the Marconi Corporation plc Group.

150

---



e Exceptional cash flows

|                                      |                                                                                              | 2005 |     | 2004 |      | 2003 |     
|------------------------------------- | -------------------------------------------------------------------------------------------- | ---- | --- | ---- | ---- | ---- | ----
|
|Operating                             |                                                                                              |      |     |      |      |      |     
|                                      | Restructuring                                                                                |      | (28 | )    | (122 | )    | (284
|                                      | Litigation settlement                                                                        |      | (12 | )    |     |      |    
|                                      | ESOP settlement                                                                              |      |    |      | (35  | )    |    
|                                      | Systems implementation costs                                                                 |      |    |      |     |      | (17 
|                                      |                                                                                              |      |     |      |      |      |     
|Continuing Operations                 |                                                                                              | (40  | )   | (157 | )    | (301 | )   
|Discontinued Operationsrestructuring |                                                                                              | (3   | )   | (9   | )    | (28  | )   
|                                      |                                                                                              |      |     |      |      |      |     
|                                      |                                                                                              | (43  | )   | (166 | )    | (329 | )   
|                                      |                                                                                              |      |     |      |      |      |     
|Non-operating and financing           |                                                                                              |      |     |      |      |      |     
|                                      | Scheme consideration                                                                         |      |    |      | (340 | )    |    
|                                      | Disposal of tangible fixed assets                                                            |      |    |      | 26   |      | 28  
|                                      | Net proceeds on disposal of interests in subsidiary companies, joint ventures and associates |      | 169 |      | 222  |      | 433 
|                                      |                                                                                              |      |     |      |      |      |     
|                                      |                                                                                              | 169  |     | (92  | )    | 461  |     
|                                      |                                                                                              |      |     |      |      |      |     

Non-operating
exceptional cash flows from the disposals of tangible fixed assets are included in note 23(d). Non-operating exceptional cash flows from the
sales of interests in subsidiary companies and associates are included in note 23(e).

5 Net interest payable

|                     |                                                                                           | 2005 |     | 2004 |     | 2003 |     
|-------------------- | ----------------------------------------------------------------------------------------- | ---- | --- | ---- | --- | ---- | ----
|
|Interest receivable  |                                                                                           |      |     |      |     |      |     
|                     | Loans and deposits                                                                        |      | 10  |      | 17  |      | 28  
|                     | Income from listed fixed assest investments                                               |      |    |      |    |      | 1   
|                     | Other                                                                                     |      | 1   |      |    |      | 17  
|                     |                                                                                           |      |     |      |     |      |     
|                     |                                                                                           | 11   |     | 17   |     | 46   |     
|Interest payable     |                                                                                           |      |     |      |     |      |     
|                     | Bank loans, loan notes and overdrafts (2004: less interest accrual release of £3 million) |      | (11 | )    | (52 | )    | (288
|                     |                                                                                           |      |     |      |     |      |     
|Net interest payable |                                                                                           |     |     | (35  | )   | (242 | )   
|                     |                                                                                           |      |     |      |     |      |     

151

---



6 Net finance expenditure

|                                                                 |  | 2005 |   | 2004 |   | 2003 |  
|---------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Interest on pension scheme liabilities (note 26)                 |  | (143 | ) | (145 | ) | (163 | )
|Expected return on pension scheme assets (note 26)               |  | 141  |   | 138  |   | 157  |  
|                                                                 |  |      |   |      |   |      |  
|                                                                 |  | (2   | ) | (7   | ) | (6   | )
|Premium on redemption of Loan Notes                              |  | (28  | ) | (41  | ) |     |  
|Exceptional write off of capitalised losses on swaps             |  |     |   | (46  | ) |     |  
|Net gain/(loss) on cash and unhedged foreign exchange borrowings |  |     |   | 12   |   | (11  | )
|Swap and bond amortisation                                       |  |     |   |     |   | 5    |  
|Other                                                            |  | (1   | ) |     |   | (2   | )
|                                                                 |  |      |   |      |   |      |  
|Net finance expenditure                                          |  | (31  | ) | (82  | ) | (14  | )
|                                                                 |  |      |   |      |   |      |  

7 Tax

a Tax credit on loss on ordinary activities

|                                     |                                                                              | 2005 |     | 2004 |     | 2003 |     
|------------------------------------ | ---------------------------------------------------------------------------- | ---- | --- | ---- | --- | ---- | ----
|
|Current taxation                     |                                                                              |      |     |      |     |      |     
|                                     | Corporation tax 30% (2004: 30%)                                              |      |    |      |    |      |    
|                                     | UK overprovision in respect of prior years                                   |      | (26 | )    | (20 | )    | (155
|                                     | Overseas tax (2004 includes £8 million tax charge on disposal of businesses) |      | 3   |      | 12  |      |    
|                                     | Overseas tax overprovision in respect of prior years                         |      | (25 | )    | (3  | )    | (30 
|                                     | Joint ventures and associates                                                |      |    |      | (2  | )    |    
|                                     |                                                                              |      |     |      |     |      |     
|                                     |                                                                              | (48  | )   | (13  | )   | (185 | )   
|Deferred taxationtiming differences |                                                                              |     |     | (6   | )   |     |     
|                                     |                                                                              |      |     |      |     |      |     
|                                     |                                                                              | (48  | )   | (19  | )   | (185 | )   
|                                     |                                                                              |      |     |      |     |      |     

In
the year ended 31 March 2005, the Group's tax credit on ordinary activities was £48 million (2004: £19 million credit; 2003:
£185 million credit) due primarily to the release of tax provisions of £33 million in respect of prior years following progress in resolving historic US and UK
tax issues and a credit of £18 million for US and UK tax refunds.

In
the year ended 31 March 2004 a non-operating net tax credit of £12 million arose due to the release of tax provisions of £20 million in
respect of prior years following the Company's scheme of arrangement offset by a tax charge of £8 million on the disposal of NAA.

152

---



b Reconciliation of current taxation credit for the year

|                                                                                   |  | 2005 |   | 2004 |   | 2003   |  
|---------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ------ | -
|
|Loss on ordinary activities before taxation                                        |  | (27  | ) | (171 | ) | (1,328 | )
|                                                                                   |  |      |   |      |   |        |  
|Tax credit on loss at a weighted average standard rate of 34% (2004 and 2003: 34%) |  | (9   | ) | (58  | ) | (452   | )
|Non deductible goodwill amortisation and other similar items                       |  | 47   |   | 52   |   | 51     |  
|Non taxable operating and non-operating exceptional items                          |  | 11   |   | (56  | ) | 158    |  
|Tax losses and other deferred tax items not recognised in current tax              |  | (46  | ) | 70   |   | 243    |  
|Overprovision in respect of prior years                                            |  | (51  | ) | (21  | ) | (185   | )
|                                                                                   |  |      |   |      |   |        |  
|Current tax credit for the year                                                    |  | (48  | ) | (13  | ) | (185   | )
|                                                                                   |  |      |   |      |   |        |  

c Factors that may affect future tax charges

Deferred tax assets totalling £817 million (2004: £659 million; 2003: £594 million) have not been
recognised in respect of operating losses, pension scheme deficits and exceptional expenditure as the Group is not sufficiently certain that it will be able to recover those assets within a relatively
short period of time.

The
Group will incur ongoing tax cash costs where losses are unavailable to cover any historic tax audit adjustments and/or future taxable profits.

8 Equity minority interests

Equity minority interests represent the share of profits less losses on ordinary activities attributable to the interests of equity shareholders in subsidiaries
which are not wholly owned by the Group.

9 Equity dividends

The directors do not propose a dividend for the year ended 31 March 2005. No dividends were declared for the years ended 31 March 2004 or
2003.

10 Profit/(loss) per share

Basic profit/(loss) per share is calculated by reference to a weighted average of 204.5 million ordinary shares (2004: 249.0 million ordinary
shares; 2003: 573.3 million ordinary shares) in issue during the year.

In
2005 the effect of share options is dilutive. The undiluted weighted average number of shares has been adjusted by 12.4 million in respect of outstanding share options to give
a diluted weighted average of 216.9 million ordinary shares. This gives a diluted profit per share of 9.7p. The effect of share options is anti-dilutive in 2004 and 2003 and has
therefore been excluded from the calculation of the diluted weighted average number of shares.

153

---





11 Employees

a Directors' remuneration

Details of the directors' remuneration specified for audit by the UK Listing Authority are given in the Report to shareholders by the Board on directors'
remuneration.

b Average monthly number of employees by sector

|                            |  | 2005 |  | 2004
|--------------------------- |  | ---- |  | ----
|
|Optical and Access Networks |  | 5    |  | 7   
|Network Services            |  | 4    |  | 4   
|BBRS                        |  | 1    |  | 1   
|                            |  |      |  |     
|Continuing Operations       |  | 10   |  | 12  
|Discontinued Operations     |  | 1    |  | 3   
|                            |  |      |  |     
|Group                       |  | 11   |  | 15  
|                            |  |      |  |     

c Staff costs

|                      |  | 2005 |  | 2004 |  | 2003
|--------------------- |  | ---- |  | ---- |  | ----
|
|Wages and salaries    |  | 368  |  | 483  |  | 717 
|Social security costs |  | 50   |  | 55   |  | 87  
|Other pension costs   |  | 22   |  | 22   |  | 43  
|                      |  |      |  |      |  |     
|                      |  | 440  |  | 560  |  | 847 
|                      |  |      |  |      |  |     
|UK                    |  | 217  |  | 228  |  | 372 
|Other EMEA            |  | 160  |  | 180  |  | 272 
|NA                    |  | 51   |  | 130  |  | 180 
|CALA                  |  | 2    |  | 8    |  | 7   
|APAC                  |  | 10   |  | 14   |  | 16  
|                      |  |      |  |      |  |     
|                      |  | 440  |  | 560  |  | 847 
|                      |  |      |  |      |  |     

Included
within the staff costs for the year ended 31 March 2005 was £25 million (2004: £31 million; 2003: £nil) related
to ongoing remuneration costs for employees of the Group that participate in Marconi Corporation plc share option plans.

Other
pension costs includes only items charged to operating expenses and excludes amounts charged to non-operating exceptional items and net finance expenditure, and items
included in the statement of total recognised gains and losses.

154

---



12 Goodwill

|                                |                                    |        |     
|------------------------------- | ---------------------------------- | ------ | ----
|
|Cost at 1 April 2003            |                                    | 5,987  |     
|                                | Disposals                          |        | (506
|                                | Exchange rate adjustment           |        | (563
|                                |                                    |        |     
|Cost at 31 March 2004           |                                    | 4,918  |     
|                                | Disposals (note 25a)               |        | (496
|                                | Exchange rate adjustment           |        | (63 
|                                |                                    |        |     
|Cost at 31 March 2005           |                                    | 4,359  |     
|                                |                                    |        |     
|Amortisation at 1 April 2003    |                                    | (5,390 | )   
|                                | Disposals                          |        | 460 
|                                | Charged to profit and loss account |        | (98 
|                                | Exchange rate adjustment           |        | 546 
|                                |                                    |        |     
|Amortisation at 31 March 2004   |                                    | (4,482 | )   
|                                | Disposals (note 25a)               |        | 452 
|                                | Charged to profit and loss account |        | (91 
|                                | Exchange rate adjustment           |        | 63  
|                                |                                    |        |     
|Amortisation at 31 March 2005   |                                    | (4,058 | )   
|                                |                                    |        |     
|Net book value at 31 March 2005 |                                    | 301    |     
|                                |                                    |        |     
|Net book value at 31 March 2004 |                                    | 436    |     
|                                |                                    |        |     

Goodwill
amortisation for the year ended 31 March 2005 was £91 million (2004: £98 million;
2003: £104 million).

13 Tangible fixed assets

|                                   |  |     |   | Leasehold property |  |    |   |      |   |      |   |   | 
|---------------------------------- |  | --- | - | ------------------ |  | -- | - | ---- | - | ---- | - | - | 
|
|
|
|Cost at 1 April 2004               |  | 101 |   | 2                  |  | 7  |   | 204  |   | 360  |   |  | 
|Additions                          |  |    |   |                   |  |   |   | 12   |   | 16   |   | 7 | 
|Disposals                          |  |    |   |                   |  | (1 | ) | (19  | ) | (28  | ) |  | 
|Businesses disposed (note 25a)     |  | (16 | ) |                   |  |   |   | (14  | ) | (48  | ) |  | 
|Exchange rate adjustment           |  |    |   |                   |  |   |   | 1    |   | 1    |   |  | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 
|Cost at 31 March 2005              |  | 85  |   | 2                  |  | 6  |   | 184  |   | 301  |   | 7 | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 
|Depreciation at 1 April 2004       |  | (29 | ) |                   |  | (1 | ) | (167 | ) | (329 | ) |  | 
|Charged to profit and loss account |  | (4  | ) |                   |  | (1 | ) | (19  | ) | (15  | ) |  | 
|Disposals                          |  |    |   |                   |  |   |   | 16   |   | 28   |   |  | 
|Businesses disposed (note 25a)     |  | 7   |   |                   |  |   |   | 7    |   | 40   |   |  | 
|Exchange rate adjustment           |  |    |   |                   |  |   |   | (1   | ) | (1   | ) |  | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 
|Depreciation at 31 March 2005      |  | (26 | ) |                   |  | (2 | ) | (164 | ) | (277 | ) |  | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 
|Net book value at 31 March 2005    |  | 59  |   | 2                  |  | 4  |   | 20   |   | 24   |   | 7 | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 
|Net book value at 31 March 2004    |  | 72  |   | 2                  |  | 6  |   | 37   |   | 31   |   |  | 
|                                   |  |     |   |                    |  |    |   |      |   |      |   |   | 

155

---



The net book value of tangible fixed assets of the Group includes an amount of £2 million (2004: £3 million)
in respect of assets held under finance leases, on which the depreciation charge for the year was £1 million (2004: £1 million).

Assets
in the course of construction relate to direct costs associated with various computer software projects.

The
depreciation charge for the year ended 31 March 2005 was £39 million (2004: £73 million; 2003: £135 million).

14 Fixed asset investments

|                                   |  | Share of
net assets |  
|---------------------------------- |  | ------------------- | -
|
|At 1 April 2003                    |  | 3                   |  
|Disposals                          |  | (3                  | )
|                                   |  |                     |  
|At 31 March 2004 and 31 March 2005 |  |                    |  
|                                   |  |                     |  

The
Group retains an investment in a joint venture, Plessey Holdings Limited. This entity no longer trades but contains a number of environmental exposures in North America. Plessey
Holdings Limited is taking remedial action against these exposures, which are funded from its own cash balances. The Group consolidates its share of its assets and liabilities, being
£10 million each.

|                              |  | Share of
net assets |   | Goodwill
net book
value |   | Total |  
|----------------------------- |  | ------------------- | - | ----------------------- | - | ----- | -
|
|At 1 April 2003               |  | 15                  |   | 29                      |   | 44    |  
|Profit less losses retained   |  | (6                  | ) |                        |   | (6    | )
|Goodwill amortisation         |  |                    |   | (5                      | ) | (5    | )
|Disposals                     |  | (3                  | ) | (24                     | ) | (27   | )
|                              |  |                     |   |                         |   |       |  
|At 31 March 2004              |  | 6                   |   |                        |   | 6     |  
|Transfer to other investments |  | (2                  | ) |                        |   | (2    | )
|Exchange rate adjustment      |  | (1                  | ) |                        |   | (1    | )
|                              |  |                     |   |                         |   |       |  
|At 31 March 2005              |  | 3                   |   |                        |   | 3     |  
|                              |  |                     |   |                         |   |       |  

The
transfer to other investments relates to investments that have been evaluated during the year and are not deemed to be associates, as the Group no longer has significant influence
over them.

|Other investments        |  | Cost or
valuation |  | Provisions |   | Total
|------------------------ |  | ----------------- |  | ---------- | - | -----
|
|At 1 April 2004          |  | 116               |  | (113       | ) | 3    
|Transfer from associates |  | 2                 |  |           |   | 2    
|                         |  |                   |  |            |   |      
|At 31 March 2005         |  | 118               |  | (113       | ) | 5    
|                         |  |                   |  |            |   |      

The
Group has no listed fixed asset investments.

156

---



|Principal subsidiaries         |  | Voting rights |   | Country of incorporation
|------------------------------ |  | ------------- | - | ------------------------
|Marconi Communications Limited |  | 100           | % | England                 
|Marconi Communications S.p.A.  |  | 100           | % | Italy                   
|Marconi Communications, Inc    |  | 100           | % | USA                     
|Marconi Communications GmbH    |  | 100           | % | Germany                 

|                         |  | Loans to Group undertakings |   | Shares in Group undertakings |   | Shares in joint ventures and associates |  |        |   |    |   |     |  
|------------------------ |  | --------------------------- | - | ---------------------------- | - | --------------------------------------- |  | ------ | - | -- | - | --- | -
|
|
|
|
|At 1 April 2004          |  | 870                         |   | (90                          | ) | 6,918                                   |  | (5,249 | ) | 32 |   | (32 | )
|Additions                |  |                            |   |                             |   | 28                                      |  |       |   |   |   |    |  
|Disposals                |  |                            |   |                             |   |                                        |  |       |   | (1 | ) | 1   |  
|Movements in Group loans |  | 15                          |   |                             |   |                                        |  |       |   |   |   |    |  
|Provisions               |  |                            |   | (6                           | ) |                                        |  | (15    | ) |   |   |    |  
|Exchange rate adjustment |  | (4                          | ) | (2                           | ) |                                        |  |       |   |   |   |    |  
|                         |  |                             |   |                              |   |                                         |  |        |   |    |   |     |  
|At 31 March 2005         |  | 881                         |   | (98                          | ) | 6,946                                   |  | (5,264 | ) | 31 |   | (31 | )
|                         |  |                             |   |                              |   |                                         |  |        |   |    |   |     |  

15 Stocks and contracts in progress

|                                       |  | Group |  | Company
|-------------------------------------- |  | ----- |  | -------
|
|
|Raw materials and bought in components |  | 37    |  | 59     
|Work in progress                       |  | 33    |  | 41     
|Finished goods                         |  | 89    |  | 69     
|Long-term contract work in progress    |  | 3     |  | 6      
|Payments on account                    |  |      |  | (1     
|                                       |  |       |  |        
|                                       |  | 162   |  | 174    
|                                       |  |       |  |        

157

---



16 Debtors

|                                              |  |                         |  | Group |   | Company
|--------------------------------------------- |  | ----------------------- |  | ----- | - | -------
|
|
|Amounts falling due within one year:          |  |                         |  |       |   |        
|Trade debtors                                 |  | 307                     |  | 309   |   |       
|Of which:                                     |  | Securitised receivables |  | 15    |   |       
|                                              |  | Non-recourse receipts   |  | (15   | ) |       
|Amounts owed by associates                    |  | 17                      |  | 17    |   | 1      
|Amounts owed by Group companies               |  |                        |  |      |   | 67     
|Other debtors                                 |  | 30                      |  | 36    |   |       
|Current tax                                   |  | 22                      |  |      |   | 14     
|Prepayments and accrued income                |  | 15                      |  | 26    |   |       
|                                              |  |                         |  |       |   |        
|                                              |  |                         |  | 391   |   | 388    
|Amounts falling due after more than one year: |  |                         |  |       |   |        
|Trade debtors                                 |  |                        |  | 4     |   |       
|Prepayments and accrued income                |  | 1                       |  | 1     |   |       
|                                              |  |                         |  |       |   |        
|                                              |  |                         |  | 1     |   | 5      
|                                              |  |                         |  |       |   |        
|                                              |  |                         |  | 392   |   | 393    
|                                              |  |                         |  |       |   |        

Amounts
owed by associates relate to trading balances.

The
Group has assigned certain trade debts as security against the advance of cash from a third party provider. All debts remain outstanding at 31 March 2005 and interest
of £55,000 was recognised in the year. The Group is not obliged to, nor does it intend to, support any credit-related losses arising from the assigned debts against which cash has been
advanced. The transaction documents stipulate that, in the event of default in payment by a debtor, the providers of the facility may only seek payment from the Group of the capped finance charge
under the arrangement and that recourse to the Group is not available.

The
Group has available to it uncommitted customer receivables financing facilities totalling €79 million (£54 million). Whilst the facilities
do not have formal expiry dates, €19 million (£13 million) is due for review in December 2005 and €60 million
(£41 million) is due for review in March 2006.

17 Cash at bank and in hand

|                                                      |  | Group |  | Company
|----------------------------------------------------- |  | ----- |  | -------
|
|
|Cash and bank deposits repayable on demand (note 28b) |  | 239   |  | 406    
|Other cash deposits (note 28b)                        |  | 95    |  | 113    
|                                                      |  |       |  |        
|Cash at bank and in hand                              |  | 334   |  | 519    
|                                                      |  |       |  |        

158

---



Included
in the amounts above is restricted cash of:

|                                                  |  | Group |  | Company
|------------------------------------------------- |  | ----- |  | -------
|
|
|Cash security for loans                           |  | 8     |  | 11     
|Collateral against bonding facilities             |  | 78    |  | 85     
|Held by captive insurance company                 |  | 17    |  | 18     
|Mandatory redemption escrow accounts              |  |      |  | 10     
|                                                  |  |       |  |        
|Restricted cash                                   |  | 103   |  | 124    
|Cash held at subsidiary level and cash in transit |  | 64    |  | 74     
|Available treasury deposits                       |  | 167   |  | 321    
|                                                  |  |       |  |        
|Cash at bank and in hand                          |  | 334   |  | 519    
|                                                  |  |       |  |        

Cash
security for loans of £8 million (2004: £11 million) relates to cash deposited against secured loans in Italy.

18 Creditors

|                                              |                     | Group |    | Company
|--------------------------------------------- | ------------------- | ----- | -- | -------
|
|
|Amounts falling due within one year:          |                     |       |    |        
|Loan Notes (note 19)                          |                     |      |    | 8      
|Bank loans and overdrafts (note 19)           |                     |       |    |        
|                                              | Repayable on demand |       | 10 |        
|                                              | Other               |       | 4  |        
|Obligations under finance leases              |                     | 1     |    |       
|                                              |                     |       |    |        
|                                              |                     | 15    |    | 26     
|Payments received in advance                  |                     | 49    |    | 56     
|Trade creditors                               |                     | 187   |    | 155    
|Amounts owed to Group companies               |                     |      |    |       
|Current taxation                              |                     | 55    |    | 104    
|Other taxation and social security            |                     | 23    |    | 25     
|Other creditors                               |                     | 64    |    | 77     
|Accruals and deferred income                  |                     | 114   |    | 134    
|                                              |                     |       |    |        
|                                              |                     | 507   |    | 577    
|                                              |                     |       |    |        
|Amounts falling due after more than one year: |                     |       |    |        
|Loan Notes (note 19)                          |                     |      |    | 257    
|Bank loans (note 19)                          |                     | 21    |    | 20     
|Obligations under finance leases              |                     | 1     |    | 2      
|                                              |                     |       |    |        
|                                              |                     | 22    |    | 279    
|Accruals and deferred income                  |                     | 6     |    | 6      
|                                              |                     |       |    |        
|                                              |                     | 28    |    | 285    
|                                              |                     |       |    |        

159

---





19 Borrowings

|                                               |                                  | Group                      |    | Company |    
|---------------------------------------------- | -------------------------------- | -------------------------- | -- | ------- | ---
|
|
|Loan Notes                                     |                                  |                           |    | 265     |    
|Bank loans and overdrafts                      |                                  |                            |    |         |    
|                                               | Repayable on demand              |                            | 10 |         | 14 
|                                               | Other                            |                            | 25 |         | 24 
|Obligations under finance leases               |                                  | 2                          |    | 2       |    
|                                               |                                  |                            |    |         |    
|                                               |                                  | 37                         |    | 305     |    
|Less amounts falling due within one year       |                                  | (15                        | )  | (26     | )  
|                                               |                                  |                            |    |         |    
|                                               |                                  | 22                         |    | 279     |    
|                                               |                                  |                            |    |         |    
|Analysis of repayments of long-term borrowings |                                  |                            |    |         |    
|                                               | Loan Notes                       |                            |    |         |    
|                                               |                                  | Between two and five years |    |        |    
|                                               | Bank loans                       |                            |    |         |    
|                                               |                                  | Between one and two years  |    | 4       |    
|                                               |                                  | Between two and five years |    | 7       |    
|                                               |                                  | In more than five years    |    | 10      |    
|                                               | Obligations under finance leases |                            |    |         |    
|                                               |                                  | Between one and two years  |    | 1       |    
|                                               |                                  | Between two and five years |    |        |    
|                                               |                                  |                            |    |         |    
|                                               |                                  | 22                         |    | 279     |    
|                                               |                                  |                            |    |         |    
|                                               | Loan Notes                       |                            |   |         | 257
|                                               |                                  |                            |    |         |    

Maturity

Further analysis of the maturity of the Group's debt is given in note 28b.

