##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|  |  |                                                                                                                                                                                                 
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the quarterly period ended September 30, 2003
    OR                                        
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period
    from           to           
    Commission File Number 000-50709



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Marconi Corporation PLC

(Exact name of Registrant as specified in its
charter)




---

ENGLAND AND WALES

(Jurisdiction of incorporation or
organization)


New Century Park

P.O. Box 53


Coventry


Warwickshire CV3 1HJ


United Kingdom


(Address of principal executive
offices)




---

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 for such shorter period that the Registrant
was required to file such reports, and (2) has been subject
to filing requirements for the past 90 days.

YES x                  NO o

Indicate
by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).


YES o                  NO x

As of November 12, 2003, 200,000,000 shares
of the Registrants common stock was outstanding.



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---

TABLE OF CONTENTS



|                              |                                                                                               |                                                                     |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                              
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                    
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY/(DEFICIT)
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS               
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                            
|                              | Item 4. Controls and Procedures                                                              
|Part II. Other Information   
|                              | Item 1. Legal Proceedings                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                     
|Signatures                   
|EX-3.1                       
|Exhibit 31.1                 
|Exhibit 31.2                 
|Exhibit 32.1                 



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##### Table of Contents



|                              |  |                                                                                                                            |  |             |    | 
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -- | 
|                              |  |                                                                                                                            |  | Page Number
|                              |  |                                                                                                                            |  |            
|Part I. Financial Information |  |                                                                                                                            |  |            
|Item 1.                       |  | Financial Statements                                                                                                       |  |             |    | 
|                              |  | a) Condensed Consolidated Balance Sheets at
    September 30, 2003 and March 31, 2003                                      |  |             | 2  | 
|                              |  | b) Condensed Consolidated Statements of
    Operations for the three and six months ended September 30,
    2003 and 2002  |  |             | 3  | 
|                              |  | c) Condensed Consolidated Statements of Cash
    Flows for the six months ended September 30, 2003 and 2002                |  |             | 4  | 
|                              |  | d) Condensed Consolidated Statements of
    Shareholders Equity/(Deficit) for the six months ended
    September 30, 2003 |  |             | 6  | 
|                              |  | e) Notes to Condensed Consolidated Financial
    Statements                                                                |  |             | 7  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                                  |  |             | 39 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosure About
    Market Risk                                                              |  |             | 79 | 
|Item 4.                       |  | Controls and Procedures                                                                                                    |  |             | 80 | 
|Part II. Other Information    |  |                                                                                                                            |  |            
|Item 1.                       |  | Legal Proceedings                                                                                                          |  |             | 81 | 
|Item 4.                       |  | Submission of Matters to a vote of Security
    Holders                                                                    |  |             | 82 | 
|Item 6.                       |  | Exhibits and Reports on
    Form 8-K                                                                                       |  |             | 82 | 
|                              |  | Signatures                                                                                                                 |  |             | 84 | 
|                              |  | Certifications                                                                                                             |  |             | 85 | 

1



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##### Table of Contents






Part I. Financial
Information

Marconi Corporation plc and
subsidiaries






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                         |                                                                                                                                                                                        |               |       |           |   |  |        |        |  
|-------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----- | --------- | - |  | ------ | ------ | -
|                                                         |                                                                                                                                                                                        | September 30, |       | March 31,
|(in millions except per share data)                      |                                                                                                                                                                                        | 2003          |       | 2003     
|                                                         |                                                                                                                                                                                        | £             |       | £        
|                                                         |                                                                                                                                                                                        |              
|                                                         |                                                                                                                                                                                        |              
|                                                         |                                                                                                                                                                                        | (Unaudited)   |       |          
|ASSETS                                                   |                                                                                                                                                                                        |               |       |           |   |  |        |       
|Current assets                                           |                                                                                                                                                                                        |               |       |           |   |  |        |       
|                                                         | Cash and cash equivalents                                                                                                                                                              |               |       | 562       |   |  |        | 192    |  
|                                                         | Restricted cash                                                                                                                                                                        |               |       | 210       |   |  |        | 964    |  
|                                                         | Investment in securities                                                                                                                                                               |               |       | 5         |   |  |        | 16     |  
|                                                         | Accounts receivable, net                                                                                                                                                               |               |       | 338       |   |  |        | 462    |  
|                                                         | Inventories, net                                                                                                                                                                       |               |       | 202       |   |  |        | 234    |  
|                                                         | Prepaid expenses and other current assets                                                                                                                                              |               |       | 124       |   |  |        | 126    |  
|                                                         | Assets of discontinued operations                                                                                                                                                      |               |       |          |   |  |        | 4      |  
|                                                         |                                                                                                                                                                                        |              
|Total current assets                                     |                                                                                                                                                                                        |               | 1,441 |           |   |  | 1,998  |       
|Property, plant and equipment, net                       |                                                                                                                                                                                        |               | 211   |           |   |  | 263    |       
|Investments in affiliates                                |                                                                                                                                                                                        |               | 18    |           |   |  | 18     |       
|Goodwill                                                 |                                                                                                                                                                                        |               | 650   |           |   |  | 657    |       
|Intangibles, net                                         |                                                                                                                                                                                        |               | 78    |           |   |  | 101    |       
|Other non-current assets                                 |                                                                                                                                                                                        |               | 17    |           |   |  | 75     |       
|                                                         |                                                                                                                                                                                        |              
|TOTAL ASSETS                                             |                                                                                                                                                                                        |               | 2,415 |           |   |  | 3,112  |       
|                                                         |                                                                                                                                                                                        |              
|LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT)       |                                                                                                                                                                                        |               |       |           |   |  |        |       
|Current liabilities                                      |                                                                                                                                                                                        |               |       |           |   |  |        |       
|                                                         | Short-term debt                                                                                                                                                                        |               |       | 17        |   |  |        | 2,195  |  
|                                                         | Current maturities of long-term debt                                                                                                                                                   |               |       | 3         |   |  |        | 2,191  |  
|                                                         | Accounts payable                                                                                                                                                                       |               |       | 158       |   |  |        | 163    |  
|                                                         | Amounts due to Marconi plc and fellow subsidiaries                                                                                                                                     |               |       |          |   |  |        | 403    |  
|                                                         | Accrued expenses and other current liabilities                                                                                                                                         |               |       | 699       |   |  |        | 1,098  |  
|                                                         | Liabilities of discontinued operations                                                                                                                                                 |               |       |          |   |  |        | 16     |  
|                                                         |                                                                                                                                                                                        |              
|Total current liabilities                                |                                                                                                                                                                                        |               | 877   |           |   |  | 6,066  |       
|Long-term debt                                           |                                                                                                                                                                                        |               | 614   |           |   |  | 30     |       
|Deferred income taxes                                    |                                                                                                                                                                                        |               | 5     |           |   |  | 5      |       
|Other liabilities                                        |                                                                                                                                                                                        |               | 330   |           |   |  | 342    |       
|                                                         |                                                                                                                                                                                        |              
|Total liabilities                                        |                                                                                                                                                                                        |               | 1,826 |           |   |  | 6,443  |       
|Commitments and contingencies (Note 11)                  |                                                                                                                                                                                        |               |       |           |   |  |        |       
|Minority interests                                       |                                                                                                                                                                                        |               | 3     |           |   |  | 3      |       
|Shareholders equity/(deficit):                          |                                                                                                                                                                                        |               |       |           |   |  |        |       
|                                                         | Ordinary shares, £0.25 par value;                                                                                                                                                      |               |       |           |   |  |        |        |  
|                                                         | Authorized: 627 shares at September 30, 2003
    and 1,200 shares at March 31, 2003; issued and
    outstanding: 200 shares at September 30, 2003 and
    573 shares at March 31, 2003 |               |       | 50        |   |  |        | 143    |  
|                                                         | Warrants, issued and outstanding: 50 at
    September 30, 2003                                                                                                                         |               |       | 12        |   |  |        |       |  
|                                                         | Additional paid-in capital                                                                                                                                                             |               |       | 1,052     |   |  |        | 895    |  
|                                                         | Accumulated deficit                                                                                                                                                                    |               |       | (551      | ) |  |        | (4,055 | )
|                                                         | Capital reduction reserve                                                                                                                                                              |               |       | 334       |   |  |        |       |  
|                                                         | Accumulated other comprehensive loss                                                                                                                                                   |               |       | (311      | ) |  |        | (317   | )
|                                                         |                                                                                                                                                                                        |              
|Total shareholders equity/(deficit)                     |                                                                                                                                                                                        |               | 586   |           |   |  | (3,334 | )     
|                                                         |                                                                                                                                                                                        |              
|TOTAL LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT) |                                                                                                                                                                                        |               | 2,415 |           |   |  | 3,112  |       
|                                                         |                                                                                                                                                                                        |              

See notes to condensed consolidated financial
statements.

2



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##### Table of Contents



Marconi Corporation plc and
subsidiaries






CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


(Unaudited)


|                                                                     |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |       |  
|-------------------------------------------------------------------- | ---------------------------------------------- | ------------- | ---- | ------------- | - | ---- | ----- | ----- | - |  | ----- | ----- | - |  | ----- | ----- | -
|                                                                     |                                                |               |      |              
|                                                                     |                                                | Three months  |      | Six months   
|                                                                     |                                                | ended         |      | ended        
|                                                                     |                                                | September 30, |      | September 30,
|                                                                     |                                                | 2003          |      | 2002          |   | 2003 |       | 2002 
|(in millions, except per share data)                                 |                                                | £             |      | £             |   | £    |       | £    
|                                                                     |                                                |              
|                                                                     |                                                |              
|Revenue:                                                             |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Network Equipment revenues                     |               |      | 251           |   |      |       | 284   |   |  |       | 480   |   |  |       | 600   |  
|                                                                     | Network Services revenues                      |               |      | 138           |   |      |       | 198   |   |  |       | 276   |   |  |       | 392   |  
|                                                                     | Other revenues                                 |               |      |              |   |      |       |      |   |  |       |      |   |  |       | 23    |  
|                                                                     |                                                |              
|                                                                     |                                                |               | 389  |               |   |      | 482   |       |   |  | 756   |       |   |  | 1,015 |      
|Direct costs                                                         |                                                |               | 288  |               |   |      | 414   |       |   |  | 569   |       |   |  | 864   |      
|                                                                     |                                                |              
|                                                                     | Gross margin                                   |               |      | 101           |   |      |       | 68    |   |  |       | 187   |   |  |       | 151   |  
|Operating expenses:                                                  |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Selling, general and administrative            |               |      | 76            |   |      |       | 85    |   |  |       | 147   |   |  |       | 206   |  
|                                                                     | Research and development                       |               |      | 52            |   |      |       | 76    |   |  |       | 105   |   |  |       | 168   |  
|                                                                     | Amortization of intangibles                    |               |      | 12            |   |      |       | 11    |   |  |       | 23    |   |  |       | 22    |  
|                                                                     | Business restructuring charges                 |               |      | 12            |   |      |       | 58    |   |  |       | 67    |   |  |       | 129   |  
|                                                                     | Gain on sale of long-lived assets              |               |      |              |   |      |       | (1    | ) |  |       |      |   |  |       | (14   | )
|                                                                     | Impairment of long-lived assets                |               |      |              |   |      |       | 52    |   |  |       |      |   |  |       | 52    |  
|                                                                     | Other (income)/expense                         |               |      | (1            | ) |      |       | 7     |   |  |       | (47   | ) |  |       | 7     |  
|                                                                     |                                                |              
|Total operating expenses                                             |                                                |               | 151  |               |   |      | 288   |       |   |  | 295   |       |   |  | 570   |      
|Operating loss                                                       |                                                |               | (50  | )             |   |      | (220  | )     |   |  | (108  | )     |   |  | (419  | )    
|Other income/(expense):                                              |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Gain on settlement of equity forward contracts |               |      |              |   |      |       |      |   |  |       | 123   |   |  |       |      |  
|                                                                     | Gain on extinguishment of liabilities          |               |      |              |   |      |       |      |   |  |       | 2,695 |   |  |       |      |  
|                                                                     | Provision for related party receivable         |               |      |              |   |      |       | (186  | ) |  |       |      |   |  |       | (186  | )
|                                                                     | Gain/(loss) on sale of investments             |               |      | 14            |   |      |       | (3    | ) |  |       | 14    |   |  |       | (3    | )
|                                                                     | Impairment of investments in securities        |               |      |              |   |      |       | (10   | ) |  |       |      |   |  |       | (40   | )
|                                                                     | Interest income                                |               |      | 4             |   |      |       | 12    |   |  |       | 9     |   |  |       | 33    |  
|                                                                     | Interest expense                               |               |      | (36           | ) |      |       | (72   | ) |  |       | (46   | ) |  |       | (144  | )
|                                                                     |                                                |              
|Income/(loss) from continuing operations before
    income taxes     |                                                |               | (68  | )             |   |      | (479  | )     |   |  | 2,687 |       |   |  | (759  | )    
|                                                                     | Income tax (provision)/benefit                 |               |      | (7            | ) |      |       | 9     |   |  |       | 16    |   |  |       | 14    |  
|                                                                     | Gain on sale of affiliates, net                |               |      | 94            |   |      |       |      |   |  |       | 94    |   |  |       |      |  
|                                                                     | Equity in net loss of affiliates               |               |      | (2            | ) |      |       | (32   | ) |  |       | (2    | ) |  |       | (58   | )
|                                                                     |                                                |              
|Income/(loss) from continuing operations                             |                                                |               | 17   |               |   |      | (502  | )     |   |  | 2,795 |       |   |  | (803  | )    
|Discontinued operations:                                             |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Gain on sale of discontinued operations, net   |               |      | 12            |   |      |       | 22    |   |  |       | 21    |   |  |       | 22    |  
|                                                                     | Loss from discontinued operations, net         |               |      |              |   |      |       | (23   | ) |  |       | (4    | ) |  |       | (43   | )
|                                                                     |                                                |              
|Net income/(loss)                                                    |                                                |               | 29   |               |   |      | (503  | )     |   |  | 2,812 |       |   |  | (824  | )    
|                                                                     |                                                |              
|Earnings per share  basic                                           |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Income/(loss) from continuing operations       |               |      | 0.09          |   |      |       | (0.88 | ) |  |       | 9.30  |   |  |       | (1.40 | )
|                                                                     | Gain on sale of discontinued operations, net   |               |      | 0.06          |   |      |       | 0.04  |   |  |       | 0.07  |   |  |       | 0.04  |  
|                                                                     | Loss from discontinued operations, net         |               |      |              |   |      |       | (0.04 | ) |  |       | (0.01 | ) |  |       | (0.08 | )
|                                                                     |                                                |              
|Net income/(loss)                                                    |                                                |               | 0.15 |               |   |      | (0.88 | )     |   |  | 9.36  |       |   |  | (1.44 | )    
|                                                                     |                                                |              
|Earnings per share  diluted                                         |                                                |               |      |               |   |      |       |       |   |  |       |       |   |  |       |      
|                                                                     | Income/(loss) from continuing operations       |               |      | 0.08          |   |      |       | (0.88 | ) |  |       | 9.30  |   |  |       | (1.40 | )
|                                                                     | Gain on sale of discontinued operations, net   |               |      | 0.06          |   |      |       | 0.04  |   |  |       | 0.06  |   |  |       | 0.04  |  
|                                                                     | Loss from discontinued operations, net         |               |      |              |   |      |       | (0.04 | ) |  |       | (0.01 | ) |  |       | (0.08 | )
|                                                                     |                                                |              
|Net income/(loss)                                                    |                                                |               | 0.14 |               |   |      | (0.88 | )     |   |  | 9.35  |       |   |  | (1.44 | )    
|                                                                     |                                                |              
|Average shares used in computing basic
    income/(loss) per share   |                                                |               | 200  |               |   |      | 573   |       |   |  | 300   |       |   |  | 573   |      
|                                                                     |                                                |              
|Average shares used in computing diluted
    income/(loss) per share |                                                |               | 201  |               |   |      | 573   |       |   |  | 301   |       |   |  | 573   |      
|                                                                     |                                                |              

See notes to condensed consolidated financial
statements

3



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##### Table of Contents



Marconi Corporation plc and
subsidiaries






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


|                                                                                                                  |                                        |                  |        |               |   |  |      |      |  
|----------------------------------------------------------------------------------------------------------------- | -------------------------------------- | ---------------- | ------ | ------------- | - |  | ---- | ---- | -
|                                                                                                                  |                                        |                 
|                                                                                                                  |                                        | Six months ended
|                                                                                                                  |                                        | September 30,    |        | September 30,
|                                                                                                                  |                                        | 2003             |        | 2002         
|(in millions)                                                                                                     |                                        | £                |        | £            
|                                                                                                                  |                                        |                 
|                                                                                                                  |                                        |                 
|Cash flows from operating
    activities:                                                                         |                                        |                  |        |               |   |  |      |     
|Net income/(loss)                                                                                                 |                                        |                  | 2,812  |               |   |  | (824 | )   
|Adjustments to reconcile net income/(loss) to net
    cash used in operating activities of continuing operations: |                                        |                  |        |               |   |  |      |     
|Loss from discontinued operations, net                                                                            |                                        |                  | 4      |               |   |  | 43   |     
|Gain on sale of discontinued operations, net                                                                      |                                        |                  | (21    | )             |   |  | (22  | )   
|Gain on settlement of equity forward contracts                                                                    |                                        |                  | (123   | )             |   |  |     |     
|Stock compensation                                                                                                |                                        |                  | 8      |               |   |  | 7    |     
|Gain on sale of long-lived assets                                                                                 |                                        |                  |       |               |   |  | (14  | )   
|Impairment of investments in securities                                                                           |                                        |                  |       |               |   |  | 40   |     
|(Gain)/loss on sale of investments                                                                                |                                        |                  | (14    | )             |   |  | 3    |     
|Gain on sale of affiliate, net                                                                                    |                                        |                  | (94    | )             |   |  |     |     
|Impairment of long-lived assets                                                                                   |                                        |                  |       |               |   |  | 52   |     
|Depreciation and amortization                                                                                     |                                        |                  | 65     |               |   |  | 97   |     
|Provision for related party receivable                                                                            |                                        |                  |       |               |   |  | 186  |     
|Provision for doubtful accounts                                                                                   |                                        |                  | (4     | )             |   |  | (8   | )   
|Gain on extinguishment of liabilities                                                                             |                                        |                  | (2,695 | )             |   |  |     |     
|Change in current and deferred taxes                                                                              |                                        |                  | (18    | )             |   |  | (27  | )   
|Equity in net loss of affiliates                                                                                  |                                        |                  |       |               |   |  | 59   |     
|Changes in operating assets and liabilities, net
    of the effect of the extinguishment of liabilities:          |                                        |                  |        |               |   |  |      |     
|                                                                                                                  | Accounts receivable                    |                  |        | 123           |   |  |      | 80   |  
|                                                                                                                  | Inventories                            |                  |        | 33            |   |  |      | 146  |  
|                                                                                                                  | Accounts payable                       |                  |        | (69           | ) |  |      | (201 | )
|                                                                                                                  | Accrued expenses and other liabilities |                  |        | (77           | ) |  |      | (71  | )
|                                                                                                                  |                                        |                 
|Net cash used in operating activities of
    continuing operations                                                |                                        |                  | (70    | )             |   |  | (454 | )   
|                                                                                                                  |                                        |                 

See notes to condensed consolidated financial
statement

4



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##### Table of Contents



|                                                                                |  |                  |      |               |  |  |        |  
|------------------------------------------------------------------------------- |  | ---------------- | ---- | ------------- |  |  | ------ | -
|                                                                                |  |                 
|                                                                                |  | Six months ended
|                                                                                |  | September 30,    |      | September 30,
|(in millions)                                                                   |  | 2003             |      | 2002         
|                                                                                |  |                 
|                                                                                |  |                 
|Cash flow from investing activities:                                            |  |                  |      |               |  |  |        |  
|Purchases of property, plant and equipment                                      |  |                  | (12  | )             |  |  | (20    | )
|Purchases of interest in related parties                                        |  |                  | (6   | )             |  |  | (4     | )
|Proceeds from the sale of investments in
    securities                         |  |                  | 23   |               |  |  | 3      |  
|Proceeds from the sale of long-lived assets                                     |  |                  | 30   |               |  |  | 15     |  
|Sale of interest in related parties                                             |  |                  | 104  |               |  |  | 375    |  
|                                                                                |  |                 
|Net cash provided by investing activities                                       |  |                  | 139  |               |  |  | 369    |  
|                                                                                |  |                 
|Cash flow from financing activities:                                            |  |                  |      |               |  |  |        |  
|Repayment of short-term debt                                                    |  |                  | (4   | )             |  |  | (141   | )
|Repayments of long-term debt                                                    |  |                  | (106 | )             |  |  |       |  
|Distribution to creditors under the scheme
    relating to debt and borrowings* |  |                  | (330 | )             |  |  |       |  
|Net cash provided by related parties                                            |  |                  |     |               |  |  | 24     |  
|Restricted cash transferred from/(to) secured
    accounts                      |  |                  | 754  |               |  |  | (761   | )
|                                                                                |  |                 
|Net cash provided by/(used in) financing
    activities                         |  |                  | 314  |               |  |  | (878   | )
|                                                                                |  |                 
|Net cash used by discontinued operations                                        |  |                  | (3   | )             |  |  | (26    | )
|Effects of exchange rate changes on cash and cash
    equivalents               |  |                  | (10  | )             |  |  | (49    | )
|                                                                                |  |                 
|Net increase/(decrease) in cash and cash
    equivalents                        |  |                  | 370  |               |  |  | (1,038 | )
|Cash and cash equivalents, beginning of period                                  |  |                  | 192  |               |  |  | 1,230  |  
|                                                                                |  |                 
|Cash and cash equivalents, end of period                                        |  |                  | 562  |               |  |  | 192    |  
|                                                                                |  |                 
|Supplemental disclosure of cash flow
    activity:                              |  |                  |      |               |  |  |        |  
|Cash payments for interest                                                      |  |                  | 19   |               |  |  | 189    |  
|Cash payments for income taxes                                                  |  |                  | 2    |               |  |  | 13     |  
|Issuance of shares to extinguish liabilities                                    |  |                  | 562  |               |  |  |       |  
|Distribution of warrants to former plc
    shareholders                         |  |                  | 12   |               |  |  |       |  
|Gain on extinguishment of related party
    liabilities                         |  |                  | 507  |               |  |  |       |  
|Issuance of new debt to extinguish liabilities                                  |  |                  | 690  |               |  |  |       |  
|Distribution to creditors under the scheme
    relating to operating activities |  |                  | 10   |               |  |  |       |  



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The distribution made to creditors under the
    scheme of £340 million has been reported (see
    note 2) in the condensed consolidated statement of cash
    flows within operating and financing activities based on the
    nature of the creditor balances extinguished by the scheme.

See notes to condensed consolidated financial
statements.

5



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##### Table of Contents



Marconi Corporation plc and
subsidiaries






CONDENSED CONSOLIDATED STATEMENTS OF
SHAREHOLDERS EQUITY/(DEFICIT)


(Unaudited)


|                                   |                                                                          |                 |             |              |   |            |     |             |   |           |    |               |  |               |       |       |   |  |        |       |   |  |     |     |   |  |      |     |   |  |        |       |  
|---------------------------------- | ------------------------------------------------------------------------ | --------------- | ----------- | ------------ | - | ---------- | --- | ----------- | - | --------- | -- | ------------- |  | ------------- | ----- | ----- | - |  | ------ | ----- | - |  | --- | --- | - |  | ---- | --- | - |  | ------ | ----- | -
|                                   |                                                                          |                 |             |              |   |            |     |             |   |           |    |               |  | Accumulated   |       |      
|                                   |                                                                          |                 |             |              |   | Additional |     |             |   | Capital   |    | Other         |  |              
|                                   |                                                                          | Ordinary shares |             |              |   | Paid-in    |     | Accumulated |   | Reduction |    | Comprehensive |  |              
|(in £ millions, except share data) |                                                                          | Shares*         |             | Amount       |   | Warrants   |     | Capital     |   | Deficit   |    | Reserve       |  | Income/(Loss) |       | Total
|                                   |                                                                          |                
|                                   |                                                                          |                
|As of March 31, 2003               |                                                                          |                 | 573,250,147 |              |   |            | 143 |             |   |           |   |               |  |               | 895   |       |   |  | (4,055 | )     |   |  |    |     |   |  | (317 | )   |   |  | (3,334 | )    
|                                   | Net income                                                               |                 |             |             |   |            |     |            |   |           |    |              |  |               |       |      |   |  |        | 2,812 |   |  |     |    |   |  |      |    |   |  |        | 2,812 |  
|                                   | Cancellation of old share capital                                        |                 |             | (573,250,147 | ) |            |     | (143        | ) |           |    |              |  |               |       | (895  | ) |  |        | 695   |   |  |     | 343 |   |  |      |    |   |  |        |      |  
|                                   | Gain on extinguishment of related party
    liabilities                  |                 |             |             |   |            |     |            |   |           |    |              |  |               |       | 507   |   |  |        |      |   |  |     |    |   |  |      |    |   |  |        | 507   |  
|                                   | Gain on waiver of related party payable                                  |                 |             |             |   |            |     |            |   |           |    |              |  |               |       | 25    |   |  |        |      |   |  |     |    |   |  |      |    |   |  |        | 25    |  
|                                   | Issuance of ordinary shares in exchange for
    extinguished liabilities |                 |             | 200,000,000  |   |            |     | 50          |   |           |    |              |  |               |       | 512   |   |  |        |      |   |  |     |    |   |  |      |    |   |  |        | 562   |  
|                                   | Distribution of warrants                                                 |                 |             |             |   |            |     |            |   |           |    | 12            |  |               |       |      |   |  |        | (12   | ) |  |     |    |   |  |      |    |   |  |        |      |  
|                                   | Adjustment to capital reduction reserve                                  |                 |             |             |   |            |     |            |   |           |    |              |  |               |       |      |   |  |        | 9     |   |  |     | (9  | ) |  |      |    |   |  |        |      |  
|                                   | Capital contribution for stock-based compensation                        |                 |             |             |   |            |     |            |   |           |    |              |  |               |       | 8     |   |  |        |      |   |  |     |    |   |  |      |    |   |  |        | 8     |  
|                                   | Minimum pension liability                                                |                 |             |             |   |            |     |            |   |           |    |              |  |               |       |      |   |  |        |      |   |  |     |    |   |  |      | 17  |   |  |        | 17    |  
|                                   | Translation adjustments                                                  |                 |             |             |   |            |     |            |   |           |    |              |  |               |       |      |   |  |        |      |   |  |     |    |   |  |      | (11 | ) |  |        | (11   | )
|                                   |                                                                          |                
|As of September 30, 2003           |                                                                          |                 | 200,000,000 |              |   |            | 50  |             |   |           | 12 |               |  |               | 1,052 |       |   |  | (551   | )     |   |  | 334 |     |   |  | (311 | )   |   |  | 586    |      
|                                   |                                                                          |                

* After the one-for-five share consolidation.

See notes to condensed consolidated financial
statements.

6



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##### Table of Contents



Marconi Corporation plc and
subsidiaries




NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


1.   Nature of Business and
basis of preparation:

Nature of business

Marconi Corporation plc and its subsidiaries and
joint ventures (together the Company) is a
multi-regional provider of telecommunications equipment and
services which it supplies to major telecommunication network
operators, government agencies and selected large enterprises
world-wide. In connection with the Financial Restructuring (see
note 2), the Company adopted a new reporting structure that
segments its business along geographical lines. Commencing this
fiscal quarter ended September 30, 2003, the Company has
reported the results of the businesses based in the
U.S. (North American Ring-fence or NARF)
separately from the results of its businesses based in Europe
and the rest of the world other than the U.S. (Non
Ring-fenced businesses or Non NARF) as follows:



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NARF mainly comprises the equipment and services
    activities of the U.S. based Broadband Routing and
    Switching (BBRS), Outside Plant & Power (OPP) and North
    American Access (NAA) (irrespective of the country of
    destination of these revenues); and
|
| |  | Non NARF mainly comprises the European and the
    rest of the world businesses: Optical Networks, Access Networks,
    Other Network Equipment and related Network Services.                                                                                        

Basis of preparation

The condensed consolidated financial statements
as at September 30, 2003 and for the three and six months
ended September 30, 2003 and 2002, include, in the opinion
of management, all adjustments (consisting of normal recurring
adjustments and reclassifications) necessary to present fairly
the financial position, results of operations and cash flows as
of September 30, 2003 and for all periods presented. These
financial statements are unaudited and have been prepared on a
basis substantially consistent with the audited consolidated
financial statements of the Company as of and for the year ended
March 31, 2003, included in the Companys Annual
Report on Form 20-F as filed with the Securities and
Exchange Commission (Form 20-F).

The condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) for interim financial
information. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto included in the Form 20-F for
the year ended March 31, 2003. The results of operations
for the three and six months ended September 30, 2003 are
not necessarily indicative of the operating results to be
expected for the year ending March 31, 2004. Certain
amounts in prior periods financial statements and related
notes have been reclassified to conform to the current period
presentation.

The preparation of financial statements in
conformity with U.S. GAAP requires management to make
certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.

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

7



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##### Table of Contents



Currency Translation

Transactions denominated in foreign currencies
are translated into the functional currency at the rates ruling
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.

Key exchange rates relative to U.K. pounds
sterling are as follows:

|            |  |                  |      |            |  |      |      |      |  |  |      |  |  |  |      | 
|----------- |  | ---------------- | ---- | ---------- |  | ---- | ---- | ---- |  |  | ---- |  |  |  | ---- | 
|            |  |                  |      |            |  |     
|            |  | Average rates    |      |           
|            |  | Six months ended |      | Period-end
|            |  | September 30,    |      | rates     
|            |  | 2003             |      | 2002       |  | 2003 |      | 2002
|            |  |                 
|            |  |                 
|U.S. Dollar |  |                  | 1.62 |            |  |      | 1.52 |      |  |  | 1.66 |  |  |  | 1.58 | 
|Euro        |  |                  | 1.43 |            |  |      | 1.58 |      |  |  | 1.43 |  |  |  | 1.45 | 

Recently issued accounting pronouncements-not
yet adopted



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | FASB Interpretation No. 46, Consolidation
    of Variable Interest Entities (FIN 46), requires
    an entity to include the assets, liabilities and results of
    operations of a variable interest entity in its Consolidated
    Financial Statements, if it is the primary beneficiary of the
    variable interest entity. FIN 46 is effective immediately for
    all arrangements entered into after January 31, 2003. For
    arrangements entered into prior to January 31, 2003
    adoption is required at the beginning of the first interim or
    annual period after December 15, 2003. The Company does not
    anticipate that the adoption of FIN 46 will have a material
    impact on its financial position, cash flows and results of
    operations.

2.   Financial
Restructuring

On May 19, 2003, Marconi Corporation plc and
its former parent holding company, Marconi plc (now known as M
(2003) plc), concluded a Financial Restructuring. The
Financial Restructuring was effected through two separate
schemes of arrangement under the U.K. Companies Act
1985. A scheme of arrangement is a procedure under English law
through which a company may enter into a voluntary compromise or
arrangement with one or more classes of its creditors to effect
a financial restructuring of its financial obligations. One
scheme of arrangement involved all of the creditors of the
Company, other than certain excepted categories of creditors but
including the syndicate banks and bondholders to whom the
primary financial indebtedness was owed. The second scheme of
arrangement involved creditors of M (2003) plc, the
Companys former parent holding company. In connection with
the Financial Restructuring, the existing share capital of
Marconi Corporation plc was converted to non-voting deferred
shares, and subsequently cancelled through a capital reduction.
As a result, Marconi Corporation plc became the new parent
holding company of the group, replacing M (2003) plc, and M
(2003) plc ceased to be a member of the group.

As part of the Financial Restructuring, the
Company entered into an agreement with M (2003) plc to
reassign and waive some intra group balances. In addition, the
Company provided for amounts due to it from M (2003) plc,
which were schemed.

The Companys Financial Restructuring
covered approximately £4.8 billion of creditors
claims comprising £4.0 billion of syndicated bank debt
and the externally held U.S. dollar and euro denominated
bonds and £800 million of related party debt. In
exchange for the cancellation of their claims against Marconi

8



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##### Table of Contents



Corporation plc on May 19, 2003 the Company
distributed to the creditors covered by the scheme of
arrangement:




| |   |                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Cash:£340 million in cash;                                                                                                                                                                                                                                                                                                                                    
|
| |  | Senior Notes:U.S.$717,139,584 (approximately
    £437 million) in aggregate principal amount of new
    guaranteed senior secured notes due April 2008 issued by the
    Company, with interest payable quarterly in cash at a rate of 8%
    per annum;                                                                                                      
|
| |  | Junior Notes:U.S.$486,881,472 (approximately
    £297 million) in aggregate principal amount of new
    guaranteed junior secured notes due October 2008 issued by the
    Company, with interest payable quarterly in cash at a rate of
    10% per annum or, at our option, in kind, by issuing additional
    junior notes, at a rate of 12% per annum; and
|
| |  | Marconi Corporation plc Shares:995 million ordinary shares
    (199 million ordinary shares after the one-for-five share
    consolidation), representing 99.5% of the Companys issued
    ordinary share capital on May 19, 2003.                                                                                                                           

In addition, on May 19, 2003, the Company
issued 5 million ordinary shares (one million after the
one-for-five share consolidation), representing 0.5% of the
Companys issued ordinary share capital on May 19,
2003, and warrants, exercisable at £1.50 per share
(£1.50 per one-fifth of a share following one-for-five
share consolidation), to subscribe for up to 50 million
(ten million after the one-for-five share consolidation)
additional ordinary shares, equal to 5% of our issued ordinary
share capital on May 19, 2003, to shareholders of
M (2003) plc. The issuance of the 50 million
warrants to the former shareholders in M (2003) plc
was accounted for as a distribution. In connection with the
Financial Restructuring, the Company listed its ordinary shares
on the London Stock Exchange (LSE) and established
an American Depositary Receipt (ADR) program in
respect of those shares.

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

The Company recognized a gain upon extinguishment
of its liabilities under the terms of the Financial
Restructuring of approximately £3.2 billion, of which
£2.7 billion has been recorded in the consolidated
statement of operations and £0.5 billion has been
recorded in shareholders equity.

The gain was allocated to shareholders
equity to the extent that it related to the extinguishment of
related party liabilities and to the statement of operations to
the extent that it related to the extinguishment of third party
liabilities. The gain on extinguishment of the liabilities is
determined in accordance with APB Opinion 26,
Extinguishment of Debt, as follows (in
£ millions):

|                                                                         |  |  |       |  
|------------------------------------------------------------------------ |  |  | ----- | -
|Carrying value of extinguished third
    party liabilities               |  |  |       |  
|Short-term borrowings                                                    |  |  | 2,124 |  
|Current maturities of long-term debt (held by
    third parties)         |  |  | 1,808 |  
|Debt issuance costs on extinguished debt                                 |  |  | (23   | )
|Corporate tax obligations                                                |  |  | 10    |  
|Other current liabilities                                                |  |  | 3     |  
|Accrued interest accrued on long-term debt and
    short term borrowings |  |  | 113   |  
|                                                                         |  |  |       |  
|Total carrying value of extinguished third party
    liabilities         |  |  | 4,035 |  
|                                                                         |  |  |       |  

9



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##### Table of Contents



|                                                                                                                  |                                                          |  |       |      |  
|----------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  | ----- | ---- | -
|Carrying value of extinguished related
    party liabilities                                                      |                                                          |  |       |     
|Current maturities of long term debt (held by
    related parties)                                                |                                                          |  | 385   |     
|Debt issuance costs on extinguished bonds                                                                         |                                                          |  | (4    | )   
|Amounts owed to M (2003) plc and fellow
    subsidiaries                                                          |                                                          |  | 378   |     
|                                                                                                                  |                                                          |  |       |     
|Total carrying value of extinguished related
    party liabilities                                                |                                                          |  | 759   |     
|                                                                                                                  |                                                          |  |       |     
|Total carrying value of liabilities extinguished                                                                  |                                                          |  | 4,794 |     
|                                                                                                                  |                                                          |  |       |     
|Less fair value of consideration of new
    shares, new debt and cash exchanged for
    liabilities extinguished: |                                                          |  |       |     
|Cash                                                                                                              |                                                          |  | (340  | )   
|Debt:                                                                                                             |                                                          |  |       |     
|                                                                                                                  | Senior Notes repayable April 2008 at fair
    value(b)   |  |       | (407 | )
|                                                                                                                  | Junior Notes repayable October 2008 at fair
    value(b) |  |       | (291 | )
|                                                                                                                  | Debt issuance costs                                      |  |       | 8    |  
|                                                                                                                  |                                                          |  |       |     
|                                                                                                                  | Carrying value of new debt, net of issuance costs        |  |       | (690 | )
|                                                                                                                  |                                                          |  |       |     
|Equity:                                                                                                           |                                                          |  |       |     
|                                                                                                                  | New shares(a)                                            |  |       | (570 | )
|                                                                                                                  | Equity issuance costs                                    |  |       | 8    |  
|                                                                                                                  |                                                          |  |       |     
|                                                                                                                  | Fair value of new equity                                 |  |       | (562 | )
|                                                                                                                  |                                                          |  |       |     
|Gain on extinguishment of liabilities                                                                             |                                                          |  | 3,202 |     
|                                                                                                                  |                                                          |  |       |     
|Allocation of gain on extinguishment
    of liabilities:                                                          |                                                          |  |       |     
|Gain on extinguishment of third party liabilities                                                                 |                                                          |  | 2,695 |     
|Gain on extinguishment of related party
    liabilities                                                           |                                                          |  | 507   |     
|                                                                                                                  |                                                          |  |       |     
|                                                                                                                  |                                                          |  | 3,202 |     
|                                                                                                                  |                                                          |  |       |     



| |     |                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The fair value of the 995 million shares in
    the Company is based upon the closing price of 57.25 pence
    as of May 19, 2003, as reported on the LSE.                       
|
| | (b) | The fair value of the new Senior Notes and
    Junior Notes issued is based upon the closing price of 93%
    and 98%, respectively, on May 19, 2003, as reported on the
    LSE.

The Employee Share Option Plans
(ESOP) derivative settlement was conditional on the
Financial Restructuring becoming effective. Accordingly, the
ESOP derivative settlement became effective on May 19,
2003. As a result, the Company paid £35 million in
cash to the ESOP derivative banks to settle the liability to the
ESOP derivative banks recorded in the consolidated balance sheet
as of March 31, 2003. The resulting gain, arising on the
release of this liability, of £123 million is
reflected in the statement of operations in the six months ended
September 30, 2003.

The Financial Restructuring of
M (2003) plc and Marconi Corporation plc was
implemented by way of two separate schemes of arrangement under
section 425 of the U.K. Companies Act 1985. As a
result, the gain on extinguishment of liabilities described
above will not give rise to any taxable amounts. Note 20,
Income Taxes in the Form 20-F for the year ended
March 31, 2003 describes the effect of the Financial
Restructuring on our tax position.

10



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##### Table of Contents



The following unaudited pro forma data
illustrates the impact that the Financial Restructuring would
have had on the consolidated statement of operations for the six
months ended September 30, 2003 and 2002 if the Financial
Restructuring had been completed on April 1, 2002:

|                                            |                                                                            |                  |  |       |   |  |  |       |  
|------------------------------------------- | -------------------------------------------------------------------------- | ---------------- |  | ----- | - |  |  | ----- | -
|                                            |                                                                            |                 
|                                            |                                                                            | Six months ended
|                                            |                                                                            | September 30,   
|                                            |                                                                            | 2003             |  | 2002 
|(in millions, except per share data)        |                                                                            | £                |  | £    
|                                            |                                                                            |                 
|                                            |                                                                            |                 
|Pro-forma statement of operations
    data: |                                                                            |                  |  |       |   |  |  |      
|                                            | Operating loss                                                             |                  |  | (121  | ) |  |  | (421  | )
|                                            | Income/(loss) from continuing operations                                   |                  |  | 2,772 |   |  |  | (725  | )
|                                            | Income/(loss) from continuing operations per
    share  basic and diluted |                  |  | 13.86 |   |  |  | (3.63 | )



|   |                                   
|-- | ----------------------------------
|3. | Selected balance sheet information

Restricted cash

Cash balances pledged or advanced as collateral
are considered to be restricted cash. At September 30, 2003
and March 31, 2003, the total restricted cash was
£210 million and £964 million respectively.
Of the total restricted cash balance, £nil
(£771 million at March 31, 2003) was held in
secured accounts, £135 million (£135 million
at March 31, 2003) relates to cash collateral placed
against bonding facilities; £41 million (£nil at
March 31, 2003) relates to cash held in escrow accounts to
meet any claims for collateral under rights attaching to certain
uncollaterized bonds already issued before May 19, 2003;
£nil (£27 million at March 31, 2003) relates
to cash held in Employee Share Option Plan ESOP
escrow accounts; £19 million (£17 million at
March 31, 2003) relates to cash in insurance reserves,
£13 million (£14 million at March 31,
2003) relates to cash deposited against secured loans in Italy
and £2 million (£nil at March 31, 2003)
relates to cash held in a Mandatory Redemption Escrow Account
(MREA).

Inventories, net

Inventories, net are comprised of the following
at September 30, 2003 and March 31, 2003.

|              |                 |               |  |           |     |  |  |    |     | 
|------------- | --------------- | ------------- |  | --------- | --- |  |  | -- | --- | 
|              |                 | September 30, |  | March 31,
|              |                 | 2003          |  | 2003     
|(in millions) |                 | £             |  | £        
|              |                 |              
|              |                 |              
|              |                 | (Unaudited)   |  |          
|Inventories:  |                 |               |  |           |     |  |  |   
|              | Finished goods  |               |  | 74        |     |  |  | 76 |    
|              | Work-in-process |               |  | 57        |     |  |  | 69 |    
|              | Raw materials   |               |  | 71        |     |  |  | 89 |    
|              |                 |              
|              |                 | Total         |  |           | 202 |  |  |    | 234 | 
|              |                 |              

4.   Employee stock option
plans

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, (SFAS 123) 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.

Prior to the completion of the Financial
Restructuring described in note 2, employees of the Company
participated in a number of stock option plans whereby they
received rights over shares in M (2003) plc, the
former parent company of the Company. The Company accounted for
those employees stock options under APB No. 25,
Accounting for Stock Issued to Employees (APB
25) with any expense being matched by a

11



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##### Table of Contents



credit to shareholders equity as a capital
contribution by M (2003) plc. Following the completion
of the Financial Restructuring, the Company 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
Company 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 Company
accounts for such employee share plans under APB 25.

Nil Cost Share Option Plan

Under the Nil Cost 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 Company without payment based
on the attainment of certain performance criteria. The initial
options under this scheme were approved on June 24, 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 shares. The Company applies variable plan accounting
for grants under this plan and recognizes compensation cost when
achievement of the performance conditions becomes probable. The
performance targets for the first three tranches are linked to
the repayment of the Companys debt and for the last two
tranches are linked to achieving market capitalization targets.
For those tranches subject to market capitalization targets, no
compensation cost will be recognized until the targets are
achieved. As at September 30, 2003, 16,230,000 options
(after the one-for-five share consolidation) have been granted
under this plan.

Marconi Corporation Employee Share Option
Plan

Under the Marconi Corporation 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
Company 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 share at the date of
the grant. The initial options under this scheme were approved
on June 30, 2003 and are exercisable in five tranches, each
of which will be subject to the same performance conditions as
the nil cost share option plan. The options have a ten-year term
and may be satisfied using newly issued or existing Marconi
Corporation shares. The Company applies variable plan accounting
for grants under this plan and recognizes compensation cost when
achievement of the performance conditions becomes probable. As
at September 30, 2003, 6,075,000 options (after the
one-for-five share consolidation) have been granted under this
plan.

The Company recognized compensation expense in
the three and six months ended September 30, 2003 of
approximately £1 million related to stock options
previously issued over M (2003) plc shares. Had
compensation cost for the employee share plans been determined
consistent with the fair value methodology of SFAS 123, the
Companys net income/(loss) would have been as follows:

12



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|                                                                                                                             |                             |               |    |       |  |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------- | -- | ----- |  |  | - | ----- | -
|                                                                                                                             |                             |              
|                                                                                                                             |                             | Six months   
|                                                                                                                             |                             | ended        
|                                                                                                                             |                             | September 30,
|                                                                                                                             |                             | 2003          |    | 2002 
|(in millions, except per share data)                                                                                         |                             | £             |    | £    
|                                                                                                                             |                             |              
|                                                                                                                             |                             |              
|Net income/(loss)                                                                                                            |                             |               |    |       |  |  |   |      
|                                                                                                                             | As reported                 |               |    | 2,812 |  |  |   | (824  | )
|Deduct: Total stock-based employee compensation
    determined under fair value based method, net of related tax
    effects |                             |               | (2 | )     |  |  |  |      
|Add back: Total stock-based employee compensation
    determined under APB 25                                                |                             |               | 8  |       |  |  | 7 |      
|                                                                                                                             |                             |              
|                                                                                                                             | Pro forma net income/(loss) |               |    | 2,818 |  |  |   | (817  | )
|                                                                                                                             |                             |              
|Pro forma net income/(loss) per share:                                                                                       |                             |               |    |       |  |  |   |      
|                                                                                                                             | Basic                       |               |    | 9.38  |  |  |   | (1.43 | )
|                                                                                                                             |                             |              
|                                                                                                                             | Diluted                     |               |    | 9.34  |  |  |   | (1.43 | )
|                                                                                                                             |                             |              

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

|                        |  |               |      |      |  |  |     | 
|----------------------- |  | ------------- | ---- | ---- |  |  | --- | 
|                        |  |              
|                        |  | Six months   
|                        |  | ended        
|                        |  | September 30,
|                        |  | 2003          |      | 2002
|                        |  |              
|                        |  |              
|Risk-free interest rate |  |               | 4.21 | %    |  |  | n/a | 
|Expected life (years)   |  |               | 10   |      |  |  | n/a | 
|Assumed volatility      |  |               | 66.4 | %    |  |  | n/a | 
|Expected dividends      |  |               |     |      |  |  |    | 

5.   Debt and credit
facilities

Long-term debt

|                                     |                      |               |     |           |  |  |        |       | 
|------------------------------------ | -------------------- | ------------- | --- | --------- |  |  | ------ | ----- | 
|                                     |                      | September 30, |     | March 31,
|                                     |                      | 2003          |     | 2003     
|(in millions)                        |                      | £             |     | £        
|                                     |                      |              
|                                     |                      |              
|Term loans                           |                      |               | 615 |           |  |  | 2,221  |      
|Finance leases                       |                      |               | 2   |           |  |  |       |      
|                                     |                      |              
|                                     | Total obligations    |               |     | 617       |  |  |        | 2,221 | 
|Current maturities of long-term debt |                      |               | (3  | )         |  |  | (2,191 | )    
|                                     |                      |              
|                                     | Total long-term debt |               |     | 614       |  |  |        | 30    | 
|                                     |                      |              

Early debt repayment

On May 19, 2003, the Company issued as part
of its Financial Restructuring U.S.$717,139,584 in aggregate
principal amount of new guaranteed senior secured notes due
April 2008 with interest payable quarterly in cash at a rate of
8% per annum and U.S.$486,881,472 in aggregate principal amount
of new guaranteed junior secured notes due October 2008 with
interest payable quarterly in cash at a rate of 10% per annum
or, at our option, in kind, by issuing additional junior notes,
at a rate of 12% per annum. The aggregate fair value of the
notes issued was approximately £698 million. The new
notes issued on May 19, 2003 include a 10% premium upon
early redemption, which has been accounted for as an embedded
derivative. The fair value of the embedded derivative was
approximately £5 million at September 30, 2003

13



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and is included within long-term other
liabilities. For further details on the Financial Restructuring,
refer to note 2.


The Company announced on July 4, 2003 that
it had successfully completed the sale of shares in Easynet
Group plc (Easynet), which raised
£40.5 million before expenses. Of the net cash
proceeds, the Company retained £3 million for working
capital purposes and transferred the balance after expenses to
the mandatory redemption escrow account relating to the Junior
and Senior Notes (MREA). Also, the Company announced
on July 17, 2003 that it had completed the sale of UMTS to
Finmeccanica SpA. In conjunction with the sale of UMTS, the
Company agreed to capitalize the business with approximately
6 million
(approximately £4 million) prior to disposal. In a
separate agreement, announced on the same day, Finmeccanica
agreed to release approximately
12 million
(approximately £9 million) retained against the
purchase price and held in an escrow account following its
purchase of Marconis Strategic Communications subsidiary
in August 2002. These monies were also transferred to the MREA
pursuant to the terms of the Junior and Senior Notes.

Following the transfer of these funds, the
balance in the MREA exceeded the redemption threshold of
U.S.$30 million, thereby triggering a mandatory partial
redemption of the Junior Notes. The Company redeemed
approximately U.S.$66 million (£41 million) of
the Junior Notes on July 31, 2003, at a cost of 110% plus
three months accrued interest, thereby reducing the
principal amount of Junior Notes outstanding to approximately
U.S.$421 million (£263 million) at that time.

On September 30, 2003, the Company redeemed
an additional U.S.$103 million of the aggregate principal
amount of the Junior Notes. The principal amount of Junior Notes
outstanding following this redemption was approximately
U.S.$317.6 million (£198.8 million). This
mandatory partial redemption primarily resulted from the
previously disclosed sale of the Companys remaining stake
in Easynet, its entire stake holding in Gamma Telecom Holdings
Ltd (Gamma), and the release of collateral following
the expiry of certain performance bonds and letters of credit.

On September 19, 2000, the Company issued
for cash consideration, two unsecured yankee bonds having an
aggregate principal amount of $1.8 billion (approximately
£1.3 billion). One bond was for $900 million
(approximately £630 million) with a coupon rate of
7.75% per annum, maturing on September 15, 2010. The other
bond was for $900 million (approximately
£630 million) with a coupon rate of 8.375% per annum,
maturing on September 15, 2030. On March 17, 2003 the
Company failed to meet a scheduled interest payment on these
bonds. As a result, as at March 31, 2003, these bonds were
repayable on demand.

On March 30, 2000, the Company issued for
cash consideration two unsecured euro bonds having an aggregate
principal amount of
1.5 billion
(approximately £927 million). One bond was for
500 million
(approximately £309 million) with a coupon rate of
5.625% per annum, maturing on March 30, 2005. The other
bond was for
1,000 million
(approximately £618 million) with a coupon rate of
6.375% per annum, maturing on March 30, 2010.

Both the yankee bonds and the euro bonds were
extinguished by the Financial Restructuring and are no longer
outstanding. For further details on the impact of the Financial
Restructuring on the long-term debt, refer to note 2,
Financial Restructuring.

As of September 30, 2003 and March 31,
2003, the Company had other obligations of £23 million
and £20 million related to secured debenture loans,
respectively.

Key covenants

The significant covenants have been described in
the Scheme Document that was filed on Form 6-K with the SEC
on March 31, 2003.

6.   Business restructuring
charges

In September 2001, following the sudden and
significant downturn in trading in the global telecommunications
markets, the results of an operational review that had three
main objectives were

14



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##### Table of Contents



announced. The original objectives were to focus
the business on core operations, manage the non-core operations
for value, reduce group indebtedness from £4.4 billion
at August 31, 2001 to between £2.7 billion and
£3.2 billion by March 31, 2002 and reduce the
annual operating cost base. These objectives have now been
revised to reflect further operating cost base reductions during
fiscal 2004.


When management reviews the operating income
performance of the segments described in note 10,
management uses the U.K. GAAP operating profit/(loss) before
central costs, goodwill and intangible asset amortization, U.K.
GAAP operating exceptional items, gains and losses on business
disposal and the impact of less than 50% owned affiliates. This
measure does not include business restructuring charges.
Accordingly, a segmental analysis of business restructuring
charges has not been provided.