160

---



20 Provisions for liabilities and charges

|Group            |                          | Restructuring |     | Warranties |     | Contracts
and
commitments |     | Litigation
and
indemnities |     | Other |     | Total |     
|---------------- | ------------------------ | ------------- | --- | ---------- | --- | ------------------------- | --- | -------------------------- | --- | ----- | --- | ----- | ----
|
|At 1 April 2003  |                          | 64            |     | 44         |     | 45                        |     | 91                         |     | 56    |     | 300   |     
|                 | Disposals                |               |    |            | (5  | )                         |    |                            |    |       | (3  | )     | (8  
|                 | Charged                  |               | 55  |            | 29  |                           | 18  |                            | 12  |       | 15  |       | 129 
|                 | Released                 |               | (13 | )          | (2  | )                         | (3  | )                          | (6  | )     | (1  | )     | (25 
|                 | Utilised                 |               | (62 | )          | (32 | )                         | (10 | )                          | (10 | )     | (51 | )     | (165
|                 | Exchange rate adjustment |               | (3  | )          | (2  | )                         | (2  | )                          | (5  | )     |    |       | (12 
|                 |                          |               |     |            |     |                           |     |                            |     |       |     |       |     
|At 31 March 2004 |                          | 41            |     | 32         |     | 48                        |     | 82                         |     | 16    |     | 219   |     
|                 | Disposals                |               |    |            | (1  | )                         |    |                            |    |       |    |       | (1  
|                 | Charged                  |               | 24  |            | 14  |                           | 7   |                            | 13  |       | 5   |       | 63  
|                 | Released                 |               | (8  | )          | (2  | )                         | (11 | )                          | (3  | )     | (2  | )     | (26 
|                 | Utilised                 |               | (33 | )          | (16 | )                         | (29 | )                          | (25 | )     | (6  | )     | (109
|                 | Exchange rate adjustment |               |    |            | (1  | )                         | 1   |                            | (1  | )     |    |       | (1  
|                 |                          |               |     |            |     |                           |     |                            |     |       |     |       |     
|At 31 March 2005 |                          | 24            |     | 26         |     | 16                        |     | 66                         |     | 13    |     | 145   |     
|                 |                          |               |     |            |     |                           |     |                            |     |       |     |       |     

Restructuring
mainly comprises expected costs for termination of employee contracts (£15 million) and costs for properties no longer occupied, onerous lease contracts
and future scheme administration costs (in total £9 million). The associated outflows are generally expected to occur over the next year with vacant property costs being incurred
over the next three years.

Warranties
and contracts mainly comprise the expected costs of maintenance under guarantees, other work in respect of products delivered and losses on contract work in progress in excess
of related accumulated cost. The associated outflows are generally expected to occur over the lives of the products.

Contracts
and commitments comprise liquidated damages, onerous supply contracts and losses on contract work in progress in excess of related accumulated costs. The associated outflows
are generally expected to occur over the lives of the contracts, which are long term in nature.

Litigation
and indemnities comprise expected employee related claims, environmental liabilities mainly in North America, other litigation, captive insurance balances and merger and
acquisition balances held against warranties provided on the disposal of businesses. Employee related claims relate to industrial diseases. The Group's exposure to these claims, which has been
assessed by actuaries, amounts to £18 million (2004: £19 million) after discounting at a rate of 4.5%, in line with long-term government bond yields
at 31 March 2005.

161

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Other
provisions mainly comprise payroll taxes on share options and other post-retirement agreements.

|Company          |          | Restructuring |    | Litigation and
indemnities |    | Total |   
|---------------- | -------- | ------------- | -- | -------------------------- | -- | ----- | --
|
|At 1 April 2004  |          | 8             |    | 26                         |    | 34    |   
|                 | Charged  |               |   |                            | 3  |       | 3 
|                 | Released |               | (4 | )                          | (1 | )     | (5
|                 | Utilised |               | (1 | )                          | (1 | )     | (2
|                 |          |               |    |                            |    |       |   
|At 31 March 2005 |          | 3             |    | 27                         |    | 30    |   
|                 |          |               |    |                            |    |       |   

21 Equity shareholders' interests

a Share capital

|                                                    |                         | Number of shares |           | £          
|--------------------------------------------------- | ----------------------- | ---------------- | --------- | -----------
|Ordinary shares of 25p each                         |                         |                  |           |            
|Allotted, called up and fully paid at 1 April 2004  |                         | 200,022,311      |           | 50,005,578 
|Shares issued:                                      |                         |                  |           |            
|                                                    | Warrants exercised      |                  | 6,809     |            
|                                                    | Share options exercised |                  | 8,711,819 |            
|                                                    |                         |                  |           |            
|Allotted, called up and fully paid at 31 March 2005 |                         | 208,740,939      |           | 52,185,235 
|Unissued at 31 March 2005                           |                         | 418,008,914      |           | 104,502,228
|                                                    |                         |                  |           |            
|Authorised at 31 March 2005                         |                         | 626,749,853      |           | 156,687,463
|                                                    |                         |                  |           |            

b Warrants

At the time of the Group's financial restructuring in May 2003, the Company issued warrants to holders of shares in M (2003) plc to subscribe for
additional ordinary shares of 5p each in the Company. In total 49.8 million warrants, exercisable up until May 2007, were issued at an exercise price of £1.50 each. As a
result of the subsequent one for five share consolidation, five warrants must now be exercised per 25p ordinary share, giving an aggregate subscription price of £7.50 per share.

At
31 March 2005, 49.6 million warrants remained outstanding (2004: 49.7 million warrants outstanding).

162

---



c Share options

At 31 March 2005 the following share options were outstanding in respect of the Company's ordinary shares:

|                 |                          | Number of shares
under option |     | Subscription
price per
share |       | Exercise
period
|---------------- | ------------------------ | ----------------------------- | --- | ---------------------------- | ----- | ---------------
|
|Management plan  |                          |                               |     |                              |       |                
|                 | Granted 24 June 2003     |                               | 8.5 |                              | Nil   |                
|                 | Granted 1 September 2003 |                               | 0.6 |                              | Nil   |                
|                 | Granted 13 February 2004 |                               | 1.1 |                              | Nil   |                
|                 |                          |                               |     |                              |       |                
|Employee plan    |                          |                               |     |                              |       |                
|                 | Granted 30 June 2003     |                               | 4.4 |                              | £3.08 |                
|                 | Granted 1 September 2003 |                               | 0.2 |                              | £4.29 |                
|                 | Granted 13 February 2004 |                               |    |                              | £7.17 |                
|                 | Granted 1 December 2004  |                               | 0.7 |                              | £5.72 |                
|                 | Granted 6 December 2004  |                               | 0.1 |                              | £5.67 |                
|                 |                          |                               |     |                              |       |                
|Sharesave scheme |                          |                               |     |                              |       |                
|                 | Granted 3 February       |                               | 1.7 |                              | £5.06 |                
|                 |                          |                               |     |                              |       |                

The
movement in share options during the year can be analysed as follows:

|                 |  | Number of
shares under
option at
1 April
2004 |  | Number of
options
granted |  | Number of
options
forfeited |   | Number of
options
exercised |   | Number of
shares under
option at
31 March
2005
|---------------- |  | --------------------------------------------- |  | ------------------------- |  | --------------------------- | - | --------------------------- | - | ----------------------------------------------
|
|Management plan  |  | 17.6                                          |  |                          |  |                            |   | (7.4                        | ) | 10.2                                          
|Employee plan    |  | 6.1                                           |  | 0.8                       |  | (0.2                        | ) | (1.3                        | ) | 5.4                                           
|Sharesave scheme |  |                                              |  | 1.7                       |  |                            |   |                            |   | 1.7                                           
|                 |  |                                               |  |                           |  |                             |   |                             |   |                                               
|Total            |  | 23.7                                          |  | 2.5                       |  | (0.2                        | ) | (8.7                        | ) | 17.3                                          
|                 |  |                                               |  |                           |  |                             |   |                             |   |                                               

The
subscription price per share, in respect of options granted under the Employee Plan on 30 June 2003, is a mean average as the rules regarding exercise price differ between
Italy and the rest of the world.

Both
plans have five performance targets, each having a period in which the options over shares will vest. The first four performance targets have now been met.

The
overall impact on the Group's profit and loss account over the life of the plans through to the financial year ending 31 March 2007, assuming the final performance
target is also met, will be approximately £59 million before payroll taxes. We expect the remaining charge under UK GAAP, before payroll taxes, to be £9 million
in the year ended 31 March 2006 and £2 million in the year ended 31 March 2007. The £59 million charge is a non-cash item.

During
the year, the aggregate gain on share options exercised by the directors amounted to £13,806,480 (2004: £nil).

163

---



22 Reserves

|Group            |                                              | Shares to
be issued |     | Share
premium
account |        | Capital
reserve |   | Capital
reduction
reserve |     | Profit and
loss account |       | Total  |      
|---------------- | -------------------------------------------- | ------------------- | --- | --------------------- | ------ | --------------- | - | ------------------------- | --- | ----------------------- | ----- | ------ | -----
|
|At 1 April 2003  |                                              |                    |     | 700                   |        | 9               |   |                          |     | (4,187                  | )     | (3,478 | )    
|                 | Cancellation of old share capital            |                     |    |                       |       |                 |  |                           |    |                         | 143   |        | 143  
|                 | Arising on new shares issued                 |                     |    |                       | 3,670  |                 |  |                           |    |                         |      |        | 3,670
|                 | Loss retained for the year                   |                     |    |                       |       |                 |  |                           |    |                         | (153  | )      | (153 
|                 | Exchange differences                         |                     |    |                       |       |                 |  |                           |    |                         | (3    | )      | (3   
|                 | Added in the year                            |                     | 25  |                       |       |                 |  |                           |    |                         |      |        | 25   
|                 | Actuarial gain on retirement benefit schemes |                     |    |                       |       |                 |  |                           |    |                         | 96    |        | 96   
|                 | Transfer on capital reduction                |                     |    |                       | (4,370 | )               |  |                           | 343 |                         | 4,027 |        |     
|                 | Losses transferred                           |                     |    |                       |       |                 |  |                           | (60 | )                       | 60    |        |     
|                 |                                              |                     |     |                       |        |                 |   |                           |     |                         |       |        |      
|At 31 March 2004 |                                              | 25                  |     |                      |        | 9               |   | 283                       |     | (17                     | )     | 300    |      
|                 | Profit retained for the year                 |                     |    |                       |       |                 |  |                           |    |                         | 21    |        | 21   
|                 | Exchange differences                         |                     |    |                       |       |                 |  |                           |    |                         | 5     |        | 5    
|                 | Shares issued                                |                     |    |                       | 4      |                 |  |                           |    |                         |      |        | 4    
|                 | Added in the year                            |                     | 23  |                       |       |                 |  |                           |    |                         |      |        | 23   
|                 | Share options exercised                      |                     | (24 | )                     |       |                 |  |                           |    |                         | 22    |        | (2   
|                 | Actuarial gain on retirement benefit schemes |                     |    |                       |       |                 |  |                           |    |                         | 1     |        | 1    
|                 | Losses transferred                           |                     |    |                       |       |                 |  |                           | (97 | )                       | 97    |        |     
|                 |                                              |                     |     |                       |        |                 |   |                           |     |                         |       |        |      
|At 31 March 2005 |                                              | 24                  |     | 4                     |        | 9               |   | 186                       |     | 129                     |       | 352    |      
|                 |                                              |                     |     |                       |        |                 |   |                           |     |                         |       |        |      

On
21 May 2003, the high court approved a reduction of share capital and the share premium account. These balances were being credited to the Company's profit and loss reserve.
The high court determined that any surplus over the deficit at 31 March 2003 was to be held as non-distributable reserves that would be transferred to the profit and loss reserve as
losses are incurred or when all

164

---



creditors
as at 21 May 2003 have been satisfied. Company losses of £97 million have been transferred in the year (2004: £60 million).

|Company          |                                   | Shares to
be issued |     | Share
premium
account |        | Capital
reserve |   | Capital
reduction
reserve |     | Profit and
loss account |       | Total  |      
|---------------- | --------------------------------- | ------------------- | --- | --------------------- | ------ | --------------- | - | ------------------------- | --- | ----------------------- | ----- | ------ | -----
|
|At 1 April 2003  |                                   |                    |     | 700                   |        | 9               |   |                          |     | (4,170                  | )     | (3,461 | )    
|                 | Cancellation of old share capital |                     |    |                       |       |                 |  |                           |    |                         | 143   |        | 143  
|                 | Arising on new shares issued      |                     |    |                       | 3,670  |                 |  |                           |    |                         |      |        | 3,670
|                 | Loss retained for the year        |                     |    |                       |       |                 |  |                           |    |                         | (103  | )      | (103 
|                 | Added in the year                 |                     | 25  |                       |       |                 |  |                           |    |                         |      |        | 25   
|                 | Transfer on capital reduction     |                     |    |                       | (4,370 | )               |  |                           | 343 |                         | 4,027 |        |     
|                 | Losses transferred                |                     |    |                       |       |                 |  |                           | (60 | )                       | 60    |        |     
|                 |                                   |                     |     |                       |        |                 |   |                           |     |                         |       |        |      
|At 31 March 2004 |                                   | 25                  |     |                      |        | 9               |   | 283                       |     | (43                     | )     | 274    |      
|                 | Loss retained for the year        |                     |    |                       |       |                 |  |                           |    |                         | (69   | )      | (69  
|                 | Shares issued                     |                     |    |                       | 4      |                 |  |                           |    |                         |      |        | 4    
|                 | Added in the year                 |                     | 23  |                       |       |                 |  |                           |    |                         |      |        | 23   
|                 | Shares options exercised          |                     | (24 | )                     |       |                 |  |                           |    |                         | 22    |        | (2   
|                 | Losses transferred                |                     |    |                       |       |                 |  |                           | (97 | )                       | 97    |        |     
|                 |                                   |                     |     |                       |        |                 |   |                           |     |                         |       |        |      
|At 31 March 2005 |                                   | 24                  |     | 4                     |        | 9               |   | 186                       |     | 7                       |       | 230    |      
|                 |                                   |                     |     |                       |        |                 |   |                           |     |                         |       |        |      

23 Cash flow

a Net cash inflow/(outflow) from operating activities

|Year ended 31 March 2005                      |  | Continuing |   | Discontinued |   | Total |  
|--------------------------------------------- |  | ---------- | - | ------------ | - | ----- | -
|
|Group operating loss after exceptional items  |  | (95        | ) | (4           | ) | (99   | )
|Operating exceptional items (note 4a)         |  | 9          |   |             |   | 9     |  
|                                              |  |            |   |              |   |       |  
|Group operating loss before exceptional items |  | (86        | ) | (4           | ) | (90   | )
|Depreciation charge                           |  | 37         |   | 2            |   | 39    |  
|Goodwill amortisation                         |  | 89         |   | 2            |   | 91    |  
|Shares to be issued related to share options  |  | 23         |   |             |   | 23    |  
|Increase in stock                             |  | (22        | ) |             |   | (22   | )
|(Increase)/decrease in debtors                |  | (21        | ) | 6            |   | (15   | )
|Increase/(decrease) in creditors              |  | 34         |   | (13          | ) | 21    |  
|Decrease in provisions                        |  | (22        | ) | (2           | ) | (24   | )
|                                              |  |            |   |              |   |       |  
|                                              |  | 32         |   | (9           | ) | 23    |  
|                                              |  |            |   |              |   |       |  

165

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|Year ended 31 March 2004                               |  | Continuing |   | Discontinued |   | Total |  
|------------------------------------------------------ |  | ---------- | - | ------------ | - | ----- | -
|
|Group operating (loss)/profit after exceptional items  |  | (249       | ) | 8            |   | (241  | )
|Operating exceptional items (note 4a)                  |  | 76         |   | 5            |   | 81    |  
|                                                       |  |            |   |              |   |       |  
|Group operating (loss)/profit before exceptional items |  | (173       | ) | 13           |   | (160  | )
|Depreciation charge                                    |  | 63         |   | 10           |   | 73    |  
|Goodwill amortisation                                  |  | 87         |   | 11           |   | 98    |  
|Shares to be issued related to share options           |  | 25         |   |             |   | 25    |  
|Decrease/(increase) in stock                           |  | 54         |   | (5           | ) | 49    |  
|Decrease/(increase) in debtors                         |  | 151        |   | (3           | ) | 148   |  
|(Decrease)/increase in creditors                       |  | (81        | ) | 7            |   | (74   | )
|Decrease in provisions                                 |  | (2         | ) | (6           | ) | (8    | )
|                                                       |  |            |   |              |   |       |  
|                                                       |  | 124        |   | 27           |   | 151   |  
|                                                       |  |            |   |              |   |       |  

|Year ended 31 March 2003                               |  | Continuing |   | Discontinued |   | Total |  
|------------------------------------------------------ |  | ---------- | - | ------------ | - | ----- | -
|
|Group operating (loss)/profit after exceptional items  |  | (634       | ) | (95          | ) | (729  | )
|Operating exceptional items (note 4a)                  |  | 267        |   | 50           |   | 317   |  
|                                                       |  |            |   |              |   |       |  
|Group operating (loss)/profit before exceptional items |  | (367       | ) | (45          | ) | (412  | )
|Depreciation charge                                    |  | 117        |   | 18           |   | 135   |  
|Goodwill amortisation                                  |  | 83         |   | 21           |   | 104   |  
|Decrease/(increase) in stock                           |  | 228        |   | 5            |   | 233   |  
|Decrease/(increase) in debtors                         |  | 94         |   | 85           |   | 179   |  
|(Decrease)/increase in creditors                       |  | (115       | ) | (116         | ) | (231  | )
|Decrease in provisions                                 |  | 6          |   | (6           | ) |      |  
|                                                       |  |            |   |              |   |       |  
|                                                       |  | 46         |   | (38          | ) | 8     |  
|                                                       |  |            |   |              |   |       |  

b Returns on investments and servicing of finance

|                                            |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Income from loans, deposits and investments |  | 11   |   | 17   |   | 45   |  
|Interest paid                               |  | (15  | ) | (48  | ) | (209 | )
|Premium on redemption of Loan Notes         |  | (28  | ) | (41  | ) |     |  
|                                            |  |      |   |      |   |      |  
|                                            |  | (32  | ) | (72  | ) | (164 | )
|                                            |  |      |   |      |   |      |  

Of
the above amounts, Continuing Operations account for an outflow of £32 million (2004: £72 million; 2003: £162 million) and Discontinued
Operations and outflow of £nil (2004: £nil; 2003: £2 million).

166

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c Tax paid

|                          |  | 2005 |   | 2004 |   | 2003 |  
|------------------------- |  | ---- | - | ---- | - | ---- | -
|
|UK corporation tax repaid |  |     |   |     |   | 52   |  
|Overseas tax paid         |  | (7   | ) | (4   | ) | (21  | )
|                          |  |      |   |      |   |      |  
|                          |  | (7   | ) | (4   | ) | 31   |  
|                          |  |      |   |      |   |      |  

All
the above amounts relate to Continuing Operations. Tax paid in respect of previous business disposals is included in note 23e.

d Capital expenditure and financial investments

|                                     |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------ |  | ---- | - | ---- | - | ---- | -
|
|Purchases of tangible fixed assets   |  | (35  | ) | (29  | ) | (43  | )
|Purchases of fixed asset investments |  |     |   |     |   | (20  | )
|Sales of tangible fixed assets       |  | 3    |   | 41   |   | 30   |  
|Sales of fixed asset investments     |  |     |   | 24   |   | 3    |  
|                                     |  |      |   |      |   |      |  
|                                     |  | (32  | ) | 36   |   | (30  | )
|                                     |  |      |   |      |   |      |  

Sales
of tangible fixed assets in 2004 included an amount of £26 million relating to information technology assets. In 2003, sales included
£26 million of property disposals and £2 million of car fleet disposals.

Of
the above amounts, Continuing Operations account for an outflow of £32 million (2004: £35 million inflow; 2003: £24 million
outflow) and Discontinued Operations a cash flow of £nil (2004: £1 million inflow; 2003: £6 million outflow).

e Acquisitions and disposals

|                                                    |  | 2005 |   | 2004 |   | 2003 |  
|--------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Investments in subsidiary companies                 |  |     |   | (6   | ) | (3   | )
|Sales of interests in subsidiary companies          |  | 184  |   | 136  |   | 377  |  
|Sales of interests in joint ventures and associates |  | (15  | ) | 98   |   | 46   |  
|Net cash disposed with subsidiary companies         |  |     |   | (6   | ) | 13   |  
|                                                    |  |      |   |      |   |      |  
|                                                    |  | 169  |   | 222  |   | 433  |  
|                                                    |  |      |   |      |   |      |  

Sales
of interests in subsidiary companies are shown net of proceeds, transaction costs and related tax cash flows.