The following table shows the activity by
statement of operations heading and the balances remaining in
accrued expenses and other liabilities at September 30,
2003 following the implementation of actions required to achieve
these objectives.

|                                                |  |            |    |         |  |          |    |          |  |               |     |   |  |  |    |   |  |  |    | 
|----------------------------------------------- |  | ---------- | -- | ------- |  | -------- | -- | -------- |  | ------------- | --- | - |  |  | -- | - |  |  | -- | 
|                                                |  | Balance at |    |         |  |          |    |          |  | Balance at   
|                                                |  | March 31,  |    |         |  | Net cash |    | Non cash |  | September 30,
|(in millions)                                   |  | 2003       |    | Charged |  | Payments |    | Movement |  | 2003         
|                                                |  | £          |    | £       |  | £        |    | £        |  | £            
|                                                |  |           
|                                                |  |           
|Business restructuring costs:                   |  |            |    |         |  |          |    |          |  |               |     |   |  |  |    |   |  |  |    | 
|Employee severance                              |  |            | 10 |         |  |          | 19 |          |  |               | (22 | ) |  |  |   |   |  |  | 7  | 
|Site rationalization                            |  |            | 36 |         |  |          | 6  |          |  |               | (8  | ) |  |  |   |   |  |  | 34 | 
|Contractual commitments and other Restructuring |  |            | 3  |         |  |          |   |          |  |               |    |   |  |  |   |   |  |  | 3  | 
|Advisor fees                                    |  |            | 1  |         |  |          | 42 |          |  |               | (33 | ) |  |  | (2 | ) |  |  | 8  | 
|                                                |  |           
|Total                                           |  |            | 50 |         |  |          | 67 |          |  |               | (63 | ) |  |  | (2 | ) |  |  | 52 | 
|                                                |  |           

Employee severance

As a consequence of the objective to reduce the
annual operating cost base, the Company recorded a charge of
£19 million during the six months ended
September 30, 2003 associated with redundancy payments for
approximately 700 employees. Management expects that the
majority of the remaining balance of £7 million at
September 30, 2003, which covers approximately 260 further
employees, will be paid out in fiscal 2004.

In the six months ended September 30, 2002,
the Company recorded a charge of £67 million to
reflect the charges associated with voluntary redundancy
payments for approximately 4,000 employees, while cash payments
of £97 million were made in the same period.

Site rationalization

The charge of £6 million in respect of
site rationalization in the six months ended September 30,
2003 represents additional costs associated with closing and
consolidating various sites around the world as part of the
business restructuring. Cash payments of £8 million
were made in respect of these site closures and consolidations.

In the six months ended September 30, 2002,
the Company recorded a charge of £29 million and made
cash payments of £15 million in respect of these site
closures and consolidations.

Contractual commitments and other
restructuring

The balance of £3 million at
September 30, 2003 represents various other costs
associated with the restructuring program.

15



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##### Table of Contents



In the six months ended September 30, 2002
the company recorded a charge of £1 million and made
cash payments of £13 million in respect of these other
restructuring associated costs.

Advisor fees

The charge of £42 million in respect of
advisor fees for the six months ended September 30, 2003
represents charges from the Companys external advisors
with respect to services rendered in the period related to the
Financial Restructuring. Of the £42 million charge in
the period, £13 million relates to costs, which were
prepaid at March 31, 2003. In addition, the Company now
expects to incur approximately £36 million of cash
costs during fiscal 2004 in relation to the Financial
Restructuring, £33 million of which was paid out
during the six months ended September 30, 2003.

In the six months ended September 30, 2002,
£32 million was charged and cash payments of
£30 million made in respect of these services.

7.   Goodwill

The changes in the carrying amount of goodwill
for the six months ended September 30, 2003, are as follows:

|                              |                        |      |       |              |   |       |        |   |  |  |     |    |  
|----------------------------- | ---------------------- | ---- | ----- | ------------ | - | ----- | ------ | - |  |  | --- | -- | -
|                              |                        |      |       | Accumulated  |   |      
|                              |                        | Cost |       | Amortization |   | Total
|(in millions)                 |                        | £    |       | £            |   | £    
|                              |                        |     
|                              |                        |     
|Balance at March 31, 2003     |                        |      | 1,880 |              |   |       | (1,223 | ) |  |  | 657 |   
|                              | Translation adjustment |      |       | (6           | ) |       |        |  |  |  |     | (6 | )
|                              |                        |     
|Balance at June 30, 2003      |                        |      | 1,874 |              |   |       | (1,223 | ) |  |  | 651 |   
|                              | Translation adjustment |      |       | (1           | ) |       |        |  |  |  |     | (1 | )
|                              |                        |     
|Balance at September 30, 2003 |                        |      | 1,873 |              |   |       | (1,223 | ) |  |  | 650 |   
|                              |                        |     

8.   Intangibles

The changes in the carrying amount of intangibles
for the six months ended September 30, 2003, are as follows:

|                              |                      |      |     |              |  |       |      |     |   |  |     |     |  
|----------------------------- | -------------------- | ---- | --- | ------------ |  | ----- | ---- | --- | - |  | --- | --- | -
|                              |                      |      |     | Accumulated  |  |      
|                              |                      | Cost |     | Amortization |  | Total
|(in millions)                 |                      | £    |     | £            |  | £    
|                              |                      |     
|                              |                      |     
|Balance at March 31, 2003     |                      |      | 372 |              |  |       | (271 | )   |   |  | 101 |    
|                              | Amortization expense |      |     |             |  |       |      | (11 | ) |  |     | (11 | )
|                              |                      |     
|Balance at June 30, 2003      |                      |      | 372 |              |  |       | (282 | )   |   |  | 90  |    
|                              | Amortization expense |      |     |             |  |       |      | (12 | ) |  |     | (12 | )
|                              |                      |     
|Balance at September 30, 2003 |                      |      | 372 |              |  |       | (294 | )   |   |  | 78  |    
|                              |                      |     

Intangible amortization expense based on
September 30, 2003 intangibles for the next five years is
expected to be:

|                       |  |   |    | 
|---------------------- |  | - | -- | 
|(in millions)          |  | £
|                       |  |  
|Fiscal 2004 (6 months) |  |   | 21 | 
|Fiscal 2005            |  |   | 44 | 
|Fiscal 2006            |  |   | 13 | 
|Fiscal 2007            |  |   |   | 
|Fiscal 2008            |  |   |   | 

16



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9.   Other comprehensive
income/(loss)

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

|                                   |                                     |                    |    |                  |   |      |      |      |  |  |       |     |   |  |      |    | 
|---------------------------------- | ----------------------------------- | ------------------ | -- | ---------------- | - | ---- | ---- | ---- |  |  | ----- | --- | - |  | ---- | -- | 
|                                   |                                     |                    |    |                 
|                                   |                                     | Three months ended |    | Six months ended
|                                   |                                     | September 30,      |    | September 30,   
|                                   |                                     | 2003               |    | 2002             |   | 2003 |      | 2002
|(in millions)                      |                                     | £                  |    | £                |   | £    |      | £   
|                                   |                                     |                   
|                                   |                                     |                   
|Net income/(loss)                  |                                     |                    | 29 |                  |   |      | (503 | )    |  |  | 2,812 |     |   |  | (824 | ) 
|Other comprehensive (loss)/income: |                                     |                    |    |                  |   |      |      |      |  |  |       |     |   |  |      |   
|                                   | Accumulated translation adjustments |                    |    | (6               | ) |      |      | 40   |  |  |       | (11 | ) |  |      | 53 | 
|                                   | Minimum pension liability           |                    |    | 17               |   |      |      |     |  |  |       | 17  |   |  |      |   | 
|                                   | Unrealized gains on investments     |                    |    | (2               | ) |      |      |     |  |  |       |    |   |  |      |   | 
|                                   |                                     |                   
|Other comprehensive income/(loss)  |                                     |                    | 38 |                  |   |      | (463 | )    |  |  | 2,818 |     |   |  | 771  |   
|                                   |                                     |                   

10. Segment and related information
disclosures

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



| |   |                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NARF mainly comprises the equipment and services
    activities of the U.S. based Broadband Routing and
    Switching (BBRS), Outside Plant & Power (OPP) and North
    American Access (NAA) (irrespective of the country of
    destination of these revenues); and
|
| |  | Non NARF mainly comprises the European and the
    rest of the world businesses: Optical Networks, Access Networks,
    Other Network Equipment and related Network Services.                                                                                        

The new segmentation is connected with the
contractual separation or ring-fencing of the
U.S. based businesses that the Company implemented as part
of the Financial Restructuring.

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



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Network Equipment segment, which comprised
    Optical Networks, Broadband Routing and Switching (BBRS),
    European Access, North American Access, Outside Plant &
    Power (OPP) and Other Network Equipment;
|
| |  | The Network Services segment, which comprised
    Installation, Commissioning & Maintenance (IC&M) and
    Value-Added Services (VAS); and                                                                           
|
| |  | Other, which comprised non-core businesses,
    including Marconi Applied Technologies, all of which have been
    sold by the end of the quarter ended September 30, 2003.                                          

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

In certain specific cases prior to the completion
of the Financial Restructuring and the implementation of the
North American Ring Fence, the Company entered into contracts
with customers for the supply of equipment or services, which
now form part of the Non Ring-fenced business but did this
through entities, which now form part of NARF (or vice versa).
In the analysis of revenues by product area on page 56,
these revenues are shown in the product or service area from
which the revenue originated rather than through the

17



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##### Table of Contents



entity that invoiced the final customer. A
detailed footnote is provided to reconcile the product area
sub-totals to the NARF and Non NARF revenues as they are
recorded in the NARF and Non NARF consolidated financial
statements (see Note 17). During the six months ended
September 30, 2003, revenues of NARF products direct to
customers and through Non NARF entities totalled
£256 million and revenues of products or services from
Non NARF businesses sold through NARF entities totalled
approximately £4 million bringing total NARF revenues
to £260 million for the six months ended
September 30, 2003.


The indentures governing the Notes issued in the
Financial Restructuring require that we provide certain
financial information with respect to each of (i) Marconi
Corporation plc and its Non-U.S. Subsidiaries (as defined in the
Indentures) and (ii) Marconi Communications, Inc. (which is the
holding company of our U.S. operations) and its Subsidiaries (as
defined). For these purposes the Non NARF segment is equivalent
to Marconi Corporation plc and its Non-U.S. Subsidiaries and the
NARF segment is equivalent to Marconi Communications, Inc. and
its Subsidiaries. In accordance with the requirements of the
indentures, we will provide the additional financial information
until the Junior Notes are repaid in full.

Segmental performance

The requirements of U.S. GAAP applied to the
Company have resulted in us preparing segment results using
information prepared in accordance with generally accepted
accounting principles in the United Kingdom (U.K. GAAP). The
U.S. Financial Accounting Standards Board
standard  Statement of Financial Accounting Standards
No. 131  Disclosure about Segments of an
Enterprise and Related Information requires us to determine
and review our segments as reflected in the management
information systems reports that our managers use in making
decisions. As we are an English company and we prepare our
consolidated statutory financial statements under
U.K. GAAP, our chief operating decision-maker evaluates our
segment performance using U.K. GAAP measures.

Revenues and operating profits are measured on a
segmental basis in accordance with U.K. GAAP. Management
uses the U.K. GAAP operating (loss)/ profit before central
costs, goodwill, and intangible asset amortization,
U.K. GAAP exceptional items, gains and losses on business
disposals and the impact of 50% or less owned affiliates as its
measure of segment profitability. In the tables below, this
measure is referred to as segment operating (loss)/profit.

The following tables present the Companys
revenues, operating (loss)/ income before central and head
office costs, goodwill and intangible asset amortization and
operating exceptional segmental items gains and losses on
business disposals and the impact of 50% or less owned
affiliates, and other financial data from the Companys
reportable segments presented in accordance with U.K. GAAP
and then reconciled to U.S. GAAP financial information
consolidated totals:

Analysis of reportable segments (U.K.
GAAP)

New Segments:

|                            |  |                    |     |                |  |  |     |  
|--------------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                            |  |                   
|                            |  | Three months ended
|                            |  | September 30, 2003
|                            |  |                    |     | Segment       
|                            |  |                    |     | operating     
|                            |  | Revenues           |     | (loss)/ profit
|(in millions)               |  | £                  |     | £             
|                            |  |                   
|                            |  |                   
|NARF                        |  |                    | 139 |                |  |  | 18  |  
|Non NARF                    |  |                    | 250 |                |  |  | (25 | )
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 389 |                |  |  | (7  | )
|                            |  |                   

18



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##### Table of Contents



|                            |  |                    |     |                |  |  |     |  
|--------------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                            |  |                   
|                            |  | Six months ended  
|                            |  | September 30, 2003
|                            |  |                    |     | Segment       
|                            |  |                    |     | operating     
|                            |  | Revenues           |     | (loss)/ profit
|(in millions)               |  | £                  |     | £             
|                            |  |                   
|                            |  |                   
|NARF                        |  |                    | 260 |                |  |  | 27  |  
|Non NARF                    |  |                    | 496 |                |  |  | (66 | )
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 756 |                |  |  | (39 | )
|                            |  |                   

Old Segments:

|                            |  |                    |     |                |  |  |     |  
|--------------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                            |  |                   
|                            |  | Three months ended
|                            |  | September 30, 2003
|                            |  |                    |     | Segment       
|                            |  |                    |     | operating     
|                            |  | Revenues           |     | (loss)/ profit
|(in millions)               |  | £                  |     | £             
|                            |  |                   
|                            |  |                   
|Network Equipment           |  |                    | 251 |                |  |  | (19 | )
|Network Services            |  |                    | 138 |                |  |  | 12  |  
|Other                       |  |                    |    |                |  |  |    |  
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 389 |                |  |  | (7  | )
|                            |  |                   

|                            |  |                    |     |                |  |  |     |  
|--------------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                            |  |                   
|                            |  | Six months ended  
|                            |  | September 30, 2003
|                            |  |                    |     | Segment       
|                            |  |                    |     | operating     
|                            |  | Revenues           |     | (loss)/ profit
|(in millions)               |  | £                  |     | £             
|                            |  |                   
|                            |  |                   
|Network Equipment           |  |                    | 480 |                |  |  | (51 | )
|Network Services            |  |                    | 276 |                |  |  | 17  |  
|Other                       |  |                    |    |                |  |  | (5  | )
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 756 |                |  |  | (39 | )
|                            |  |                   

|                            |  |                    |     |                |  |  |     |  
|--------------------------- |  | ------------------ | --- | -------------- |  |  | --- | -
|                            |  |                   
|                            |  | Three months ended
|                            |  | September 30, 2002
|                            |  |                    |     | Segment       
|                            |  |                    |     | operating     
|                            |  | Revenues           |     | (loss)/ profit
|(in millions)               |  | £                  |     | £             
|                            |  |                   
|                            |  |                   
|Network Equipment           |  |                    | 284 |                |  |  | (83 | )
|Network Services            |  |                    | 198 |                |  |  | 7   |  
|Other                       |  |                    | 4   |                |  |  | (12 | )
|Discontinued(1)             |  |                    | 28  |                |  |  | (2  | )
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 514 |                |  |  | (90 | )
|                            |  |                   

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|                            |  |                    |       |                |  |  |      |  
|--------------------------- |  | ------------------ | ----- | -------------- |  |  | ---- | -
|                            |  |                   
|                            |  | Six months ended  
|                            |  | September 30, 2002
|                            |  |                    |       | Segment       
|                            |  |                    |       | operating     
|                            |  | Revenues           |       | (loss)/ profit
|(in millions)               |  | £                  |       | £             
|                            |  |                   
|                            |  |                   
|Network Equipment           |  |                    | 600   |                |  |  | (179 | )
|Network Services            |  |                    | 392   |                |  |  | 5    |  
|Other                       |  |                    | 27    |                |  |  | (24  | )
|Discontinued(1)             |  |                    | 87    |                |  |  | (2   | )
|                            |  |                   
|Segmental total  U.K. GAAP |  |                    | 1,106 |                |  |  | (200 | )
|                            |  |                   



| |     |                                                                                                                          
| | --- | -------------------------------------------------------------------------------------------------------------------------
| | (1) | For the three and six months ended
    September 30, 2002, the discontinued operations relates to
    the mobile segment.

Major customers

British Telecommunications plc (BT)
accounted for 19% and 20% of revenues for the three months ended
September 30, 2003 and 2002 respectively. For the
six months ended September 30, 2003 and 2002, BT
accounted for 20% and 17% of revenues respectively.

Analysis of revenue by product (U.K.
GAAP)

|                                                          |       |              |     |              |  |      |     |      |  |  |     |     |  |  |       |     | 
|--------------------------------------------------------- | ----- | ------------ | --- | ------------ |  | ---- | --- | ---- |  |  | --- | --- |  |  | ----- | --- | 
|                                                          |       |              |     |             
|                                                          |       | Three months |     | Six months  
|                                                          |       | ended        |     | ended       
|                                                          |       | September 30 |     | September 30
|                                                          |       | 2003         |     | 2002         |  | 2003 |     | 2002
|(in millions)                                             |       | £            |     | £            |  | £    |     | £   
|                                                          |       |             
|                                                          |       |             
|Network Equipment:                                        |       |              |     |              |  |      |     |      |  |  |     |     |  |  |       |    
|Optical Networks                                          |       |              | 80  |              |  |      | 108 |      |  |  | 165 |     |  |  | 242   |    
|BBRS                                                      |       |              | 53  |              |  |      | 59  |      |  |  | 96  |     |  |  | 116   |    
|European Access                                           |       |              | 48  |              |  |      | 69  |      |  |  | 92  |     |  |  | 128   |    
|North American Access                                     |       |              | 30  |              |  |      | 23  |      |  |  | 55  |     |  |  | 48    |    
|Outside Plant & Power                                     |       |              | 54  |              |  |      | 52  |      |  |  | 105 |     |  |  | 126   |    
|Other Network Equipment                                   |       |              | 16  |              |  |      | 15  |      |  |  | 28  |     |  |  | 29    |    
|                                                          |       |             
|                                                          | Total |              |     | 281          |  |      |     | 326  |  |  |     | 541 |  |  |       | 689 | 
|                                                          |       |             
|Network Services:                                         |       |              |     |              |  |      |     |      |  |  |     |     |  |  |       |    
|IC&M                                                      |       |              | 47  |              |  |      | 51  |      |  |  | 90  |     |  |  | 100   |    
|VAS                                                       |       |              | 61  |              |  |      | 105 |      |  |  | 125 |     |  |  | 203   |    
|                                                          |       |             
|                                                          | Total |              |     | 108          |  |      |     | 156  |  |  |     | 215 |  |  |       | 303 | 
|                                                          |       |             
|Total network equipment and network services
    revenues |       |              | 389 |              |  |      | 482 |      |  |  | 756 |     |  |  | 992   |    
|                                                          |       |             
|Total Other revenue                                       |       |              |    |              |  |      | 4   |      |  |  |    |     |  |  | 27    |    
|Total discontinued                                        |       |              |    |              |  |      | 28  |      |  |  |    |     |  |  | 87    |    
|                                                          |       |             
|Total revenues                                            |       |              | 389 |              |  |      | 514 |      |  |  | 756 |     |  |  | 1,106 |    
|                                                          |       |             

20



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Reconciliation of U.K. GAAP segmental
information to U.S. GAAP

|                                                         |  |               |     |               |  |      |     |      |  |  |     |  |  |  |       |  
|-------------------------------------------------------- |  | ------------- | --- | ------------- |  | ---- | --- | ---- |  |  | --- |  |  |  | ----- | -
|                                                         |  |               |     |              
|                                                         |  | Three months  |     | Six months   
|                                                         |  | ended         |     | ended        
|Revenue                                                  |  | September 30, |     | September 30,
|(in millions)                                            |  | 2003          |     | 2002          |  | 2003 |     | 2002
|                                                         |  | £             |     | £             |  | £    |     | £   
|                                                         |  |              
|                                                         |  |              
|Total segmental revenue in accordance with U.K.
    GAAP |  |               | 389 |               |  |      | 514 |      |  |  | 756 |  |  |  | 1,106 |  
|Discontinued operations  mobile                         |  |               |    |               |  |      | (32 | )    |  |  |    |  |  |  | (91   | )
|                                                         |  |              
|Total segmental revenue in accordance with
    U.S. GAAP |  |               | 389 |               |  |      | 482 |      |  |  | 756 |  |  |  | 1,015 |  
|                                                         |  |              

|                                                                           |                                                                   |               |     |               |   |      |      |      |   |  |       |       |   |  |      |      |  
|-------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------- | --- | ------------- | - | ---- | ---- | ---- | - |  | ----- | ----- | - |  | ---- | ---- | -
|                                                                           |                                                                   |               |     |              
|                                                                           |                                                                   | Three months  |     | Six months   
|                                                                           |                                                                   | ended         |     | ended        
|Operating (loss)/income                                                    |                                                                   | September 30, |     | September 30,
|(in millions)                                                              |                                                                   | 2003          |     | 2002          |   | 2003 |      | 2002
|                                                                           |                                                                   | £             |     | £             |   | £    |      | £   
|                                                                           |                                                                   |              
|                                                                           |                                                                   |              
|Segmental operating loss per U.K. GAAP                                     |                                                                   |               | (3  | )             |   |      | (90  | )    |   |  | (39   | )     |   |  | (200 | )   
|                                                                           | Amortization expense                                              |               |     | (24           | ) |      |      | (23  | ) |  |       | (49   | ) |  |      | (54  | )
|                                                                           | Central costs                                                     |               |     | (21           | ) |      |      | (12  | ) |  |       | (28   | ) |  |      | (31  | )
|                                                                           | Share of joint ventures and associates operating
    loss         |               |     | (5            | ) |      |      | (55  | ) |  |       | (13   | ) |  |      | (103 | )
|                                                                           | Operating exceptional items                                       |               |     | (14           | ) |      |      | (121 | ) |  |       | (33   | ) |  |      | (206 | )
|                                                                           |                                                                   |              
|U.K. GAAP operating loss                                                   |                                                                   |               | (67 | )             |   |      | (301 | )    |   |  | (162  | )     |   |  | (594 | )   
|                                                                           | Joint ventures and associates operating loss                      |               |     | 5             |   |      |      | 55   |   |  |       | 13    |   |  |      | 103  |  
|                                                                           | U.K. GAAP operating loss of U.S. GAAP
    discontinued operations |               |     |              |   |      |      | 20   |   |  |       | 4     |   |  |      | 38   |  
|U.S. GAAP adjustments:                                                     |                                                                   |               |     |               |   |      |      |      |   |  |       |       |   |  |      |     
|                                                                           | Share option plans                                                |               |     | 1             |   |      |      | (3   | ) |  |       |      |   |  |      | (7   | )
|                                                                           | Pension and other post-retirement benefits                        |               |     | (6            | ) |      |      |     |   |  |       | (10   | ) |  |      | 3    |  
|                                                                           | Intangible asset amortization                                     |               |     | 12            |   |      |      | 8    |   |  |       | 26    |   |  |      | 28   |  
|                                                                           | Restructuring costs                                               |               |     | 2             |   |      |      |     |   |  |       | (24   | ) |  |      | (4   | )
|                                                                           | Foreign exchange transaction gains                                |               |     | (3            | ) |      |      |     |   |  |       | 43    |   |  |      |     |  
|                                                                           | Other                                                             |               |     | 6             |   |      |      | 1    |   |  |       | 2     |   |  |      | 14   |  
|                                                                           |                                                                   |              
|U.S. GAAP operating loss                                                   |                                                                   |               | (50 | )             |   |      | (220 | )    |   |  | (108  | )     |   |  | (419 | )   
|                                                                           | Gain on settlement of equity forward contracts                    |               |     |              |   |      |      |     |   |  |       | 123   |   |  |      |     |  
|                                                                           | Gain on extinguishment of liabilities                             |               |     |              |   |      |      |     |   |  |       | 2,695 |   |  |      |     |  
|                                                                           | Provision for related party receivable                            |               |     |              |   |      |      | (186 | ) |  |       |      |   |  |      | (186 | )
|                                                                           | Gain/(loss) on sale of investments                                |               |     | 14            |   |      |      | (3   | ) |  |       | 14    |   |  |      | (3   | )
|                                                                           | Impairment of investments in securities                           |               |     |              |   |      |      | (10  | ) |  |       |      |   |  |      | (40  | )
|                                                                           | Interest income                                                   |               |     | 4             |   |      |      | 12   |   |  |       | 9     |   |  |      | 33   |  
|                                                                           | Interest expense                                                  |               |     | (36           | ) |      |      | (72  | ) |  |       | (46   | ) |  |      | (144 | )
|                                                                           |                                                                   |              
|U.S. GAAP income/(loss) from continuing
    operations before income taxes |                                                                   |               | (68 | )             |   |      | (479 | )    |   |  | 2,687 |       |   |  | (759 | )   
|                                                                           |                                                                   |              

U.K.  U.S. GAAP
adjustments

With the exception of the items below, a
description of the significant U.K. GAAP to U.S. GAAP
adjustments as they relate to segment information is provided in
note 9, Segment and related information disclosures
in the Form 20-F for the year ended March 31, 2003.

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Gain on equity forward contract

At March 31, 2003, the Company recognized a
gain under U.K. GAAP of £123 million upon settlement
of an equity forward contract related to the ESOP in place at
that time. This gain was not recognized at March 31, 2003
under U.S. GAAP because settlement was conditional on the
Financial Restructuring becoming effective on May 19, 2003.
The Company paid £35 million in cash to the ESOP
derivative banks to settle the Companys liability of
£158 million as recorded in the consolidated balance
sheet of March 31, 2003. The resulting gain, arising on the
release of this liability, of £123 million is
reflected in the statement of operations for the six months
ended September 30, 2003.

Gain on extinguishment of
liabilities

As described in note 2, the Company
recognized a gain of approximately £3.2 billion on
May 19, 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
creditors claims extinguished over the fair value, less
issuance costs, of the cash, new debt, and new equity issued in
consideration. Under U.K. 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/(deficit).

Foreign exchange transaction gains

The aggregate gain of £43 million
recognized under U.S. GAAP in the six months ended
September 30, 2003 which is reflected in other
income/expense differed from the U.K. GAAP gain by
approximately £31 million because the latter used
foreign exchange rates established by the terms of the Scheme of
Arrangement in accounting for the extinguishment of liabilities
whereas under U.S. GAAP the foreign exchange rate on
May 19, 2003 was used. The balance of the U.S. GAAP
adjustment of £12 million represents a classification
difference between U.K. and U.S. GAAP as this amount is
reflected in net finance expenditure under U.K. GAAP.

11. Commitments and
Contingencies

Legal Proceedings

In note 10, Commitments and
Contingencies of the annual report on Form 20-F for the
year ended March 31, 2003 the Company made disclosure of
the lawsuit filed by Bell Communications Research, Inc, now
known as Telcordia Technologies Inc., or Telcordia, on
October 14, 1998. On September 29, 2003, the district
court held a hearing in relation to that lawsuit to clarify its
previous claim construction ruling. Subsequent to the hearing
the district court issued an opinion clarifying its original
claim construction in a manner that will permit Telcordia to
maintain its claim for infringement of the remaining patent.

The Company is subject to legal proceedings,
claims and litigation arising in the ordinary course of
business. While the outcome of these claims is currently not
determinable, the Company does not expect the ultimate costs to
resolve these matters will have a material adverse effect on
its consolidated financial position, results of
operations, or cash flows.

Third party guarantees

The Company has the following major types of
guarantees that are subject to the disclosure requirements of
FIN 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.