167

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f Net cash inflow/(outflow) from management of liquid resources

|                                                                 |  | 2005 |   | 2004 |   | 2003 |  
|---------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Deposits made with banks and similar financial institutions      |  | (247 | ) | (410 | ) | (167 | )
|Deposits withdrawn from banks and similar financial institutions |  | 270  |   | 513  |   | 8    |  
|                                                                 |  |      |   |      |   |      |  
|                                                                 |  | 23   |   | 103  |   | (159 | )
|                                                                 |  |      |   |      |   |      |  

g Net cash outflow from financing

|                                                                   |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|
|Issue of ordinary shares                                           |  | 4    |   |     |   |     |  
|Decrease in bank loans                                             |  |     |   | (5   | ) | (63  | )
|Decrease in Loan Notes                                             |  | (270 | ) | (410 | ) |     |  
|Capital element of finance lease payments                          |  |     |   | (1   | ) | (1   | )
|Scheme consideration                                               |  |     |   | (340 | ) |     |  
|Increase in loans to M (2003) plc and subsidiaries of M (2003) plc |  |     |   |     |   | 24   |  
|                                                                   |  |      |   |      |   |      |  
|                                                                   |  | (266 | ) | (756 | ) | (40  | )
|                                                                   |  |      |   |      |   |      |  

24 Analysis of net monetary funds

|                                              |                | At 1 April
2004 |      | Cash flow |     | Other
non-cash
changes |    | Exchange
rate
adjustment |    | At 31 March
2005 |    
|--------------------------------------------- | -------------- | --------------- | ---- | --------- | --- | ---------------------- | -- | ------------------------ | -- | ---------------- | ---
|
|Cash at bank and in hand                      |                | 406             |      | (169      | )   |                       |    | 2                        |    | 239              |    
|Loans repayable on demand                     |                | (14             | )    | 4         |     |                       |    |                         |    | (10              | )  
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    
|                                              |                |                 |      | (165      | )   |                        |    |                          |    |                  |    
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    
|Liquid resources                              |                | 113             |      | (23       | )   |                       |    | 5                        |    | 95               |    
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    
|Amounts falling due within one year:          |                |                 |      |           |     |                        |    |                          |    |                  |    
|                                              | Bank loans     |                 | (4   | )         | 4   |                        | (4 | )                        |   |                  | (4 
|                                              | Loan Notes     |                 | (8   | )         | 8   |                        |   |                          |   |                  |   
|                                              | Finance leases |                 |     |           |    |                        | (1 | )                        |   |                  | (1 
|Amounts falling due after more than one year: |                |                 |      |           |     |                        |    |                          |    |                  |    
|                                              | Bank loans     |                 | (20  | )         | (4  | )                      | 4  |                          | (1 | )                | (21
|                                              | Loan Notes     |                 | (257 | )         | 262 |                        |   |                          | (5 | )                |   
|                                              | Finance leases |                 | (2   | )         |    |                        | 1  |                          |   |                  | (1 
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    
|                                              |                |                 |      | 270       |     |                        |    |                          |    |                  |    
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    
|                                              |                | 214             |      | 82        |     |                       |    | 1                        |    | 297              |    
|                                              |                |                 |      |           |     |                        |    |                          |    |                  |    

168

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25 Acquisitions and disposals

a Sales of interests in subsidiaries

|                                             |  | Total
2005 |   | Total
2004 |   | Total
2003 |  
|-------------------------------------------- |  | ---------- | - | ---------- | - | ---------- | -
|
|Net assets sold                              |  |            |   |            |   |            |  
|Tangible fixed assets                        |  | 24         |   | 7          |   | 75         |  
|Stock                                        |  | 29         |   | 6          |   | 249        |  
|Debtors                                      |  | 25         |   | 12         |   | 318        |  
|Net cash                                     |  |           |   | 6          |   | (13        | )
|Borrowings (excluding overdrafts)            |  |           |   |           |   | (22        | )
|Taxation                                     |  |           |   |           |   | (4         | )
|Creditors and provisions                     |  | (21        | ) | (21        | ) | (246       | )
|Finance lease creditors                      |  |           |   |           |   | (2         | )
|Minority interests                           |  |           |   | (1         | ) | (11        | )
|Retirement benefit deficit                   |  | (16        | ) |           |   | (38        | )
|Goodwill                                     |  | 44         |   | 46         |   | 122        |  
|                                             |  |            |   |            |   |            |  
|                                             |  | 85         |   | 55         |   | 428        |  
|                                             |  |            |   |            |   |            |  
|Cash consideration received                  |  | 204        |   | 139        |   | 394        |  
|Deferred consideration and transaction costs |  | (16        | ) | (8         | ) | (1         | )
|                                             |  |            |   |            |   |            |  
|Profit on disposal                           |  | 103        |   | 76         |   | (35        | )
|                                             |  |            |   |            |   |            |  

OPP
was disposed of on 16 August 2004, on which we incurred additional tax costs of £4 million.

In
the year ended 31 March 2004, NAA was disposed of on 23 February 2004 and Marconi Mobile Access S.p.A (also known as UMTS) was disposed of on
17 July 2003. The Group incurred additional tax costs of £8 million upon the disposal of NAA in the year ended 31 March 2004. Following the review of
historic US tax attributes, the Group has received a refund of £4 million in the year ended 31 March 2005.

Marconi
Mobile Holdings S.p.A., the holding company for the Group's Strategic Communications business, was disposed of on 2 August 2002 and the Marconi Applied Technologies Group
was disposed of on 12 July 2002. In addition, £17 million was paid out to settle completion accounts adjustments for the disposals made during the year ended 31 March 2002 of
Medical Systems, Data Systems, Commerce Systems and Marconi Optical Components.

b Sales of interests in joint ventures and associates

In the year ended 31 March 2004, the Group's investment in Easynet Group plc, an associated undertaking, was sold in two tranches on
4 July 2003 and 11 September 2003, for a combined total of £94 million cash consideration giving rise to a profit of £76 million.

The
Group's investment in Confirmant Limited, a joint venture, was sold on 12 November 2003. £4 million cash consideration was received and a profit of
£1 million was recognised in the year ended 31 March 2004.

169

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26 Post retirement benefits

Marconi operates defined benefit pension plans in the UK, USA, Germany and Italy, and post-retirement benefit plans in the USA. The most significant
plan is the G.E.C. 1972 Plan (the UK Plan) in the UK. A full actuarial valuation for the UK Plan was carried out as at 5 April 2002 and a valuation for accounting purposes was carried out as at
31 March 2005 by independent qualified actuaries. A further full actuarial valuation is being carried out as at 5 April 2005, the results of which will be available in the second half of
the year ending 31 March 2006.

For
the US plans, full valuations were carried out at 1 January 2003 and 1 January 2004 and updated as applicable to 31 March 2005 by independent qualified
actuaries.

For
the German and Italian unfunded plans, valuations were carried out for accounting purposes at 31 March 2005 by independent qualified actuaries.

The
contributions made to the plans in the year totalled £17 million (2004: £21 million; 2003: £20 million). Benefit payments in the
accounting period totalled £9 million (2004: £17 million; 2003: £17 million). For the unfunded pension plans and the post retirement medical plans,
payments are made when the benefits are provided.

Company
contributions to the UK Plan are 8.2% of pensionable pay. In the USA, on 25 March 2003, the Group signed a funding agreement with the Pension Benefit Guaranty Corporation
(PBGC) for the US defined benefit schemes. This agreement was amended on 17 February 2004. Under this agreement, Marconi was required to contribute $2.25 million at the end of each
calendar quarter to its US defined benefit plans, in addition to the annual normal cost associated with the continuation of benefits. Effective from 13 August 2004, the quarterly contribution
was reduced to $1.75 million due to the transfer of the Reltec Retirement liability to Emerson. Additionally, proceeds from any disposal of US businesses shall be used to fund the scheme
deficits.

The
Group operates defined contribution schemes in addition to the defined benefit schemes listed. Contributions to these schemes amounted to £3 million (2004:
£5 million; 2003: £7 million).

170

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The
major assumptions used by the actuaries to determine the liabilities on a FRS 17 basis for the significant defined benefit plans are set out below:

|                                         |  | At 31 March 2005 |  | At 31 March 2004                            |  | At 31 March 2003
|---------------------------------------- |  | ---------------- |  | ------------------------------------------- |  | ----------------
|
|
|Rate of general increase in salaries     |  | 4.25             |  | 4.12                                        |  | 4.75            
|Rate of increase in pensions in payment  |  | 2.75             |  | 1.50                                        |  | 2.75            
|Rate of increase for deferred pensioners |  | 2.75             |  | N/A                                         |  | 2.75            
|Rate of credited interest                |  | 2.50             |  | N/A                                         |  | 3.00            
|Discount rate applied to liabilities     |  | 5.50             |  | 5.11                                        |  | 5.50            
|Inflation assumption                     |  | 2.75             |  | 2.12                                        |  | 2.75            
|                                         |  |                  |  |                                             |  |                 
|Expected healthcare trend rates          |  | N/A              |  | 11.0                                        |  | N/A             
|                                         |  |                  |  | pre and post 65, reducing to 6.0 after 2012 |  |                 
|                                         |  |                  |  |                                             |  |                 
|Expected prescription drug trend rates   |  | N/A              |  | 13.0                                        |  | N/A             
|                                         |  |                  |  | reducing to 6.0 after 2012                  |  |                 
|                                         |  |                  |  |                                             |  |                 

The
UK Plan provides benefits to members on the best of three bases. One of the bases is a money purchase underpin in which a discretionary level of credited interest is applied to a
percentage of members' contributions. The discretionary level of credited interest has been treated as a constructive obligation.

Pension plans

The assets in the UK Plan and the expected rates of return were:

|                                                    |  | Long-term
expected
rate of
return |  | Value at
31 March
2005 |   | Long-term
expected
rate of
return |  | Value at
31 March
2004 |   | Long-term
expected
rate of
return |  | Value at
31 March
2003 |  
|--------------------------------------------------- |  | --------------------------------- |  | ---------------------- | - | --------------------------------- |  | ---------------------- | - | --------------------------------- |  | ---------------------- | -
|
|Equities                                            |  | 8.00                              |  | 719                    |   | 8.25                              |  | 638                    |   | 8.25                              |  | 497                    |  
|Bonds                                               |  | 4.76                              |  | 1,503                  |   | 4.84                              |  | 1,536                  |   | 4.84                              |  | 1,702                  |  
|Property                                            |  | 6.50                              |  | 114                    |   | 6.70                              |  | 101                    |   | 6.75                              |  | 111                    |  
|Cash                                                |  | 3.75                              |  | 51                     |   | 3.75                              |  | 43                     |   | 4.00                              |  | 30                     |  
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  
|Total market value of assets                        |  |                                   |  | 2,387                  |   |                                   |  | 2,318                  |   |                                   |  | 2,340                  |  
|Present value of plan liabilities                   |  |                                   |  | (2,496                 | ) |                                   |  | (2,436                 | ) |                                   |  | (2,535                 | )
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  
|Net pension liability before and after deferred tax |  |                                   |  | (109                   | ) |                                   |  | (118                   | ) |                                   |  | (195                   | )
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  

171

---



The
assets in the overseas plans and the expected rates of return were:

|                                                    |  | Long-term
expected
rate of
return |  | Value at
31 March
2005 |   | Long-term
expected
rate of
return |  | Value at
31 March
2004 |   | Long-term
expected
rate of
return |  | Value at
31 March
2003 |  
|--------------------------------------------------- |  | --------------------------------- |  | ---------------------- | - | --------------------------------- |  | ---------------------- | - | --------------------------------- |  | ---------------------- | -
|
|Equities                                            |  | 8.75                              |  | 53                     |   | 8.75                              |  | 68                     |   | 10.00                             |  | 65                     |  
|Bonds                                               |  | 5.00                              |  | 46                     |   | 5.00                              |  | 57                     |   | 6.00                              |  | 59                     |  
|Other                                               |  | 6.50                              |  | 7                      |   | 6.50                              |  | 7                      |   | 9.00                              |  | 10                     |  
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  
|Total market value of assets                        |  |                                   |  | 106                    |   |                                   |  | 132                    |   |                                   |  | 134                    |  
|Present value of plan liabilities                   |  |                                   |  | (211                   | ) |                                   |  | (238                   | ) |                                   |  | (263                   | )
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  
|Net pension liability before and after deferred tax |  |                                   |  | (105                   | ) |                                   |  | (106                   | ) |                                   |  | (129                   | )
|                                                    |  |                                   |  |                        |   |                                   |  |                        |   |                                   |  |                        |  

|                                                                                          |  | Value at
31 March
2005 |   | Value at
31 March
2004 |   | Value at
31 March
2003 |  
|----------------------------------------------------------------------------------------- |  | ---------------------- | - | ---------------------- | - | ---------------------- | -
|
|Other post retirement benefits                                                            |  |                        |   |                        |   |                        |  
|Present value of plan liabilities and net pension liability before and after deferred tax |  | (14                    | ) | (22                    | ) | (29                    | )
|                                                                                          |  |                        |   |                        |   |                        |  

Analysis of the amount charged to operating loss

|                     |  | 2005 |   | 2004 |   | 2003 | 
|-------------------- |  | ---- | - | ---- | - | ---- | 
|
|
|Current service cost |  | (17  | ) | (5   | ) |     | 
|Past service cost    |  |     |   |     |   |     | 
|                     |  |      |   |      |   |      | 
|Total service cost   |  | (17  | ) | (5   | ) |     | 
|                     |  |      |   |      |   |      | 

172

---



Analysis of other amounts charged to the profit and loss account

|                                                  |  | 2005 |  | 2004 |  | 2003
|------------------------------------------------- |  | ---- |  | ---- |  | ----
|
|
|Gain/(loss) on settlements                        |  |     |  | 11   |  | 4   
|Gain/(loss) on curtailments                       |  |     |  | 1    |  |    
|                                                  |  |      |  |      |  |     
|Net gain/(loss)charged to profit and loss account |  |     |  | 12   |  | 4   
|                                                  |  |      |  |      |  |     

Of the amounts above £16 million was credited to non-operating exceptional items and £nil to operating
profit (2004: £8 million charged to non-operating exceptional items and £nil to operating loss; 2003: £57 million credited to non-operating
exceptional items and £3 million credited to operating loss).

Analysis of the amount credited to other finance (expenditure)/income

|                                         |  | 2005 |   | 2004 |   | 2003 |  
|---------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|
|Expected return on pension scheme assets |  | 132  |   | 9    |   |     |  
|Interest on pension scheme liabilities   |  | (130 | ) | (12  | ) | (1   | )
|                                         |  |      |   |      |   |      |  
|Total finance income/(expenditure)       |  | 2    |   | (3   | ) | (1   | )
|                                         |  |      |   |      |   |      |  
|Net (expenditure)/income                 |  | (15  | ) | 4    |   | 3    |  
|                                         |  |      |   |      |   |      |  

The net (expenditure)/income represents the operating charge plus curtailment and settlement gains and losses plus finance income/(expenditure).

173

---



Analysis of amount recognised in the consolidated statement of total recognised gains and losses (STRGL)

|                                                                                         |  | 2005 |   | 2004 |   | 2003 | 
|---------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | 
|
|
|Expected return less actual return on pension scheme assets gains/(losses)               |  | 71   |   | (4   | ) |     | 
|Experience gains and (losses) arising on scheme liabilities                              |  |     |   | (1   | ) | 2    | 
|Changes in assumptions underlying the present value of scheme liabilities (losses)/gains |  | (57  | ) | (10  | ) |     | 
|                                                                                         |  |      |   |      |   |      | 
|Actuarial gain/(loss) recognised in STRGL                                                |  | 14   |   | (15  | ) | 2    | 
|                                                                                         |  |      |   |      |   |      | 

The main element of the amount recognised in the STRGL in all three years has resulted from the difference between the actual rate of return and
expected rate of return on the plans' assets. In the year ended 31 March 2005, actual investment returns in the UK Plan exceeded expected returns across all classes of assets, resulting
in a substantial asset gain. In the year ended 31 March 2004, asset gains were experienced for both the UK and US funded plans, primarily due to the recovery of equity markets.

The
second largest impact on the STRGL in all three years has been the losses resulting from changes in assumptions underlying the present value of the plans' liabilities.

At
31 March 2005, revisions to the UK Plan mortality assumption have led to a STRGL loss of £102 million. This revision recognised observed improvements in
longevity in line with the most recent available plan data, plus an allowance for likely improvements in the future. In the UK Plan, the trustees have discretion to credit interest (bonuses) to
pension awards. During the year, our credited interest assumption has been reduced from 3.0% to 2.5% to align with actual expected awards, providing a STRGL gain. A further STRGL gain was recognised
from a reduction in our salary growth assumption.

At
31 March 2004, in the UK Plan, the reduction of our credited interest assumption provided a gain. Offsetting this gain was a loss resulting from revised mortality assumptions,
recognising observed improvements in longevity at that date.

At
31 March 2005, due to movements in Eurobond rates during the year, the German and Italian Plan discount rates were reduced. The German Plan discount rate was reduced from 5.50%
at

174

---



31 March 2004
to 4.50% at 31 March 2005. The Italian Plan discount rate was reduced from 5.00% at 31 March 2004 to 4.00% at 31 March 2005. Both
of these changes resulted in STRGL losses.

At
31 March 2004, due to movements in AA corporate bond rates in the UK and US, the UK discount rate was increased from 5.25% to 5.50% leading to a gain, and the US discount rate
was decreased from 6.25% to 5.75% leading to a loss.

Movement in deficit during the year

|                    |                                    | 2005 |     | 2004 |    
|------------------- | ---------------------------------- | ---- | --- | ---- | ---
|
|
|Deficit at 1 April  |                                    | (118 | )   | (106 | )  
|Movement in year:   |                                    |      |     |      |    
|                    | Current service cost               |      | (17 | )    | (5 
|                    | Contributions and benefit payments |      | 10  |      | 14 
|                    | Settlement gain/(loss)             |      |    |      | 11 
|                    | Curtailment gain                   |      |    |      | 1  
|                    | Other finance income/(charge)      |      | 2   |      | (3 
|                    | Actuarial gain/(loss)              |      | 14  |      | (15
|                    | Foreign exchange                   |      |    |      | (2 
|                    |                                    |      |     |      |    
|Deficit at 31 March |                                    | (109 | )   | (105 | )  
|                    |                                    |      |     |      |    

The
net deficit before deferred taxation is analysed by jurisdiction as follows:

|                        |  | 2005 |   | 2004 |  
|----------------------- |  | ---- | - | ---- | -
|
|
|Surpluses               |  |     |   | 3    |  
|Deficits                |  | (109 | ) | (108 | )
|                        |  |      |   |      |  
|Net deficit at 31 March |  | (109 | ) | (105 | )
|                        |  |      |   |      |  

175

---





History of experience gains and losses

|                                                                                   |                                                       | 2005 |       | 2004 |       | 2003 |       | 2002 |       | 2001 |     
|---------------------------------------------------------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----- | ---- | ----
|Difference between the expected and actual return on scheme assets gains/(losses): |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Amount (£ million)                                    |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      | 71    |      | 115   |      | (147  | )    | (218  | )    | (139
|                                                                                   | Rest of the world pension plans                       |      | (4    | )    | 15    |      | (31   | )    | (59   | )    | (47 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Total                                                 |      | 67    |      | 130   |      | (178  | )    | (277  | )    | (186
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Percentage of scheme assets                           |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      | 3.0   |      | 5.0   |      | (6.3  | )    | (8.7  | )    | (5.2
|                                                                                   | Rest of the world pension plans                       |      | (0.2  | )    | 11.4  |      | (23.1 | )    | (33.1 | )    | (8.7
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Overall                                               |      | 2.7   |      | 5.3   |      | (7.2  | )    | (10.3 | )    | (5.8
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|Experience gains and (losses) on scheme liabilities:                               |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Amount (£ million)                                    |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      |      |      | 9     |      | 4     |      | 20    |      | (41 
|                                                                                   | Rest of the world pension plans                       |      | (1    | )    | (2    | )    | (3    | )    | (10   | )    | (9  
|                                                                                   | Post retirement medical plans                         |      | 2     |      | 3     |      | 6     |      | (1    | )    | (1  
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Total                                                 |      | 1     |      | 10    |      | 7     |      | 9     |      | (51 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Percentage of the present value of scheme liabilities |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      |      |      | (0.4  | )    | (0.2  | )    | (0.8  | )    | 1.7 
|                                                                                   | Rest of the world pension plans                       |      | 0.5   |      | 0.8   |      | 1.1   |      | 3.9   |      | 1.7 
|                                                                                   | Post retirement medical plans                         |      | (14.3 | )    | (13.6 | )    | (20.7 | )    | 2.6   |      | 2.0 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Overall                                               |      |      |      | (0.4  | )    | (0.3  | )    | (0.3  | )    | 1.7 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|Total amount recognised in STRGL:                                                  |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Amount (£ million)                                    |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      | 14    |      | 91    |      | (209  | )    | (250  | )    | (14 
|                                                                                   | Rest of the world pension plans                       |      | (15   | )    | 3     |      | (58   | )    | (98   | )    | (57 
|                                                                                   | Post retirement medical plans                         |      | 2     |      | 2     |      | (2    | )    | (3    | )    | (2  
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Total                                                 |      | 1     |      | 96    |      | (269  | )    | (351  | )    | (73 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Percentage of the present value of scheme liabilities |      |       |      |       |      |       |      |       |      |     
|                                                                                   | UK Plan                                               |      | (0.6  | )    | (3.7  | )    | 8.2   |      | 10.0  |      | 0.6 
|                                                                                   | Rest of the world pension plans                       |      | 7.1   |      | (1.3  | )    | 22.1  |      | 37.8  |      | 10.9
|                                                                                   | Post retirement medical plans                         |      | (14.3 | )    | (9.1  | )    | 6.9   |      | 7.9   |      | 4.0 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     
|                                                                                   | Overall                                               |      |      |      | (3.6  | )    | 9.5   |      | 12.5  |      | 2.4 
|                                                                                   |                                                       |      |       |      |       |      |       |      |       |      |     

176

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27 Other information

a Contingent liabilities

|                                   |  | Group |  | Company
|---------------------------------- |  | ----- |  | -------
|
|
|Contingent liabilities at year end |  | 20    |  | 20     
|                                   |  |       |  |        

Litigation

Contingent liabilities relate mainly to obligations arising from legal proceedings, which in the opinion of the directors, are not expected to have a materially
adverse effect on the Group. The Group is engaged in a number of legal proceedings relating to patent and other claims under contracts. The Group is vigorously defending these cases, the estimated
cost of which is disclosed above, and the directors currently believe that the claims are unlikely to be settled for amounts resulting in material cash or other asset outflows.

Guarantees

At 31 March 2005, the Group had provided third parties with a total of £137 million of guarantees, performance bonds and
indemnities, the exercise of which is considered to be remote. At 31 March 2005, the value of total collateral against these various guarantees was £78 million. In
addition, the Group estimates that £59 million of the providers had varying conditional and unconditional rights to call for cash collateral.

b Capital expenditure

|                                   |  | Group |  | Company
|---------------------------------- |  | ----- |  | -------
|
|
|Commitments contracted at year end |  | 6     |  | 4      
|                                   |  |       |  |        

c Operating leases

|                     |                    | Group |    | Company
|-------------------- | ------------------ | ----- | -- | -------
|
|
|Charges in the year: |                    |       |    |        
|                     | Land and buildings |       | 16 |        
|                     | Other items        |       | 8  |        
|                     |                    |       |    |        
|                     |                    | 24    |    | 40     
|                     |                    |       |    |        

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Amounts
payable under operating leases which fall due in the next financial year

|                                     |                            | Group |   | Company
|------------------------------------ | -------------------------- | ----- | - | -------
|
|
|Land and buildings, leases expiring: |                            |       |   |        
|                                     | Within one year            |       | 2 |        
|                                     | Between two and five years |       | 5 |        
|                                     | After five years           |       | 5 |        
|Other items, leases expiring:        |                            |       |   |        
|                                     | Within one year            |       |  |        
|                                     | Between two and five years |       | 4 |        
|                                     |                            |       |   |        
|                                     |                            | 16    |   | 32     
|                                     |                            |       |   |        

d Fees paid to auditors

|                                       |  | Group |  | Company
|-------------------------------------- |  | ----- |  | -------
|
|
|Audit services                         |  | 2     |  | 2      
|Audit-related services                 |  |      |  |       
|Tax services and other compliance work |  | 1     |  | 2      
|Business support and other services    |  |      |  | 1      
|                                       |  |       |  |        
|                                       |  | 3     |  | 5      
|                                       |  |       |  |        

Audit
fees are £1.8 million (2004: £2.3 million). The cost of reporting quarterly in both UK and US Generally Accepted Accounting Principles is
borne by the Company.

Tax
services and other compliance work include fees of £0.6 million (2004: £1.6 million) dealing with tax computations, submissions, appeals,
restructuring and £0.2 million (2004: £0.6 million) for expatriate services. Expatriate services have now been transitioned to another professional services firm.

Business
support and other services include fees for operational internal audit of £0.2 million (2004: £0.6 million) and
£0.2 million (2004: £0.2 million) for Sarbanes-Oxley, project work and technical advice. All internal audit work was transitioned to another professional services
firm during the year.

All
non-audit services performed by the auditors are pre-approved by the Audit Committee, following a competitive tender process where appropriate, in accordance
with our auditors' independence policy.

All
the Group amounts shown above were charged to administrative expenditure.

28 Financial instruments

a Treasury policies and organisation

The Group's treasury activities are coordinated by its central treasury function, which operates in accordance with policies and procedures approved by the Board.
It does not operate as a profit centre.

178

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The
treasury function advises operational management on treasury matters and undertakes all derivative transactions. All treasury-related transactions undertaken by operating businesses are required
to be carried out in accordance with guidelines laid down by the treasury function and must comply with the Group risk management policies.

Short-term
debtors and creditors have been excluded from all disclosures within this note with the exception of the currency related risk profile disclosures.

The
main risks faced by the Group in the financial markets in the years ended 31 March 2005 and 2004 were liquidity risk, interest rate risk, foreign currency risk and
counter-party risk. The Board reviews and agrees policies for managing each of these, which are summarised below.

Financial instruments

Prior to the Group's financial restructuring in May 2003, the Group used financial instruments, including derivatives (principally interest rate swaps,
cancellable interest rate swaps, currency swaps and forward foreign exchange contracts) to manage interest rate and currency risk exposures. In February 2005 the Group recommenced hedging of
foreign currency cash flows with forward foreign exchange contracts. The Group is reviewing its interest rate hedging policy and any requirement for interest rate hedging instruments to mitigate
interest rate risks.

It
is the Group's policy that there is no trading in financial instruments, and that all financial instruments are used solely for the purpose of financing or hedging identified
exposures of the Group.

Liquidity risk

The Group funded its activities mainly through cash generated from its operational activities and proceeds of disposals. The Senior Notes were repaid in full in
September 2004 (£265 million outstanding as at 31 March 2004).

The
Group's gross borrowings as at 31 March 2005 were £37 million (2004: £305 million) and cash and liquid resources were
£334 million (2004: £519 million), resulting in net cash of £297 million at 31 March 2005 (2004: £214 million).

In
the years ended 31 March 2005 and 2004, the Group had local borrowing facilities in Italy and China. The Group has not sought to increase or add to its bank facilities given
its net cash and liquid resources position of £297 million as at 31 March 2005.

As
disclosed in note 16, the Group has uncommitted receivables financing facilities for €79 million (£54 million) of which
€22 million (£15 million) was drawn as at 31 March 2005. The facilities do not have formal expiry dates, however, €19 million
(£13 million) of these facilities is due for review in December 2005 and the remaining €60 million (£41 million) is due for review
in March 2006.

179

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The following table sets out the breakdown of restricted and free cash balances.

|                                                      |  | 31 March
2005 |  | 31 March
2004
|----------------------------------------------------- |  | ------------- |  | -------------
|
|Cash collateral for performance bonds and guarantees  |  | 78            |  | 85           
|Captive insurance company                             |  | 17            |  | 18           
|Collateral for secured loans                          |  | 8             |  | 11           
|Mandatory Redemption Escrow Account (MREA)            |  |              |  | 10           
|                                                      |  |               |  |              
|Total restricted cash                                 |  | 103           |  | 124          
|Cash held at subsidiary level and cash in transit     |  | 64            |  | 74           
|Available treasury deposits                           |  | 167           |  | 321          
|                                                      |  |               |  |              
|Cash at bank and in hand (including liquid resources) |  | 334           |  | 519          
|                                                      |  |               |  |              

The
Group continues to be required to place cash collateral, in whole or in part, against any provision of performance bonding facilities or letters of credit. As at 31
March 2005, £78 million of cash collateral was outstanding (2004: £85 million) to secure £137 million of bonding (2004:
£141 million).

Interest rate risk

The Group repaid its fixed-rate US Dollar denominated debt (the Loan Notes) in full on 1 September 2004 and subsequently the Group's interest
charge exposure was limited to floating-rate interest on RMB 153 million of loans in China (£10 million), €3 million
(£2 million) of leases in Italy and €7 million (£5 million) of debt in Italy. €29 million
(£20 million) of debt in Italy was at fixed-rate interest. All the Italian borrowings are at rates sponsored by the Italian government.

The
Group's cash and liquid resources of £334 million (2004: £519 million) are all at floating rate.

A
one-percentage point decrease in market interest rates would have decreased profit before taxation by £3 million in the year ended 31 March 2005.
The average rate of interest achieved on invested cash was approximately 2.7% per annum (2004: 2.0%; 2003: 2.7%).

Counter-party risk

All deposits and foreign exchange forward contracts are made with creditworthy and authorised counter-parties. The Group's counter-party risk to foreign currency
hedging is weighted at 12.5% of gross exposure up to three months and added to deposit exposure weighted at 100%. Exposure to any single financial counter-party is limited by policy as a proportion of
the central treasury function's free cash deposits to a maximum of 25%.

Customer financing risks

The Group has not issued any new customer finance commitments during the year ended 31 March 2005. At 31 March 2005, the Group had a net exposure to
customer financing of approximately £1 million.

180

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In
addition, the Group uses export credit agencies to assist in managing political and credit risks on major contracts, and makes use of export credit insurance in respect of small to
medium-sized contracts when considered appropriate.

Contract bonding facilities

The Group provides third parties with guarantees, performance bonds and indemnities, the exercise of which is considered to be remote. At 31 March 2005 the
amount outstanding was £137 million (2004: £141 million). Marconi Bonding Limited, a Group subsidiary, has available to it a committed bonding facility for
£35 million until November 2007. Under the terms of the facility, Marconi Bonding Limited provides 50% cash collateral to the bonding provider; the provider has unconditional rights
to call for the balance, up to 100% cash collateral, at any time. This facility replaces a facility for £50 million which was due to expire in November 2005 and which required 100%
cash collateral to be placed with the provider.

A
maturity profile of all bonds and guarantees outstanding is set out below:

|Expiring 31 March |  | Bonds
outstanding
at 31 March
2005 |  | Bonds
outstanding
at 31 March
2004
|----------------- |  | ---------------------------------- |  | ----------------------------------
|
|2005 or earlier   |  |                                   |  | 51                                
|2006              |  | 54                                 |  | 8                                 
|2007              |  | 57                                 |  | 58                                
|2008              |  | 7                                  |  | 6                                 
|Thereafter        |  | 9                                  |  | 11                                
|No expiry date    |  | 10                                 |  | 7                                 
|                  |  |                                    |  |                                   
|Total             |  | 137                                |  | 141                               
|                  |  |                                    |  |                                   

At
31 March 2005 the value of total cash collateral against these various guarantees was £78 million. The Group estimates that as at
31 March 2005, £59 million of the providers had varying conditional and unconditional rights to call for cash collateral.

Insurance risk management

The Group manages centrally the purchase of global insurance policies in respect of major insurable risks, including property (material damage/business
interruption), directors' and officers' and public liability. The Group maintains the types of property and liability insurance which the directors regard as appropriate given the nature of the risks
run in the course of its business, and for amounts which they consider adequate. When considering the appropriateness of insurance cover, the directors make assessments of insurable risks using both
in-house professionals and the advice of insurance brokers. The directors have determined what they believe to be the appropriate level of cover having regard, among other things, to the
Group's loss record, the industry in which it operates, its risk tolerance level, the cost of cover relative to the risk, customer and legal requirements and any relevant and available information on
the levels of cover typically purchased by other comparable companies which operate in the Group's industry.

181

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The
use of global policies and centrally appointed brokers allows the Group to improve internal control and optimise the overall level of retained risk. Risk management and insurance
spend are concentrated on those insurable risks which are considered potentially catastrophic to the Group as a whole. The Group continues to work with its insurers and advisors to improve its loss
prevention and mitigation process.

Foreign exchange risk

The Group is exposed to movements in foreign exchange rates against Sterling for both trading transactions and the translation of net assets and the profit and
loss accounts of overseas subsidiaries. The main trading currencies of the Group are the US Dollar, Sterling and the Euro.

In
September 2004, the Group redeemed the remainder of its US Dollar-denominated debt (£265 million).

The
Group's cash and liquid resources were £334 million (2004: £519 million) of which £138 million (2004:
£111 million) was denominated in Sterling, £35 million (2004: £262 million) in US Dollars, £128 million (2004:
£110 million) in Euro and the balance of £33 million (2004: £36 million) in other currencies.

As
at 31 March 2005, the Group held approximately €78 million (£54 million) and $31 million (£17 million) of
foreign-currency denominated cash within the UK, as a combination of collateral against bonding facilities and to meet foreign currency working capital requirements. This cash is not treated as a
hedge for accounting purposes, and gains and losses on retranslation of the cash into Sterling are taken to net finance income/(expenditure).

The
Group has overseas subsidiaries that earn profits or incur losses in their local currencies. It is not the Group's policy to hedge the exposures arising from the translation of these
overseas results into Sterling. The Group's sales and profitability are sensitive to exchange rate fluctuations.

The
table below demonstrates the sensitivity of the Group's profits to exchange rates:

|                               |  | Reduction in Group
reported Sterling
operating profit/(loss)
before goodwill,
amortisation and
exceptional items
2005 |  
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------- | -
|
|10% reduction in the value of: |  |                                                                                                                       |  
|US Dollar                      |  | 2.2                                                                                                                   |  
|Euro-trade currencies          |  | 0.4                                                                                                                   |  
|Other                          |  | (0.9                                                                                                                  | )
|                               |  |                                                                                                                       |  
|Total                          |  | 1.7                                                                                                                   |  
|                               |  |                                                                                                                       |  

182

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b Currency and interest rate risk profile of financial assets and liabilities

Financial assets

The currency and interest rate profile of the Group's financial assets at 31 March 2005 and 31 March 2004 were:

|31 March 2005    |                                                        | Total |     | Floating
rate |     | Non-interest
bearing |   | Non-interest
bearing
weighted
average
period
Years
|---------------- | ------------------------------------------------------ | ----- | --- | ------------- | --- | -------------------- | - | --------------------------------------------------
|
|Sterling         |                                                        | 138   |     | 138           |     |                     |   |                                                  
|US Dollar        |                                                        | 35    |     | 35            |     |                     |   |                                                  
|Euro             |                                                        | 128   |     | 128           |     |                     |   |                                                  
|Other            |                                                        | 33    |     | 33            |     |                     |   |                                                  
|                 |                                                        |       |     |               |     |                      |   |                                                   
|Total            |                                                        | 334   |     | 334           |     |                     |   |                                                  
|                 |                                                        |       |     |               |     |                      |   |                                                   
|Analysed between |                                                        |       |     |               |     |                      |   |                                                   
|                 | Cash at bank and in hand (note 17)                     |       | 239 |               | 239 |                      |  |                                                   
|                 | Other cash deposits (note 17)                          |       | 95  |               | 95  |                      |  |                                                   
|                 | Long-term debtors and amounts recoverable on contracts |       |    |               |    |                      |  |                                                   
|                 |                                                        |       |     |               |     |                      |   |                                                   
|                 |                                                        | 334   |     | 334           |     |                     |   |                                                   
|                 |                                                        |       |     |               |     |                      |   |                                                   

|
|

|31 March 2004    |                                                        | Total |     | Floating
rate |     | Non-interest
bearing |   | Non-interest
bearing
weighted
average
period
Years
|---------------- | ------------------------------------------------------ | ----- | --- | ------------- | --- | -------------------- | - | --------------------------------------------------
|
|Sterling         |                                                        | 111   |     | 111           |     |                     |   |                                                  
|US Dollar        |                                                        | 265   |     | 262           |     | 3                    |   | 1.4                                               
|Euro             |                                                        | 111   |     | 110           |     | 1                    |   | 2.9                                               
|Other            |                                                        | 36    |     | 36            |     |                     |   |                                                  
|                 |                                                        |       |     |               |     |                      |   |                                                   
|Total            |                                                        | 523   |     | 519           |     | 4                    |   | 1.6                                               
|                 |                                                        |       |     |               |     |                      |   |                                                   
|Analysed between |                                                        |       |     |               |     |                      |   |                                                   
|                 | Cash at bank and in hand (note 17)                     |       | 406 |               | 406 |                      |  |                                                   
|                 | Other cash deposits (note 17)                          |       | 113 |               | 113 |                      |  |                                                   
|                 | Long-term debtors and amounts recoverable on contracts |       | 4   |               |    |                      | 4 |                                                   
|                 |                                                        |       |     |               |     |                      |   |                                                   
|                 |                                                        | 523   |     | 519           |     | 4                    |   |                                                   
|                 |                                                        |       |     |               |     |                      |   |                                                   

183

---



Financial liabilities

The currency and interest rate profile of the Group's financial liabilities at 31 March 2005 and 31 March 2004 were:

|31 March 2005                             |                                                     | Total |    | Floating-
rate |    | Fixed-rate |    | Fixed-rate
average
interest rate |  | Weighted
period
|----------------------------------------- | --------------------------------------------------- | ----- | -- | -------------- | -- | ---------- | -- | -------------------------------- |  | ---------------
|
|Euro                                      |                                                     | 27    |    | 7              |    | 20         |    | 2.7                              |  | 4.6            
|Other                                     |                                                     | 10    |    | 10             |    |           |    |                                 |  |               
|                                          |                                                     |       |    |                |    |            |    |                                  |  |                
|Total                                     |                                                     | 37    |    | 17             |    | 20         |    | 2.7                              |  | 4.6            
|                                          |                                                     |       |    |                |    |            |    |                                  |  |                
|Analysed as                               |                                                     |       |    |                |    |            |    |                                  |  |                
|                                          | Borrowings (note 19)                                |       | 37 |                | 17 |            | 20 |                                  |  |                
|                                          |                                                     |       |    |                |    |            |    |                                  |  |                
|Maturity profile of financial liabilities |                                                     |       |    |                |    |            |    |                                  |  |                
|                                          | In one year or less, or on demand                   |       | 15 |                |    |            |    |                                  |  |                
|                                          | In more than one year, but no more than two years   |       | 5  |                |    |            |    |                                  |  |                
|                                          | In more than two years, but no more than five years |       | 7  |                |    |            |    |                                  |  |                
|                                          | In more than five years                             |       | 10 |                |    |            |    |                                  |  |                
|                                          |                                                     |       |    |                |    |            |    |                                  |  |                
|                                          |                                                     | 37    |    |                |    |            |    |                                  |  |                
|                                          |                                                     |       |    |                |    |            |    |                                  |  |                

|31 March 2004                             |                                                     | Total |     | Floating-
rate |    | Fixed-rate |     | Fixed-rate
average
interest rate |  | Weighted
period
|----------------------------------------- | --------------------------------------------------- | ----- | --- | -------------- | -- | ---------- | --- | -------------------------------- |  | ---------------
|
|Sterling                                  |                                                     |      |     |               |    |           |     |                                 |  |               
|US Dollar                                 |                                                     | 265   |     |               |    | 265        |     | 8.0                              |  | 4.0            
|Euro                                      |                                                     | 26    |     | 3              |    | 23         |     | 4.6                              |  | 4.6            
|Other                                     |                                                     | 14    |     | 14             |    |           |     |                                 |  |               
|                                          |                                                     |       |     |                |    |            |     |                                  |  |                
|Total                                     |                                                     | 305   |     | 17             |    | 288        |     | 7.7                              |  | 4.0            
|                                          |                                                     |       |     |                |    |            |     |                                  |  |                
|Analysed as                               |                                                     |       |     |                |    |            |     |                                  |  |                
|                                          | Borrowings (note 19)                                |       | 305 |                | 17 |            | 288 |                                  |  |                
|                                          |                                                     |       |     |                |    |            |     |                                  |  |                
|Maturity profile of financial liabilities |                                                     |       |     |                |    |            |     |                                  |  |                
|                                          | In one year or less, or on demand                   |       | 26  |                |    |            |     |                                  |  |                
|                                          | In more than one year, but no more than two years   |       | 5   |                |    |            |     |                                  |  |                
|                                          | In more than two years, but no more than five years |       | 267 |                |    |            |     |                                  |  |                
|                                          | In more than five years                             |       | 7   |                |    |            |     |                                  |  |                
|                                          |                                                     |       |     |                |    |            |     |                                  |  |                
|                                          |                                                     | 305   |     |                |    |            |     |                                  |  |                
|                                          |                                                     |       |     |                |    |            |     |                                  |  |                

Floating-rate
borrowings and assets bear interest based on relevant national LIBOR equivalents.

184

---



In
addition to the above, in December 2004 the Group entered into an arrangement to assign certain Euro-denominated trade debts as security against the advance of cash
from a third party provider. Debts outstanding at 31 March 2005 were €22 million (£15 million) (2004: £nil).
€15 million (£10 million) of trade debts assigned expire within three months of 31 March 2005 and the average rate payable, including fees, is 3.7%
(refer to note 16).

c Currency profile

At 31 March 2005 and 31 March 2004 (after taking into account the effects of forward foreign exchange contracts held at 31 March 2005) the
Group's currency exposures, excluding borrowings treated as hedges, were:

Functional currency of Group operation

|          |  | Net foreign currency monetary
assets/(liabilities) |  |   
|--------- |  | -------------------------------------------------- |  | --
|
|
|Sterling  |  |                                                   |  | 14
|US Dollar |  |                                                   |  |  
|Euro      |  | 2                                                  |  | 9 
|Other     |  | 1                                                  |  | 2 
|          |  |                                                    |  |   
|Total     |  | 3                                                  |  | 25
|          |  |                                                    |  |   

|          |  | Net foreign currency monetary
assets/(liabilities) |  |     |  
|--------- |  | -------------------------------------------------- |  | --- | -
|
|
|Sterling  |  |                                                   |  | (87 | )
|US Dollar |  |                                                   |  |    |  
|Euro      |  | 2                                                  |  | (6  | )
|Other     |  | 5                                                  |  | 1   |  
|          |  |                                                    |  |     |  
|Total     |  | 7                                                  |  | (92 | )
|          |  |                                                    |  |     |  

The
Group's net monetary debt and net assets by currency at 31 March 2005 and 31 March 2004 were:

|31 March 2005 |  | Net
assets
before net
monetary
funds/(debt) |   | Net
monetary
funds |  | Net assets/
(liabilities) |  
|------------- |  | ------------------------------------------- | - | ------------------ |  | ------------------------- | -
|
|Sterling      |  | 48                                          |   | 209                |  | 257                       |  
|US Dollar     |  | (19                                         | ) | 28                 |  | 9                         |  
|Euro          |  | 92                                          |   | 48                 |  | 140                       |  
|Other         |  | (13                                         | ) | 12                 |  | (1                        | )
|              |  |                                             |   |                    |  |                           |  
|Total         |  | 108                                         |   | 297                |  | 405                       |  
|              |  |                                             |   |                    |  |                           |  

185

---



|31 March 2004 |  | Net
assets
before net
monetary
funds/(debt) |  | Net
monetary
funds |  | Net assets/
(liabilities)
|------------- |  | ------------------------------------------- |  | ------------------ |  | -------------------------
|
|Sterling      |  | 53                                          |  | 86                 |  | 139                      
|US Dollar     |  | 7                                           |  | 77                 |  | 84                       
|Euro          |  | 76                                          |  | 34                 |  | 110                      
|Other         |  | 2                                           |  | 17                 |  | 19                       
|              |  |                                             |  |                    |  |                          
|Total         |  | 138                                         |  | 214                |  | 352                      
|              |  |                                             |  |                    |  |                          

d Fair values of finance assets and liabilities

The book values and fair values of the Group's financial assets and liabilities at 31 March 2005 and 31 March 2004 were:

|                                                                             |  | Book value |   | Fair value |  
|---------------------------------------------------------------------------- |  | ---------- | - | ---------- | -
|
|
|Short-term financial liabilities and current portion of long-term borrowings |  | (15        | ) | (26        | )
|Long-term borrowings and long-term financial liabilities                     |  | (22        | ) | (279       | )
|Financial assets                                                             |  | 334        |   | 523        |  
|                                                                             |  |            |   |            |  

The
fair values of the traded outstanding long-term borrowings have been determined by references available from the markets on which the instruments are traded. Fair values
for foreign exchange contracts are immaterial.

e Gain and losses on hedges

In February 2005, the Group recommenced hedging of foreign currency cash flow exposures with maturity of three months or less from forecast date. As at
31 March 2005, gross exposures totalling £22 million (2004: £nil) were hedged with forward foreign exchange contracts that were deemed to be 100% effective.
Unrealised gains and losses were considered to be immaterial.

The
Group has overseas subsidiaries that earn profits or incur losses in their local currencies. It is not the Group's policy to hedge the exposures arising from the translation of these
overseas results into Sterling.

29 Post balance sheet events

On 28 April 2005, BT announced that Marconi had not been selected as a preferred supplier for its 21CN project. Consequently Marconi has recognised the
need to refocus its business and, in the first quarter of fiscal 2006, has undertaken a process of consultation with trade union and employee representatives on a proposed headcount reduction of up to
800 jobs in the UK, as announced on 6 May 2005.

186

---



In
the year ending 31 March 2006, the Group expects the restructuring plan to achieve headcount and associated cost savings of approximately £36 million. In
addition, the Group has identified further business cost reduction and efficiency gains from other initiatives, some of which were commenced in the year ended 31 March 2005. The restructuring
cash costs are expected to be approximately £55 million including cash related to existing restructuring provisions. Of these cash costs, the Group expects to incur approximately
£45 million in the year ending 31 March 2006.

30 US GAAP supplementary information

(a) Reconciliation of UK GAAP to US GAAP:

The consolidated financial statements of Marconi Corporation plc have been prepared in accordance with UK accounting principles (UK GAAP), which
differs in certain respects from generally accepted accounting principles in the United States of America (US GAAP). The effect of applying US GAAP to net income/(loss), shareholders'
equity and cash flow is set out below, followed by an explanation of the principal differences between UK GAAP and US GAAP, that affect net income/(loss) and shareholders' equity.