Financial and other
guarantees

The Company and various of its subsidiaries have
undertaken, in the normal course of business, to provide support
to the joint ventures of the Company, to meet their liabilities.
These undertakings contain

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financial guarantees. A payment under these
undertakings would be required in the event of any of the joint
ventures being unable to pay its liabilities. Payment of this
funding would be required if requested by the joint ventures in
accordance with the funding agreements. The potential amount of
future payments, which may be required to be made by the Company
under these guarantees, is approximately £10 million.


Other guarantees relate primarily to financial
standby letters of credit and irrevocable undertakings to
guarantee payment of a specified financial obligation. The
maximum potential amount of future payments, which may be
required to be made by the Company under these guarantees, is
approximately £74 million.

In connection with agreements for the sale of
portions of its business, including certain discontinued
operations, the Company 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 Company 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
Company. These types of indemnification guarantees typically
extend for a number of years.

From time to time, the Company 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 Company maintains adequate levels
of insurance coverage to protect the Company 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
Companys business. There are no material indemnifications
issued since January 1, 2003 and accordingly no liabilities
have been recorded with respect to such indemnification
agreements as of September 30, 2003.

In addition, the Companys Senior and Junior
Notes are guaranteed by certain of its subsidiaries. The
guarantee is a joint and several guarantee of each guarantor of
all amounts due with respect to the Senior and Junior Notes.
Payment under the guarantee may be required if the Company fails
to make any payment when due in accordance with the terms of the
Senior or Junior Notes as applicable. The potential amount of
future payments under the guarantees is the same as under the
Senior and Junior Notes, which is the principal amount of such
Notes plus accrued and unpaid interest thereon and, in certain
cases, the redemption premium provided for in such Notes. The
outstanding principal amount of the Senior Notes and Junior
Notes as of September 30, 2003 was £432 million
and £191 million, respectively.

In addition to the guarantees of the
Companys Junior and Senior Notes, certain of the
Companys subsidiaries have entered into a composite
guarantee. The composite guarantee is a joint and several
guarantee of each guarantor of all amounts due by the Company
under or in respect of the Security Trust and Intercreditor
Deed, any Agent/Trustee/New Bonding Facility Bank Accession
Letter, any Guarantor Accession Letter, the Escrow Agreement,
the New Bonding Facility Agreement, the Security Documents, the
Fee Letter and any Additional Remuneration Fee Letter (each term
as defined in the Security Trust and Intercreditor Deed) (the
Guaranteed Obligations). Payment under the guarantee may be
required if the Company fails to make any payment when due in
accordance with any of the Guaranteed Obligations.

Apart from the New Bonding Facility Agreement,
the above mentioned documents have been entered into in
connection with the Companys Senior and Junior Notes and
do not themselves contain facilities for new borrowings
(although they do contain indemnities and similar obligations).
The Security Trust and Intercreditor Deed also gives the right
for the Security Trustee to demand that the Company indemnify
the Security Trustee for any costs and liabilities that arise as
a result of entering into the documentation related to the Notes.

The New Bonding Facility is a
£50 million facility for the issue of bank guarantee
letters of credit and performance bonds, available (until
November 19, 2004) to Marconi Bonding Limited
(MBL) on behalf of certain Group companies. The
Company guarantees MBLs counter indemnity and other
obligations under the New Bonding Facility Agreement. In
addition, the Company has certain direct liabilities under the
New

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Bonding Facility Agreement, including certain
specified arrangement and agency fees, transaction expenses,
enforcement costs, increased costs, a tax indemnity and other
indemnities. Cash collateral of no less than 50% is required to
be maintained under the New Bonding Facility Agreement.


As of September 30, 2003, the fair value of
the Companys guarantees that were issued or modified after
December 31, 2002 was not material.

Asset repurchase 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, Marconi has novated existing service
and maintenance contracts to CSC.

The IT service contract is for a period of
10 years with a right to terminate without cause, but
subject to a number of penalties, after 2 years and
contains an obligation for Marconi to repurchase 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
September 30, 2003.

Product warranty reserves

The following information is provided with
respect to product warranty reserves included in accounts
payable and other liabilities:

|                 |  |           |    |           |  |            |   |           |  |             |    |               |  |  |   |  |  |  |     |   |  |  |    | 
|---------------- |  | --------- | -- | --------- |  | ---------- | - | --------- |  | ----------- | -- | ------------- |  |  | - |  |  |  | --- | - |  |  | -- | 
|                 |  |           |    |           |  |            |   | Effect of |  |             |    |              
|                 |  |           |    | Change to |  |            |   | Exchange  |  |             |    |              
|                 |  | March 31, |    | opening   |  | Additions/ |   | rate      |  |             |    | September 30,
|Description      |  | 2003      |    | reserve   |  | (release)  |   | Changes   |  | Utilization |    | 2003         
|(in millions)    |  | £         |    | £         |  | £          |   | £         |  | £           |    | £            
|                 |  |          
|                 |  |          
|Warranty reserve |  |           | 43 |           |  |            | 1 |           |  |             | 11 |               |  |  |  |  |  |  | (14 | ) |  |  | 41 | 
|                 |  |          

12. Investment in affiliates

Easynet

The Company has disposed of its entire stake in
Easynet. The Company affected this disposal through a placing
completed on July 4, 2003 of 36,135,948 ordinary
shares in Easynet at a price of 112 pence per share
together with a placing completed on September 4, 2003 of
44,682,364 ordinary shares in Easynet at a price of
127 pence per share. The Company no longer has an interest
in Easynet nor does the Company have a seat on the board of
Easynet.

Before expenses the disposal on July 4, 2003
raised approximately £40.5 million before expenses
while the disposal on September 4, 2003 raised
approximately £56.7 million, before expenses.

The cash proceeds were paid into the mandatory
redemption escrow account and were used to fund partial
redemptions of the Junior Notes.

13. Discontinued operations

The Company established a formal plan for the
disposal of the various businesses comprising the mobile segment
during fiscal 2002. On July 17, 2003, the Company announced
that it had completed the sale of its remaining
non-core mobile communications subsidiary, Marconi Mobile
Access SpA (also known as UMTS) to Finmeccanica SpA.
Marconi agreed to capitalize the business with approximately
 6 million
(approximately £4 million) prior to disposal. The gain
on sale was £9 million.

24



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##### Table of Contents



Net assets and liabilities of discontinued
operations at September 30, 2003 and March 31, 2003
which relate to the former mobile business are comprised of the
following:

|                                           |                                        |                           |   |           |   |  |      |      |      | 
|------------------------------------------ | -------------------------------------- | ------------------------- | - | --------- | - |  | ---- | ---- | ---- | 
|                                           |                                        | September 30,             |   | March 31,
|                                           |                                        | 2003                      |   | 2003     
|(in millions)                              |                                        | £                         |   | £        
|                                           |                                        |                          
|                                           |                                        |                          
|Assets:                                    |                                        |                           |   |           |   |  |      |     
|                                           | Cash and cash equivalents              |                           |   |          |   |  |      | 2    |     
|                                           | Accounts receivable                    |                           |   |          |   |  |      | 2    |     
|                                           |                                        |                          
|                                           |                                        | Total current assets      |   |           |  |  |      |      | 4    | 
|                                           |                                        |                          
|Liabilities:                               |                                        |                           |   |           |   |  |      |     
|                                           | Accounts payable                       |                           |   |          |   |  |      | (10) |     
|                                           | Accrued expenses and other liabilities |                           |   |          |   |  |      | (6)  |     
|                                           |                                        |                          
|                                           |                                        | Total current liabilities |   |           |  |  |      |      | (16) | 
|                                           |                                        |                          
|                                           |                                        |                          
|Net liabilities of discontinued operations |                                        |                           |  |           |   |  | (12) |     
|                                           |                                        |                          

14. Shareholders equity

On September 9, 2003 the Company undertook a
one-for-five share consolidation.

Holders of ordinary shares in Marconi Corporation
plc are entitled to one vote per share on matters to be voted on
by the shareholders, and to receive dividends when and as
declared by the Board of Directors. Shareholders are entitled to
certain pre-emptive rights but have no subscription, redemption
or conversion privileges. The ordinary shares do not have
cumulative voting rights. The rights, preferences and privileges
of holders of ordinary shares are subject to the rights of the
holders of shares of any series of preferred shares issued or
that may be issued in the future.

The indentures governing the Senior and Junior
Notes issued in the Financial Restructuring contain significant
restrictions on our ability to pay dividends on our shares.
Accordingly, the Companys Board of Directors does not
expect to declare a dividend for the foreseeable future.

15. Related party transactions

The table below provides details of the revenues
and purchases that the Company and its subsidiaries had with
equity investees, joint ventures and associates, which are not
consolidated, during the six months ended September 30,
2003 and 2002. It also provides details of the receivable and
payable balances with these equity investees, joint ventures and
associates as at September 30, 2003 and March 31,
2003. All transactions are in the ordinary course of business.

|                         |  |               |    | 
|------------------------ |  | ------------- | -- | 
|                         |  | Six months   
|                         |  | ended        
|                         |  | September 30,
|                         |  | 2003         
|(in millions)            |  | £            
|                         |  |              
|Statement of operations: |  |               |    | 
|Revenues                 |  |               | 11 | 
|Purchases                |  |               |   | 

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##### Table of Contents



|                         |  |               |    | 
|------------------------ |  | ------------- | -- | 
|                         |  | Six months   
|                         |  | ended        
|                         |  | September 30,
|                         |  | 2002         
|                         |  | £            
|                         |  |              
|Statement of operations: |  |               |    | 
|Revenues                 |  |               | 16 | 
|Purchases                |  |               |   | 

|                  |  |               |    |  
|----------------- |  | ------------- | -- | -
|                  |  | At           
|                  |  | September 30,
|                  |  | 2003         
|(in millions)     |  | £            
|                  |  |              
|Balance sheet:    |  |               |    |  
|Trade receivables |  |               | 25 |  
|Trade payables    |  |               | (9 | )
|Other receivables |  |               |   |  
|Other payables    |  |               |   |  

|                  |  |           |      |  
|----------------- |  | --------- | ---- | -
|                  |  | At       
|                  |  | March 31,
|                  |  | 2003     
|                  |  | £        
|                  |  |          
|Balance sheet:    |  |           |      |  
|Trade receivables |  |           | 26   |  
|Trade payables    |  |           | (9   | )
|Other receivables |  |           |     |  
|Other payables    |  |           | (403 | )

16. Subsequent events

Outsource of Offenburg
operations

On October 10, 2003, the Company announced
that it has agreed to outsource the manufacture of its Fixed
Wireless Access products and associated operations in Offenburg,
Germany, to Elcoteq Network Corporation in exchange for
consideration of approximately £7 million.
Approximately 340 current employees at the site will transfer
employment. Completion of the transaction occurred during
November 2003.

Early debt repayment

On October 17, 2003, the Company redeemed
U.S.$29 million (approximately £17 million) of
the Junior Notes bringing the outstanding principal to
$289 million (approximately £174 million).

Disposal of interest in Confirmant
Limited

On November 12, 2003, the Company announced
the disposal of its 50% interest in Confirmant Limited to Oxford
GlycoSciences, a wholly owned subsidiary of Celltech Group plc.
The cash proceeds of over £4 million will be
transferred into the Mandatory Redemption Escrow Account and
used in due course to fund a further partial redemption of the
Junior Notes. In the six months ended September 30, 2003,
the Company recorded a £2 million charge to the
P&L account in respect of its share of Confirmants
operating loss.

26



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17. Supplemental Information for NARF
& Non NARF Segments

The indentures governing our Notes, which have
been filed as exhibits on our Annual Report on Form 20-F on
March 31, 2003, require that we provide supplemental
information with respect to Marconi Corporation plc and its
Non-U.S. subsidiaries (as defined therein) and Marconi
Communications, Inc. (the U.S. Parent) and its subsidiaries. We
call these segments Non NARF and North American Ring-Fence
(NARF), respectively. The new segments we have adopted reflect
the classification of the Non NARF segment as equivalent to
Marconi Corporation plc and its Non-U.S. subsidiaries and the
NARF segment as equivalent to the U.S. parent and its
subsidiaries. These segments are comprised as follows:



| |   |                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NARF mainly comprises the equipment and services
    activities of our three U.S. based Broadband Routing and
    Switching (BBRS), Outside Plant & Power (OPP) and North
    American Access (NAA) (irrespective of the country of
    destination of these revenues); and
|
| |  | Non NARF mainly comprises our European and the
    rest of the world based businesses: Optical Networks, Access
    Networks, Other Network Equipment and related Network Services.                                                                                        

In accordance with the indenture requirements,
consolidated income statements, consolidated balance sheets and
consolidated cash flow statements, in respect of the NARF and
Non NARF segments, together with an MD&A in respect of each
segment, follows.

NARF and Non NARF are the only two segments of
our Group and can be reconciled to the Group total as follows.

|                                                                   |  |               |     |            |  |  |       |  
|------------------------------------------------------------------ |  | ------------- | --- | ---------- |  |  | ----- | -
|                                                                   |  | Three months  |     | Six months
|                                                                   |  | ended         |     | ended     
|                                                                   |  |              
|                                                                   |  | September 30,
|                                                                   |  | 2003          |     | 2003      
|(in millions)                                                      |  | £             |     | £         
|                                                                   |  |              
|                                                                   |  |              
|Revenues                                                           |  |               |     |            |  |  |       |  
|NARF                                                               |  |               | 139 |            |  |  | 260   |  
|Non NARF                                                           |  |               | 250 |            |  |  | 496   |  
|                                                                   |  |              
|Group                                                              |  |               | 389 |            |  |  | 756   |  
|                                                                   |  |              
|Net income                                                         |  |               |     |            |  |  |       |  
|NARF                                                               |  |               | 15  |            |  |  | 19    |  
|Non NARF                                                           |  |               | 14  |            |  |  | 2,793 |  
|                                                                   |  |              
|Group                                                              |  |               | 29  |            |  |  | 2,812 |  
|                                                                   |  |              
|Net cash used in operating activities of
    continuing operations |  |               |     |            |  |  |       |  
|NARF                                                               |  |               | (1  | )          |  |  | 4     |  
|Non NARF                                                           |  |               | (25 | )          |  |  | (74   | )
|                                                                   |  |              
|Group                                                              |  |               | (26 | )          |  |  | (70   | )
|                                                                   |  |              

|                          |  |               |     |         |  |           |     |  |  |  |        |  
|------------------------- |  | ------------- | --- | ------- |  | --------- | --- |  |  |  | ------ | -
|                          |  | September 30, |     | June 30 |  | March 31,
|Net assets/(liabilities): |  | 2003          |     | 2003    |  | 2003     
|                          |  |              
|                          |  |              
|NARF                      |  |               | 235 |         |  |           | 216 |  |  |  | (348   | )
|Non NARF                  |  |               | 351 |         |  |           | 324 |  |  |  | (2,986 | )
|                          |  |              
|Group                     |  |               | 586 |         |  |           | 540 |  |  |  | (3,334 | )
|                          |  |              

27



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CONDENSED NARF BALANCE SHEETS

(Unaudited)


|                                                         |                                                                          |               |     |         |   |           |     |        |   |  |       |        |  
|-------------------------------------------------------- | ------------------------------------------------------------------------ | ------------- | --- | ------- | - | --------- | --- | ------ | - |  | ----- | ------ | -
|                                                         |                                                                          | September 30, |     | June 30 |   | March 31,
|(in millions except per share data)                      |                                                                          | 2003          |     | 2003    |   | 2003     
|                                                         |                                                                          | £             |     | £       |   | £        
|                                                         |                                                                          |              
|                                                         |                                                                          |              
|ASSETS                                                   |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|Current assets                                           |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|                                                         | Cash and cash equivalents                                                |               |     | 75      |   |           |     | 77     |   |  |       | 24     |  
|                                                         | Restricted cash                                                          |               |     |        |   |           |     |       |   |  |       |       |  
|                                                         | Accounts receivable, net                                                 |               |     | 80      |   |           |     | 74     |   |  |       | 81     |  
|                                                         | Amounts due from Non NARF Group Companies                                |               |     | 135     |   |           |     | 118    |   |  |       | 157    |  
|                                                         | Inventories, net                                                         |               |     | 41      |   |           |     | 40     |   |  |       | 42     |  
|                                                         | Prepaid expenses and other current assets                                |               |     | 14      |   |           |     | 14     |   |  |       | 21     |  
|                                                         |                                                                          |              
|Total current assets                                     |                                                                          |               | 345 |         |   |           | 323 |        |   |  | 325   |       
|Property, plant and equipment, net                       |                                                                          |               | 98  |         |   |           | 103 |        |   |  | 118   |       
|Investments in affiliates                                |                                                                          |               |    |         |   |           |    |        |   |  |      |       
|Goodwill                                                 |                                                                          |               | 139 |         |   |           | 140 |        |   |  | 146   |       
|Intangibles, net                                         |                                                                          |               |    |         |   |           |    |        |   |  |      |       
|Loans due from Non NARF Group Companies                  |                                                                          |               | 186 |         |   |           | 187 |        |   |  | 83    |       
|                                                         |                                                                          |              
|TOTAL ASSETS                                             |                                                                          |               | 768 |         |   |           | 753 |        |   |  | 672   |       
|                                                         |                                                                          |              
|LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT)       |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|Current liabilities                                      |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|                                                         | Short-term debt                                                          |               |     |        |   |           |     |       |   |  |       |       |  
|                                                         | Accounts payable                                                         |               |     | 68      |   |           |     | 70     |   |  |       | 64     |  
|                                                         | Amounts due to Non NARF Group Companies                                  |               |     | 149     |   |           |     | 135    |   |  |       | 178    |  
|                                                         | Accrued expenses and other current liabilities                           |               |     | 131     |   |           |     | 147    |   |  |       | 169    |  
|                                                         | Liabilities of discontinued operations                                   |               |     |        |   |           |     |       |   |  |       |       |  
|                                                         |                                                                          |              
|Total current liabilities                                |                                                                          |               | 348 |         |   |           | 352 |        |   |  | 411   |       
|Long-term debt                                           |                                                                          |               | 5   |         |   |           | 6   |        |   |  | 6     |       
|Loans due to Non NARF Group Companies                    |                                                                          |               | 159 |         |   |           | 158 |        |   |  | 579   |       
|Deferred income taxes                                    |                                                                          |               |    |         |   |           |    |        |   |  |      |       
|Other liabilities                                        |                                                                          |               | 20  |         |   |           | 20  |        |   |  | 23    |       
|                                                         |                                                                          |              
|Total liabilities                                        |                                                                          |               | 532 |         |   |           | 536 |        |   |  | 1,019 |       
|Commitments and contingencies                            |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|Minority interests                                       |                                                                          |               | 1   |         |   |           | 1   |        |   |  | 1     |       
|Shareholders equity/(deficit)*                          |                                                                          |               |     |         |   |           |     |        |   |  |       |       
|                                                         | Ordinary shares, £0.01 par value;                                        |               |     |         |   |           |     |        |   |  |       |        |  
|                                                         | Authorized: 1,000 shares at
    September 30 and June 30, 2003           |               |     |         |   |           |     |        |   |  |       |        |  
|                                                         | Issued and outstanding: 100 shares at
    September 30 and June 30, 2003 |               |     |        |   |           |     |       |   |  |       |       |  
|                                                         | Warrants, issued and outstanding                                         |               |     |        |   |           |     |       |   |  |       |       |  
|                                                         | Additional paid-in capital*                                              |               |     | 5,174   |   |           |     | 5,174  |   |  |       | 4,618  |  
|                                                         | Accumulated deficit*                                                     |               |     | (5,350  | ) |           |     | (5,367 | ) |  |       | (5,365 | )
|                                                         | Capital reduction reserve*                                               |               |     | 4       |   |           |     | 4      |   |  |       |       |  
|                                                         | Accumulated other comprehensive loss                                     |               |     | 407     |   |           |     | 405    |   |  |       | 399    |  
|                                                         |                                                                          |              
|Total shareholders equity/(deficit)                     |                                                                          |               | 235 |         |   |           | 216 |        |   |  | (348  | )     
|                                                         |                                                                          |              
|TOTAL LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT) |                                                                          |               | 768 |         |   |           | 753 |        |   |  | 672   |       
|                                                         |                                                                          |              

* Represents Share Capital of Marconi
Communications, Inc.

28



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CONDENSED NARF STATEMENTS OF
OPERATIONS

(Unaudited)


|                                                          |                                              |              |     |            |   |  |     |     |  
|--------------------------------------------------------- | -------------------------------------------- | ------------ | --- | ---------- | - |  | --- | --- | -
|                                                          |                                              | Three months |     | Six months
|                                                          |                                              | ended        |     | ended     
|                                                          |                                              |             
|                                                          |                                              | September 30
|                                                          |                                              | 2003         |     | 2003      
|(in millions, except per share data)                      |                                              | £            |     | £         
|                                                          |                                              |             
|                                                          |                                              |             
|Revenue:                                                  |                                              |              |     |            |   |  |     |    
|                                                          | Network equipment                            |              |     | 107        |   |  |     | 198 |  
|                                                          | Network services                             |              |     | 32         |   |  |     | 62  |  
|                                                          | Other                                        |              |     |           |   |  |     |    |  
|                                                          |                                              |             
|                                                          |                                              |              | 139 |            |   |  | 260 |    
|Direct costs                                              |                                              |              | 85  |            |   |  | 166 |    
|                                                          |                                              |             
|                                                          | Gross margin                                 |              |     | 54         |   |  |     | 94  |  
|Operating expenses:                                       |                                              |              |     |            |   |  |     |    
|                                                          | Selling, general and administrative          |              |     | 17         |   |  |     | 34  |  
|                                                          | Research and development                     |              |     | 14         |   |  |     | 30  |  
|                                                          | Amortization of intangibles                  |              |     |            |   |  |     |    |  
|                                                          | Business restructuring charges               |              |     | 2          |   |  |     | 5   |  
|                                                          | Gain on sale of long-lived assets            |              |     |            |   |  |     |    |  
|                                                          | Other (income)/expense                       |              |     | 4          |   |  |     | (1  | )
|                                                          |                                              |             
|Total operating expenses                                  |                                              |              | 37  |            |   |  | 68  |    
|Operating income                                          |                                              |              | 17  |            |   |  | 26  |    
|Other income/(expense):                                   |                                              |              |     |            |   |  |     |    
|                                                          | Interest expense                             |              |     | (2         | ) |  |     | (6  | )
|                                                          |                                              |             
|Income from continuing operations before income
    taxes |                                              |              | 15  |            |   |  | 20  |    
|                                                          | Income tax provision                         |              |     |           |   |  |     | (1  | )
|                                                          | Equity in net loss of affiliates             |              |     |           |   |  |     |    |  
|                                                          |                                              |             
|Income from continuing operations                         |                                              |              | 15  |            |   |  | 19  |    
|Discontinued operations:                                  |                                              |              |     |            |   |  |     |    
|                                                          | Gain on sale of discontinued operations, net |              |     |           |   |  |     |    |  
|                                                          | Loss from discontinued operations            |              |     |           |   |  |     |    |  
|                                                          |                                              |             
|Net income                                                |                                              |              | 15  |            |   |  | 19  |    
|                                                          |                                              |             

29



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CONDENSED NARF STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                                                                   |                                        |               |    |            |   |  |    |     |  
|---------------------------------------------------------------------------------- | -------------------------------------- | ------------- | -- | ---------- | - |  | -- | --- | -
|                                                                                   |                                        | Three months  |    | Six months
|                                                                                   |                                        | ended         |    | ended     
|                                                                                   |                                        |              
|                                                                                   |                                        | September 30,
|                                                                                   |                                        | 2003          |    | 2003      
|(in millions)                                                                      |                                        | £             |    | £         
|                                                                                   |                                        |              
|                                                                                   |                                        |              
|Cash flows from operating
    activities:                                          |                                        |               |    |            |   |  |    |    
|Net income                                                                         |                                        |               | 15 |            |   |  | 19 |    
|Adjustments to reconcile net income to net cash
    provided by/                   |                                        |               |    |            |   |  |    |    
|(used in) operating activities from continuing
    operations:                     |                                        |               |    |            |   |  |    |    
|                                                                                   | Depreciation and amortization          |               |    | 5          |   |  |    | 12  |  
|                                                                                   | Provision for doubtful accounts        |               |    |           |   |  |    | (4  | )
|                                                                                   | Accounts receivable                    |               |    | (2         | ) |  |    | 7   |  
|                                                                                   | Inventories                            |               |    | (1         | ) |  |    | 1   |  
|                                                                                   | Accounts payable                       |               |    | (2         | ) |  |    | 4   |  
|                                                                                   | Movement in Group Balances             |               |    |           |   |  |    | (8  | )
|                                                                                   | Accrued expenses and other liabilities |               |    | (16        | ) |  |    | (27 | )
|                                                                                   |                                        |              
|Net cash provided by/(used in) operating
    activities from continuing operations |                                        |               | (1 | )          |   |  | 4  |    
|                                                                                   |                                        |              
|Cash flow from investing activities:                                               |                                        |               |    |            |   |  |    |    
|Purchases of property, plant and equipment                                         |                                        |               | (2 | )          |   |  | (4 | )  
|Proceeds from the sale of long-lived assets                                        |                                        |               | 1  |            |   |  | 9  |    
|                                                                                   |                                        |              
|Net cash provided by/(used in) investing
    activities                            |                                        |               | (1 | )          |   |  | 5  |    
|                                                                                   |                                        |              
|Cash flow from financing activities:                                               |                                        |               |    |            |   |  |    |    
|Net cash provided by related parties                                               |                                        |               |   |            |   |  | 42 |    
|                                                                                   |                                        |              
|Net cash provided by financing activities                                          |                                        |               |   |            |   |  | 42 |    
|                                                                                   |                                        |              
|Net increase/(decrease) in cash and cash
    equivalents                           |                                        |               | (2 | )          |   |  | 51 |    
|Cash and cash equivalents, beginning of period                                     |                                        |               | 77 |            |   |  | 24 |    
|                                                                                   |                                        |              
|Cash and cash equivalents, end of period                                           |                                        |               | 75 |            |   |  | 75 |    
|                                                                                   |                                        |              

30



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CONDENSED NON NARF BALANCE SHEETS