187

---



Effect on net income/(loss) of differences between UK GAAP and US GAAP

The following table is a reconciliation of net income/(loss) as reported in the Group's consolidated profit and loss account under UK GAAP to net income as
adjusted for the effects of the application of US GAAP for the three years ended 31 March 2005, 2004 and 2003.

|                                                      |                                                                      | Year ended 31 March                              |    
|----------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------ | ---
|
|
|Retained profit/(loss) in accordance with UK GAAP     |                                                                      | 21                                               |    
|Continuing Operations                                 |                                                                      |                                                  |    
|                                                      | (1)Share option plans                                                |                                                  | (6 
|                                                      | (2)Pension and other post retirement benefits                        |                                                  | (3 
|                                                      | (3)Goodwill and intangible asset amortisation and impairment charges |                                                  | 46 
|                                                      | (4)Restructuring costs                                               |                                                  | (11
|                                                      | (5)Provision for industrial disease claims                           |                                                  | (21
|                                                      | (6)Derivatives and debt discount                                     |                                                  | (12
|                                                      | (7)Net interest expense                                              |                                                  | 7  
|                                                      | (8)Gain on sale of associates                                        |                                                  |   
|                                                      | (8)Share of associates operating loss                                |                                                  |   
|                                                      | Loss on sale of investments                                          |                                                  |   
|                                                      | Adjustments related to the financial restructuring:                  |                                                  |    
|                                                      |                                                                      | (9)Gain on settlement of equity forward contract |    
|                                                      |                                                                      | (10)Gain on extinguishment of liabilities        |    
|                                                      |                                                                      | (11)Gain on waiver of related party payable      |    
|                                                      |                                                                      | (12)Foreign exchange transaction gains           |    
|                                                      |                                                                      | (13)Write-off of capitalised losses on swaps     |    
|                                                      |                                                                      | Gain on waiver of related party receivable       |    
|                                                      | Other, net                                                           |                                                  |   
|Discontinued Operations                               |                                                                      |                                                  |    
|                                                      | Gain on sale of Discontinued Operations                              |                                                  | 101
|                                                      | GAAP differences related to Discontinued Operations                  |                                                  | (5 
|Taxation adjustments                                  |                                                                      |                                                  |    
|                                                      | Tax effect of adjustments related to Continuing Operations           |                                                  |   
|                                                      | Tax effect of adjustments related to Discontinued Operations         |                                                  |   
|                                                      |                                                                      |                                                  |    
|Net income in accordance with US GAAP                 |                                                                      | 117                                              |    
|                                                      |                                                                      |                                                  |    
|Earnings per sharebasic in accordance with US GAAP   |                                                                      |                                                  |    
|(Loss)/Income from Continuing Operations              |                                                                      | (0.38                                            | )  
|Loss from Discontinued Operations                     |                                                                      | (0.06                                            | )  
|Gain on sale of Discontinued Operations               |                                                                      | 1.01                                             |    
|                                                      |                                                                      |                                                  |    
|Net income/(loss)                                     |                                                                      | 0.57                                             |    
|                                                      |                                                                      |                                                  |    
|Earnings per sharediluted in accordance with US GAAP |                                                                      |                                                  |    
|(Loss)/Income from Continuing Operations              |                                                                      | (0.38                                            | )  
|Loss from Discontinued Operations                     |                                                                      | (0.06                                            | )  
|Gain on sale of Discontinued Operations               |                                                                      | 1.01                                             |    
|                                                      |                                                                      |                                                  |    
|Net income/(loss)                                     |                                                                      | 0.57                                             |    
|                                                      |                                                                      |                                                  |    

188

---





Cumulative effect on shareholders equity of differences between UK GAAP and US GAAP

The following table is a reconciliation of shareholders' equity as reported in the Group's consolidated balance sheets under UK GAAP to shareholders'
equity as adjusted for the effects of the application of US GAAP as at 31 March 2005 and 2004:

|                                                          |                                                              | 31 March                                     
|--------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------
|
|
|Equity shareholders' interests in accordance with UK GAAP |                                                              | 404                                          
|                                                          | Items increasing/(decreasing) equity shareholders' interests |                                              
|                                                          |                                                              | (3)Goodwill                                  
|                                                          |                                                              | (3)Intangible assets                         
|                                                          |                                                              | (6)Derivatives                               
|                                                          |                                                              | (2)Pension and other post retirement benefits
|                                                          |                                                              | (4)Provisions for restructuring costs        
|                                                          |                                                              | (5)Provisions for industrial disease claims  
|                                                          |                                                              | Other                                        
|                                                          |                                                              |                                              
|                                                          | Shareholders' equity in accordance with US GAAP              |                                              
|                                                          |                                                              |                                              

Consolidated Statements of Cash Flows

Under UK GAAP, the Group complies with FRS 1 (Revised),Cash Flow Statements, the objective and principles
of which are similar to those set out in SFAS No. 95,Statement of Cash Flows. The principal difference between the two standards is in respect
of classification. SFAS 95 is less prescriptive than FRS 1 (Revised) and recognises only three categories of cash flow activity: (a) operating; (b) investing; and
(c) financing. Cash flows arising from taxation and returns on investments and servicing of finance under FRS 1 (Revised) would be included as operating activities under SFAS 95;
dividend payments would be included as a financing activity under SFAS 95, and cash flows from capital expenditure, long-term investments, acquisitions and disposals would be included as
investing activities under SFAS 95.

In
addition, under FRS 1 (Revised), cash represents cash at bank and in hand, less bank overdrafts. Cash equivalents are not included within cash. Cash equivalents are defined as
short-term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired. Movements in cash
equivalents are included under a separate heading. Under US GAAP, cash is not offset by bank overdrafts repayable within 24 hours from the date of the advance. Such overdrafts are classified
within financing activities under US GAAP.

Under
US GAAP, cash that cannot be withdrawn without prior notice or penalty is considered to be restricted cash and is not presented as part of cash and cash equivalents, instead it is
considered part of financing activities.

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Set
out below is a summary consolidated statement of cash flows under US GAAP:

|                                                      |                      | Year Ended |     
|----------------------------------------------------- | -------------------- | ---------- | ----
|
|
|Cash and cash equivalents were (used in)/provided by: |                      |            |     
|                                                      | Operating activities |            | (59 
|                                                      | Investing activities |            | 137 
|                                                      | Financing activities |            | (249
|                                                      |                      |            |     
|Net (decrease)/increase in cash and cash equivalents  |                      | (171       | )   
|Exchange movement                                     |                      | 7          |     
|Cash and cash equivalents at beginning of year        |                      | 395        |     
|                                                      |                      |            |     
|Cash and cash equivalents at the end of year          |                      | 231        |     
|                                                      |                      |            |     
|Supplemental disclosure of cash flow activity:        |                      |            |     
|Cash payments for interest                            |                      | 32         |     
|Cash payment/(receipts) for income taxes              |                      | 7          |     

(b)    Summary of differences between UK GAAP and US GAAP

The following describes the significant UK GAAP to US GAAP adjustments.

(i) Recurring GAAP differences

(1) Share option plans

Under UK GAAP, the estimated cost of employee share awards is charged to the profit and loss account over the relevant performance period. The estimated cost of
awards is comprised of (i) the market value of shares awarded or the intrinsic value of the awards (being the difference between the exercise price of the award and the market price at the date
of grant) adjusted to reflect any applicable performance conditions; and (ii) national insurance contributions accrued on the expected gain on the exercise of share options.

Under
US GAAP, the Group follows the accounting prescribed by Accounting Principles Board (APB) Opinion 25,Accounting for Stock Issued to
Employees, whereby compensation is recorded for the cost of providing the warrants and options to the employee over the relevant performance period. The costs are determined
based on the intrinsic value method, under which, compensation cost is the difference between the market price of the stock at the measurement date and the price to be contributed by the employee (the
exercise price). The measurement date is the first date on which the employee is aware of the number of shares that they are entitled to receive and the exercise price. The measurement date is often
the grant date; however, it may be later than the grant date in plans with variable terms that depend on events which occur after the grant date. National Insurance contributions related to share
option plans are expensed when the liability crystallises. This is when the options are exercised.

SFAS 148,
"Accounting for Stock-Based CompensationTransition and Disclosure of Amendment of
FASB Statement No. 123"amends the disclosure requirements of SFAS No. 123,Accounting for Stock-Based
Compensation, to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and
the effect of the method used on reported results.

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Prior
to the completion of the Group's financial restructuring, employees of the Group participated in a number of stock option plans whereby they received rights over shares in M (2003)
plc, the former parent company of the Group. The Group accounted for those employees stock options under APB No. 25,Accounting for Stock Issued to
Employeeswith any expense being matched by a credit to shareholders' equity as a capital contribution by M (2003) plc. Following the completion of the Financial Restructuring,
the Group is no longer a subsidiary of M (2003) plc and no further cost is recorded in respect of these stock option plans.

Following
the financial restructuring, the Group established two plans under which it grants options over its own shares: a nil cost senior management share option plan and a market
value employee share option plan. The Group accounts for such employee share plans under APB 25.

The
Group recognised compensation expense in the years ended 31 March 2005, 2004 and 2003 of approximately £32 million, £48 million and
£14 million respectively. Had compensation cost for the employee share plans been determined consistent with the fair value methodology of SFAS 123, the Group's net
income/(loss) would have been as follows:

|                                                                                                                     |                         | 31 March |     
|-------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ----
|
|Net income/(loss):                                                                                                   |                         |          |     
|                                                                                                                     | As reported             |          | 117 
|Deduct: Total stock-based employee compensation determined under fair value based method, net of related tax effects |                         | (23      | )   
|Add back: Total stock-based employee compensation determined under APB 25                                            |                         | 32       |     
|                                                                                                                     |                         |          |     
|                                                                                                                     | Pro forma income/(loss) |          | 126 
|                                                                                                                     |                         |          |     
|Pro forma income/(loss) per share:                                                                                   |                         |          |     
|                                                                                                                     | Basic                   |          | 0.62
|                                                                                                                     | Diluted                 |          | 0.61
|Reported income/(loss) per share:                                                                                    |                         |          |     
|                                                                                                                     | Basic                   |          | 0.57
|                                                                                                                     | Diluted                 |          | 0.57

In
the year ended 31 March 2005, the Group has adopted a binomial option-pricing model as its method of determining stock-based compensation on a fair value basis. In the years
ended 31 March 2004 and 2003, a Black-Scholes option-pricing model was used. Had the Black-Scholes option-pricing model been used in 2005, the charge for the year ended 31 March 2005
would have been £2 million lower than the charge under the binomial model.

Under
SFAS 123, using a binomial model, the fair value of each option is estimated on the date of grant using the following weighted average assumptions:

|                        |  | 31 March
2005 |  
|----------------------- |  | ------------- | -
|Risk-free interest rate |  | 4.01          | %
|Expected life (years)   |  | 10            |  
|Assumed volatility      |  | 60            | %
|Expected dividends      |  |              |  

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The
valuation of each option using the Black-Scholes option-pricing model used the following weighted-average assumptions:

|                        |  | 31 March
|----------------------- |  | --------
|
|Risk-free interest rate |  | 4.25    
|Expected life (years)   |  | 10      
|Assumed volatility      |  | 64.91   
|Expected dividends      |  |        

A
total of 750,000 options were granted in the year ended 31 March 2005. 23,860,000 options were granted in the year ended 31 March 2004. There were no grants in the year
ended 31 March 2003.

(2) Pension and other post retirement benefits

The Group accounts for its defined benefit pension plans and its non-pension post retirement benefit plans using actuarial models required by
FRS 17,Retirement Benefits, under UK GAAP and SFAS 87,Employers' Accounting for
Pensions, and SFAS 106,Employers' Accounting for Post Retirement Benefits Other Than Pensions, under US GAAP. 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 profit and loss account effects of pensions or non-pension post retirement benefit plans are earned in, and should follow, the same pattern.
The operating cost for providing pensions and other post retirement benefits, as calculated periodically by independent actuaries, is therefore charged to the Group's operating profit or loss in the
year that the benefits are earned by employees.

The
financial returns expected on the pension schemes' assets are recognised in the year in which they arise as part of finance income. The use of an expected rate of return may result
in recognised 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.

Under
UK GAAP, differences between actual and expected returns are recognised as actuarial gains/(losses) in the statement of total recognised gains and losses. Under US GAAP, the
differences (to the extent that they exceed 10% of the market value of assets or the projected benefit obligation at the start of the period) are recognised in the net periodic pension cost 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.

Under
UK GAAP, the effect of the unwinding of the discounted value of the pension schemes' liabilities is treated as part of finance costs, whereas under US GAAP it is treated as part of
staff costs.

Under
UK GAAP, the pension schemes' surpluses, to the extent they are considered recoverable, or deficits are recognised in full and presented in the balance sheet net of any related
deferred tax. Under US GAAP, if the unfunded accumulated benefit obligation exceeds the fair value of the plan assets, the Group recognises an additional minimum liability that is at least equal to
the unfunded

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accumulated
benefit obligation. Where an additional minimum liability is recognised, an intangible asset is recognised up to the amount of any unrecognised prior service cost and the balance is
recognised through other comprehensive income.

Further
information on the Group's pension deficit, as valued under US GAAP, is set out in section (j) of this note.

(3) Goodwill and intangible asset amortisation and impairment charges

Under UK GAAP, purchased goodwill is capitalised and amortised on a straight-line basis over its estimated useful economic life. Each acquisition is
separately evaluated for the purposes of determining the useful economic life, up to a maximum of 20 years. The useful economic lives are reviewed annually and revised if necessary. Provision
is made for any impairment.

Under
US GAAP, in accordance with SFAS No. 142,Goodwill and Other Intangible Assets, the Group no longer amortises goodwill, but
instead tests for impairment at the reporting unit level (at a level below that of the reporting segments) on an annual basis and at any other time if events occur or circumstances change that
indicate the fair value of the reporting unit may be below its carrying amount.

If
the carrying value exceeds the fair value of the reporting unit, the fair value is allocated to the assets and liabilities of the reporting unit, including any unrecognised intangible
assets, using a hypothetical purchase price allocation, and the associated goodwill is written down to its implied fair value.

Measurement
of the fair value of a reporting unit is based on one or more of the following 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; and using valuation techniques based on multiples of earnings or revenue, or a similar performance
measure.

Any
impairment loss is recorded in the consolidated statement of operations. During fiscal 2005, no impairment was recorded. Differences in the impairment loss recognised in previous
years arise as a result of the differences in the carrying value of the underlying goodwill and net assets under UK GAAP and US GAAP.

Further
information on the Group's US GAAP goodwill balance is provided in section (g) of this note.

Under
UK GAAP, the Group recognises intangible assets separately in a business combination only when they can be disposed of separately without disposing of the business of the entity
and their value can be measured reliably on initial measurement. Under US GAAP, the Group recognises acquired intangible assets separately from goodwill if (i) they arise from contracted or
other legal rights even if the assets are not transferable or separable from the acquired entity or from other rights and obligations; or (ii) they are capable of being separated or divided
from the acquired entity and sold, transferred, licensed, rented or exchanged. Intangible assets are carried at cost and are amortised on a straight-line basis over their estimated useful
lives. The Group has no intangible assets for which it has adopted an indefinite useful life. Further information on the Group's US GAAP intangible assets is provided in section (i) of this
note.

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(4) Restructuring costs

Under UK GAAP, provisions are recognised when the Group 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 US GAAP, a number of specific criteria must be met before
restructuring costs can be recognised as an expense. Among these criteria 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.

Details
of the Group's restructuring costs under US GAAP are provided in section (f) of this note.

(5) Provision for industrial disease claims

Under UK GAAP, the Group's provision for industrial disease claims is discounted at a rate of 4.5% in accordance with the requirement of FRS 12, Provisions,
Contingent Liabilities and Assets, to record the provision at the present value of the expected cost to settle the obligation, as the time
value of money is material. The provision is not discounted under US GAAP as the timing and amounts of the cash flows for these obligations are not fixed or determinable. Accordingly, an adjustment
arises to record the undiscounted value of the provision under US GAAP.

(6) Derivatives and debt discount

The Group does not enter into derivative financial instruments for speculative purposes. During the period, the only derivatives used by the Group were foreign
currency derivatives. Under UK GAAP, foreign currency derivatives that are designated as a hedge are not recorded on the balance sheet at fair value. All movements in fair value are recorded in income
or equity using the same accounting principles as under US GAAP set out below.

Under
US GAAP, derivative instruments are recorded in the balance sheet at fair value and marked-to-market each reporting period, with changes in the fair value
recognised as a component of income, unless specific hedge accounting criteria are met and the derivative is designated as a fair value hedge, a cash flow hedge, or a foreign currency hedge.

The
Group has entered into various contracts that may, under US GAAP, contain 'embedded' derivative instruments, which are 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,an embedded derivative should be bifurcated from the host contract and accounted for as a derivative instrument. The Group has
assessed the existence of potential embedded derivatives contained in its contracts.

The
Senior Notes issued on 19 May 2003, and fully repaid on 1 September 2004, included a 10% premium upon early redemption, which has been accounted for as an embedded derivative in
accordance with SFAS 133. The fair value of the embedded derivative at 31 March 2005 was £nil and at 31 March 2004 was approximately £7.1 million,
which was included within long-term other liabilities.

The
Group developed a fair value model with the assistance of outside advisors to arrive at an estimate of the fair value of the embedded derivative in relation to the Senior Notes. The
model uses various assumptions, which includes changes in credit risk, expected timing of redemption of the Senior Notes and interest rates. The change in fair value of these embedded derivatives is
recorded in our

194

---



statement
of operations as interest expense, which is a non-cash item. While the Group has made an estimate of the fair value of the embedded derivative using a model that is believed to
be appropriate and based upon reasonable assumptions, certain of the assumptions used are subjective.

Under
UK GAAP, such embedded derivatives are not separately accounted for. The premium on the redemption of the loan notes was recorded as incurred.

(7) Net interest expense

Under US GAAP, a portion of the interest arising on the Senior Notes is allocated to the results of OPP, in accordance with EITF 87-24, Allocation of Interest to
Discontinued Operations, as the proceeds from the sale of this business funded the redemption of the Notes. This is a
presentational difference, with the opposite entry reflected in 'GAAP differences related to Discontinued Operations'.

(8) Share of associates operating loss and gain on sale of associates

Under UK GAAP, an investor is required to record its share of operating losses of an equity method investee unless there is evidence of the investor's
irreversible withdrawal from its investee as its associate.

Under
US GAAP, use of the equity method ceases when the carrying value of the investment in the associate is reduced to zero, unless the investor has guaranteed the losses of the
associate and incurred obligations or made payments on behalf of the associate. If the associate subsequently reports net income, the application of the equity method is only resumed after the share
in the net income equals the share in net losses not recognised during the period that the equity method was suspended. Accordingly, under US GAAP, the Group ceased to record its share of operating
losses from its former associate, Easynet plc, when the carrying value of our investment in Easynet was £nil at 31 March 2003.

(ii) GAAP differences relating to the Financial Restructuring

Under
US GAAP all these items would be reported in other income/(expense).

(9) Gain on equity forward contract

At 31 March 2003, the Group recognised a gain under UK GAAP of £123 million upon settlement of an equity forward contract related to the
ESOP in place at that time.

Under
US GAAP, this gain was not recognised at 31 March 2003 because the settlement was conditional on the Financial Restructuring becoming effective on 19 May 2003. The
Group paid £35 million in cash to the ESOP derivative banks to settle the Group's liability of £158 million as recorded in the consolidated balance sheet of
31 March 2003. The resulting gain, arising on the release of this liability, of £123 million is reflected in the statement of operations for the year ended
31 March 2004.

(10) Gain on extinguishment of liabilities

Under US GAAP, the Group recognised a gain of approximately £3.2 billion on 19 May 2003, the date on which the Financial
Restructuring was completed, of which approximately £2.7 billion was recorded in the consolidated statement of operations and approximately £0.5 billion was
recorded in shareholders' equity/(deficit). This gain represented the excess of the approximately £4.8 billion of

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creditors'
claims extinguished over the fair value, less issuance costs, of the cash, new debt, and new equity issued in consideration on 19 May 2003. Under UK GAAP, the consideration for the
shares issued in connection with the Financial Restructuring was treated as equal to the excess of the creditor's claims extinguished over the cash and new debt issued. Accordingly, all of the gain
was recorded in shareholders' equity.

(11) Gain on waiver of related party payable

As part of the Financial Restructuring, Marconi Corporation plc and its subsidiaries entered into an agreement with M (2003) plc and its direct subsidiaries to
reassign and waive balances between the M (2003) plc group and the Marconi Corporation plc Group. The gain of £25 million was recorded as exceptional income under UK GAAP and as a
capital contribution in equity under US GAAP.

(12) Foreign exchange transaction gains

Under UK GAAP, foreign exchange rates established by the terms of the Scheme of Arrangement, which effected the Group's Financial Restructuring, were used in
accounting for the gain arising on the extinguishment of liabilities whereas, under US GAAP, the foreign exchange rate on 19 May 2003 was used. As a result, under US GAAP, the resulting gain is
£31 million higher than the gain recorded under UK GAAP.

(13) Write-off of capitalised losses on swaps

Under US GAAP, net losses arising on US dollar and euro denominated interest rate swaps that had been deferred within other comprehensive income were recognised
in income in the year ended 31 March 2003 because the underlying debt instruments would be extinguished through the Group's Financial Restructuring. Under UK GAAP these net losses were
recognised upon completion of the financial restructuring on 19 May 2003.

(iii) GAAP differences related to Discontinued Operations

(14) Gain on sale of Discontinued Operations

In accordance with SFAS No. 52,Foreign Currency Translation,US GAAP requires that foreign currency
translation gains and losses previously recorded in Accumulated Other Comprehensive Income (AOCI) are removed from AOCI and are included in the gain/(loss) on sale of Discontinued Operations.
Accordingly, the gain on sale of the OPP business recorded in the year ended 31 March 2005 reflects £136 million of translation gains previously recorded in AOCI. This is
offset by £35 million of GAAP differences related primarily to the carrying value of goodwill and pension liabilities of the disposed operations.

(15) GAAP differences related to Discontinued Operations

OPP has been classified as a Discontinued Operation for the year ended 31 March 2005 and all comparative periods under UK and US GAAP. The results of
operations of OPP reflect GAAP differences in respect of accounting for goodwill and pensions. In addition, under US GAAP, a portion of interest expense for the year ended 31 March 2005 has
been allocated to OPP in accordance with EITF 87-24.

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(iv) Other differences between UK and US GAAP

(16) Foreign Currency

Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated at the rates ruling at that date. Under UK GAAP,
these translation differences are dealt with in the profit and loss account with the exception of certain gains and losses arising under hedging transactions. The differences arising from the
restatement of profits and losses and the retranslation of the opening net liabilities to year end rates are taken to reserves.

Under
US GAAP, translation adjustments are included in other comprehensive income/(loss), as a separate component of shareholders' equity.

(17) Taxation

Under UK GAAP, deferred taxation is provided in full on timing differences that result in an obligation at the balance sheet date to pay more tax, or a right to
pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Deferred tax assets are recognised to the extent that it is regarded as more likely
than not that they will be recovered. Deferred tax assets and liabilities are not discounted.

Under
US GAAP, all deferred tax liabilities and assets resulting from temporary differences in financial and tax reporting are recognised together with deferred tax assets relating to
tax losses carried forward subject to certain limited exemptions which include unremitted earnings of overseas subsidiaries that are essentially 'permanent'. Deferred tax assets are reduced by a
valuation allowance if it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realised. During the years ended 31 March 2005
and 2004, all deferred tax assets under US GAAP, without offsetting liabilities in the same jurisdiction, were fully reserved.

Under
US GAAP the discounting of deferred tax balances is not permitted, and the tax rate is based on rates that have been enacted.

(18) Other comprehensive loss

Under US GAAP, comprehensive loss represents the net income/(loss) for the period plus the results of certain shareholders equity changes that are not reflected
in the consolidated statements of operations.

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The
accumulated balances of other comprehensive income are as follows:

|£ million             |  | Net unrealized gains (losses) on investments |  | Accumulated translation adjustments |   | Net unrealized gains (losses) on derivative instruments |   | Minimum pension liability adjustment |   | Accumulated other comprehensive loss |  
|--------------------- |  | -------------------------------------------- |  | ----------------------------------- | - | ------------------------------------------------------- | - | ------------------------------------ | - | ------------------------------------ | -
|As of 31 March 2002   |  |                                             |  | (64                                 | ) | (23                                                     | ) |                                     |   | (87                                  | )
|Movement for the year |  |                                             |  | 43                                  |   | 22                                                      |   | (295                                 | ) | (230                                 | )
|                      |  |                                              |  |                                     |   |                                                         |   |                                      |   |                                      |  
|As of 31 March 2003   |  |                                             |  | (21                                 | ) | (1                                                      | ) | (295                                 | ) | (317                                 | )
|Movement for the year |  |                                             |  | (86                                 | ) | 1                                                       |   | 104                                  |   | 19                                   |  
|                      |  |                                              |  |                                     |   |                                                         |   |                                      |   |                                      |  
|As of 31 March 2004   |  |                                             |  | (107                                | ) |                                                        |   | (191                                 | ) | (298                                 | )
|Movement for the year |  |                                             |  | (133                                | ) |                                                        |   | 42                                   |   | (91                                  | )
|                      |  |                                              |  |                                     |   |                                                         |   |                                      |   |                                      |  
|As of 31 March 2005   |  |                                             |  | (240                                | ) |                                                        |   | (149                                 | ) | (389                                 | )
|                      |  |                                              |  |                                     |   |                                                         |   |                                      |   |                                      |  

(19) Disposal of long-lived assets

Under US GAAP, 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
have 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 Group 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
Group 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.

There
is no equivalent classification under UK GAAP.

(20) Fixed asset investments

Under UK GAAP, other unlisted fixed asset investments are stated at cost less provision for impairment in value, unless they have been transferred from associates
at net book value. Listed fixed asset investments are stated at market value with changes in market value recorded in the profit and loss account.

Under
US GAAP, listed investment, or 'marketable equity securities', are classified as 'available for sale' and net unrealised holding gains and losses, net of tax, are reported as a
separate component of shareholders' 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.