(Unaudited)


|                                                         |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |        |  
|-------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | ----- | ------- | - | -------- | ----- | ----- | - |  | ------ | ------ | -
|                                                         |                                                                                                                                                                                                             | September 30, |       | June 30 |   | March 31
|                                                         |                                                                                                                                                                                                             | 2003          |       | 2003    |   | 2003    
|(in millions except per share data)                      |                                                                                                                                                                                                             | £             |       | £       |   | £       
|                                                         |                                                                                                                                                                                                             |              
|                                                         |                                                                                                                                                                                                             |              
|ASSETS                                                   |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|Current assets                                           |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|                                                         | Cash and cash equivalents                                                                                                                                                                                   |               |       | 487     |   |          |       | 492   |   |  |        | 168    |  
|                                                         | Restricted cash                                                                                                                                                                                             |               |       | 210     |   |          |       | 217   |   |  |        | 964    |  
|                                                         | Investment in securities                                                                                                                                                                                    |               |       | 5       |   |          |       | 18    |   |  |        | 16     |  
|                                                         | Accounts receivable, net                                                                                                                                                                                    |               |       | 258     |   |          |       | 299   |   |  |        | 381    |  
|                                                         | Amounts due from NARF Group Companies                                                                                                                                                                       |               |       | 149     |   |          |       | 135   |   |  |        | 178    |  
|                                                         | Inventories, net                                                                                                                                                                                            |               |       | 161     |   |          |       | 175   |   |  |        | 192    |  
|                                                         | Prepaid expenses and other current assets                                                                                                                                                                   |               |       | 110     |   |          |       | 129   |   |  |        | 105    |  
|                                                         | Assets of discontinued operations                                                                                                                                                                           |               |       |        |   |          |       | 4     |   |  |        | 4      |  
|                                                         |                                                                                                                                                                                                             |              
|Total current assets                                     |                                                                                                                                                                                                             |               | 1,380 |         |   |          | 1,469 |       |   |  | 2,008  |       
|Property, plant and equipment, net                       |                                                                                                                                                                                                             |               | 113   |         |   |          | 125   |       |   |  | 145    |       
|Investments in affiliates                                |                                                                                                                                                                                                             |               | 18    |         |   |          | 18    |       |   |  | 18     |       
|Goodwill                                                 |                                                                                                                                                                                                             |               | 511   |         |   |          | 511   |       |   |  | 511    |       
|Intangibles, net                                         |                                                                                                                                                                                                             |               | 78    |         |   |          | 90    |       |   |  | 101    |       
|Loans due from NARF Group Companies                      |                                                                                                                                                                                                             |               | 159   |         |   |          | 158   |       |   |  | 579    |       
|Other non-current assets                                 |                                                                                                                                                                                                             |               | 17    |         |   |          | 17    |       |   |  | 75     |       
|                                                         |                                                                                                                                                                                                             |              
|TOTAL ASSETS                                             |                                                                                                                                                                                                             |               | 2,276 |         |   |          | 2,388 |       |   |  | 3,437  |       
|                                                         |                                                                                                                                                                                                             |              
|LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT)       |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|Current liabilities                                      |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|                                                         | Short-term debt                                                                                                                                                                                             |               |       | 17      |   |          |       | 21    |   |  |        | 2,195  |  
|                                                         | Current maturities of long-term debt                                                                                                                                                                        |               |       | 3       |   |          |       |      |   |  |        | 2,191  |  
|                                                         | Accounts payable                                                                                                                                                                                            |               |       | 90      |   |          |       | 87    |   |  |        | 99     |  
|                                                         | Amounts due to Marconi plc and fellow subsidiaries                                                                                                                                                          |               |       |        |   |          |       |      |   |  |        | 403    |  
|                                                         | Amounts due to NARF Group Companies                                                                                                                                                                         |               |       | 135     |   |          |       | 118   |   |  |        | 157    |  
|                                                         | Accrued expenses and other current liabilities                                                                                                                                                              |               |       | 568     |   |          |       | 594   |   |  |        | 929    |  
|                                                         | Liabilities of discontinued operations                                                                                                                                                                      |               |       |        |   |          |       | 17    |   |  |        | 16     |  
|                                                         |                                                                                                                                                                                                             |              
|Total current liabilities                                |                                                                                                                                                                                                             |               | 813   |         |   |          | 837   |       |   |  | 5,990  |       
|Long-term debt                                           |                                                                                                                                                                                                             |               | 609   |         |   |          | 709   |       |   |  | 24     |       
|Loans due to NARF Group Companies                        |                                                                                                                                                                                                             |               | 186   |         |   |          | 187   |       |   |  | 83     |       
|Deferred income taxes                                    |                                                                                                                                                                                                             |               | 5     |         |   |          | 5     |       |   |  | 5      |       
|Other liabilities                                        |                                                                                                                                                                                                             |               | 310   |         |   |          | 325   |       |   |  | 319    |       
|                                                         |                                                                                                                                                                                                             |              
|Total liabilities                                        |                                                                                                                                                                                                             |               | 1,923 |         |   |          | 2,063 |       |   |  | 6,421  |       
|Commitments and contingencies                            |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|Minority interests                                       |                                                                                                                                                                                                             |               | 2     |         |   |          | 1     |       |   |  | 2      |       
|Shareholders equity/(deficit)                           |                                                                                                                                                                                                             |               |       |         |   |          |       |       |   |  |        |       
|                                                         | Ordinary shares, £0.25 par value:                                                                                                                                                                           |               |       |         |   |          |       |       |   |  |        |        |  
|                                                         | Authorized: 627 shares at September 30 and
    June 30, 2003 and 1,200 shares at March 31, 2003;
    issued and outstanding: 200 shares at September 30 and
    June 30, 2003, 573 shares at March 31, 2003 |               |       | 50      |   |          |       | 50    |   |  |        | 143    |  
|                                                         | Warrants, issued and outstanding: 50 at
    June 30, 2003                                                                                                                                                   |               |       | 12      |   |          |       | 12    |   |  |        |       |  
|                                                         | Additional paid-in capital                                                                                                                                                                                  |               |       | 1,052   |   |          |       | 1,044 |   |  |        | 895    |  
|                                                         | Accumulated deficit                                                                                                                                                                                         |               |       | (379    | ) |          |       | (400  | ) |  |        | (3,308 | )
|                                                         | Capital reduction reserve                                                                                                                                                                                   |               |       | 334     |   |          |       | 343   |   |  |        |       |  
|                                                         | Accumulated other comprehensive loss                                                                                                                                                                        |               |       | (718    | ) |          |       | (725  | ) |  |        | (716   | )
|                                                         |                                                                                                                                                                                                             |              
|Total shareholders equity/(deficit)                     |                                                                                                                                                                                                             |               | 351   |         |   |          | 324   |       |   |  | (2,986 | )     
|                                                         |                                                                                                                                                                                                             |              
|TOTAL LIABILITIES AND SHAREHOLDERS
    EQUITY/(DEFICIT) |                                                                                                                                                                                                             |               | 2,276 |         |   |          | 2,388 |       |   |  | 3,437  |       
|                                                         |                                                                                                                                                                                                             |              

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CONDENSED NON NARF STATEMENTS OF
OPERATIONS

(Unaudited)


|                                                                 |                                               |               |     |            |   |  |       |       |  
|---------------------------------------------------------------- | --------------------------------------------- | ------------- | --- | ---------- | - |  | ----- | ----- | -
|                                                                 |                                               | Three months  |     | Six months
|                                                                 |                                               | ended         |     | ended     
|                                                                 |                                               |              
|                                                                 |                                               | September 30,
|                                                                 |                                               | 2003          |     | 2003      
|(in millions, except per share data)                             |                                               | £             |     | £         
|                                                                 |                                               |              
|                                                                 |                                               |              
|Revenue:                                                         |                                               |               |     |            |   |  |       |      
|                                                                 | Network equipment                             |               |     | 144        |   |  |       | 282   |  
|                                                                 | Network services                              |               |     | 106        |   |  |       | 214   |  
|                                                                 | Other                                         |               |     |            |   |  |       |       |  
|                                                                 |                                               |              
|                                                                 |                                               |               | 250 |            |   |  | 496   |      
|Direct costs                                                     |                                               |               | 203 |            |   |  | 403   |      
|                                                                 |                                               |              
|                                                                 | Gross margin                                  |               |     | 47         |   |  |       | 93    |  
|Operating expenses:                                              |                                               |               |     |            |   |  |       |      
|                                                                 | Selling, general and administrative           |               |     | 59         |   |  |       | 113   |  
|                                                                 | Research and development                      |               |     | 38         |   |  |       | 75    |  
|                                                                 | Amortization of intangibles                   |               |     | 12         |   |  |       | 23    |  
|                                                                 | Business restructuring charges                |               |     | 10         |   |  |       | 62    |  
|                                                                 | Other income                                  |               |     | (5         | ) |  |       | (46   | )
|                                                                 |                                               |              
|Total operating expenses                                         |                                               |               | 114 |            |   |  | 227   |      
|Operating loss                                                   |                                               |               | (67 | )          |   |  | (134  | )    
|Other income/(expense):                                          |                                               |               |     |            |   |  |       |      
|                                                                 | Gain on settlement of equity forward contract |               |     |           |   |  |       | 123   |  
|                                                                 | Gain on extinguishment of liabilities         |               |     |           |   |  |       | 2,695 |  
|                                                                 | Gain on sale of investments                   |               |     | 14         |   |  |       | 14    |  
|                                                                 | Interest income                               |               |     | 6          |   |  |       | 15    |  
|                                                                 | Interest expense                              |               |     | (36        | ) |  |       | (46   | )
|                                                                 |                                               |              
|Income/(loss) from continuing operations before
    income taxes |                                               |               | (83 | )          |   |  | 2,667 |      
|                                                                 | Income tax (provision)/benefit                |               |     | (7         | ) |  |       | 17    |  
|                                                                 | Gain on sale of affiliates, net               |               |     | 94         |   |  |       | 94    |  
|                                                                 | Equity in net loss of affiliates              |               |     | (2         | ) |  |       | (2    | )
|                                                                 |                                               |              
|Income from continuing operations                                |                                               |               | 2   |            |   |  | 2,776 |      
|Discontinued operations:                                         |                                               |               |     |            |   |  |       |      
|                                                                 | Gain on sale of discontinued operations, net  |               |     | 12         |   |  |       | 21    |  
|                                                                 | Loss from discontinued operations, net        |               |     |           |   |  |       | (4    | )
|                                                                 |                                               |              
|Net income                                                       |                                               |               | 14  |            |   |  | 2,793 |      
|                                                                 |                                               |              

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CONDENSED NON NARF STATEMENTS OF CASH
FLOWS

(Unaudited)


|                                                                                                             |                                                |               |     |            |   |  |       |        |  
|------------------------------------------------------------------------------------------------------------ | ---------------------------------------------- | ------------- | --- | ---------- | - |  | ----- | ------ | -
|                                                                                                             |                                                | Three months  |     | Six months
|                                                                                                             |                                                | ended         |     | ended     
|                                                                                                             |                                                |              
|                                                                                                             |                                                | September 30,
|                                                                                                             |                                                | 2003          |     | 2003      
|(in millions)                                                                                                |                                                | £             |     | £         
|                                                                                                             |                                                |              
|                                                                                                             |                                                |              
|Cash flows from operating
    activities:                                                                    |                                                |               |     |            |   |  |       |       
|Net income                                                                                                   |                                                |               | 14  |            |   |  | 2,793 |       
|Adjustments to reconcile net income to net cash
    used in operating activities from continuing operations: |                                                |               |     |            |   |  |       |       
|                                                                                                             | Loss from discontinued operations, net         |               |     |           |   |  |       | 4      |  
|                                                                                                             | Gain on sale of discontinued operations, net   |               |     | (12        | ) |  |       | (21    | )
|                                                                                                             | Gain on settlement of equity forward contracts |               |     |           |   |  |       | (123   | )
|                                                                                                             | Stock compensation                             |               |     | 7          |   |  |       | 8      |  
|                                                                                                             | Gain on sale of investments                    |               |     | (14        | ) |  |       | (14    | )
|                                                                                                             | Gain on sale of affiliate, net                 |               |     | (94        | ) |  |       | (94    | )
|                                                                                                             | Depreciation and amortization                  |               |     | 29         |   |  |       | 53     |  
|                                                                                                             | Gain on extinguishment of liabilities          |               |     |           |   |  |       | (2,695 | )
|Change in current and deferred taxes                                                                         |                                                |               | 7   |            |   |  | (18   | )     
|Changes in operating assets and liabilities, net
    of the effect of the extinguishment of liabilities:     |                                                |               |     |            |   |  |       |       
|                                                                                                             | Accounts receivable                            |               |     | 54         |   |  |       | 116    |  
|                                                                                                             | Inventories                                    |               |     | 16         |   |  |       | 32     |  
|                                                                                                             | Accounts payable                               |               |     | (31        | ) |  |       | (73    | )
|                                                                                                             | Movement in Group Balances                     |               |     |           |   |  |       | 8      |  
|                                                                                                             | Accrued expenses and other liabilities         |               |     | (1         | ) |  |       | (50    | )
|                                                                                                             |                                                |              
|Net cash used in operating activities from
    continuing operations                                         |                                                |               | (25 | )          |   |  | (74   | )     
|                                                                                                             |                                                |              

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|                                                                                |  |               |      |            |  |  |      |  
|------------------------------------------------------------------------------- |  | ------------- | ---- | ---------- |  |  | ---- | -
|                                                                                |  | Three months  |      | Six months
|                                                                                |  | ended         |      | ended     
|                                                                                |  |              
|                                                                                |  | September 30,
|(in millions)                                                                   |  | 2003          |      | 2003      
|                                                                                |  | £             |      | £         
|                                                                                |  |              
|                                                                                |  |              
|Cash flow from investing activities:                                            |  |               |      |            |  |  |      |  
|Purchases of property, plant and equipment                                      |  |               | (4   | )          |  |  | (8   | )
|Proceeds from the sale of long-lived assets                                     |  |               | 1    |            |  |  | 21   |  
|Proceeds from the sale of investments in
    securities                         |  |               | 23   |            |  |  | 23   |  
|Investment in NARF                                                              |  |               |     |            |  |  | (42  | )
|Purchase of interest in related parties                                         |  |               |     |            |  |  | (6   | )
|Sale of interest in related parties                                             |  |               | 104  |            |  |  | 104  |  
|                                                                                |  |              
|Net cash provided by investing activities                                       |  |               | 124  |            |  |  | 92   |  
|                                                                                |  |              
|Cash flow (used in)/from financing
    activities:                              |  |               |      |            |  |  |      |  
|Repayment of short-term borrowings                                              |  |               | 1    |            |  |  | (4   | )
|Repayment of long-term borrowings                                               |  |               | (106 | )          |  |  | (106 | )
|Distribution to creditors under the scheme
    relating to debt and borrowings* |  |               |     |            |  |  | (330 | )
|Restricted cash transferred from secured accounts                               |  |               | 7    |            |  |  | 754  |  
|                                                                                |  |              
|Net cash provided by/(used in) financing
    activities                         |  |               | (98  | )          |  |  | 314  |  
|                                                                                |  |              
|Net cash used by discontinued operations                                        |  |               |     |            |  |  | (3   | )
|Effects of exchange rate changes on cash and cash
    equivalents               |  |               | (6   | )          |  |  | (10  | )
|                                                                                |  |              
|Net increase/(decrease) in cash and cash
    equivalents                        |  |               | (5   | )          |  |  | 319  |  
|Cash and cash equivalents, beginning of period                                  |  |               | 492  |            |  |  | 168  |  
|                                                                                |  |              
|Cash and cash equivalents, end of period                                        |  |               | 487  |            |  |  | 487  |  
|                                                                                |  |              
|Supplemental disclosure of cash flow
    activity:                              |  |               |      |            |  |  |      |  
|Cash payments for interest                                                      |  |               | 16   |            |  |  | 19   |  
|Cash payments for income taxes                                                  |  |               |     |            |  |  | 2    |  
|Issuance of shares to extinguish liabilities                                    |  |               |     |            |  |  | 562  |  
|Distribution of warrants to former
    Marconi plc shareholders                 |  |               |     |            |  |  | 12   |  
|Gain on extinguishment of related party
    liabilities                         |  |               |     |            |  |  | 507  |  
|Issuance of new debt to extinguish liabilities                                  |  |               |     |            |  |  | 690  |  
|Distribution to creditors under the scheme
    relating to operating Activities |  |               |     |            |  |  | 10   |  



| |   |                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The distribution made to creditors under the
    scheme of £340 million has been reported (see
    note 2) in the condensed consolidated statement of cash
    flows within operating and financing activities based on the
    nature of the creditor balances extinguished by the scheme.

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Management Discussion and Analysis of
Financial Condition and Results of Operations

NARF & Non NARF Supplemental
Information


The following discussion and analysis should be
read in conjunction with our condensed consolidated financial
statements and related notes and management discussion and
analysis of financial condition and results of operations
appearing elsewhere in this Form 10-Q.

Results of Operations

Revenues

Three months ended September 30, 2003
as compared to the three months ended June 30,
2003

Certain sales of our products (produced by our
Non NARF businesses) are transacted through NARF businesses
where economies of scale permit the NARF businesses to process
these transactions more efficiently.

NARF revenues of £139 million in the
three months ended September 30, 2003, increased
£18 million or 15% as compared to revenues of
£121 million in the three months ended
June 30, 2003, with BBRS, NAA and OPP all contributing to
this increase in revenues.

BBRS equipment revenues of £38 million
in the three months ended September 30, 2003, increased
£10 million or 36% as compared to
£28 million in the three months ended June 30,
2003. This increase in equipment sales was mainly due to a
significant increase in sales to the US Federal Government, at
the end of their fiscal year, and included sales of our
BXR-48000 multi-service switch router under the
£6 million agreement announced at the end of June
2003. BBRS service revenues of £15 million were stable
quarter-on-quarter with increased levels of professional
services to the US Federal Government offset by a further
decline, as expected, of support sales to our North American
enterprise customers.

NAA revenues of £30 million in the
three months ended September 30, 2003, improved
£5 million or 20% as compared to £25 million
in the three months ended June 30, 2003, which was
primarily a result of the acceleration of ADSL roll-outs
(particularly at BellSouth).

OPP revenues of £54 million in the
three months ended September 30, 2003, increased
£3 million or 6% as compared to £51 million
in the three months ended June 30, 2003. OPP equipment
sales of £39 million in the three months ended
September 30, 2003, increased £4 million or 11%
as compared to £35 million in the three months
ended June 30, 2003, while OPP service revenues were
relatively flat at £15 million in the
three months ended September 30, 2003 as compared to
£16 million in the three months ended
June 30, 2003. We have been successful in securing a number
of new wins of outside plant and power systems, primarily from
North American wireless operators.

NARF revenues of £260 million in the
six months ended September 30, 2003, included
£4 million of products and services from Non NARF
businesses, which were sold through NARF entities
(£2 million in the three months ended
June 30, 2003, £2 million in the three months
ended September 30, 2003).

Non NARF revenues of £250 million in
the three months ended September 30, 2003, increased
£4 million or 2% as compared to £246 million
in the three months ended June 30, 2003, with modest
growth in Network Equipment revenues and revenues relatively
stable in Network Services.

Optical Network revenues of
£80 million, decreased £5 million or 6% as
compared to £85 million in the three months ended
June 30, 2003 as operators continued to spend on activities
to maintain the smooth running of existing infrastructure as
opposed to spending on new network build projects. In EMEA,
which accounted for approximately 75% of Optical Network sales
in the three months ended September 30, 2003, a reduced
level of sales to BT were partially offset by increased sales to
Vodafone and Wind in Italy. From a product line perspective,
sales of DWDM declined further during the three months
ended September 30, 2003 as a result of decreased demand
for this technology across the industry. Sales of SDH equipment,
however, which accounted for over 80% of Optical Network
revenues in the three months ended September 30, 2003,
increased slightly quarter-on-quarter with further progress made
in migrating existing customers to our

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recently launched next generation optical
products with shipments to the Italian market and orders
received in China and the UK.


Access Network revenues of £48 million
in the three months ended September 30, 2003, increased
£4 million or 9% as compared to £44 million
in the three months ended June 30, 2003. This increase of
£4 million was driven by the increased demand for
fixed wireless access products from German wireless operators,
with fixed wireless access accounting for approximately 38% of
Access Network sales in the three months ended
September 30, 2003. We maintained the level of shipments of
our multi-service access node, the Access Hub, which accounted
for approximately 20% of Access Network sales with shipments to
Telecom Italia, Wind and Telkom South Africa. The balance of
Access Network sales related to Voice Systems (25%) and other
legacy narrowband access products (17%).

Other Network Equipment of £16 million
in the three months ended September 30, 2003,
increased £4 million or 33% as compared to
£12 million in the three months ended
June 30, 2003 and resulted mainly from shipments of
multi-media terminals to Telefonica (Spain) and payphones to
customers in APAC.

Overall, Non NARF service revenues were stable
quarter-on-quarter with an increased level of IC&M activity
particularly in Italy and the UK (up £4 million or
9 per cent to £47 million), offsetting
slightly lower sales of Value-Added Services (down
£3 million or 5 per cent to
£61 million). The aftermath of the recent conflict in
the Middle East and tough market conditions in Wireless Software
and Services continue to affect the VAS business. Reduced
revenues in these areas were, however, partially offset during
the three months ended September 30, 2003 by an improvement
in cable installation services due to increased volumes from
frame agreements and by initial sales to a new customer in the
German transportation market within the Groups Integrated
Systems activity.

In the six months ended September 30, 2003,
Non NARF businesses sold £4 million of equipment
through NARF entities. This £4 million of revenues are
reported as NARF revenues and are eliminated from Non NARF
revenues, which, as reported, total £496 million in
the six months ended September 30, 2003.

Gross Margins

NARF gross margins of £54 million or
39% of revenues in the three months ended
September 30, 2003, increased £14 million or 35%
as compared to £40 million or 33% of revenues in the
three months ended June 30, 2003. The improvement of
£14 million in the three months ended
September 30, 2003 as compared to the three months
ended June 30, 2003 resulted mainly from higher revenues, a
higher percentage of BBRS revenues as compared to total NARF
revenues and a higher proportion of BBRS revenues of our newly
launched BXR-48000. BBRS revenues represented 38.4% of total
NARF revenues in the three months ended September 30,
2003 versus 34.8% of total NARF revenues in the
three months ended June 30, 2003.

Non NARF gross margins of £47 million
or 19% of revenues in the three months ended September 30,
2003, increased £1 million or 2% as compared to
£46 million or 19% of revenues in the three months
ended June 30, 2003. The increase of £1 million
resulted mainly from the improved profitability on long-term
contracts in the UK following our usual contract review and cost
reductions, which more than offset depreciation on development
and test models.

Operating Expenses

NARF operating expenses of £37 million
or 27% of revenues in the three months ended September 30,
2003, increased £6 million or 19% as compared to
£31 million, or 26% of revenues in the
three months ended June 30, 2003. This increase of
£6 million is mainly due to business restructuring
charges of £2 million relating to site rationalisation
and employee severance costs charged in the three months
ended September 30, 2003.

Non NARF operating expenses of
£114 million or 46% of revenues in the three months
ended September 30, 2003 were relatively flat as compared
to £113 million or 46% of revenues in the
three months ended June 30, 2003. Decreases in
business restructuring charges and selling and general and
administrative expenses in the three months ended
September 30, 2003 of £52 million and
£5 million, respectively as

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compared with the three months ended
June 30, 2003 were partially offset by a
£41 million decrease in other income/expense
(primarily foreign currency transaction gains) between periods.
Non NARF includes central costs.


Liquidity and Capital Resources

Operating activities

Net cash used by NARF operating activities of
continuing operations was £1 million in the three
months ended September 30, 2003. Income from continuing
operations of £15 million and deprecation and
amortization of £5 million were offset by changes in
operating assets and liabilities of £21 million. In
the three months ended June 30, 2003, net cash of
£5 million was provided by NARF operating activities
of continuing operations. Income from continuing operations of
£4 million and depreciation and amortization of
£7 million were partially offset by changes in
operating assets and liabilities of £6 million. The
cash used by operating assets and liabilities was mainly due to
the timing of expense payments and reductions in advanced
billings on legacy enterprise customer service contracts.

Net cash used by Non NARF operating activities of
continuing operations was £25 million in the three
months ended September 30, 2003. Income from continuing
operations of £2 million, depreciation and
amortization of £29 million and changes in operating
assets and liabilities net of the effect of the extinguishment
of liabilities of £38 million were offset by a gain on
sale of affiliates of £94 million. The cash provided
by operating assets and liabilities, net of the effect of the
extinguishment of liabilities resulted from a decrease in
accounts receivables, which is primarily a result of
improvements in collections and lower inventory levels, which
has resulted primarily from facility site rationalization and
from streamlining the use of contract manufacturers. The gain on
sale of affiliates resulted from the sale of our investment in
Easynet. Net cash used by Non NARF operating activities of
continuing operations was higher at £49 million in the
three months ended June 30, 2003, as compared with the
three months ended September 30, 2003, mainly as a result
of payments related to business restructuring charges.

Investing activities

Net cash used by NARF investing activities was
£1 million in the three months ended
September 30, 2003. Purchases of property, plant and
equipment of £2 million were partially offset by
proceeds from the sale of property, plant and equipment of
£1 million. In the three months ended June 30,
2003, net cash provided by investing activities of
£6 million was mainly due to the disposal of IT assets
under an outsourcing contract.

Net cash provided by Non NARF investing
activities was £124 million in the three months ended
September 30, 2003. Proceeds from the disposal of interest
in related parties of £104 million (primarily related
to Easynet) and net cash received for investments in joint
ventures and associates of £23 million, were partially
offset by purchases of property, plant and equipment of
£4 million. Net cash used by Non NARF investing
activities was £32 million in the three months ended
June 30, 2003, and principally resulted from a
£42 million cash capital contribution to NARF,
partially offset by proceeds from the disposal of IT assets
under an outsourcing contract.

Financing activities

NARF had no financing activities in the three
months ended September 30, 2003. In the three months ended
June 30, 2003, and prior to the Financial Restructuring
NARF received a cash capital contribution of
£42 million from Non NARF.

Net cash used by Non NARF financing activities
was £98 in the three months ended September 30, 2003.
Repayment of long-term debt of £106 million, which was
related to the Junior Notes was partially offset by restricted
cash transferred from secured accounts of £7 million.
Net cash used by Non NARF financing activities was
£422 million in the three months ended
September 30, 2003, and arose as a consequence of our
Financial Restructuring.

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Pensions

A NARF retirement plan deficit of
£8.5 million at September 30, 2003 relates to
former Reltec plans, which include NAA and OPP employees.

The Marconi USA Employees plan, which has a
deficit of £10.4 million at September 30, 2003,
includes assets and liabilities in respect of NARF and Non NARF
employees and deferred pensioners. As the sponsoring company
lies within Non NARF, the entire deficit has been allocated to
Non NARF. Non NARF contains the remainder of our Company pension
plans.

Current liquidity

No external borrowings are permitted for NARF
businesses other than a committed U.S.$22.5 million working
capital facility. The credit facility, which is secured by
certain buildings and property located in the U.S. has not been
used during the six months ended September 30, 2003. Non
NARF borrowings reflect all other borrowings of the Company,
which are discussed in the discussion of our current liquidity
position on page 66 of this report.

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Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations

This discussion and analysis should be read in
conjunction with the information under the caption Risk
Factors below, our condensed consolidated financial
statements and related notes appearing elsewhere in this
Form 10-Q and our audited consolidated financial statements
and related notes contained in our Form 20-F filed on
June 27, 2003 with the Securities and Exchange Commission.
Since the completion of the Financial Restructuring on
May 19, 2003, Marconi Corporation plc has replaced Marconi
plc (now known as M (2003) plc) as the parent company of the
Group and the Group now consists of Marconi Corporation plc and
its subsidiaries. Marconi plc is no longer a member of the group.

Forward Looking Statements

This Quarterly Report on Form 10-Q,
including this Managements Discussion and Analysis of
Financial Condition and Results of Operations includes forward
looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995 concerning our
business, operations and financial performance and condition as
well as for our plans and objectives for our business operations
and financial performance and conditions. You can identify these
statements by words such as aim,
anticipate, assume, believe,
could, due, estimate,
expect, goal, intend,
may, objective, plan,
positioned, should, target,
will, would, and other similar
expressions which are predictions of or indicate future events
and future trends. These forward-looking statements involve
known and unknown risks, uncertainties and other factors which
are in some cases beyond our control and may cause our actual
results, performance and condition or achievements to differ
materially from those expressed or implied by such
forward-looking statements. Factors that may cause such
differences include, but are not limited to, the risks described
below under the caption Risk Factors.

Overview

We are a focused multi-regional provider of
telecommunications equipment and services, which we supply to
major telecommunications network operators and selected
government agencies and large enterprises worldwide. Conditions
in our main markets remain challenging with customer spending on
telecommunications equipment and services running at a
considerably lower level than in the six months ended
September 30, 2002. Total revenues of
£389 million in the three months ended
September 30, 2003, declined 19.3% as compared to
£482 million in the three months ended
September 30, 2002, but increased on a sequential basis as
compared to £367 million in the three months ended
June 30, 2003. This growth in the three months ended
September 30, 2003 as compared with the three months ended
June 30, 2003 was driven primarily by increased revenues
across our three main US equipment businesses Broadband, Routing
and Switching (BBRS), Outside Power and Plant (OPP) and North
American Access as well as increased demand for our fixed
wireless access products in Germany. Total revenues of
£756 million in the six months ended
September 30, 2003, declined 25.5% as compared to
£1,015 million in the six months ended
September 30, 2002.

Bookings also increased in the three months ended
September 30, 2003, driven partly by a high level of orders
received for fixed wireless access products in Germany but
mainly resulted from two major long-term service contracts
booked in the Middle East and Germany during the three months
ended September 30, 2003. We have recently announced a
number of significant successes for our next generation
products. These include a three-year frame contract with BT for
the provision of our multi-service access node, the Access Hub
and a smaller order for this technology from Fastweb (Italy) to
allow this operator to offer live broadcast services for ADSL.
In addition, in North America, we were awarded follow-on orders
for our newly launched BXR-48000 multi-service switch router
from the US Federal Government and a major European financial
institution.

We continue to focus on and make good progress in
our cost reduction initiatives. Gross margin of 26.0% of total
revenues in the three months ended September 30, 2003
increased from 14.1% of total revenues in the three months ended
September 30, 2002. This increase in gross margin was
driven mainly by the increased level of higher-margin BBRS sales
and cost savings achieved in our supply chain and

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manufacturing operations. Operating expenses of
£151 million or 38.8% of total revenues in the three
months ended September 30, 2003, decreased
£137 million or 47.6% as compared to
£288 million or 59.8% of total revenues in the three
months ended September 30, 2002.


Operating loss of £108 million,
decreased £311 million in the six months ended
September 30, 2003 as compared to £419 million in the
six months ended September 30, 2002. This improvement was
driven primarily by the cost reductions achieved in our supply
chain and manufacturing operations together with savings across
all areas of operating expense. In addition, operating losses in
the Other segment of £nil in the six months ended
September 30, 2003, decreased from £12 million in
the six months ended September 30, 2002. This improvement
has been driven primarily by the disposal of loss making
non-core businesses.

At September 30, 2003, our total cash
balance (including restricted cash) totaled
£772 million, a decrease of £384 million as
compared with £1,156 million at March 31, 2003.
We had significant cash outflows in the six months ended
September 30, 2003 of £340 million and
£35 million related to the completion of our Financial
Restructuring on May 19, 2003 and the settlement with our
ESOP derivative banks, respectively. The £340 million
outflow represented a distribution of cash to scheme creditors
under our scheme of arrangement. In addition, we repaid
approximately U.S.$169 million (or approximately
£106 million) of our Junior Notes in the six months
ended September 30, 2003 together with a
£10 million redemption premium. Partially offsetting
these cash outflows were £26 million of proceeds from
our IT outsourcing agreement with CSC that we completed in June
2003 and proceeds from the disposals of assets and investments
of approximately (£157 million).

We are beginning to see early signs of some of
our major customers looking towards next generation network
projects, but we are maintaining a prudent stance to spending on
current technologies and a continued tight control of capital
expenditure budgets. As a result, we maintain our cautious view
on potential volatility in near-term market conditions. We
continue to benefit from improved market dynamics in Germany
from continued strong demand for fixed wireless access products
among mobile operators and in our OPP and NAA businesses in
North America as a result of increased spending from both
wireless and wireline operators. We are targeting to achieve
sales in the three months ended December 31, 2003 at a
level slightly higher than the £389 million recorded
in the three months ended September 30, 2003 as a result of
increased order bookings to-date in the three months ending
December 31, 2003.

We continue to focus on cost reduction and cash
generation initiatives in order to achieve our previously
disclosed financial targets:



| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to increase gross margin as a percent of revenues
    by March 31, 2004;                                                                                      
|
| |  | to reduce the operating cost run-rate by
    March 31, 2004; and                                                                                              
|
| |  | to generate a positive operating cash inflow for
    fiscal 2004 through improvements in operating performance and
    some contribution from working capital.

Once we have achieved our current gross margin
and operating cost run-rate targets, we expect that we will
require annual sales of approximately £1.5 billion in
order to break even at an operating (EBITA) level.

We have cost reduction plans already in place,
which should allow us to make steady progress towards increasing
gross margin as a percent of revenues during the second half of
fiscal 2004. We expect that gross margin improvement will result
primarily from:



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued benefits of sourcing from lower
    cost locations and the renegotiation of improved business terms
    with key suppliers, in particular in respect of our revised
    manufacturing outsourcing agreement with Jabil, which became
    effective on June 30, 2003;
|
| |  | further rationalization of supply chain and
    manufacturing operations, which we have retained in-house; and                                                                                                                                                                    
|
| |  | the benefits of re-designed and recently launched
    product lines such as Next Generation SDH as the proportion of
    sales of the new products increases during the second half of
    fiscal 2004.                                                                           

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In any given period, product mix has a positive
or negative impact on our gross margin performance. In the three
months ended September 30, 2003, for example, approximately
half of the sequential improvement from 23.4% in the three
months ended June 30, 2003 to 26.0% in the three months
ended September 30, 2003 was due to favorable product mix,
which resulted mainly from the higher proportion of sales of
higher-margin BBRS equipment in the three months ended
September 30, 2003. Similarly, as previously disclosed, we
expect gross margin performance during the three months ending
March 31, 2004 to benefit from the planned sale of
higher-margin wireless software licenses to one of our large US
customers.

We have plans in place to achieve further annual
operating cost savings in the second half of fiscal 2004. These
actions include:



| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the completion of planned headcount reductions in
    Europe which have now been agreed with the necessary authorities
    and have been announced to the workforce;                                                                                                    
|
| |  | the benefit from the previously announced closure
    of our headquarters for the Central and Latin America
    (CALA) region previously based in Florida (US) with
    all corporate functions for the CALA region being managed from
    our Italian operations; and
|
| |  | our drive for further efficiency gains in R&D.                                                                                                                                                                                                                          

As previously disclosed, we expect cash outflows
of approximately £100 million during fiscal 2004 to
complete our ongoing operational restructuring, of which
approximately £41 million was spent during the six
months ended September 30, 2003. As noted above, we
continue to focus on cash generation initiatives with the intent
of repaying our Junior Notes as soon as possible and thereby
reduce the associated interest charges. During the second half
of fiscal 2004, we aim to generate positive operating cash flow.
We believe that ongoing working capital initiatives will result
in continued improvement in working capital in the second half
of fiscal 2004, but we expect less contribution than in the six
months ended September 30, 2003 as our business begins to
stabilize. We expect future operating cash performance will be
driven mainly by improvements in overall operating performance.
We expect to use cash flow from operations and our existing cash
resources to fund interest payments (which, following the third
partial redemption of our Junior Notes on October 17, 2003,
amount to approximately £13 million per quarter for
Senior Notes and Junior Notes combined, assuming cash payment of
interest on the Junior Notes) and costs associated with our
ongoing operational restructuring.

We continue to perform ahead of our cash
generation plans partly as a result of disposal proceeds noted
above but also due to higher than anticipated contribution from
working capital. As a result, our Board of Directors approved
the payment in cash of the interest payment on the Junior Notes
on October 31, 2003. In accordance with the terms of the
Notes, after this second consecutive quarterly cash interest
payment we will be permitted to make market repurchases of both
Junior Notes and Senior Notes, thus facilitating early repayment
of the Junior Notes.

We have accumulated significant tax losses in
recent years, but these may not be available to cover earlier
years that are open for, or under, tax audit. In addition, as
previously disclosed and as a result of the Financial
Restructuring, we have forfeited all loss carry forwards
accumulated in the US prior to May 2003 and our use of loss
carry forwards in certain other jurisdictions (e.g. Germany and
the UK) may also be restricted. We will, therefore, be subject
to ongoing tax cash costs, where losses are unavailable. We
estimate that tax cash costs incurred in the normal course of
business could be in the order of £10 million for each
of the financial years ending March 31, 2004 and 2005. Any
amounts which become payable as the result of settlement of tax
disputes relating to prior periods would be in addition to this
amount.

As previously announced, we expect total
headcount to reduce to around 13,000 employees at the end of
March 2004 from approximately 14,100 at September 30, 2003.
This includes the impact of the transfer of approximately 340
employees to Elcoteq as a result of our previously announced
outsourcing agreement in the field of fixed wireless access
products in Germany which is expected to take effect prior to
March 31, 2004.

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Basis of presentation

Our condensed consolidated financial statements
as at September 30, 2003 for the three and six months ended
September 30, 2003 and 2002 included in this report on
Form 10-Q have been prepared in accordance with accounting
principles generally accepted in the United States
(U.S. GAAP). The discussion and analysis below of our
consolidated results of operations and financial condition are
based upon these financial statements.

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

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



| |   |                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NARF (the U.S. parent, Marconi Communications,
    Inc and its subsidiaries) mainly comprises the equipment and
    services activities of our three U.S. based Broadband
    Routing and Switching (BBRS), Outside Plant & Power (OPP)
    and North American Access (NAA) (irrespective of the country of
    destination of these revenues); and
|
| |  | Non NARF (the Issuer, Marconi Corporation plc and
    its non U.S. subsidiaries) mainly comprises our European and the
    rest of the world based businesses: Optical Networks, Access
    Networks, Other Network Equipment and related Network Services.                                                                                        

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

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



| |   |                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Network Equipment segment, which comprised
    Optical Networks, Broadband Routing and Switching (BBRS),
    European Access, North American Access, Outside Plant &
    Power (OPP) and Other Network Equipment;
|
| |  | The Network Services segment, which comprised
    Installation, Commissioning & Maintenance (IC&M)
    and Value-Added Services (VAS); and                                                                           
|
| |  | Other, which comprised non-core businesses,
    including Marconi Applied Technologies, all of which have been
    sold by the end of the quarter ended September 30, 2003.                                          

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

In certain specific cases prior to the completion
of our Financial Restructuring and the implementation of the
North American Ring Fence, we entered into contracts with
customers for the supply of equipment or

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services, which now form part of our Non
Ring-fenced business but did this through legal entities, which
now form part of NARF (or vice versa). In our analysis of
revenues by product area on page 54, we show these revenues
in the product or service area from which the revenues
originated rather than through the legal entity which invoiced
the final customer, and provide a detailed footnote to reconcile
the product area sub-totals to the NARF and Non NARF revenues as
they are recorded in the NARF and Non NARF consolidated
financial statements (see Note 17 to our condensed
consolidated financial statements contained in this report).
During the six months ended September 30, 2003, revenues of
products and services from NARF businesses supplied direct to
customers and through Non NARF legal entities totalled
£256 million and revenues of products or services from
Non NARF businesses sold through NARF legal entities totalled
approximately £4 million bringing total NARF revenues
to £260 million for the six months ended
September 30, 2003.


The indentures governing the Notes issued in the
Financial Restructuring require that we provide certain
financial information with respect to each of(i) Marconi
Corporation plc and its Non-U.S. Subsidiaries (as defined in the
Indentures) and (ii) Marconi Communications, Inc. (which is the
holding company of our U.S. operations) and its Subsidiaries (as
defined). For these purposes the Non NARF segment is equivalent
to Marconi Corporation plc and its Non-U.S. Subsidiaries and the
NARF segment is equivalent to Marconi Communications, Inc. and
its Subsidiaries. In accordance with the requirements of the
indentures, we will provide the additional financial information
until the Junior Notes are repaid in full.

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##### Table of Contents



Results of operations 
Consolidated

The following table presents our results of
operations for the three and six months ended September 30,
2003 and 2002 prepared in accordance with U.S. GAAP.

|                               |                                                                  |                    |     |                  |   |      |      |      |   |  |       |       |   |  |       |      |  
|------------------------------ | ---------------------------------------------------------------- | ------------------ | --- | ---------------- | - | ---- | ---- | ---- | - |  | ----- | ----- | - |  | ----- | ---- | -
|                               |                                                                  |                    |     |                 
|                               |                                                                  | Three months ended |     | Six months ended
|                               |                                                                  | September 30,      |     | September 30,   
|                               |                                                                  | 2003               |     | 2002             |   | 2003 |      | 2002
|(in millions)                  |                                                                  | £                  |     | £                |   | £    |      | £   
|                               |                                                                  |                   
|                               |                                                                  |                   
|Revenues:                      |                                                                  |                    |     |                  |   |      |      |      |   |  |       |       |   |  |       |     
|                               | Network Equipment revenues                                       |                    |     | 251              |   |      |      | 284  |   |  |       | 480   |   |  |       | 600  |  
|                               | Network Services revenues                                        |                    |     | 138              |   |      |      | 198  |   |  |       | 276   |   |  |       | 392  |  
|                               | Other revenues                                                   |                    |     |                 |   |      |      |     |   |  |       |      |   |  |       | 23   |  
|                               |                                                                  |                   
|                               |                                                                  |                    | 389 |                  |   |      | 482  |      |   |  | 756   |       |   |  | 1,015 |     
|                               | Direct costs                                                     |                    |     | 288              |   |      |      | 414  |   |  |       | 569   |   |  |       | 864  |  
|                               |                                                                  |                   
|                               | Gross margin                                                     |                    |     | 101              |   |      |      | 68   |   |  |       | 187   |   |  |       | 151  |  
|Operating expenses:            |                                                                  |                    |     |                  |   |      |      |      |   |  |       |       |   |  |       |     
|                               | Selling, general and administrative                              |                    |     | 76               |   |      |      | 85   |   |  |       | 147   |   |  |       | 206  |  
|                               | Research and development                                         |                    |     | 52               |   |      |      | 76   |   |  |       | 105   |   |  |       | 168  |  
|                               | Amortization of intangibles                                      |                    |     | 12               |   |      |      | 11   |   |  |       | 23    |   |  |       | 22   |  
|                               | Business restructuring charges                                   |                    |     | 12               |   |      |      | 89   |   |  |       | 67    |   |  |       | 129  |  
|                               | (Gain)/loss on sale of long-lived assets                         |                    |     |                 |   |      |      | (1   | ) |  |       |      |   |  |       | (14  | )
|                               | Impairment of long-lived assets                                  |                    |     |                 |   |      |      | 21   |   |  |       |      |   |  |       | 52   |  
|                               | Other (income)/expense                                           |                    |     | (1               | ) |      |      | 7    |   |  |       | (47   | ) |  |       | 7    |  
|                               |                                                                  |                   
|Total operating expenses       |                                                                  |                    | 151 |                  |   |      | 288  |      |   |  | 295   |       |   |  | 570   |     
|                               |                                                                  |                   
|Operating loss                 |                                                                  |                    | (50 | )                |   |      | (220 | )    |   |  | (108  | )     |   |  | (419  | )   
|Other income/(expense):        |                                                                  |                    |     |                  |   |      |      |      |   |  |       |       |   |  |       |     
|                               | Gain on settlement of equity forward contract                    |                    |     |                 |   |      |      |     |   |  |       | 123   |   |  |       |     |  
|                               | Gain on extinguishment of liabilities                            |                    |     |                 |   |      |      |     |   |  |       | 2,695 |   |  |       |     |  
|                               | Provision for related party receivable                           |                    |     |                 |   |      |      | (186 | ) |  |       |      |   |  |       | (186 | )
|                               | Gain/(loss) on sale of investments                               |                    |     | 14               |   |      |      | (3   | ) |  |       | 14    |   |  |       | (3   | )
|                               | Impairment of investments in securities                          |                    |     |                 |   |      |      | (10  | ) |  |       |      |   |  |       | (40  | )
|                               | Interest income                                                  |                    |     | 4                |   |      |      | 12   |   |  |       | 9     |   |  |       | 33   |  
|                               | Interest expense                                                 |                    |     | (36              | ) |      |      | (72  | ) |  |       | (46   | ) |  |       | (144 | )
|                               |                                                                  |                   
|                               | Income/(loss) from continuing operations before
    income taxes |                    |     | (68              | ) |      |      | (479 | ) |  |       | 2,687 |   |  |       | (759 | )
|Income tax (provision)/benefit |                                                                  |                    | (7  | )                |   |      | 9    |      |   |  | 16    |       |   |  | 14    |     
|                               | Gain on sale of affiliates                                       |                    |     | 94               |   |      |      |     |   |  |       | 94    |   |  |       |     |  
|                               | Equity in net loss of affiliates                                 |                    |     | (2               | ) |      |      | (32  | ) |  |       | (2    | ) |  |       | (58  | )
|                               |                                                                  |                   
|                               | Income/(loss) from continuing operations                         |                    |     | 17               |   |      |      | (502 | ) |  |       | 2,795 |   |  |       | (803 | )
|                               | Gain on sale of discontinued operations, net                     |                    |     | 12               |   |      |      | 22   |   |  |       | 21    |   |  |       | 22   |  
|                               | Loss from discontinued operations, net                           |                    |     |                 |   |      |      | (23  | ) |  |       | (4    | ) |  |       | (43  | )
|                               |                                                                  |                   
|Net income/(loss)              |                                                                  |                    | 29  |                  |   |      | (503 | )    |   |  | 2,812 |       |   |  | (824  | )   
|                               |                                                                  |                   

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##### Table of Contents



Revenues

The following table sets forth our revenues by
geographical region of destination for the three and six months
ended September 30, 2003 and 2002 as reported under
U.S. GAAP:

|                                 |                                             |                    |     |                  |  |      |     |      |  |  |     |     |  |  |     |       | 
|-------------------------------- | ------------------------------------------- | ------------------ | --- | ---------------- |  | ---- | --- | ---- |  |  | --- | --- |  |  | --- | ----- | 
|                                 |                                             |                    |     |                 
|                                 |                                             | Three months ended |     | Six months ended
|                                 |                                             | September 30,      |     | September 30,   
|                                 |                                             | 2003               |     | 2002             |  | 2003 |     | 2002
|(in millions)                    |                                             | £                  |     | £                |  | £    |     | £   
|                                 |                                             |                   
|                                 |                                             |                   
|United Kingdom                   |                                             |                    | 89  |                  |  |      | 128 |      |  |  | 200 |     |  |  | 261 |      
|Italy                            |                                             |                    | 40  |                  |  |      | 29  |      |  |  | 74  |     |  |  | 81  |      
|Germany                          |                                             |                    | 41  |                  |  |      | 33  |      |  |  | 77  |     |  |  | 71  |      
|Other                            |                                             |                    | 53  |                  |  |      | 95  |      |  |  | 92  |     |  |  | 170 |      
|                                 |                                             |                   
|                                 | Total Europe, Middle East and Africa (EMEA) |                    |     | 223              |  |      |     | 285  |  |  |     | 443 |  |  |     | 583   | 
|North America                    |                                             |                    | 131 |                  |  |      | 142 |      |  |  | 242 |     |  |  | 303 |      
|Central and Latin America (CALA) |                                             |                    | 12  |                  |  |      | 10  |      |  |  | 21  |     |  |  | 35  |      
|Asia-Pacific (APAC)              |                                             |                    | 23  |                  |  |      | 45  |      |  |  | 50  |     |  |  | 94  |      
|                                 |                                             |                   
|                                 | Total revenues                              |                    |     | 389              |  |      |     | 482  |  |  |     | 756 |  |  |     | 1,015 | 
|                                 |                                             |                   

Capital expenditure by our main incumbent
telecommunications customers continued to run at a considerably
lower rate than in fiscal 2003 and spending by second tier
operators has reduced significantly, leading to sales declines
across all major geographic regions in both the three months and
six months ended September 30, 2003 as compared to the
three and six months ended September 30, 2002. Market
conditions remain difficult and price pressure exists in all
regions. Conditions remain most challenging in APAC. The net
impact of foreign exchange rate movements on our revenues in the
three months ended September 30, 2003 was to increase
revenues by approximately £7 million from the rates
used for the three months ended September 30, 2002.

Three months ended September 30, 2003
compared with three months ended September 30,
2002

Total revenues of £389 million in the
three months ended September 30, 2003, decreased
£93 million or 19.3% as compared to
£482 million in the three months ended
September 30, 2002.

Revenues in EMEA of £223 million, or
approximately 57% of revenues in the three months ended
30 September 2003, decreased £62 million or 22%
as compared to £285 million, or 59% of revenues in the
three months ended 30 September 2002. The
£62 million decrease in revenues in EMEA was largely
driven by reduced revenue levels in the UK and the Middle East,
which were partially offset by increased revenues in Italy and
Germany.

Revenues in the UK of £89 million in
the three months ended September 30, 2003, decreased
£39 million or 30% as compared to
£128 million in the three months ended
September 30, 2002. Of this £39 million decrease,
£16 million related to reduced sales to BT as our
largest customer has focused its reduced capital expenditure on
the accelerated deployment of its broadband access network and
supporting technologies resulting in greater reductions in spend
in other areas, particularly Optical Networks. We were not a
supplier of broadband access equipment as part of BTs
initial deployment but we expect to benefit in the future from
our three-year frame contract for the supply of our next
generation multi-service access node, the Access Hub.
Conformance testing of our Access Hub into BTs network is
progressing well and we expect to initiate shipments under our
frame contract early in calendar year 2004. The balance of the
reduction in sales in the UK resulted from a general decline in
demand from second tier operators, who, despite showing initial
signs of increased interest in our equipment and services, have
not yet re-launched any major capital expenditure programmes
since emerging from their Financial Restructuring processes.
Sales of Network Services in the UK remained relatively stable
during the period.

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Revenues in Italy of £40 million in the
three months ended September 30, 2003, increased
£11 million or 38% as compared to
£29 million in the three months ended
September 30, 2002. Sales to Telecom Italia (TI) were up
slightly during the three months ended September 2003 as a
result of increased shipments of our Access Hub into TIs
broadband access network and increased deliveries of our next
generation optical products, in particular the MSH64c and MSH2K
optical core switches to Vodafone (previously known as Omnitel
in Italy).

Revenues in Germany of £41 million in
the three months ended September 30, 2003, increased
£8 million or 24% as compared to £33 million
in the three months ended September 30, 2002. This increase
is a result of strong demand from wireless operators such as
O2, E-Plus and Vodafone, as these customers began to
roll out 3G mobile networks in order to reach the 25% mobile
coverage threshold prior to the December 31, 2003 deadline
set by the national regulator.

Revenues in other countries in the EMEA region of
£53 million in the three months ended
September 30, 2003, decreased £42 million or 44%
as compared to £95 million in the three months ended
September 30, 2002. Over half of this decrease occurred in
the Middle East as a result of the completion of a key phase of
a long-term service contract in Saudi Arabia in the three month
period ended December 31, 2002 and a reduced level of sales
of wireless consultancy services. The recent conflict in Iraq
has also caused a general slowdown in customer spend and delays
to projects in the region in recent months. Approximately
£4 million of the decrease in revenues resulted from
the disposal of our South African legacy operations completed in
December 2002 with the balance of the decrease related mainly to
the significant reduction in the level of sales through indirect
channel partners such as Ericsson and Nokia, as well as further
reductions in capital expenditure by other European second tier
operators.

Revenues in North America of
£131 million or 34% of sales from continuing
operations in the three months ended September 30, 2003
decreased £11 million or 8% as compared to
£142 million in the three months ended
September 30, 2002. The decrease was related mainly to the
disposal of our US-based SMS subsidiary, which was completed in
December 2002. A reduction in revenues from wireless software
and services in North America was offset by an increase in
revenues from sales of BBRS, OPP and NAA equipment and services
in North America as a result of increased spending by key
customers in the region (see Revenues by Product Area on
page 56 below for more information).

Revenues in Central and Latin America (CALA) of
£12 million in the three months ended
September 30, 2003, increased £2 million or 20%
as compared to £10 million in the three months ended
September 30, 2002. Customer spending in the region remains
at very low levels as a result of the general downturn in
economic conditions with current demand coming from the wireless
rather than fixed wireline operators, focused mainly on optical
networks and outside plant and power equipment.