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(c) Consolidated statements of other comprehensive income/(loss)

The following statement is presented under US GAAP.

|                                                                                               |                                                                                                  | Year ended 31 March |     
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------- | ----
|
|
|Other comprehensive income/(loss):                                                             |                                                                                                  |                     |     
|Income/(loss) from Continuing Operations                                                       |                                                                                                  | 130                 |     
|Loss from Discontinued Operations                                                              |                                                                                                  | (13                 | )   
|                                                                                               |                                                                                                  |                     |     
|Net income/(loss)                                                                              |                                                                                                  | 117                 |     
|Other comprehensive income/(loss):                                                             |                                                                                                  |                     |     
|                                                                                               | Unrealised gains/(losses) on derivative instruments                                              |                     |    
|                                                                                               | Accumulated translation adjustments (net of income tax of £nil and reclassification adjustments) |                     | (133
|                                                                                               | Minimum pension liability, (net of tax of £nil)                                                  |                     | 42  
|                                                                                               |                                                                                                  |                     |     
|Other comprehensive income/(loss)                                                              |                                                                                                  | 28                  |     
|                                                                                               |                                                                                                  |                     |     
|Disclosure of tax and reclassification amounts:                                                |                                                                                                  |                     |     
|Unrealised gains/(losses) on derivative instruments, net of tax of £nil (2004: £nil; 2003: £1) |                                                                                                  |                    |     
|                                                                                               |                                                                                                  |                     |     

SFAS
No. 130,Reporting Comprehensive Income, requires that all items that are required to be recognised as components of
comprehensive income be reported in a separate financial statement. There are no material differences between total recognised gains and losses for the financial year shown in the Statement of Total
Recognised Gains and Losses presented under UK GAAP and US GAAP comprehensive income, except for the differences between UK and US GAAP net income shown above.

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(d) Consolidation statements of shareholders' equity/(deficit)

The following statements are presented under US GAAP.

|                    |                                                                      | Ordinary shares |              |     |      |    |    |       |      |        |        | Accumulated
other
comprehensive
income/(loss) |      |      |     
|------------------- | -------------------------------------------------------------------- | --------------- | ------------ | --- | ---- | -- | -- | ----- | ---- | ------ | ------ | --------------------------------------------- | ---- | ---- | ----
|
|
|
|As of 31 March 2002 |                                                                      | 573,250,147     |              | 143 |      |   |    | 878   |      | (2,888 | )      |                                              |      | (87  | )   
|                    | Net loss                                                             |                 |             |     |     |    |   |       |     |        | (1,167 | )                                             |     |      |    
|                    | Fair value movements on derivative instruments                       |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | 22  
|                    | Unrealised holding gains on investments, net of tax                  |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | (217
|                    | Capital contribution for stock based compensation                    |                 |             |     |     |    |   |       | 14   |        |       |                                               |     |      |    
|                    | Shares issued by equity method investee                              |                 |             |     |     |    |   |       | 3    |        |       |                                               |     |      |    
|                    | Translation adjustments                                              |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | 43  
|                    | Minimum pension liability                                            |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | (295
|                    |                                                                      |                 |              |     |      |    |    |       |      |        |        |                                               |      |      |     
|As of 31 March 2003 |                                                                      | 573,250,147     |              | 143 |      |   |    | 895   |      | (4,055 | )      |                                              |      | (317 | )   
|                    | Net income                                                           |                 |             |     |     |    |   |       |     |        | 2,765  |                                               |     |      |    
|                    | Fair value movements on derivative instruments                       |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | 1   
|                    | Cancellation of old share capital                                    |                 | (573,250,147 | )   | (143 | )  |   |       | (895 | )      | 695    |                                               | 343  |      |    
|                    | Capital contribution for stock based compensation                    |                 |             |     |     |    |   |       | 1    |        |       |                                               |     |      |    
|                    | Gain on extinguishment of related party liabilities                  |                 |             |     |     |    |   |       | 507  |        |       |                                               |     |      |    
|                    | Gain on waiver of related party balances                             |                 |             |     |     |    |   |       | 42   |        |       |                                               |     |      |    
|                    | Issuance of ordinary shares in exchange for extinguished liabilities |                 | 200,000,000  |     | 50   |    |   |       | 512  |        |       |                                               |     |      |    
|                    | Issuance of ordinary shares on exercise of warrants                  |                 | 20,343       |     |     |    |   |       |     |        |       |                                               |     |      |    
|                    | Distribution of warrants                                             |                 |             |     |     |    | 12 |       |     |        | (12    | )                                             |     |      |    
|                    | Stock based compensation                                             |                 |             |     |     |    |   |       | 48   |        |       |                                               |     |      |    
|                    | Translation adjustments                                              |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | (86 
|                    | Minimum pension liability                                            |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | 104 
|                    |                                                                      |                 |              |     |      |    |    |       |      |        |        |                                               |      |      |     
|As of 31 March 2004 |                                                                      | 200,022,311     |              | 50  |      | 12 |    | 1,110 |      | (607   | )      | 343                                           |      | (298 | )   
|                    | Net income                                                           |                 |             |     |     |    |   |       |     |        | 117    |                                               |     |      |    
|                    | Losses transferred                                                   |                 |             |     |     |    |   |       | 9    |        | 93     |                                               | (102 | )    |    
|                    | Issuance of ordinary shares on exercise of stock options             |                 | 8,711,819    |     | 2    |    |   |       | 2    |        |       |                                               |     |      |    
|                    | Issuance of ordinary shares on exercise of warrants                  |                 | 6,809        |     |     |    |   |       |     |        |       |                                               |     |      |    
|                    | Stock based compensation                                             |                 |             |     |     |    |   |       | 29   |        |       |                                               |     |      |    
|                    | Translation adjustments                                              |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | (133
|                    | Minimum pension liability                                            |                 |             |     |     |    |   |       |     |        |       |                                               |     |      | 42  
|                    |                                                                      |                 |              |     |      |    |    |       |      |        |        |                                               |      |      |     
|As of 31 March 2005 |                                                                      | 208,740,939     |              | 52  |      | 12 |    | 1,150 |      | (397   | )      | 241                                           |      | (389 | )   
|                    |                                                                      |                 |              |     |      |    |    |       |      |        |        |                                               |      |      |     

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(e) Recently issued accounting pronouncements not yet adopted

US GAAP

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

In
December 2004, the FASB issued SFAS No. 123 (revised 2004),Share-Based Payment(SFAS No. 123(R)), which is a revision of
SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95,Statement of Cash Flows.
SFAS No. 123(R) requires the fair value of all share-based payments to employees to be recognised in the consolidated statement of operations. The Group has historically provided
proforma disclosures pursuant to SFAS 123 as if the fair value method of accounting for stock options had been applied. Note 30(l) sets out the impact of this on the Group for fiscal
2005, 2004 and 2003. SFAS No. 123(R) is effective for fiscal years beginning after 15 June 2005.

In
November 2004, the FASB issued SFAS No. 151,Inventory Costsan amendment of ARB No. 43, Chapter 4,
(SFAS No. 151). SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognised as current-period
charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning
after 15 June 2005. The Group does not expect the adoption of SFAS No. 151 to have a material impact on its consolidated financial position, results of operations or cash flows.

FASB
Interpretation No. 47 (FIN 47),Accounting for Conditional Asset Retirement Obligations, issued in March 2005,
clarifies the term 'conditional asset retirement obligation' as used in SFAS 143,Accounting for Asset Retirement Obligations, and when an entity
would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This interpretation is effective as of 1 April 2005. The Group has not determined the
effect, if any, of FIN 47 on the Group's financial position, results of operations or cash flows.

In
May 2005, SFAS No. 154,Accounting Changes and Error Correctionsreplacement of APB Opinion No. 20 and FASB Statement
No. 3, (SFAS No. 154) was issued. SFAS No. 154 changes the accounting for and reporting of a change in accounting principle by requiring retrospective
application to prior periods' financial statements of changes in accounting principle unless impracticable. SFAS No. 154 is effective for accounting changes made in fiscal years beginning after
15 December 2005. The
Group does not expect the adoption of SFAS No. 154 to have a material impact on its results of operations, financial position or cash flows.

In
June 2005 the EITF reached consensus on Issue 05-6,Determining the Amortization Period for Leasehold Improvements Purchased after Lease
Inception or Acquired in a Business Combination(EITF 05-6). EITF 05-6 requires that leasehold improvements acquired in a business combination to
be amortised over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition.
Additionally the EITF requires improvements that are placed in service significantly after and not contemplated at or near the beginning of the lease term should be amortised over the shorter of the
useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. EITF
05-6 is effective immediately. The adoption of EITF 05-6 has had no impact on the Group.

201

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(f) Business restructuring charges

As a result of an operational review in September 2001, following a sudden and significant downturn in trading in the global telecommunications markets, a
period of restructuring began with the focus of reducing Group indebtedness. This restructuring spanned fiscal 2002 to 2005.

When
management reviews the operating income performance of the segments described in note 2, 'Segmental analysis', management uses UK GAAP operating (loss)/profit before goodwill
and intangible asset amortisation, UK 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 reorganisation of the business as a whole. A segmental allocation of restructuring charges is impracticable. Consequently, a
segmental analysis has not been provided.

In
fiscal 2005, £27 million was charged to business restructuring (2004: £114 million; 2003: £221 million). The following tables show the activity by
statement of operations heading and the balances remaining in other liabilities at 31 March 2005 and 2004 under US GAAP following the implementation of actions required to achieve the
restructuring objectives.

|                                                |       |    |    |    |    | Utilised |     |   
|----------------------------------------------- | ----- | -- | -- | -- | -- | -------- | --- | --
|
|
|Business restructuring costs:                   |       |    |    |    |    |          |     |   
|Employee severance                              |       | 15 |    | 21 |    | (21      | )   | (2
|Site rationalisation                            |       | 10 |    | 5  |    | (10      | )   | 1 
|Contractual commitments and other restructuring |       | 1  |    |   |    |         |     |  
|Advisor fees                                    |       |   |    | 1  |    | (1       | )   |  
|                                                |       |    |    |    |    |          |     |   
|                                                | Total |    | 26 |    | 27 |          | (32 | ) 
|                                                |       |    |    |    |    |          |     |   

202

---



|                                                |       |    |    |    |     | Utilised |      |    
|----------------------------------------------- | ----- | -- | -- | -- | --- | -------- | ---- | ---
|
|
|Business restructuring costs:                   |       |    |    |    |     |          |      |    
|Employee severance                              |       | 10 |    | 63 |     | (58      | )    |   
|Site rationalisation                            |       | 36 |    | 6  |     | (31      | )    | (1 
|Contractual commitments and other restructuring |       | 3  |    |   |     | (2       | )    |   
|Advisor fees                                    |       | 1  |    | 45 |     | (33      | )    | (13
|                                                |       |    |    |    |     |          |      |    
|                                                | Total |    | 50 |    | 114 |          | (124 | )  
|                                                |       |    |    |    |     |          |      |    

Employee severance

The Group recorded a charge of £21 million during the year ended 31 March 2005 (2004: £63 million) associated with
redundancy payments for approximately 900 employees (2004: approximately 1,600 employees). The total reduction in headcount in the year ended 31 March 2005 was approximately 2,600. The
cost related to the 900 employees is included in the charge for the year ended 31 March 2005. Any other severance costs related to these headcount reductions are included in cash payments for
fiscal 2005 in the table above. The Group expects to make cash payments in the year ending 31 March 2006 with respect to the balance remaining at 31 March 2005 (see note 29).

Site rationalisation

The Group recorded a charge of £5 million and made cash payments of £10 million in the year ended 31 March 2005
relative to site rationalisation, representing additional costs associated with closing and consolidating various sites around the world as part of its ongoing business reorganisation. Approximately
48 sites were closed or disposed of during fiscal 2005, across all regions, of which the most significant were sites in Coventry, Frankfurt and the various cities in the US. 22 of the total site
disposals relate to the disposal of our OPP business (see note 25). In the year ended 31 March 2004, the Group recorded a charge of £6 million and made cash payments
of £31 million, which also resulted from the consolidation and closure of sites, across all regions, the most significant of which were Frankfurt and Ottawa.

Contractual commitments and other restructuring

During the year ended 31 March 2005, the Group did not record any further charges in respect of other costs associated with its business reorganisation
program (2004: £nil). No cash payments were made during the year ended 31 March 2004 (2004: £2 million). The Group expects
to make cash payments in the year ending 2006 with respect to the balance of the unused charged amount remaining at 31 March 2005.

Advisor fees

The charge of £1 million that we recorded in the year ended 31 March 2005 relative to advisor fees represents charges from the Group's
external advisors with respect to the Group's financial restructuring. The Group made cash payments totalling £1 million during the year ended 31 March 2005 (2004:
£33 million). Additional amounts in respect of ongoing scheme administration expenses will be expensed as incurred.

203

---



(g) Goodwill

The changes in the carrying amount of goodwill for the year ended 31 March 2005 are as follows:

|                         |  | Carrying
value |  
|------------------------ |  | -------------- | -
|
|Balance at 1 April 2003  |  | 657            |  
|Goodwill disposed of     |  | (62            | )
|Translation adjustment   |  | (21            | )
|                         |  |                |  
|Balance at 31 March 2004 |  | 574            |  
|Goodwill disposed of     |  | (64            | )
|Translation adjustment   |  | (1             | )
|                         |  |                |  
|Balance at 31 March 2005 |  | 509            |  
|                         |  |                |  

Goodwill
disposed of in the year ended 31 March 2005 relates to the sale of the Group's OPP business in August 2004. Goodwill disposed of in the year ended 31 March
2004 related to the sale of the Group's NAA business in February 2004.

The
Group completed its annual impairment review of goodwill in September 2004, and updated this as at 31 March 2005, and concluded that no impairment was required. The
assessments 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 for all reporting units.
There was no impairment of goodwill in the year ended 31 March 2004.

(h) Property, plant and equipment

The changes in the values of interest capitalised and included within property, plant and equipment as at 31 March 2005, 2004 and 2003 are as follows:

|                            |  | Cost |   | Accumulated
depreciation
|--------------------------- |  | ---- | - | ------------------------
|
|Balance as at 1 April 2002  |  | 4    |   |                        
|Interest capitalised        |  | 1    |   |                        
|Disposals                   |  | (1   | ) |                        
|                            |  |      |   |                         
|Balance as at 31 March 2003 |  | 4    |   |                        
|Interest capitalised        |  |     |   |                        
|Balance as at 31 March 2004 |  | 4    |   |                        
|                            |  |      |   |                         
|Interest capitalised        |  |     |   |                        
|Disposals                   |  | (3   | ) |                        
|                            |  |      |   |                         
|Balance as at 31 March 2005 |  | 1    |   |                        
|                            |  |      |   |                         

The
net book value of property, plant and equipment includes an amount of £15 million (2004: £17 million) in respect of land and buildings held under
finance leases, as defined under US GAAP.

204

---



Total
future minimum lease payments of £34 million are due under these finance leases, including the following payments due in the next five fiscal years.

|                              |  | (£ million)
|----------------------------- |  | -----------
|For the year ending 31 March: |  |            
|2006                          |  | 4          
|2007                          |  | 3          
|2008                          |  | 3          
|2009                          |  | 3          
|2010                          |  | 2          

(i) Intangible assets

Intangible assets consist of the following:

|                              |  | 31 March | 
|----------------------------- |  | -------- | 
|
|
|
|Core developed technology     |  | 360      | 
|Internally generated software |  | 5        | 
|Trademarks                    |  | 1        | 
|Customer lists                |  | 6        | 
|                              |  |          | 
|                              |  | 372      | 
|                              |  |          | 

The
remaining useful economic life of the intangible assets is 1 year.

Amortisation
of intangibles for the year ended 31 March 2005 was £44 million (2004 and 2003, £44 million). Intangible amortisation expense
based on 31 March 2005 intangibles for the next five years is expected to be:

|                              |  | (£ million)
|----------------------------- |  | -----------
|For the year ending 31 March: |  |            
|2006                          |  | 13         
|2007                          |  |           
|2008                          |  |           
|2009                          |  |           
|2010                          |  |           

(j) Pension plans and other post-retirement plans

Pension plans

The Group operates a number of funded and unfunded defined benefit and defined contribution pension plans on behalf of its employees. The most significant pension
plan is the G.E.C. 1972 Plan (the UK Plan), a funded defined benefit plan for employees in the UK. The assets of the UK Plan are

205

---



held
separately from the assets of the Group, 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
Group funds its defined benefit pension obligations at a level that meets or exceeds local legal requirements. Funded pension plan assets are primarily invested in equity and debt
securities.

The
Group uses a 31 March measurement date for all of its plans.

206

---



Data
with respect to benefit obligations, excluding those related to Discontinued Operations, is as follows:

|                                                                      |                                                | Pension benefits
UK plans |       | Pension benefits
Overseas plans |      
|--------------------------------------------------------------------- | ---------------------------------------------- | ------------------------- | ----- | ------------------------------- | -----
|
|
|Change in benefit obligations:                                        |                                                |                           |       |                                 |      
|                                                                      | Benefit obligation at beginning of year        |                           | 2,442 |                                 | 2,444
|                                                                      | Service cost                                   |                           | 17    |                                 | 16   
|                                                                      | Interest cost                                  |                           | 130   |                                 | 124  
|                                                                      | Plan participants' contributions               |                           | 4     |                                 | 4    
|                                                                      | Actuarial loss/(gain)                          |                           | 58    |                                 | 10   
|                                                                      | Benefits paid                                  |                           | (149  | )                               | (156 
|                                                                      | Curtailment gain                               |                           |      |                                 |     
|                                                                      | Settlement gain                                |                           |      |                                 |     
|                                                                      | Divestitures                                   |                           |      |                                 |     
|                                                                      | Foreign currency exchange rate changes         |                           |      |                                 |     
|                                                                      |                                                |                           |       |                                 |      
|Benefit obligations at end of year                                    |                                                | 2,502                     |       | 2,442                           |      
|                                                                      |                                                |                           |       |                                 |      
|Change in plan assets:                                                |                                                |                           |       |                                 |      
|                                                                      | Fair value of plan assets at beginning of year |                           | 2,318 |                                 | 2,237
|                                                                      | Actual return on plan assets                   |                           | 204   |                                 | 223  
|                                                                      | Employer contributions                         |                           | 10    |                                 | 10   
|                                                                      | Plan participants' contributions               |                           | 4     |                                 | 4    
|                                                                      | Benefits paid                                  |                           | (149  | )                               | (156 
|                                                                      | Settlements                                    |                           |      |                                 |     
|                                                                      | Divestitures                                   |                           |      |                                 |     
|                                                                      | Foreign currency exchange rate changes         |                           |      |                                 |     
|                                                                      |                                                |                           |       |                                 |      
|Fair value of plan assets at end of year                              |                                                | 2,387                     |       | 2,318                           |      
|                                                                      |                                                |                           |       |                                 |      
|                                                                      | Funded status                                  |                           | (115  | )                               | (124 
|                                                                      | Unrecognised net actuarial loss                |                           | 191   |                                 | 205  
|                                                                      | Unrecognised net transition obligation         |                           |      |                                 |     
|                                                                      |                                                |                           |       |                                 |      
|Net amount recognised                                                 |                                                | 76                        |       | 81                              |      
|                                                                      |                                                |                           |       |                                 |      
|Amounts recognised in the Statement of Financial Position consist of: |                                                |                           |       |                                 |      
|                                                                      | Prepaid benefit cost                           |                           |      |                                 |     
|                                                                      | Accrued benefit liability                      |                           | (61   | )                               | (70  
|                                                                      | Intangible asset                               |                           |      |                                 |     
|                                                                      | Accumulated other comprehensive income         |                           | 137   |                                 | 151  
|                                                                      |                                                |                           |       |                                 |      
|Net amount recognised                                                 |                                                | 76                        |       | 81                              |      
|                                                                      |                                                |                           |       |                                 |      

207

---



The
accumulated benefit obligation for the Group's defined benefit plans was £2,641 million at 31 March 2005 (£2,615 million at
31 March 2004). Information with respect to plans, which have an accumulated benefit obligation in excess of plan assets, is as follows:

|                               |  | 2005  |  | 2004 
|------------------------------ |  | ----- |  | -----
|
|Projected benefit obligation   |  | 2,583 |  | 2,664
|Accumulated benefit obligation |  | 2,539 |  | 2,607
|Fair value of plan assets      |  | 2,387 |  | 2,450

The
table below presents data with respect to net periodic benefit expense/(income):

|                                                         |                                                   | Pension benefits
UK plans |      | Pension benefits
Overseas plans |     
|-------------------------------------------------------- | ------------------------------------------------- | ------------------------- | ---- | ------------------------------- | ----
|
|
|Components of net periodic benefit                       |                                                   |                           |      |                                 |     
|Expense/(income):                                        |                                                   |                           |      |                                 |     
|                                                         | Service cost                                      |                           | 17   |                                 | 16  
|                                                         | Interest cost                                     |                           | 130  |                                 | 124 
|                                                         | Expected return on plan assets                    |                           | (132 | )                               | (122
|                                                         | Amortisation of unrecognised transition liability |                           |     |                                 | 3   
|                                                         | Amortisation of actuarial losses                  |                           |     |                                 | 5   
|                                                         |                                                   |                           |      |                                 |     
|Net periodic benefit expense of defined benefit plans    |                                                   | 15                        |      | 26                              |     
|Amounts recognised in respect of Discontinued Operations |                                                   |                          |      |                                |     
|Net curtailment loss                                     |                                                   |                          |      |                                |     
|Net settlement loss                                      |                                                   |                          |      |                                |     
|                                                         |                                                   |                           |      |                                 |     
|Net periodic benefit expense                             |                                                   | 15                        |      | 26                              |     
|                                                         |                                                   |                           |      |                                 |     

Additional information

|                                                                     |  | Pension benefits
UK plans |   | Pension benefits
Overseas plans |  
|-------------------------------------------------------------------- |  | ------------------------- | - | ------------------------------- | -
|
|
|Decrease in minimum liability included in other comprehensive income |  | (14                       | ) | (85                             | )
|                                                                     |  |                           |   |                                 |  

208

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The
actuarial assumptions used to determine benefit obligations and periodic benefit cost were as follows:

|                                                                                 |  | Pension benefits
UK plans |  | Pension benefits
Overseas plans
|-------------------------------------------------------------------------------- |  | ------------------------- |  | -------------------------------
|
|
|Weighted average assumptions used to determine benefit obligations at 31 March:  |  |                           |  |                                
|Discount rate                                                                    |  | 5.5                       |  | 5.5                            
|Rate of compensation increases                                                   |  | 4.3                       |  | 4.8                            
|Rate of pension increases                                                        |  | 2.8                       |  | 2.8                            
|Credited interest                                                                |  | 2.5                       |  | 3.0                            
|Weighted average assumptions used to determine net cost for year ended 31 March: |  |                           |  |                                
|Discount rate                                                                    |  | 5.5                       |  | 5.3                            
|Expected return on plan assets                                                   |  | 5.9                       |  | 5.7                            
|Rate of compensation increases                                                   |  | 4.8                       |  | 4.5                            
|Rate of pension increases                                                        |  | 2.8                       |  | 2.5                            
|Credited interest                                                                |  | 3.0                       |  | 4.0                            

The
Group operates two funded defined benefit plansthe UK Plan and the Marconi USA Employees' Retirement Plan (the US Plan).

For
the UK Plan, the overall expected return on assets assumption has been determined with the aim of reflecting the average rate of growth expected on the funds invested. In deriving
this return the aim
is to use a realistic long-term rate of return. In any year, it is considered whether the rate of return is reasonable having regard to the weighted average of the expected returns from
each of the main asset classes. The expected return for each asset class reflects a combination of historical performance analysis, the forward-looking views of the financial markets (as suggested by
the yields available) and the views of investment organisations. Consideration is also given to the rate of return expected to be available for reinvestment.