Revenues in Asia Pacific (APAC) of
£23 million in the three months ended
September 30, 2003, decreased £22 million or 49%
as compared to £45 million in the three months ended
September 30, 2002. Part of this decline was due to our
exit from legacy operations in the region during fiscal 2003
which totaled approximately £8 million. In the ongoing
businesses, the market environment in China has become
increasingly challenging over the last year due to significant
pricing pressure across all product areas. Sales of optical
network equipment to China Railcom and China Unicom was reduced
significantly in the three months ended September 30, 2003
as compared with the three months ended September 30, 2002
and we have adopted a cautious approach when bidding for new
business in the territory. Sales in Australia were also lower
than in the previous year when we were supplying optical network
equipment to second tier operator, IP1, which has since gone
into receivership. This had also caused a slowdown in capital
expenditure by the main incumbent operator, Telstra pending the
outcome of its now successful bid to purchase the assets of IP1
from the receiver.

Six months ended September 30, 2003
compared with six months ended September 30, 2002

Total revenues of £756 million,
decreased £259 million or 26% in the six months ended
September 30, 2003 as compared to £1,015 million
in the six months ended September 30, 2002. The trends in
the geographic regions were broadly similar to those described
above in respect of the comparison for the three

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month periods ended September 30, 2003 and
2002, with EMEA accounting for over half of the reduction in
sales in the six months ended September 30, 2003 as
compared with the six months ended September 30, 2002.
Within EMEA, reduced revenue in the UK, the Middle East and
Italy were partially offset by revenue growth in Germany.


Revenues in the UK of £200 million in
the six months ended September 30, 2003, decreased
£61 million or 23% as compared to
£261 million in the six months ended
September 30, 2002. This decrease resulted mainly from
lower sales of optical networking equipment to BT and the impact
of the sale of an intelligent network software upgrade in our
Access Networks business in the six months ended
September 30, 2002, which was not repeated in the six
months ended September 30, 2003.

Revenues in Italy of £74 million in the
six months ended September 30, 2003, decreased
£7 million or 9% as compared to £81 million
in the six months ended September 30, 2002. The decrease
resulted primarily from the phasing of network build projects
with Vodafone and Wind. In the six months ended
September 30, 2002, we were supplying network equipment to
these two customers in order to build new optical networks,
while in the six months ended September 30, 2003, our sales
were focused on infill and activities designed to increase the
efficiency of this existing infrastructure, which are typically
not of the same magnitude as initial network builds.

Revenues in Germany of £77 million six
months ended September 30, 2003, increased
£6 million or 8% as compared to £71 million
in the six months ended September 30, 2002. This
increase resulted primarily from the increased demand for fixed
wireless access equipment in the three months ended
September 30, 2003 described above.

Revenues in other countries of the EMEA region of
£92 million in the six months ended
September 30, 2003, decreased £78 million or 46%
as compared to £170 million in the six months
ended September 30, 2002. As described above, the main
factor behind this decline in revenues was the reduced level of
Network Services revenues in the Middle East. Within EMEA,
reduced sales in the UK, Middle East and Italy were partially
offset by growth in Germany.

Revenues in North America of
£242 million in the six months ended
September 30, 2003, decreased £61 million or 20%
as compared to £303 million in the six months ended
September 30, 2002. We recorded growth in sales of North
American Access equipment in the period as a result of the
acceleration of ADSL roll outs, particularly at BellSouth, and
growth in sales of BBRS equipment to the US Federal Government.
This was more than offset, however, by a reduction in sales of
BBRS services due to the completion of a significant airport
services contract in the previous year and a reduction in sales
of OPP equipment and services resulting from a general
contraction in capital expenditure amongst US service providers.

Revenues in CALA of £21 million in the
six months ended September 30, 2003, decreased
£14 million or 40% as compared to
£35 million in the six months ended
September 30, 2002. The decrease in revenues is primarily a
result of lower sales in the three months ended
June 30, 2003, which resulted from political, regulatory
and economic issues, which led network operators to restrict
capital expenditure.

Revenues in APAC of £50 million in the
six months ended September 30, 2003, decreased
£44 million or 47% as compared to
£94 million in the six months ended September 30,
2002. Major factors contributing to this trend include our exit
from legacy operations in the region described above, increased
pricing pressure in China described above as well as the limited
mobility in the region during the three months ended
June 30, 2003 caused by the SARS virus and reduced sales in
Malaysia, which resulted from the expiry of a frame contract for
optical networking equipment during the six months ended
September 30, 2003, which has since been renewed. Market
conditions also remain difficult for BBRS in APAC, primarily
with the large installed service provider and enterprise
customer base, which has had minimal deployment or upgrade
activity of BBRS equipment in the six months ended
September 30, 2003.

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Book to Bill Ratio

|                        |  |                    |      |                  |  |      |      |      |  |  |      |  |  |  |      | 
|----------------------- |  | ------------------ | ---- | ---------------- |  | ---- | ---- | ---- |  |  | ---- |  |  |  | ---- | 
|                        |  |                    |      |                 
|                        |  | Three months ended |      | Six months ended
|                        |  | September 30,      |      | September 30,   
|                        |  | 2003               |      | 2002             |  | 2003 |      | 2002
|                        |  |                   
|                        |  |                   
|Total Network Equipment |  |                    | 1.14 |                  |  |      | 0.98 |      |  |  | 1.08 |  |  |  | 0.95 | 
|Total Network Services  |  |                    | 1.36 |                  |  |      | 0.49 |      |  |  | 1.11 |  |  |  | 0.69 | 
|                        |  |                   
|Group                   |  |                    | 1.22 |                  |  |      | 0.78 |      |  |  | 1.09 |  |  |  | 0.86 | 
|                        |  |                   

Book-to-bill is the ratio of order intake divided
by the level of sales in any given period. We use this as a key
indicator of future short-term sales performance in the Network
Equipment business and we strive to increase and maintain this
ratio above 1.00 over any 12-month period. Book-to-bill in
Network Equipment increased to 1.14 from 0.98 in the three
months ended September 30, 2003 and 2002 respectively.

This ratio is less meaningful in Network Services
given the long-term contract nature of this business where the
full value of a service contract, which can typically be tens of
millions of £sterling is booked as an order at the point of
firm contract signature and then recognised as sales over the
life of the contract, which can be typically over a period of 2
to 5 years. Two major new long-term service contracts booked in
the three months ended September 30, 2003, in the Middle
East and Germany, were the main drivers of a book-to-bill ratio
of 1.36 in Network Services compared to 0.49 in the three months
ended September 30, 2002.

Gross Margin

Three months ended September 30, 2003 as
compared to the three months ended September 30,
2002

Gross profit of £101 million or 26.0%
of revenues in the three months ended September 30, 2003
represented a marked increase of £33 million or
11.9 percentage points as compared to the
£68 million or 14.1% of revenues recorded in the
three months ended September 30, 2002. This
improvement of £33 million resulted mainly from the
restructuring of our supply chain and our outsourcing agreement
with Jabil and from cost reductions in both Network Equipment
(£22 million) and Network Services
(£1 million).

In Network Equipment, where gross margin
increased from 13.4% of revenues in the three months ended
September 30, 2002 to 25.9% of revenues in the
three months ended September 30, 2003, the improvement
was largely driven by:



| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | favorable product mix including higher-margin
    BBRS sales and wireless services in the U.S.;                                                                                                                                                                                                                                                             
|
| |  | the impact of inventory write-offs totaling
    £25 million recorded during the three months ended
    September 30, 2002, which reduced gross margin by
    approximately 5.2 percentage points in that
    three month period, which was not repeated in the three
    months ended September 30, 2003; and                                               
|
| |  | the achievement of cost savings in our supply
    chain and manufacturing operations in Europe and North America
    through the rationalization and procurement initiatives
    described above, which more than offset the increased
    depreciation, price reductions under existing frame contracts
    and the £33 million reduction in sales volumes.

In Network Services, where gross margins
increased from 17.7% of revenues in the three months ended
September 30, 2002 to 26.1% of revenues in the
three months ended September 30, 2003, significant
cost savings were achieved largely through reductions in
headcount and other overhead costs. These savings were partially
offset by the impact of the £60 million reduction in
revenues between periods and the improved profitability on
long-term contracts in the U.K. following our usual contract
risk reviews.

Six months ended September 30, 2003 as
compared to the six months ended September 30,
2002

Gross profit of £187 million or 24.7%
of revenues in the six months ended September 30,
2003, increased £36 million or 9.8 percentage
points as compared to £151 million or 14.9% of
revenues in the

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six months ended September 30, 2002.
Cost reductions in both Network Equipment and Network Services,
were more than sufficient to offset the lower sales volumes of
£236 million, increased depreciation and the continued
pricing pressure described above. In Network Equipment, gross
margin increased from 13.3% of revenues in the six months
ended September 30, 2002 to 25.9% of revenues in the
six months ended September 30, 2003, as a result of
the impact of inventory write-offs totaling
£25 million recorded during the three months ended
September 30, 2002 and due to cost savings achieved through
rationalization and procurement initiatives in our European and
North American supply chain and manufacturing operations. In
Network Services, where gross margin increased from 18.1% of
revenues in the six months ended September 30, 2002 to
26.1% of revenues in the six months ended
September 30, 2003, the reduction in cost of sales was
largely achieved through headcount reductions as we continued to
target increasing efficiencies in our field forces and as a
result of the provision adjustments described above.


Operating Expenses

Operating cost reduction has remained a key focus
of our strategy during the three and six months ended
September 30, 2003 as we continue to make progress towards
reducing our annualized operating cost run-rate. By
September 30, 2003, the run-rate for the total Network
Equipment and Network Services segments had been reduced as
compared to the run-rate at March 31, 2003.

Selling, general and administrative
expenses

Selling, general and administrative expenses of
£76 million or 19.5% of revenue in the
three months ended September 30, 2003, decreased
£9 million or 10.6% as compared to
£85 million or 17.6% of revenue in the
three months ended September 30, 2002, while Selling,
general and administrative expenses of £147 million or
19.4% of revenue in the six months ended September 30,
2003, decreased £59 million or 28.6% as compared to
£206 million or 20.3% of revenue in the
six months ended September 30, 2002. We have achieved
significant savings through a program of focused headcount
reductions, organizational consolidation and rationalization,
site rationalization (including closure of sales offices
worldwide and relocation of our U.K. head office) and reduced
spend on professional fees incurred in the normal course of
business.

Research and Development

R&D expenditures of £52 million or
13.4% of revenues in the three months ended
September 30, 2003, decreased £24 million or
31.6% as compared to £76 million the three months
ended September 30, 2002, while R&D expenditures of
£105 million or 13.9% of revenue in the
six months ended September 30, 2003, decreased
£63 million or 37.5% as compared to
£168 million or 16.6% of revenue in the
six months ended September 30, 2002. We achieved cost
savings mainly through headcount reductions and initiatives to
significantly rationalize, consolidate and close research and
development centers around the world. Other factors contributing
to the overall reduction in R&D expenditure included lower
levels of spend on third party sub contractors and materials and
a reduced level of depreciation due to lower levels of capital
expenditure and write down of development and test models.

We have continued to focus the majority of our
R&D investment in three main product areas: Optical
Networks, Access Networks and BBRS and in aggregate, spend in
these three areas accounted for approximately
three quarters of our R&D expenditures during the three
and six months ended September 30, 2003.

Optical Networks (ON) accounted for
approximately 38% of R&D spend in the three months
ended September 30, 2003 as compared to approximately 37%
in the three months ended September 30, 2002. The
percentages for the three and six months ended
September 30, 2003 are similar. Major recent programs
include the development and launch of our high capacity optical
core switch platform (MSH2K). We continue to invest in next
generation SDH including the introduction of our successful
MSH64c product and the new SMA 16-64 product range, which
we launched in November, 2003. Our investment in DWDM is focused
on modularizing and simplifying our existing platforms for core
and metro applications. We also launched further

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upgrades to our network management software.
Since September 30, 2002, we have withdrawn from the US
Optical Networks market and ceased investment in our former
SONET product range.


Access Networks accounted for approximately 21%
of R&D spend in the three months ended September 30,
2003 compared with approximately 17% in three months ended
September 30, 2002. The percentages for the three and
six months ended September 30, 2003 are similar.
R&D investment in this business is focused on our Access
Hub, Softswitch and continued enhancements to our fixed wireless
access product ranges.

BBRS accounted for approximately 19% of R&D
spend in the three months ended September 30, 2003 as
compared with approximately 20% in the three months ended
September 30, 2002. The percentages for the three and six
months ended September 30, 2003 are similar. We have
achieved significant cost savings through realignment of core
programs to meet specific customer demand. Almost half of the
spend in the six months ended September 30, 2003 related to
further enhancements to our latest multi-service core switch
router, the BXR. Other programs focused on adding Gigabit
Ethernet and channelized interfaces to the smaller switch line,
the release of Virtual Presence (Vipr), and maintenance
activities throughout the product portfolio. We are seeking to
leverage our own R&D spend in this field by establishing
partnerships in order to complement our own technology
initiatives. As previously announced, in May 2003, we launched
our BXR-5000, 80 Gbps multi-service switch router following the
creation of one such technology partnership with IP-routing
specialist firm, Laurel Networks where we have seen initial
success in the US Federal Government sector.

Amortization of intangibles

Intangible asset amortization expense of
£12 million or 3.1% of revenues and
£23 million or 3.0% of revenues in the three and six
months ended September 30, 2003, respectively, were flat as
compared with intangible assets amortization expense of
£11 million or 2.3% of revenues and
£22 million or 2.2% in the three and six months ended
September 30, 2002, respectively.

Business restructuring charges

Business restructuring charges of
£67 million or 8.9% of revenues in the six months
ended September 30, 2003, decreased £62 million
or 48.1% as compared to £129 million or 12.7% of
revenues in the six months ended September 30, 2002. Of the
£67 million amount recorded in the six months ended
September 30, 2003, £19 million related to
employee severance, £6 million to site rationalization
and £42 million to advisor fees incurred and accrued
to complete our Financial Restructuring. Of the
£129 million amount recorded in the six months ended
September 30, 2002, £67 million related to
employee severance, £29 million to site
rationalization, £1 million to contractual commitments
and other restructuring and £32 million to advisor
fees incurred and accrued to complete our Financial
Restructuring.

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The following table summarizes the activity
relative to business restructuring charges reflected as charges
to operating expenses in the six months ended September 30,
2003 and 2002 and the balances remaining in accrued expenses and
other liabilities at September 30, 2003 and 2002,
respectively:

|                              |                                                 |            |  |         |    |          |  |           |    |               |  |     |     |   |  |    |    |   |  |    |    | 
|----------------------------- | ----------------------------------------------- | ---------- |  | ------- | -- | -------- |  | --------- | -- | ------------- |  | --- | --- | - |  | -- | -- | - |  | -- | -- | 
|                              |                                                 | Balance at |  |         |    |          |  |           |    | Balance at   
|                              |                                                 | March 31   |  |         |    | Cash     |  | Non cash  |    | September 30,
|                              |                                                 | 2003       |  | Charged |    | payments |  | movements |    | 2003         
|(in millions)                 |                                                 | £          |  | £       |    | £        |  | £         |    | £            
|                              |                                                 |           
|                              |                                                 |           
|Business restructuring costs: |                                                 |            |  |         |    |          |  |           |    |               |  |     |     |   |  |    |    |   |  |   
|                              | Employee severance                              |            |  | 10      |    |          |  | 19        |    |               |  | (22 | )   |   |  |   |    |   |  | 7  |   
|                              | Site rationalization                            |            |  | 36      |    |          |  | 6         |    |               |  | (8  | )   |   |  |   |    |   |  | 34 |   
|                              | Contractual commitments and other restructuring |            |  | 3       |    |          |  |          |    |               |  |    |     |   |  |   |    |   |  | 3  |   
|                              | Advisor fees                                    |            |  | 1       |    |          |  | 42        |    |               |  | (33 | )   |   |  | (2 | )  |   |  | 8  |   
|                              |                                                 |           
|                              |                                                 | Total      |  |         | 50 |          |  |           | 67 |               |  |     | (63 | ) |  |    | (2 | ) |  |    | 52 | 
|                              |                                                 |           



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

As a consequence of our objective to further
reduce our annual operating cost base, we recorded a charge of
£19 million and £67 million associated with
redundancy payments for approximately 700 and 4,000 employees,
respectively, during the six months ended September 30,
2003 and 2002, respectively. We made cash payments of
£33 million and £97 million in the six
months ended September 30, 2003 and 2002, respectively. We
expect to make cash payments in fiscal 2004 with respect to the
majority of the unused charged amount remaining at
September 30, 2003, which relates to approximately
260 employees.



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

We recorded charges of £6 million and
£29 million in the six months ended September 30,
2003 and 2002, respectively, relative to site rationalization.
These charges represent additional costs associated with closing
and consolidating various sites around the world as part of our
business reorganization. We made cash payments of
£8 million and £15 million in the six months
ended September 30, 2003 and 2002, respectively.



|  |                                                    
|- | ---------------------------------------------------
| | Contractual commitments and other
    restructuring

During the six months ended September 30,
2002, we recorded a charge of £1 million and made cash
payments of £13 million in respect of other costs
associated with our business reorganization program. During the
six months ended September 30, 2003, no activity was
recorded.



|  |             
|- | ------------
| | Advisor fees

The charge of £42 million that we
recorded in six months ended September 30, 2003 relative to
advisor fees represents charges from our external advisors with
respect to our Financial Restructuring. Of the
£42 million charge, £13 million relates to
costs, which were prepaid at March 31, 2003. We made cash
payments totaling £33 million during the six months
ended September 30, 2003 and a balance of
£8 million remains at September 30, 2003. We
expect to make a further £3 million of cash payments
in fiscal 2004 with respect to the balance of the unused charged
amount remaining at September 30, 2003. We recorded charges
of £32 million and made payments of
£30 million in the six months ended September 30,
2002.



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

During fiscal 2002, we had planned to implement a
new global information technology system. In light of our
revised trading outlook and our continued focus on cost
reduction, we terminated the implementation in fiscal 2002.
There is no remaining obligation at September 30, 2003.

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Gain/loss on sale of long-lived
assets

During the three and six months ended
September 30, 2002, we recorded gains of
£1 million and £14 million respectively on
the sale of long-lived assets.

Impairment of long-lived assets

We recorded £nil in the three and six months
ended September 30, 2003 and £21 million and
£52 million in the three and six months ended
September 30, 2002 for the impairment of long-lived assets.
The charges resulted from our ongoing processes assessing the
carrying value of our tangible property, plant and equipment.

Other income/expense

During the three and six months ended
September 30, 2003, we recorded income of
£1 million and £47 million, respectively and
in the three and six months ended September 30, 2002, we
recorded charges of £7 million and
£7 million, respectively in other income/ expense
related primarily to foreign currency transaction adjustments.

Gain on equity forward contract

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

Gain on extinguishment of
liabilities

During the six months ended September 30,
2003, we recorded a gain of £2,695 million on the
extinguishment of liabilities related to our Financial
Restructuring as compared with £nil in the six months ended
September 30, 2002. This gain represents the excess of
approximately £4.8 billion of creditors claims
extinguished over the fair value, less issuance costs, of the
cash, new debt, and new equity issued to those creditors. The
total gain was allocated to the statement of operations to the
extent that it related to the extinguishment of third party
liabilities.

Provision for related party
receivable

We recorded a provision of £186 million
or 18.3% of revenues in the six months ended September 30,
2002 related to amounts due to us from Marconi plc (now known as
M (2003) plc), which we did not consider to be
recoverable due to the terms of our Financial Restructuring.

Gain/(loss) on sale of investments

The gain of £14 million in the three
and six months ended September 30, 2003 related primarily
to gains arising on the sale of our investments in Bookham
(approximately £8 million) and Gamma (approximately
£4 million).

Impairment of investments

We recorded £nil in the three and six months
ended September 2003 as compared with a charge of
£10 million or 2.1% of revenues and
£40 million or 3.9% of revenues in the three and six
months ended September 2002, respectively. This charge of
£10 million in the three months ended
September 30, 2002 related to the impairment of our
investments in several companies, none individually significant
and a £4 million charge related to an
other-than-temporary decline in the value of our
equity securities, primarily Bookham. The charge of
£40 million in the six months ended September 30,
2002 was primarily related to investments in Arraycom
(£18 million), Highspeed Office (£4 million)
and ARH (£3 million) and a £8 million charge
related to an other-than-temporary decline in the
value of our equity securities, primarily Bookham.

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Interest income

Interest income of £4 million or 1% of
revenues in the three months ended September 30, 2003,
decreased £8 million or 66.7% as compared to
£12 million or 2.5% of revenues in the three months
ended September 30, 2002, while interest income of
£9 million or 1.2% of revenues in the six months ended
September 30, 2003, decreased £24 million or
72.7% as compared to £33 million or 3.3% of revenues
in the six months ended September 30, 2002. The income
recognized for all periods relates primarily to interest
received on deposits and insurance.

Interest expense

Interest expense of £36 million or 9.3%
of revenues in the three months ended September 30, 2003,
decreased £36 million or 50.0% as compared to
£72 million or 14.9% of revenues in the three months
ended September 30, 2002, while interest expense of
£46 million or 6.1% of revenues in the six months
ended September 30, 2003, decreased £98 million
or 68.1% as compared to £144 million or 14.2% of
revenues in the six months ended September 30, 2002. The
charges in the three and six months ended September 30,
2003 of £36 million and £46 million,
respectively includes interest charges related to our Junior and
Senior Notes and a charge related to the 10% premium redemption
on the partial repayment of our Junior Notes
(£10 million). The interest charges of
£72 million and £144 million in the three
and six months ended September 30, 2002 related primarily
to interest expense on our bonds and syndicated debt outstanding
at that time.

Income tax provision/ benefit

In the three and six months ended
September 30, 2003, our effective income tax rate was
-10.9% compared to the U.K. statutory rate of 30%. This
difference was primarily due to tax charges for those
territories incurring tax payments and a full valuation
allowance against deferred tax assets. A £20 million
tax provision was reversed in the six months ended
September 30, 2003 in respect of prior years following the
Marconi Corporation plc Scheme of Arrangement.

In comparison, the effective income tax rate in
the three and six months ended September 30, 2002 was 1.9%
compared to the U.K. statutory rate of 30%. This difference
was primarily due to net non-deductible expenses and a full
valuation allowance against deferred tax assets during the full
fiscal year ended March 31, 2003.

Gain on sale of affiliates, net

During the three and six months ended
September 30, 2003, we recorded a gain of
£94 million on the sale of fixed assets and
investments as compared with £nil in the three and six
months ended September 30, 2002. The gain of
£94 million relates to the sale of our investment in
Easynet.

Equity in net loss of affiliates

We recognized a loss on equity in net loss of
affiliates of £2 million or 0.5% of revenues in the
three months ended September 30, 2003 as compared with a
loss of £32 million or 6.7% of revenues in the three
months ended September 30, 2002. The loss in the three and
six months ended September 30, 2002 relates primarily to
our share of the losses in Easynet. We did not record our share
of the losses in Easynet, in the three and six months ended
September 30, 2003 up to the date of disposal as the
carrying value of our investment in Easynet was £nil at
March 31, 2003.

Gain on sale of discontinued operations,
net

During the three months ended September 30,
2003 we received further consideration and recorded gains on the
sale of the discontinued operations of Tetra (approximately
£3 million) and UMTS (approximately
£9 million). In the six months ended
September 30, 2003, Finmeccanica SpA, agreed to release
approximately
12 million
(approximately £9 million), which had been retained
against the purchase price

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and held in an escrow account following its
purchase of our Strategic Communications subsidiary in August
2002. As a result, we recorded total gains of
£21 million on the sale of discontinued operations in
the six months ended September 30, 2003.


Loss from discontinued operations

The loss from discontinued operations of
£nil in the three months ended September 30, 2003,
decreased £23 million as compared with a loss of
£23 million or 4.8% of revenues in the three months
ended September 30, 2002, while the loss from discontinued
operations of £4 million in the six months ended
September 30, 2003, decreased £39 million as
compared to £43 million or 4.2% of revenues in the six
months ended September 30, 2002. The losses in all periods
relate to our Mobile operations sold to Finmecannica.

Results of operations 
Segmental

The requirements of U.S. GAAP applied to our
group have resulted in us preparing our discussion and analysis
of segment results using information prepared in accordance with
U.K. GAAP. The U.S. Financial Accounting Standards
Board standard  Statement of Financial Accounting
Standards No. 131  Disclosure about
Segments of an Enterprise and Related Information
(FAS 131) requires us to determine and review our segments
as reflected in the management information systems reports that
our managers use in making decisions. As we are an English
company and we prepare our consolidated statutory financial
statements under U.K. GAAP, our chief operating
decision-maker evaluates our segment performance using
U.K. GAAP measures. Therefore, we have presented our
discussion and analysis of segment revenues and operating
(loss)/profit below based upon information prepared in
accordance with U.K. GAAP. As described above under the heading
Basis of Presentation, commencing with this quarter
ended September 30, 2003, we have adopted a new reporting
structure that segments our business along geographical lines
being the U.S. businesses and Europe and rest of world
businesses. We report this together with intercompany
eliminations along a legal entity basis called NARF and Non
NARF, respectively. As required by FAS 131, we have
reflected segment information on both the new (NARF and Non
NARF) and old basis (Network Equipment, Network Services and
Other), as it is impracticable for us to restate prior period
information for NARF and Non NARF, with the exception of revenue
information. We have discussed and analyzed segmental revenues
on both the new and old basis and operating (loss)/profit on the
old basis.

A reconciliation of revenue and segment operating
(loss)/profit as reported under U.K. GAAP to the amounts
presented in accordance with U.S. GAAP is set out in
note 10 of our condensed consolidated financial statements
contained elsewhere herein.