For
the US Plan, the expected long-term rate of return on assets is developed using the building block approach and is designed, over time, to approximate the actual
long-term returns on plan assets. The expected return is set with reference to the participant's benefit horizons, the mix of investments held directly by the plans and the current view of
expected future returns, which is influenced by historical average returns.

The
requirement to use an expected long-term rate of return on plan assets, compared to an actual rate of return, may lead to the recognition of pension income or expense
that is greater or less than the actual returns in any given year. To the extent the Group changed its estimate of the expected long-term rate of return on plan assets, there would be an
impact on pension expense or income and the associated net liability or asset.

209

---





Plan assets

UK Plan

The following table sets forth the asset allocations and target asset allocations by asset category, as of the measurement date of the UK Plan.

|                  |  | Percentage of plan assets |  | Target allocation range
|----------------- |  | ------------------------- |  | -----------------------
|
|
|
|Equity securities |  | 30                        |  | 28                     
|Debt securities   |  | 63                        |  | 66                     
|Property          |  | 5                         |  | 4                      
|Cash and other    |  | 2                         |  | 2                      
|                  |  |                           |  |                        
|Total             |  | 100                       |  | 100                    
|                  |  |                           |  |                        

The
UK Plan employs an investment policy that is designed to lead to reasonable returns and low volatility in the funding level of the plan. The Trustees believe that the current policy
is consistent with an expectation that the plan will continue to satisfy the ongoing statutory Minimum Funding Requirement in the UK. To achieve this result, the UK Plan has a written investment
policy, which includes a prescribed strategic asset allocation benchmark and minimum and maximum percentages of the assets that may be allocated to each class. External investment managers then manage
the assets within a specified percentage range.

The
target allocations reflect the Trustees' views on the appropriate balance to be struck between returns and risk and the extent to which the UK Plan's assets should be distributed so
as to match its liabilities. Target allocations between UK and overseas securities are also prescribed. The benchmark, together with investment restrictions that are imposed on the investment managers
to ensure that there is no undue concentration at the stock level, is designed to ensure that UK Plan's investments are suitable and adequately diversified insofar as is appropriate to the
circumstances of the UK Plan. The restrictions imposed on the investment managers ensure that a high proportion of assets is readily realisable and that sufficient liquidity is maintained to meet
known benefit payments. The Investment Committee, a committee of the Board of Trustees comprising directors and co-opted investment experts, continually assesses market trends and
conditions and recommends amendments to the benchmark within the approved ranges, having obtained appropriate advice from the Investment Consultant.

Investment
risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews performed by the Investment Committee in conjunction with the investment
managers.

A
review of the investment strategy will be undertaken as part of the actuarial valuation for funding purposes that is being carried out as at 5 April 2005.

210

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US Plan

The following table sets forth the weighted average asset allocations and target asset allocations by asset category for the US Plan, as of the measurement date.

|                                    |  | Percentage of plan assets |  | Target allocation
|----------------------------------- |  | ------------------------- |  | -----------------
|
|
|
|Equity securities                   |  | 51                        |  | 52               
|Debt securities                     |  | 43                        |  | 43               
|Other (including cash and property) |  | 6                         |  | 5                
|                                    |  |                           |  |                  
|Total                               |  | 100                       |  | 100              
|                                    |  |                           |  |                  

The
investment policy of the US Plan is governed by a set of rules and asset allocation targets promulgated by the Marconi USA Retirement and Investment Committee (US Committee), a
committee composed of executives of Marconi and its US subsidiaries, and is set forth in a written policy document. The target allocations reflect the US Committee's view on the appropriate balance to
be struck between returns and risk and the extent to which the US Plan's assets should be distributed in order to match its liabilities. The policy also specifies target allocations between US and
overseas securities and prescribes a return benchmark for each type of investment, together with investment restrictions that are imposed on the investment managers to ensure that there is no undue
concentration at the stock level. These and other rules set forth in the investment policy are designed to ensure that the US Plan's investments are suitable and adequately diversified insofar as is
appropriate to the circumstances of the Plan. The restrictions imposed on the investment managers ensure that a high proportion of assets are readily realisable and that sufficient liquidity is
maintained to meet known benefit payments. The US Committee, along with the investment and other experts it employs, continually assesses market trends and conditions and recommends amendments to the
provisions set forth in the investment policy. The US Committee and its experts also assess on an ongoing basis the performance of the investment managers employed to invest the assets of the US Plan
and periodically recommends changes in investment managers, if circumstances warrant such a change.

Other post retirement benefits

At 31 March 2005 no active employees and 931 retired employees (at 31 March 2004, nil and 1,508 respectively) of companies in the USA 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.

|                                         |                                        | Other post retirement benefits 31 March |   
|---------------------------------------- | -------------------------------------- | --------------------------------------- | --
|
|
|Change in benefit obligations:           |                                        |                                         |   
|Benefit obligations at beginning of year |                                        | 22                                      |   
|                                         | Interest cost                          |                                         | 1 
|                                         | Plan amendments                        |                                         |  
|                                         | Actuarial gain                         |                                         | (3
|                                         | Settlement gain                        |                                         | (4
|                                         | Benefits paid                          |                                         | (2
|                                         | Foreign currency exchange rate changes |                                         |  
|                                         |                                        |                                         |   
|Benefit obligations at end of year       |                                        | 14                                      |   
|                                         |                                        |                                         |   
|Funded status                            |                                        | (14                                     | ) 
|Unrecognised net actuarial gain          |                                        | (10                                     | ) 
|Unrecognised prior service credit        |                                        | (2                                      | ) 
|                                         |                                        |                                         |   
|Net accrued benefit cost                 |                                        | (26                                     | ) 
|                                         |                                        |                                         |   

Data
with respect to net periodic benefit (income)/expense is as follows:

|                                                                     |                          | Other post retirement benefits 31 March |   
|-------------------------------------------------------------------- | ------------------------ | --------------------------------------- | --
|
|
|Components of net periodic benefit (income)/expense:                 |                          |                                         |   
|                                                                     | Service cost             |                                         |  
|                                                                     | Interest cost            |                                         | 1 
|                                                                     | Amortisation of net gain |                                         | (1
|                                                                     | Net curtailment gain     |                                         | (5
|                                                                     |                          |                                         |   
|Net periodic benefit (income)/expense of other post retirement plans |                          | (5                                      | ) 
|                                                                     |                          |                                         |   

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Different
actuarial assumptions were made in relation to the cost of retiree health care benefits, as follows:

|                                                                                  |  | Other post retirement
benefits
31 March
|--------------------------------------------------------------------------------- |  | ---------------------------------------
|
|
|Weighted average assumptions used to determine benefit obligations at March 31:   |  |                                        
|Discount rate                                                                     |  | 5.8                                    
|Weighted average assumptions used to determine net cost for year ended March 31:  |  |                                        
|Discount rate                                                                     |  | 5.8                                    
|Assumed health care cost trend rates at March 31:                                 |  |                                        
|Medical cost trend rate assumed for next year                                     |  | 11.0                                   
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 6.0                                    
|Year that rate reaches the ultimate trend                                         |  | 2012                                   
|Prescription drug cost trend rate assumed for next year                           |  | 13.0                                   
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 6.0                                    
|Year that rate reaches the ultimate trend                                         |  | 2012                                   

Assumed
health care cost trend rates have an effect on the amounts reported for the post retirement benefit plans. A one percentage point change in assumed health care cost trend rates
would have the following effects:

|                                             |  | Effect of one
percentage
point increase |  | Effect of one
percentage
point decrease |  
|-------------------------------------------- |  | --------------------------------------- |  | --------------------------------------- | -
|
|Effect on total of service and interest cost |  |                                        |  |                                        |  
|Effect on post-retirement benefit obligation |  | 1                                       |  | (1                                      | )
|                                             |  |                                         |  |                                         |  

Cash flows

Benefit payments

The following table summarises expected benefit payments from our pension and post-retirement plans until 2015. Actual benefit payments may differ
from expected benefit payments.

|                                            |  | UK plan |  | Overseas plans |  | Post retirement benefit plans
|------------------------------------------- |  | ------- |  | -------------- |  | -----------------------------
|For the year ending:                        |  |         |  |                |  |                              
|31 March 2006                               |  | 153     |  | 10             |  | 2                            
|31 March 2007                               |  | 157     |  | 10             |  | 1                            
|31 March 2008                               |  | 161     |  | 11             |  | 1                            
|31 March 2009                               |  | 166     |  | 12             |  | 1                            
|31 March 2010                               |  | 170     |  | 12             |  | 1                            
|31 March 2011 to 31 March 2015 in aggregate |  | 924     |  | 67             |  | 6                            
|                                            |  |         |  |                |  |                              

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Contributions

The Group expects to contribute £10 million to the UK Plan and £5 million to its overseas plans in the year ending
31 March 2006.

Defined contribution plans

The US subsidiaries of the Group operate 401(k) plans for eligible employees who contribute a percentage of their pre-tax compensation with the Group
matching these contributions up to prescribed limits. The Group also operates similar defined contribution plans in the UK. For fiscal 2005, the contributions made by the Group to such plans were
£3 million (2004, £5 million and 2003, £7 million).

(k) Commitments and contingencies

Legal proceedings

The Group is not and has not been engaged in, nor, so far as it is aware, does the Group have pending or threatened by or against it, any legal or arbitration
proceedings which may have or have had in the recent past, including at least the 12 months immediately preceding the date of this report, a significant effect on its financial position as a
whole, except as set out below. Where a liquidated sum is claimed, ade minimisfigure 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. The Group and its other former group companies intend to defend claims vigorously. While the Group believes that it has meritorious defences, 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 claims made against the Group or our former group that are oustanding or have been resolved during fiscal 2005:



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215

---





216

---





217

---







218

---





Claims brought by our group companies

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





219

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Industrial injury claims

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

Third party guarantees

The Group has entered into agreements that contain features, which meet the definition of a guarantee under Financial Interpretation (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 Group to make payments (either in cash, financial instruments, other assets, common shares of the Group 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 recognise a liability for the fair value of the obligation it assumes under that guarantee. The initial
recognition and measurement requirement of

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FIN 45
is effective for guarantees issued or modified after 31 December 2002. As of 31 March 2005, the fair value of the Group's guarantees that were issued or modified after
31 December 2002 were not material.

The
Group has the following major types of guarantees that are subject to the disclosure requirements of FIN 45.

Financial and other guarantees

The Group and various of its subsidiaries have undertaken, in the normal course of business, to provide support to the joint ventures of the Group, to meet their
liabilities. These undertakings contain 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 Group may be required to make
under these guarantees, is £6 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 Group under these guarantees, is £68 million.

In
connection with agreements for the sale of portions of its business, including certain discontinued operations, the Group has typically retained the liabilities of a business that
relate to events occurring prior to its sale, such as tax, environmental, litigation and employment matters. The Group generally indemnifies the purchaser of a Marconi business in the event that a
third party asserts a claim against the purchaser that relates to a liability retained by the Group. These types of indemnification guarantees typically extend for a number of years.

From
time to time, the Group enters into indemnification agreements with certain contractual parties in the ordinary course of business, including agreements with lenders, lessors,
customers and certain vendors. All such indemnification agreements are entered into in the context of the particular agreements and are provided in an attempt to properly allocate risk of loss in
connection with the consummation of the underlying contractual arrangements. Management believes that the Group maintains adequate levels of insurance coverage to protect the Group with respect to
most claims arising from such agreements and that such agreements do not otherwise have value separate and apart from the liabilities incurred in the ordinary course of the Group's business. There are
no material indemnifications issued since 1 January 2003.

The
performance bonding facility is used for the issuance of bonds, guarantees, letters of credit, indemnities or similar instruments at the request of MBL for the purpose of supporting,
directly or indirectly, obligations of members of our Group to third parties for obligations incurred in the ordinary course of our Group's trade or business. The purposes for which the performance
bonding facility is available include supporting financing facilities which have been provided to members of our Group for the purpose of supporting directly obligations of members of our Group in the
ordinary course of our Group's trade or business, other than obligations in respect of financial indebtedness. For example, this may be used in connection with supporting a facility in a foreign
currency where such foreign currency is not available under the performance bonding facility. Under the security over cash agreement, MBL has granted, in favour of HSBC Bank plc, as security trustee,
security over the accounts into which cash collateral deposits will be made in respect of bonds issued under the performance bonding facility.

As
of 31 March 2005, the fair value of the Group's guarantees that were issued or modified after 31 March 2004 was not material.

221

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Asset purchase obligations

An information technology outsourcing agreement was signed with Computer Sciences Corporation International Systems Management Inc. (CSC) in
May 2003. Under the terms of the agreement, property, plant and equipment with an approximate book value of £17 million and 420 employees were transferred to CSC in exchange
for cash proceeds of £26 million. In addition to the transfer of employees and assets, the Group novated existing service and maintenance contracts to CSC.

The
IT service contract is for a period of ten years with a right to terminate without cause, but subject to a number of penalties, after two years and contains an obligation for the
Group to purchase at fair value the assets with which CSC is providing the service at such time that the contract ceases. This obligation to purchase the assets cannot be quantified until such time
that notice to terminate has been given and a contract cessation date is known. Consequently, this obligation has not been quantified at 31 March 2005.

Sale of OPP

In connection with the sale of OPP, which was completed on 13 August, 2004, the Group provided certain indemnities to the purchaser, Emerson Electric Co.
(Emerson). Under the terms of the asset purchase and sale agreement (the Agreement), the Group indemnified Emerson for any losses arising from any inaccuracy or breach of any representation, warranty
or covenant made by the Group in the Agreement or in any document delivered by the Group in connection with the Agreement. In addition, the Group provided indemnities to Emerson in respect of assets,
liabilities and obligations that were not transferred to Emerson under the Agreement. The Group and Emerson are engaged in continuing negotiations regarding several issues relating to the Agreement.
Until such negotiations are concluded, the Group is unable to perform a valuation exercise to determine the fair value of the aforementioned indemnities. Therefore, the Group has not attributed any
value to the obligations.

Purchase commitments

In the ordinary course of business the Group enters into contracts for capital expenditures as set out below:

|            |  | Capital expenditure commitments
|----------- |  | -------------------------------
|
|
|At 31 March |  | 6                              
|            |  |                                

Leases

The Group leases certain facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Total rental expense for
the year ended 31 March 2005 was £21 million (2004: £37 million; 2003: £34 million).

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At
31 March 2005, minimum future rental commitments under operating leases having non-cancellable lease terms in excess of one year are as follows:

|                              |       | Land and
buildings |    | Other
items |    | Total
|----------------------------- | ----- | ------------------ | -- | ----------- | -- | -----
|
|For the year ending 31 March: |       |                    |    |             |    |      
|2006                          |       | 9                  |    | 4           |    | 13   
|2007                          |       | 6                  |    | 6           |    | 12   
|2008                          |       | 4                  |    | 5           |    | 9    
|2009                          |       | 3                  |    | 1           |    | 4    
|2010                          |       | 1                  |    |            |    | 1    
|Thereafter                    |       | 15                 |    |            |    | 15   
|                              |       |                    |    |             |    |      
|                              | Total |                    | 38 |             | 16 |      
|                              |       |                    |    |             |    |      

(l) Employee stock option plans

Marconi Corporation plc Senior Management Share Option Plan

Under the Marconi Corporation plc Senior Management Share Option Plan announced at the time of the financial restructuring, participants selected by the
remuneration committee may be granted performance-related awards entitling them to be granted a right to call for a number of ordinary shares of the Group without payment based on the attainment of
certain performance criteria. The initial options under this scheme were approved on 24 June 2003 and are exercisable in five tranches, each of which is subject to different performance
conditions. The options have a ten-year term and may be satisfied using newly issued or existing Marconi Corporation plc shares. The Group applies variable plan accounting for grants under
this plan and recognises compensation cost over the vesting period when achievement of the performance conditions becomes probable. The performance targets for the first three tranches are linked to
the repayment of the Group's debt and for the last two tranches are linked to achieving market capitalisation targets. For those tranches subject to market capitalisation targets, no compensation cost
will be recognised until the targets are achieved. The market capitalisation target for the fourth tranche of options was reached in November 2003 and compensation cost has now been accrued for
the fourth tranche. As at 31 March 2005, nil cost options over 17,740,000 shares (after a one for five share consolidation that occurred in September 2003) have been granted under this
plan.

Marconi Corporation plc Employee Share Option Plan

Under the Marconi Corporation plc Employee Share Option Plan, participants selected by the remuneration committee may be granted performance-related awards
entitling them to be granted a right to call for a number of ordinary shares of the Group based on the attainment of certain performance criteria. The exercise price of options granted under this plan
will be determined by the remuneration committee but will be based on the market value of a Marconi Corporation plc Share at the date of the grant. The initial options under this scheme were approved
on 30 June 2003 and are exercisable in five tranches, each of which will be subject to the same performance conditions as the Marconi Corporation plc Senior Management Share Option Plan. The
options have a ten-year term and may be satisfied using newly issued or existing Marconi Corporation plc shares. The Group applies variable plan accounting for grants under this plan and
recognises compensation cost over the vesting

223

---



period
when achievement of the performance conditions becomes probable. The market capitalisation target for the fourth tranche of options was reached in November 2003 and compensation cost has
now been accrued for the fourth tranche. As at 31 March 2005, options over 6,870,000 shares (after a one for five share consolidation that occurred in September 2003) have been granted
under this plan.

Stock
options outstanding at 31 March 2005 in respect of the above plans were as follows:

|                          |           | Shares     |            | Weighted average
exercise price
|------------------------- | --------- | ---------- | ---------- | -------------------------------
|Outstanding 1 April 2003  |           |           |            |                                
|                          |           |            |            |                                
|                          | Granted   |            | 23,860,000 |                                
|                          | Lapsed    |            | (210,000   | )                              
|                          | Exercised |            |           |                                
|                          |           |            |            |                                
|Outstanding 31 March 2004 |           | 23,650,000 |            | £                              
|                          | Granted   |            | 750,000    |                                
|                          | Lapsed    |            | (170,696   | )                              
|                          | Exercised |            | (8,709,819 | )                              
|                          |           |            |            |                                
|Outstanding 31 March 2005 |           | 15,519,485 |            | £                              
|                          |           |            |            |                                

All
options granted under the Marconi Corporation plc Employee Share Option Plan, were granted with an exercise price equal to the market value of the shares at the date of the grant
(17,740,000 share options). Options granted under the Marconi Corporation plc Senior Management Share Option Plan were granted with an exercise price of £Nil (6,870,000 share options).

Additional
information regarding all options outstanding as of 31 March 2005 is noted in the table below:

|Range of exercise prices (£) |       | Total number
outstanding |            | Weighted
average
exercise
price (£) |      | Weighted
average
remaining
contractual
life (years) |     | Number
Exercisable |           | Weighted
average
exercise
price of
exercisable
options (£)
|---------------------------- | ----- | ------------------------ | ---------- | ----------------------------------- | ---- | --------------------------------------------------- | --- | ------------------ | --------- | ----------------------------------------------------------
|Nil to £2.50                 |       | 10,135,000               |            |                                     | Nil  |                                                     | 8.0 |                    | 786,000   |                                                           
|£2.50 to £5.00               |       | 4,589,485                |            | £                                   | 3.11 |                                                     | 8.3 |                    | 1,163,648 |                                                           
|£5.00 to £7.70               |       | 795,000                  |            | £                                   | 5.80 |                                                     | 9.6 |                    | 17,996    |                                                           
|                             |       |                          |            |                                     |      |                                                     |     |                    |           |                                                           
|                             | Total |                          | 15,519,485 |                                     | £    | 1.22                                                |     |                    |           | 1,967,644                                                 
|                             |       |                          |            |                                     |      |                                                     |     |                    |           |                                                           

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(m) Fair values of financial instruments

The carrying amounts and fair values of material financial instruments at 31 March 2005 and 2004 are as follows:

|                                 |  | 2005 |  | 2004
|-------------------------------- |  | ---- |  | ----
|
|
|Marketable securities            |  | 5    |  | 5   
|Total long-term debt*            |  | 21   |  | 21  
|Obligations under capital leases |  | 2    |  | 2   
|                                 |  |      |  |     

---

The
following methods and assumptions were used in estimating the fair values of financial instruments:

Cash and cash equivalents, receivables, payables, accrued liabilities and short-term borrowings

The carrying values of cash and cash equivalents, receivables, payables, accrued liabilities, current maturities of long-term debt and short-term
borrowings approximate their fair values due to the short-term nature of the instruments.

Marketable securities and long-term debt

The fair value of marketable securities and traded long-term debt has been determined by traded market prices. Non-traded debt is held at par value.

Obligations under capital leases

The fair value of obligations under capital leases has been determined by discounting projected future cash flows.

(n) Valuation and qualifying accounts

|Description                     |  | 31 March
2004 |  | Change to
opening
reserve |   | Disposals |   | Additions/
(release) |   | Effect of
exchange rate
changes |   | Utilisation |   | 31 March
2005
|------------------------------- |  | ------------- |  | ------------------------- | - | --------- | - | -------------------- | - | ------------------------------- | - | ----------- | - | -------------
|
|Allowance for doubtful accounts |  | 40            |  | (1                        | ) |          |   | (4                   | ) |                                |   | (5          | ) | 30           
|Warranty reserve(1)             |  | 31            |  |                          |   | (1        | ) | 13                   |   | (1                              | ) | (16         | ) | 26           
|                                |  |               |  |                           |   |           |   |                      |   |                                 |   |             |   |              
|Total                           |  | 71            |  | (1                        | ) | (1        | ) | 9                    |   | (1                              | ) | (21         | ) | 56           
|                                |  |               |  |                           |   |           |   |                      |   |                                 |   |             |   |              

225

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|Description                     |  | 31 March 2003 |  | Change to
opening
reserve |  | Additions/
(release) |   | Effect of
exchange rate
changes |   | Utilisation |   | 31 March
2004
|------------------------------- |  | ------------- |  | ------------------------- |  | -------------------- | - | ------------------------------- | - | ----------- | - | -------------
|
|Allowance for doubtful accounts |  | 78            |  |                          |  | (4                   | ) | (4                              | ) | (30         | ) | 40           
|Warranty reserve(1)             |  | 43            |  | 1                         |  | 21                   |   | (2                              | ) | (32         | ) | 31           
|                                |  |               |  |                           |  |                      |   |                                 |   |             |   |              
|Total                           |  | 121           |  | 1                         |  | 17                   |   | (6                              | ) | (62         | ) | 71           
|                                |  |               |  |                           |  |                      |   |                                 |   |             |   |              

|Description                     |  | 31 March 2002 |  | Change to
opening
reserve |  | Additions/
release |   | Effect of
exchange rate
changes |   | Utilisation |   | 31 March 2003
|------------------------------- |  | ------------- |  | ------------------------- |  | ------------------ | - | ------------------------------- | - | ----------- | - | -------------
|
|Allowance for doubtful accounts |  | 167           |  |                          |  | (10                | ) | (7                              | ) | (72         | ) | 78           
|Warranty reserve(1)             |  | 29            |  | 12                        |  | 37                 |   | (1                              | ) | (34         | ) | 43           
|                                |  |               |  |                           |  |                    |   |                                 |   |             |   |              
|Total                           |  | 196           |  | 12                        |  | 27                 |   | (8                              | ) | (106        | ) | 121          
|                                |  |               |  |                           |  |                    |   |                                 |   |             |   |              

---

In
light of the declining market and economic trends the Group was experiencing, a provision against bad and doubtful debts of £150 million was charged during the year
ended 31 March 2002. Of this amount, £10 million was reassessed and released to the profit and loss account in the year ended 31 March 2003.

(o) Earnings per share

The following table reconciles net income/(loss) available for ordinary shareholders and the weighted average ordinary shares outstanding for basic earnings per
ordinary share for the periods:

|                                                       |  | 31 March | 
|------------------------------------------------------ |  | -------- | 
|
|
|Net income/(loss)                                      |  | 117      | 
|Weighted average ordinary shares outstanding*          |  | 204.5    | 
|Dilutive impact of stock option plans                  |  | 1.8      | 
|Weighted average diluted ordinary shares outstanding** |  | 205.7    | 
|Basic earnings/(loss) per ordinary share               |  | 0.57     | 
|Diluted earnings/(loss) per ordinary share             |  | 0.57     | 

---

Under
US GAAP the difference on diluted earnings per share arises as the treasury method requires that compensation costs attributable to future services that have not yet been
recognised be included in the calculation.

226

---



(p) Income taxes

The geographic analysis of (loss)/income from Continuing Operations before income taxes, minority interests and cumulative changes in accounting principles under
US GAAP is as follows:

|                   |  | 31 March |  
|------------------ |  | -------- | -
|
|
|United Kingdom     |  | (127     | )
|Non-United Kingdom |  | 1        |  
|                   |  |          |  
|Total              |  | (126     | )
|                   |  |          |  

Income
tax benefit/(provision) under US GAAP includes:

|                       |                    | 31 March |   
|---------------------- | ------------------ | -------- | --
|
|
|Current income taxes:  |                    |          |   
|                       | United Kingdom     |          | 26
|                       | Non-United Kingdom |          | 22
|                       |                    |          |   
|Total current taxes    |                    | 48       |   
|                       |                    |          |   
|Deferred income taxes: |                    |          |   
|                       | United Kingdom     |          |  
|                       | Non-United Kingdom |          |  
|                       |                    |          |   
|Total deferred taxes   |                    |         |   
|                       |                    |          |   
|Total income taxes     |                    | 48       |   
|                       |                    |          |   

The
net tax on Discontinued Operations and on the disposal of Discontinued Operations is £nil.

The
differences between the Group's income tax benefit, and the statutory income tax rate in the UK are as follows:

|                                                                |  | 31 March |  
|--------------------------------------------------------------- |  | -------- | -
|
|
|Taxes computed at the statutory rate: (30% 2005, 2004 and 2003) |  | (38      | )
|Non-UK tax rate differences                                     |  |         |  
|Non-deductible/(non-taxable) items                              |  | 24       |  
|Prior period adjustments to NOLS and tax attributes             |  | (24      | )
|Valuation allowances on losses and other assets                 |  | 38       |  
|Overprovision in prior years                                    |  | (51      | )
|Other, net                                                      |  | 3        |  
|                                                                |  |          |  
|Income tax benefit                                              |  | (48      | )
|                                                                |  |          |  
|Effective tax rate                                              |  | 38.1     | %
|                                                                |  |          |  

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Deferred
income tax assets/(liabilities) in the balance sheet under US GAAP are as follows:

|                             |                                         | 31 March |    
|---------------------------- | --------------------------------------- | -------- | ---
|
|
|Net deferred tax assets      |                                         |          |    
|                             | Net operating losses                    |          | 714
|                             | Provisions and other expenses           |          | 43 
|                             | Derivatives                             |          |   
|                             | Pension and post-retirement benefits    |          | 49 
|                             |                                         |          |    
|Sub total                    |                                         | 806      |    
|Valuation allowance          |                                         | (800     | )  
|                             |                                         |          |    
|Sub total                    |                                         | 6        |    
|                             |                                         |          |    
|Net deferred tax liabilities |                                         |          |    
|                             | Provisions                              |          | (3 
|                             | Intangible assets (other than goodwill) |          | (3 
|                             |                                         |          |    
|Sub total                    |                                         | (6       | )  
|                             |                                         |          |    
|Total                        |                                         |         |    
|                             |                                         |          |    

Deferred
tax assets totalling £800 million (2004: £762 million) have not been recognised in respect of operating losses, pension scheme deficits,
and exceptional expenditure due to the fact that it is more likely than not that those assets will not be realised.

Most
of the increase in unrecognised deferred tax assets over the £762 million disclosed at 31 March 2004 is due to the accessibility of US tax losses and
attributes. The Group announced at the time of the financial restructuring that its US tax losses in existence at 19 May 2003 would be forfeit. The Group has since conducted a detailed
technical review and undertaken extensive valuation work with external advisors. The Group has concluded as a result of this work, and the external advisors have confirmed, that a large part of the
pre-refinancing US tax attributes are accessible.

As
of 31 March 2005, 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 2005, 2004 and 2003 due to the fact that it is more likely than not that those assets will not be realised. If unused,
£571 million will expire between 2007 and 2024. The remainder of £1.7 billion does not expire.

The
distribution of tax assets is as follows:

|        |  | (£ million)
|------- |  | -----------
|UK      |  | 402        
|US      |  | 196        
|Italy   |  | 129        
|Germany |  | 49         
|Brazil  |  | 14         
|Other   |  | 10         
|        |  |            
|        |  | 800        
|        |  |            

228

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No
deferred tax has been provided on the undistributed earnings of foreign subsidiaries as they are all considered to be permanently reinvested. It is not practicable to estimate the
amount of additional taxes payable if these earnings were remitted.

The
net tax credit was mainly due to the release of tax provisions of £33 million in respect of prior years following progress to resolve historic US and UK tax issues
and audits, and a credit of £18 million for US and UK tax refunds.

There
is ongoing tax litigation with the Indian tax authorities. Marconi has sought leave to appeal against the High Court decision to the Indian Supreme Court and is currently waiting
to hear the outcome of its application for a Supreme Court hearing. A potential cash outflow of £6 million for tax and related interest is at risk. For further details see
note 30(k) on page 217.

(q) Related party transactions

The Group and its subsidiaries have made sales and purchases during fiscal 2005, 2004 and 2003 with equity investments, joint ventures and associates, which are
not consolidated. All transactions are in the ordinary course of business. The primary transactions between the Group and related parties are summarised as follows:

|                         |  | Year ended 31 March 2005
|------------------------ |  | ------------------------
|
|
|Statement of operations: |  |                         
|Net sales                |  |                        
|Purchases                |  |                        
|Balance sheet:           |  |                         
|Trade receivables        |  |                        
|Trade payables           |  |                        
|Other receivables        |  |                        
|Other payables           |  |                        

|                         |  | Year ended 31 March 2004
|------------------------ |  | ------------------------
|
|
|Statement of operations: |  |                         
|Net sales                |  |                        
|Purchases                |  |                        
|Balance sheet:           |  |                         
|Trade receivables        |  |                        
|Trade payables           |  |                        
|Other receivables        |  |                        
|Other payables           |  |                        

229

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|                         |  | Year ended 31 March 2003
|------------------------ |  | ------------------------
|
|
|Statement of operations: |  |                         
|Net sales                |  |                        
|Purchases                |  |                        
|Balance sheet:           |  |                         
|Trade receivables        |  |                        
|Trade payables           |  |                        
|Other receivables        |  |                        
|Other payables           |  | 403                     

All
the contracts and other arrangements are with Atlantic Telecommunications Limited, GaMMa, Alstom and the Group's joint ventures and associates described above, which management
believe have been on arm's-length terms. We may enter into arrangements with these companies in the future, which management believe will be on arm's-length terms.

230

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GLOSSARY OF TERMS

|3G (Third Generation)                       |  | third-generation protocols in mobile telephony that support the much higher data rates needed for broadband and bandwidth-hungry applications such as full-motion video, videoconferencing and full internet
access.
|------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Access Networks                             |  | our fixed wireless access, Access Hub and narrowband access product activities.                                                                                                                                     
|ADSL (Asymmetric Digital Subscriber Line)   |  | a technology that allows broadband data to be sent over existing copper telephone lines.                                                                                                                            
|APAC                                        |  | Asia Pacific.                                                                                                                                                                                                       
|ASTN (Automatic Switched Transport Network) |  | a technology that uses the GMPLS signalling protocol to set up and monitor edge-to-edge transport connections and restore faults automatically.                                                                     
|ATM (Asynchronous Transfer Mode)            |  | a transfer mode in which the information is organised into fixed-length cells instead of variable length packets.                                                                                                   
|AXH (Access Hub)                            |  | our Access Hub platform.                                                                                                                                                                                            
|AXR (Access Radio)                          |  | our Access Radio platform.                                                                                                                                                                                          
|BBRS                                        |  | our Broadband Routing and Switching business.                                                                                                                                                                       
|BXR-48000 (Broadband Switch Router)         |  | our high-end switch-router platform.                                                                                                                                                                                
|CALA                                        |  | Central and Latin America.                                                                                                                                                                                          
|CPE (Customer Premises
Equipment)           |  | equipment located at the customer's end of a telecommunication line, to provide an interconnect point.                                                                                                              
|CDMA (Code Division Multiple Access)        |  | a form of wireless multiplexing, in which data can be sent over multiple frequencies simultaneously, optimizing the use of available bandwidth.                                                                     
|Combined Code                               |  | the Combined Code on Corporate Governance appended to the Listing Rules.                                                                                                                                            
|(the) Company                               |  | Marconi Corporation plc.                                                                                                                                                                                            
|Core                                        |  | the designation given to the central portion of a network where all types of traffic come together in order to be transmitted to their intended destinations.                                                       
|CWDM (Coarse Wave Division Multiplexing)    |  | a type of multiplexing that uses lasers to overlay optical light channels in a pipe.                                                                                                                                
|DSL (Digital Subscriber Line)               |  | a high speed method to move data over a phone line.                                                                                                                                                                 
|                                            |  |                                                                                                                                                                                                                     

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|DSLAM (Digital Subscriber Line Access Multiplexer)    |  | equipment located at the network end of the customer access connection, providing Digital Subscriber Line (broadband) capabilities.                                                                                                          
|----------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|DWDM (Dense Wave Division Multiplexing)               |  | a type of multiplexing that uses up to 160 different colours (also known as lambdas or channels) to provide high-capacity bandwidth across an optical fibre network.                                                                         
|Edge                                                  |  | the designation given to the outer limits of a network where end users typically enter the network in order to gain access to services and information.                                                                                      
|EMEA                                                  |  | Europe, the Middle East and Africa.                                                                                                                                                                                                          
|Ethernet                                              |  | the most widely installed local area network technology (using coaxial or suitable grades of twisted pair copper cable) that is now being deployed at higher speeds (using fibre-optic connectivity) in
metropolitan-scale networks.         
|Ethernet line cards                                   |  | a type of line card used in optical switches that allows traffic and services to be passed to end users via an Ethernet connection.                                                                                                          
|ETSI (European Telecommunications Standard Institute) |  | an independent, non-profit organisation, whose mission is to produce telecommunications standards for today and for the future.                                                                                                              
|FTTC (Fibre to the Curb) or FTTH (Fibre to the Home)  |  | the installation and use of optical fibre cable directly to the curbs near homes or any business environment as a replacement for 'plain old telephone service' (POTS).                                                                      
|Gbit/s                                                |  | Gigabits per second, data rate nomenclature for billions (109) of bits per second.                                                                                                                                                           
|GDA                                                   |  | General Domestic Appliances Holdings Limited which was sold in March 2002.                                                                                                                                                                   
|GMPLS (Generalised Multiprotocol Label Switching)     |  | a proposed industry standard to simplify the creation and management of IP services over optical networks.                                                                                                                                   
|(the) Group                                           |  | the Company together with its subsidiary undertakings.                                                                                                                                                                                       
|GSM (Global System for Mobile communications)         |  | the de facto 2G wireless telephone standard in Europe. It was designed to support voice, data, text messaging and cross-border roaming. GSM is a time division multiplex (TDM) system, implemented on 900,
1800 and 1900 MHz frequency bands.
|Hiper Access                                          |  | an ETSI wireless standard for broadband wireless access.                                                                                                                                                                                     
|IC&M                                                  |  | our Installation, Commissioning and Maintenance business.                                                                                                                                                                                    
|IEEE                                                  |  | Institute of Electrical and Electronics Engineers, Inc.                                                                                                                                                                                      
|IFRS                                                  |  | International Financial Reporting Standards.                                                                                                                                                                                                 
|                                                      |  |                                                                                                                                                                                                                                              

232

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|Impact SoftSwitch                        |  | our softswitch product.                                                                                                                                                                                  
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|IMS                                      |  | Interactive Multi-Media Sub-Systems.                                                                                                                                                                     
|IP (Internet Protocol)                   |  | a connectionless, best-effort packet switching protocol that offers a common layer over dissimilar networks.                                                                                             
|Junior Notes                             |  | the guaranteed junior secured notes due 2008 issued by the Company as a part of the Restructuring.                                                                                                       
|LAN (Local Area Network)                 |  | a data network intended to serve an area of only a few square kilometres or less.                                                                                                                        
|LIBOR                                    |  | the London Inter-bank Offered Rate.                                                                                                                                                                      
|Listing Rules                            |  | the Listing Rules issued in the UK by the Financial Services Authority.                                                                                                                                  
|Loan Notes                               |  | the Junior Notes and the Senior Notes together, unless the context dictates otherwise.                                                                                                                   
|M (2003) plc                             |  | the company formerly known as Marconi plc, that was the ultimate parent company of the Marconi Group until the effective date of the Restructuring.                                                      
|MAN (Metropolitan Area Network)          |  | a network designed to carry data over an area larger than a campus, such as an entire city and its outlying area.                                                                                        
|Mbit/s                                   |  | Megabits per second, data rate nomenclature for millions (106) of bits per second.                                                                                                                       
|MDMS (Marconi Digital Multipoint System) |  | our broadband radio access platform delivering toll-quality voice, leased lines and Ethernet-based data traffic to multi-dwelling, small and medium enterprises.                                         
|MDRS (Marconi Digital Radio System)      |  | our point-to-point wireless system for short-haul or long-haul access, feeder and backhaul applications operating over a frequency range of 4 to 38 GHz.                                                 
|Metro                                    |  | a network designed to carry data over an area larger than a campus, such as an entire city and its outlying area.                                                                                        
|MPLS (Multiple Protocol Label Switching) |  | a way of making the best of IP and ATM technologies into one to create multiservice networks that carry any type of traffic.                                                                             
|MSAN (Multi-Service Access Node)         |  | equipment located at the edge of the network that supports a wide range of customer access interfaces and protocols, designed to replace the functionality of individual access platforms such as
DSLAMs.
|NA                                       |  | North America.                                                                                                                                                                                           
|NAA                                      |  | our former North American Access business, which was sold in February 2004.                                                                                                                              
|Network Services                         |  | our network services businesses, mainly comprising our IC&M and VAS businesses.                                                                                                                          
|OCS (Optical Core Switch)                |  | the generic industry designation that we use to describe our family of Core optical switches.                                                                                                            
|                                         |  |                                                                                                                                                                                                          

233

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|OPP                                      |  | our former Outside Plant and Power business, which was sold in August 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Optical Networks                         |  | our SDH and DWDM transmission equipment, and our network management systems business.                                                                                                                                                                                                                                                                                                                                                                                                                             
|OTN (Optical Transport Network)          |  | a series of proposed industry standards to boost network bandwidth by building more network functionality into optical networks.                                                                                                                                                                                                                                                                                                                                                                                  
|PBX (Private Branch Exchange)            |  | a private telephone exchange that transmits calls internally and to and from the public telephone network.                                                                                                                                                                                                                                                                                                                                                                                                        
|PSTN (Public Switched Telephone Network) |  | the international telephone system based on copper wires carrying analog voice data.                                                                                                                                                                                                                                                                                                                                                                                                                              
|Restructuring, financial
restructuring   |  | the financial restructuring of the Group that took effect on 19 May 2003 pursuant to the schemes of arrangement of the Company and M (2003) plc.                                                                                                                                                                                                                                                                                                                                                                  
|R&D                                      |  | research and development.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|SDH (Synchronous Digital Hierarchy)      |  | a transport technology using optical signals. Using a mesh/ring network topology, SDH transmits data using a point-to-point method that ensures reliability if a link is broken.                                                                                                                                                                                                                                                                                                                                  
|Senior Notes                             |  | the guaranteed senior secured notes due 2008 issued by the Company as a part of the Restructuring.                                                                                                                                                                                                                                                                                                                                                                                                                
|ServiceOn                                |  | our portfolio of carrier-class, open-standard network management products.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|SIP (Session Initiation Protocol)        |  | an open standard for establishing and managing multiparty, mixed-media communications sessions over converged networks.                                                                                                                                                                                                                                                                                                                                                                                           
|Softswitch                               |  | software-based, carrier-class servers that control voice phone calls across circuit and packet-switched networks. The attraction softswitches hold is that they cost about a tenth of regular local phone
switches, take up much less space, and have open interfaces that enable third-party vendors to write complex services to the switches' control. They also enable completion of calls between circuit-switched and packet networks, enabling carriers to
use a single network for voice and data traffic.
|Strategic Communications                 |  | our former Strategic Communications business, which was sold in August 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|STRGL                                    |  | our consolidated statement of total recognised gains and losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Tbit/s                                   |  | Terabits per second, data rate nomenclature for trillions (1012) of bits per second.                                                                                                                                                                                                                                                                                                                                                                                                                              
|TDM (Time Division Multiplexing)         |  | a method of traditional digital multiplexing in which a signal occupies a fixed, repetitive time slot within a higher-rate signal.                                                                                                                                                                                                                                                                                                                                                                                
|                                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

234

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|UK GAAP                                                 |  | generally accepted accounting principles applicable in the UK, including Financial Reporting Standards and Statements of Standard Accounting Practice issued by the Accounting Standards Board, consistently
applied and as in effect from time to time.             
|------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|US GAAP                                                 |  | generally accepted accounting principles applicable in the US.                                                                                                                                                                                                       
|VAS                                                     |  | our Value Added Services business.                                                                                                                                                                                                                                   
|VDSL (Very high bit rate Digital Subscriber Line)       |  | a DSL-based transmission method that sends data in the 13 Mbit/s55 Mbit/s range over short distances, usually between 1,000 and 4,500 feet (3001,500 metres), of twisted pair copper wire.
The shorter the distance, the faster the connection rate.               
|ViPr (Virtual Presence)                                 |  | our desktop video telephony platform that offers multi-party videoconferencing over IP networks.                                                                                                                                                                     
|VoIP (Voice over Internet Protocol)                     |  | a means to transport voice, video and data over a packet wide-area IP network. This does not mean using the public internet. Data is broken into packets and may be transported using different routes to be
assembled into their correct order at the receiving end.
|VPN (Virtual Private Network)                           |  | a private voice communications network built on public switching and transport facilities rather than dedicated leased facilities such as T1.                                                                                                                        
|VTOA (Voice & Telephony Over ATM)                       |  | a single, integrated infrastructure that can manage and deliver all types of subscriber signals (audio, data, voice, and video) as well as switched and dedicated services reliably and
efficiently.                                                                 
|WDM (Wavelength Division Multiplexing)                  |  | a type of multiplexing developed for use on optical fibre, that modulates each of several data streams onto a different part of the light spectrum.                                                                                                                  
|WiMAX (Worldwide Interoperability for Microwave Access) |  | the industry standard that defines point-to-point broadband wireless access.                                                                                                                                                                                         
|xDSL (x Digital Subscriber Line)                        |  | a generic way to refer to all the different variations of DSL which can include symmetrical, asymmetrical, DSL Lite, etc.                                                                                                                                            

235

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EXHIBITS

|1.1  | (1) | Memorandum and Articles of Association and Bylaws of Marconi Corporation plc (as amended on May 19, 2003).                                                                                                                                                                                                                                                                                                                                                                                             
|---- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1  | (2) | Deposit Agreement dated as of March 31, 2003 between Marconi Corporation plc and The Bank of New York, as depositary, and owners and beneficial holders of American Depositary Receipts.                                                                                                                                                                                                                                                                                                               
|2.2  | (2) | American Depositary Receipt of Marconi Corporation plc (included in Exhibit 2.1).                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.1  | (3) | Asset Purchase and Sale agreement dated February 20, 2004, between Marconi Communications, Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi Corporation plc, Advanced Fibre Communications, Inc. and Advance Fibre
Communications North America, Inc., together with exhibits and disclosure schedules.                                                                                                                                                                                   
|4.2  | (2) | Escrow and Distribution Agreement dated March 27, 2003 between M (2003) 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.                                                                                                                                                                                                                                              
|4.3  | (2) | Memorandum of Understanding dated March 25, 2003 between the Marconi Corporation plc, M (2003) plc and the United States Pension Benefit Guaranty Corporation.                                                                                                                                                                                                                                                                                                                                         
|4.4  | (2) | Instrument by way of Deed Poll dated May 18, 2003 executed by Marconi Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.5  | (4) | Master Services Agreement dated May 23, 2003 between CSC International Systems Management Inc, Marconi Corporation plc and Marconi Communications Limited.                                                                                                                                                                                                                                                                                                                                             
|4.6  | (5) | Asset Transfer Agreement dated May 23, 2003 between Marconi Corporation plc and CSC International Systems Management Inc.                                                                                                                                                                                                                                                                                                                                                                              
|4.7  | (2) | Performance Bonding Facility dated March 27, 2003 relating to a new £50 million committed revolving facility between Marconi Bonding Limited (MBL), as applicant, Marconi Corporation, HSBC Bank plc, as agent and security trustee, the
original issuing banks named therein, the original banks name therein and the original indemnifying subsidiaries named therein and the Security Over Cash Agreement dated March 27, 2003 between MBL and HSBC Bank plc.                                       
|4.8  | (6) | Availability Period Extension Letter & Consent from HSBC Bank plc, as agent and security trustee, dated September 27, 2004 to Performance Bonding Facility dated March 27, 2003 relating to a £50 million committed revolving facility between
Marconi Bonding Limited (MBL), as applicant, Marconi Corporation plc, HSBC Bank plc, as agent and security trustee, the original issuing banks named therein, the original banks named therein and the original indemnifying subsidiaries named
therein.
|4.9  | (6) | Performance Bonding Facility dated June 29, 2005 relating to a £35 million committed multicurrency revolving facility between Marconi Bonding Limited (MBL), as applicant, Marconi Corporation plc, HSBC Bank plc, as agent and security trustee,
the original issuing banks named therein, the original banks named therein and the original indemnifying subsidiaries named therein.                                                                                                                 
|4.10 | (2) | Performance bond letters executed by Marconi Corporation plc.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.11 | (6) | Patent Licence Agreement dated June 25, 2004 between Marconi Communications Inc., Marconi Corporation plc and Telcordia Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                             
|     |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

236

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|4.12 | (7) * | Asset Purchase and Sale agreement dated July 6, 2004, between Marconi Corporation plc, Marconi Communications, Inc., Marconi Intellectual Property (Ringfence) Inc., Marconi Communications Canada Inc., Marconi Communications de Mexico S.A. de C.V.,
Marconi Communications Exportel, S.A. de C.V., Administrativa Marconi Communications S.A. de C.V., Marconi Polska SP ZOO, Marconi Colombia, S.A., Emersub XCII, Inc., Emerson Electric Canada Limited, Emerson Mexico Corporate Services, S. de R.L. de
C.V. and Emerson Electric Co., together with exhibits and disclosure schedules.
|---- | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8.1  | (6)   | List of principal subsidiaries of Marconi Corporation plc (incorporated by reference to Note 14 of the Notes to the Consolidated Financial Statements included in this annual report).                                                                                                                                                                                                                                                                                                                                                                                                         
|12.1 | (7)   | Certification pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|12.2 | (7)   | Certification pursuant to Exchange Act Rule 13a-14(a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|13.1 | (7)   | Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|13.2 | (7)   | Certification pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. 1350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|15.1 | (6)   | Consent of Independent Registered Public Accounting FirmDeloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

---

237

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SIGNATURES

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

| |  | TELENT PLC
| |  | ----------
| |  | By:       
| |  |           
| |  |           
| |  |           
| |  |           

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