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Segmental revenues (U.K. GAAP) 
new segment basis

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

|                                                     |  |                    |     |                  |  |      |     |      |  |  |     |  |  |  |       | 
|---------------------------------------------------- |  | ------------------ | --- | ---------------- |  | ---- | --- | ---- |  |  | --- |  |  |  | ----- | 
|                                                     |  |                    |     |                 
|                                                     |  | Three months ended |     | Six months ended
|                                                     |  | September 30,      |     | September 30,   
|                                                     |  | 2003               |     | 2002             |  | 2003 |     | 2002
|(in millions)                                        |  | £                  |     | £                |  | £    |     | £   
|                                                     |  |                   
|                                                     |  |                   
|Optical Networks                                     |  |                    | 80  |                  |  |      | 108 |      |  |  | 165 |  |  |  | 242   | 
|Access Networks                                      |  |                    | 48  |                  |  |      | 69  |      |  |  | 92  |  |  |  | 128   | 
|Other Network Equipment                              |  |                    | 16  |                  |  |      | 15  |      |  |  | 28  |  |  |  | 29    | 
|                                                     |  |                   
|Europe/RoW Network Equipment                         |  |                    | 144 |                  |  |      | 192 |      |  |  | 285 |  |  |  | 399   | 
|                                                     |  |                   
|Installation, Commissioning & Maintenance
    (IC&M) |  |                    | 47  |                  |  |      | 51  |      |  |  | 90  |  |  |  | 100   | 
|Value-Added Services (VAS)                           |  |                    | 61  |                  |  |      | 105 |      |  |  | 125 |  |  |  | 203   | 
|                                                     |  |                   
|Europe/RoW Network Services                          |  |                    | 108 |                  |  |      | 156 |      |  |  | 215 |  |  |  | 303   | 
|                                                     |  |                   
|Total Europe/RoW businesses                          |  |                    | 252 |                  |  |      | 348 |      |  |  | 500 |  |  |  | 702   | 
|                                                     |  |                   
|BBRS Equipment                                       |  |                    | 38  |                  |  |      | 35  |      |  |  | 66  |  |  |  | 73    | 
|OPP Equipment                                        |  |                    | 39  |                  |  |      | 34  |      |  |  | 74  |  |  |  | 80    | 
|NAA Equipment                                        |  |                    | 30  |                  |  |      | 23  |      |  |  | 55  |  |  |  | 48    | 
|                                                     |  |                   
|US Network Equipment                                 |  |                    | 107 |                  |  |      | 92  |      |  |  | 195 |  |  |  | 201   | 
|                                                     |  |                   
|BBRS Services                                        |  |                    | 15  |                  |  |      | 24  |      |  |  | 30  |  |  |  | 43    | 
|OPP Services                                         |  |                    | 15  |                  |  |      | 18  |      |  |  | 31  |  |  |  | 46    | 
|                                                     |  |                   
|US Network Services                                  |  |                    | 30  |                  |  |      | 42  |      |  |  | 61  |  |  |  | 89    | 
|Total  US
    businesses (1)                        |  |                    | 137 |                  |  |      | 134 |      |  |  | 256 |  |  |  | 290   | 
|Total Network Equipment and Network
    Services     |  |                    | 389 |                  |  |      | 482 |      |  |  | 756 |  |  |  | 992   | 
|Other                                                |  |                    |    |                  |  |      | 4   |      |  |  |    |  |  |  | 27    | 
|                                                     |  |                   
|Total Continuing operations                          |  |                    | 389 |                  |  |      | 486 |      |  |  | 756 |  |  |  | 1,019 | 
|Discontinued operations                              |  |                    |    |                  |  |      | 28  |      |  |  |    |  |  |  | 87    | 
|                                                     |  |                   
|Group                                                |  |                    | 389 |                  |  |      | 514 |      |  |  | 756 |  |  |  | 1,106 | 
|                                                     |  |                   
|NARF                                                 |  |                    | 139 |                  |  |      |     |      |  |  | 260 |  |  |  |       | 
|Non NARF                                             |  |                    | 250 |                  |  |      |     |      |  |  | 496 |  |  |  |       | 
|                                                     |  |                    |     |                  |  |      |     |      |  |  |     |  |  |  |       | 
|Group                                                |  |                    | 389 |                  |  |      |     |      |  |  | 756 |  |  |  |       | 
|                                                     |  |                    |     |                  |  |      |     |      |  |  |     |  |  |  |       | 



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | NARF sales for the three months ended
    September 30, 2003 were £139 million and include
    sales of NARF products of £137 million and sales of
    Non NARF products invoiced through NARF legal entities of
    £2 million.



| |                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | NARF sales for the six months ended
    September 30, 2003 were £260 million and include
    sales of NARF products of £256 million and sales of
    Non NARF products invoiced through NARF legal entities of
    £4 million.

Three months ended September 30, 2003
compared to three months ended September 30, 2002

Europe/RoW Businesses

Our businesses in Europe/RoW generated revenues
of £252 million, a decrease of £96 million
or 28% as compared to £348 million in the three months
ended September 30, 2002 with the most significant declines
occurring in European/RoW Network Equipment and Value-Added
Services. This decrease was spread evenly between Network
Equipment, which represented 57% of Europe/RoW revenues in the
three months ended September 30, 2003 as compared with 55%
of Europe/RoW revenues in the three months ended

55



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September 30, 2002 and Network Services,
which represented 43% of Europe/RoW revenues in the three months
ended September 30, 2003 as compared with 45% of Europe/RoW
revenues in the three months ended September 30, 2002.


Optical
Networks

Optical Networks (ON) revenues of
£80 million in the three months ended
September 30, 2003, decreased £28 million or 26%
as compared to £108 million in the three months ended
September 30, 2002. There has been a significant reduction
in capital expenditure on optical networking equipment in the
three months ended September 30, 2002 as operators have
increasingly focused their capital spend away from this area of
their networks and onto broadband access deployments, with the
reduced spend in optical focused on activities to maintain
existing infrastructure rather than on new network build
projects. We expect this trend to continue in the medium-term.

From a geographic perspective, the decline in
revenues occurred primarily in EMEA as well as in APAC while
revenues in CALA remained relatively stable albeit at a low
level. In EMEA, which accounted for approximately 75% of Optical
Network revenues in the three months ended September 30,
2003, the reduced level of sales to BT discussed above were
partially offset by increased revenues to Vodafone in Italy. The
reduced level of sales to BT impacted sales of our SDH
equipment, in particular, which in total accounted for over 80%
of Optical Network revenues in the three months ended
September 30, 2003. We also experienced a modest drop in
sales of DWDM equipment as a result of decreased demand for this
technology across the industry.

Access
Networks

Access Networks revenues of
£48 million, decreased £21 million or 30% in
the three months ended September 30, 2003 as compared with
£69 million in the three months ended
September 30, 2002. Increased sales of our Access Hub were
more than offset by declines across all other product lines.
Fixed Wireless Access products accounted for approximately 38%
of Access Network revenues in the three months ended
September 30, 2003, an increase from 30% in the three
months ended June 30, 2003 as a direct result of increased
demand for these products from wireless operators in Germany.
Sales of these products in the three months ended
September 30, 2003 were lower than in the three months
ended September 30, 2002 as a result of a decline in other
sales in other Central European markets.

Sales of our Access Hub represented approximately
20% of Access Network revenues in the three months ended
September 30, 2003, twice the level of sales in the three
months ended September 30, 2002. This was a result of
increased sales to customers, Telecom Italia and Wind in Italy.
Voice Systems and other legacy narrowband access products
accounted for 25% and 17% of Access Network revenues,
respectively, in the three months ended September 30, 2003.
Sales of these product lines fell as a result of an intelligent
network software upgrade carried out in the UK in the three
months ended September 30, 2002 as well as generally weaker
market demand for narrowband products among our major customers.

During the three months ended September 30,
2003, EMEA, CALA and APAC accounted for 94%, 4% and 2% of Access
Network revenues, respectively.

Other
Network Equipment

Other Network Equipment mainly comprised sales of
our Interactive Systems, payphones and internet terminals. Other
Network Equipment revenues of £16 million, increased
£1 million or 7% as compared with
£15 million in the three months ended
September 30, 2002 and resulted mainly from shipments of
multi-media terminals to Telefonica (Spain) and payphones to
customers in APAC.

Installation,
Commissioning and Maintenance (IC&M)

IC&M activities mainly comprise the initial
installation, commissioning and longer-term support services
element of sales of our Optical Networks and Access Networks
equipment.

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IC&M revenues of £47 million in the
three months ended September 30, 2003, decreased
£4 million or 8% as compared to £51 million
in the three months ended September 30, 2002. This was due
to the reduction in volumes of Network Equipment deliveries,
partially offset by a stable level of revenues under ongoing
support contracts.

During the three months ended September 30,
2003, EMEA accounted for 96% of IC&M sales, with the balance
mainly in APAC.

Value
Added Services (VAS)

VAS comprises three main activities:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the provision of integrated network solutions and
    services to non-telecom customers, mainly in the UK and Germany
    (Integrated Systems),
|
| |  | long-term service contracts in the Middle East
    and,                                                                                        
|
| |  | wireless software and services.                                                                                                                

VAS revenues of £61 million in the
three months ended September 30, 2003, decreased
£44 million or 42% as compared to
£105 million in the three months ended
September 30, 2002.

There were three main factors behind this
substantial decline in sales:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the completion in the year ended March 31,
    2003 of a key phase of a long-term service contract in Saudi
    Arabia and a general slowdown in customer spending across the
    Middle East following the recent conflict in the region;
|
| |  | a reduction in the level of wireless software and
    services revenues due to continued weak market conditions,
    particularly in the US; and                                                                                          
|
| |  | the disposal of our SMS subsidiary completed in
    December 2002, which generated revenues of £10 million
    in the three months ended September 30, 2002.                                                                              

During the three months ended September 30,
2003, EMEA, North America and CALA accounted for 90%, 8% and 2%
of VAS revenues, respectively.

US Businesses

Our US businesses generated revenues of
£137 million in the three months ended
September 30, 2003, an increase of £3 million or
2% from £134 million in the three months ended
September 30, 2002.

Network Equipment revenues of
£107 million in the three months ended
September 30, 2003, which increased £15 million
or 16% as compared with £92 million in the three
months ended September 30, 2002, represented 78% of the
total US business revenues in the three months ended
September 30, 2003 as compared with 69% in the three months
ended September 30, 2002. The increase in Network Equipment
revenues was partially offset by a decrease of 29% in Network
Services revenues of, which represented 22% of US business
revenues in the three months ended September 30, 2003 as
compared with 31% in the three months ended September 30,
2002.



| |               
| | --------------
| | BBRS Equipment

BBRS equipment revenues of £38 million
in the three months ended September 30, 2003, increased
£3 million or 9% as compared to £35 million
in the three months ended September 30, 2002. The increase
in equipment sales was mainly due to a significantly higher
level of sales to BBRS largest customer, the
US Federal Government, which was partially offset by
reduced sales to North American enterprise customers, which was
in line with our strategy to focus technical and commercial
resources on the service provider and government sectors. Also,
partially offsetting the increase in BBRS equipment sales were
reduced sales in APAC, in particular Japan, where market
conditions remain difficult.

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In the three months ended September 30, 2003
North America, EMEA and APAC accounted for 87%, 11% and 2% of
total BBRS equipment revenues, respectively.



| |              
| | -------------
| | OPP Equipment

OPP equipment revenues of £39 million
in the three months ended September 30, 2003, increased
£5 million or 15% as compared with
£34 million in the three months ended
September 30, 2002. We have been successful in securing a
number of new wins for outside plant and power systems,
primarily resulting from increased demand by North American
wireless operators and these have led to the increase in
equipment sales in the three months ended September 30,
2003.

In the three months ended September 30,
2003, North America and CALA accounted for 92% and 8% of OPP
revenues, respectively.

We are currently managing our OPP business for
value and ultimately for disposal. We expect to use the net cash
proceeds from this disposal to pay down our Notes.



| |              
| | -------------
| | NAA Equipment

NAA equipment revenues of £30 million
in the three months ended September 30, 2003, increased
£7 million or 30% as compared to £23 million
in the three months ended September 30, 2002. This
£7 million increase was primarily a result of the
acceleration of ADSL roll-outs and upgrade programs
(particularly at BellSouth). All of NAA sales are generated in
the North American market.

We are currently managing our NAA business for
value and ultimately for disposal. We expect to use the net cash
proceeds from its disposal to pay down our Notes.

US Network Services



| |              
| | -------------
| | BBRS Services

BBRS services revenues of £15 million
in the three months ended September 30, 2003, decreased
£9 million or 38% as compared to £24 million
in the three months ended September 30, 2002. The lower
level of BBRS service revenues in the three months ended
September 30, 2003 was mainly due to a combination of
declining support revenues from enterprise customers and the
completion of a significant commercial airport project in the
year ended March 31, 2003.



| |             
| | ------------
| | OPP Services

OPP services revenues of £15 million in
the three months ended September 30, 2003, decreased
£3 million or 17% as compared with
£18 million in the three months ended
September 30, 2002. The decrease in OPP services revenues
mainly resulted from reduced spending on central office services
by US regional customers.

In the three months ended September 30,
2003, North America and CALA accounted for 92% and 8% of OPP
revenues, respectively.

We are currently managing our OPP business for
value and ultimately for disposal. We expect to use the net cash
proceeds from this disposal to pay down our Notes.

Six months ended September 30, 2003
compared with six months ended
September 30, 2002

Europe/RoW Businesses

Our businesses in Europe/RoW generated revenues
of £500 million, a decrease of £202 million
or 28% as compared to £702 million in the three months
ended September 30, 2002 with decreases across all major
product areas in the six months ended September 30, 2003 as
compared with the six months ended September 30, 2002. The
most marked declines occurred in the three months ended
June 30, 2003 as compared to the three months ended
June 30, 2002. This decrease was spread evenly between
Network Equipment, which represented 57% of Europe/RoW revenues
in the six months ended September 30, 2003 as

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compared with 55% of Europe/RoW revenues in the
six months ended September 30, 2002 and Network Services,
which represented 43% of revenues in the six months ended
September 30, 2003 as compared with 45% in the six months
ended September 30, 2002.


Europe/RoW Network Equipment



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

Optical Network revenues of
£165 million in the six months ended
September 30, 2003, decreased £77 million or 32%
from £242 million in the six months ended
September 30, 2002. This decrease was due to the decline in
demand for optical equipment described above as well as the
shift in our customers investment from optical
transmission networks towards broadband access roll-outs. Also,
in the six months ended September 30, 2002, we completed a
number of new ON build projects, mainly for Wind and Vodafone in
Italy, which have not been repeated in the six months ended
September 30, 2003.



| |                
| | ---------------
| | Access Networks

Access Network revenues of £92 million
in the six months ended September 30, 2003, decreased
£36 million or 28% as compared with
£128 million in the six months ended
September 30, 2002. In the three months ended June 30,
2003, we experienced a sharp decline in sales of access products
in the German market, which improved with increased demand for
fixed wireless access products from wireless operators in the
three months ended September 30, 2003.



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

Other Network Equipment revenues of
£28 million in the six months ended September 30,
2003, decreased £1 million or 3% as compared with
£29 million in the six months ended September 30,
2002. This decrease was mainly due to the disposal of our South
African legacy operations, which more than offset increased
sales of payphones in the six months ended September 30,
2003.

Europe/RoW Network Services

Network Services revenues in Europe/RoW of
£215 million in the six months ended
September 30, 2003, declined £88 million or 29%
as compared with £303 million in the six months ended
September 30, 2002. Most of the decline occurred in VAS
where revenues of £125 million, decreased
£78 million or 38.4% as compared with
£203 million in the six months ended
September 30, 2002. The decrease in VAS revenues resulted
primarily from significantly lower sales in the Middle East, a
lower level of sales of wireless software and services,
particularly in the US, and the disposal of our SMS subsidiary.
All of these trends are described in more detail above. The
£10 million decrease in IC&M revenues resulted
from the lower level of revenues in our Optical Networks and
Access Networks activities.

US businesses

US Network Equipment

BBRS
Equipment

BBRS equipment revenues of £66 million
in the six months ended September 30, 2003, decreased
£7 million or 10% as compared with
£73 million in the six months ended September 30,
2002. The majority of the decline occurred in the three months
ended June 30, 2003 as compared with the three months ended
June 30, 2002 resulting mainly from reduced revenues
through indirect channels in APAC and EMEA. In North America, a
lower level of revenues to enterprise customers, as described
above, was more than offset by an increase in revenues to the US
Federal Government in the six months ended September 30,
2003.

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OPP
Equipment

OPP equipment revenues of £74 million
in the six months ended September 30, 2003, decreased
£6 million or 8% as compared with
£80 million in the six months ended September 30,
2002. Modest growth in the three months ended September 30,
2003 as compared with the three months ended September 30,
2002 was driven by increased sales of OPP equipment to North
American wireless operators, but were not sufficient to offset
declines in both OPP equipment and services in the three months
ended June 30, 2003 as compared with the three months ended
June 30, 2002, which were largely due to the significant
reductions in capital expenditure by telecom network operators
in the US and Mexico.

NAA
Equipment

NAA equipment revenues of £55 million
in the six months ended September 30, 2003, increased
£7 million or 15% as compared with
£48 million in the six months ended September 30,
2002. While revenues were flat in the three months ended
June 30, 2003 as compared with the three months ended
June 30, 2002, growth in the three months ended September
2003 as compared with the three months ended September 30,
2002 was mainly driven by BellSouths accelerated ADSL
roll-out program.

US Network Services

BBRS
Services

BBRS services revenues of £30 million
in the six months ended September 30, 2003, decreased
£13 million or 30% as compared to
£43 million in the six months ended September 30,
2002. The lower level of BBRS service revenues in the six months
ended September 30, 2003 was mainly due to a combination of
declining support revenues from enterprise customers and the
completion of a significant commercial airport project in the
year ended March 31, 2003.

OPP
Services

OPP services revenues of £31 million in
the six months ended September 30, 2003, decreased
£15 million or 33% as compared with
£46 million in the six months ended September 30,
2002. The decrease in OPP services revenues mainly resulted from
reduced spending on central office services by US regional
customers.

Segmental operating (loss)/profit 
new segment basis

The table below presents a summary of U.K. GAAP
segmental operating (loss)/profit (defined as operating
(loss)/profit before central costs, goodwill and intangible
amortization, U.K. GAAP operating exceptional items, gains and
losses on business disposal and the impact of less than 50%
owned affiliates) based upon our new segment structure. A
reconciliation of U.K. GAAP segmental operating
(loss)/profit to operating (loss)/profit on a U.S. GAAP
basis together with a description of the differences between
U.K. and U.S. GAAP is presented in note 10 of the
notes to our condensed consolidated financial statements
contained elsewhere herein.

|                         |  |               |     |               |  |  |     |  
|------------------------ |  | ------------- | --- | ------------- |  |  | --- | -
|                         |  | Three months  |     | Six months   
|                         |  | ended         |     | ended        
|U.K. GAAP                |  | September 30, |     | September 30,
|(in millions)            |  | 2003          |     | 2003         
|                         |  | £             |     | £            
|                         |  |              
|                         |  |              
|NARF                     |  |               | 18  |               |  |  | 27  |  
|Non NARF                 |  |               | (25 | )             |  |  | (66 | )
|                         |  |              
|Segmental operating loss |  |               | (7  | )             |  |  | (39 | )
|                         |  |              

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Our Group operating loss of £39 million
in the six months ended September 30, 2003 comprised an
operating loss of £66 million in Non NARF
businesses, which was partially offset by an operating profit of
£27 million in NARF businesses.

Our two segments NARF and Non-NARF have very
different operating profiles. The main differences can be
characterised as follows:

      Gross
margin: NARF benefits from a higher gross margin than
Non NARF. This is driven by our BBRS business, which has a
higher gross margin than our Group average. This is partially
offset within NARF by lower gross margins in OPP and NAA, the
two businesses which we are managing for value. In the six
months ended September 30, 2003, NARF recorded gross profit
of £94 million on revenues of £260 million,
leading to a gross margin of 36.2%. This compared to a gross
profit of £97 million in Non NARF on revenues of
£496 million, leading to a gross margin of 19.6%.



| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The operational restructuring of our supply chain
    and manufacturing cost base has been achieved more rapidly in
    North America than in Europe. As described in Overview on
    page 41 above, we expect the benefits of initiatives
    currently under way in Europe to contribute to an improvement in
    gross margin in future quarters.

      R&D
investment: In aggregate, our NARF businesses spend a lower
percentage of revenues on R&D than our Non NARF
businesses. For the six months ended September 30, 2003,
NARF invested £30 million in R&D which accounted
for 28.6% of our total spend and represented 11.5% of NARF
revenues. This compared to £75 million invested within
our Non NARF businesses, accounting for 71.4% of our total
spend and representing 15.1% of Non NARF revenues. R&D
in our NARF businesses is mainly focused on BBRS (60.7% of total
NARF R&D spend and 27.4% of BBRS equipment revenues in the
six months ended September 30, 2003). We have realized
significant savings in R&D in our BBRS business in the six
months ended September 30, 2003 mainly as a result of
headcount reductions in order to align our costs to the current
level of revenues in the business. Due to the nature of the
business, OPP is a relatively low consumer of R&D spend (20%
of total NARF R&D spend and 8.1% of OPP equipment revenues
in the six months ended September 30, 2003) We have
significantly reduced R&D spend in NAA as we manage this
business for value (20.0% of total NARF R&D spend and 10.9%
of NAA equipment revenues in the six months ended
September 30, 2003). Total R&D spend of
£58 million or 11.7% of sales in Non NARF covers
investment in Optical Networks, our largest product area and
also Access Networks where we are in the early stages of the
sales cycle for key new next generation products such as our
Access Hub Softswitch and therefore have a lower revenue base
over which to spread these R&D costs.

      Selling,
general and administrative expenses: our NARF businesses
tend to incur a lower level of selling, general and
administrative costs both in absolute terms and as a percentage
of revenues than our Non NARF businesses. This is partly
because they benefit from a higher customer concentration (58%
in the first six months ended September 30, 2003) than our
businesses in the rest of the world (48% in the first six months
ended September 30, 2003).

In addition to the factors listed above, it
should be noted that we have been able to complete the
operational restructuring of our NARF businesses in a
significantly shorter period of time than within our
Non NARF businesses and this has been a major driver in
returning our NARF businesses to operating profitability. As
described in the Overview on page 42 above, further planned
headcount reductions in Europe have been announced and are now
well under way and we expect that these will make a significant
contribution to cost savings in Non NARF during the second
half of fiscal 2004. At the same time, in CALA and APAC, we
continue to rationalize our number of operating locations by
consolidating our employees onto the larger sites in the region
and closing remote offices. These actions are also expected to
contribute to cost savings in the second half of fiscal 2004.

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Segmental revenues (U.K. GAAP) 
old segment basis

The following table presents our revenues by
product area in accordance with U.K. GAAP based upon our old
segment structure:

|                                                          |       |                    |     |                  |  |      |     |      |  |  |     |     |  |  |       |     | 
|--------------------------------------------------------- | ----- | ------------------ | --- | ---------------- |  | ---- | --- | ---- |  |  | --- | --- |  |  | ----- | --- | 
|                                                          |       |                    |     |                 
|                                                          |       | Three months ended |     | Six months ended
|                                                          |       | September 30,      |     | September 30,   
|                                                          |       | 2003               |     | 2002             |  | 2003 |     | 2002
|(in millions)                                             |       | £                  |     | £                |  | £    |     | £   
|                                                          |       |                   
|                                                          |       |                   
|Network Equipment:                                        |       |                    |     |                  |  |      |     |      |  |  |     |     |  |  |       |    
|Optical Networks                                          |       |                    | 80  |                  |  |      | 108 |      |  |  | 165 |     |  |  | 242   |    
|BBRS                                                      |       |                    | 38  |                  |  |      | 35  |      |  |  | 66  |     |  |  | 73    |    
|European Access                                           |       |                    | 48  |                  |  |      | 69  |      |  |  | 92  |     |  |  | 128   |    
|North American Access                                     |       |                    | 30  |                  |  |      | 23  |      |  |  | 55  |     |  |  | 48    |    
|Outside Plant & Power                                     |       |                    | 39  |                  |  |      | 34  |      |  |  | 74  |     |  |  | 80    |    
|Other Network Equipment                                   |       |                    | 16  |                  |  |      | 15  |      |  |  | 28  |     |  |  | 29    |    
|                                                          |       |                   
|                                                          | Total |                    |     | 251              |  |      |     | 284  |  |  |     | 480 |  |  |       | 600 | 
|                                                          |       |                   
|Network Services:                                         |       |                    |     |                  |  |      |     |      |  |  |     |     |  |  |       |    
|IC&M                                                      |       |                    | 62  |                  |  |      | 69  |      |  |  | 121 |     |  |  | 146   |    
|VAS                                                       |       |                    | 76  |                  |  |      | 129 |      |  |  | 155 |     |  |  | 246   |    
|                                                          |       |                   
|                                                          | Total |                    |     | 138              |  |      |     | 198  |  |  |     | 276 |  |  |       | 392 | 
|                                                          |       |                   
|Total Network Equipment and Network Services
    revenues |       |                    | 389 |                  |  |      | 482 |      |  |  | 756 |     |  |  | 992   |    
|Other                                                     |       |                    |    |                  |  |      | 4   |      |  |  |    |     |  |  | 27    |    
|Discontinued                                              |       |                    |    |                  |  |      | 28  |      |  |  |    |     |  |  | 87    |    
|                                                          |       |                   
|Total U.K. GAAP revenues                                  |       |                    | 389 |                  |  |      | 514 |      |  |  | 756 |     |  |  | 1,106 |    
|                                                          |       |                   

Three months ended September 30, 2003
compared with three months ended September 30,
2002.

Network Equipment

Network Equipment revenues of
£251 million or 65% of total Network revenues in the
three months ended September 30, 2003, decreased
£33 million or 12% as compared to
£284 million or 59% of total Network revenues in the
three months ended September 30, 2002.

Optical Networks

Optical Networks revenues of
£80 million in the three months ended
September 30, 2003, decreased £28 million or 26%
as compared to £108 million in the three months ended
September 30, 2002. There has been a significant reduction
in capital expenditure on optical networking equipment in the
three months ended September 30, 2002 as operators have
increasingly focused their capital spend away from this area of
their networks and onto broadband access deployments, with the
reduced spend in optical focused on activities to maintain
existing infrastructure rather than on new network build
projects. We expect this trend to continue in the medium-term.

From a geographic perspective, the decline in
revenues occurred primarily in EMEA as well as in APAC while
revenues in CALA remained relatively stable albeit at a low
level. In EMEA, which accounted for approximately 75% of Optical
Network revenues in the three months ended September 30,
2003, the reduced level of sales to BT discussed above were
partially offset by increased revenues to Vodafone in Italy. The
reduced level of sales to BT impacted sales of our SDH
equipment, in particular, which in total accounted for over 80%
of Optical Network revenues in the three months ended
September 30, 2003. We also experienced a modest drop in
sales of DWDM equipment as a result of decreased demand for this
technology across the industry.

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Broadband Routing and Switching

BBRS equipment revenues of £38 million
in the three months ended September 30, 2003, increased
£3 million or 9% as compared to £35 million
in the three months ended September 30, 2002. The increase
in equipment sales was mainly due to a significantly higher
level of sales to BBRS largest customer, the US Federal
Government, which was partially offset by reduced sales to North
American enterprise customers, which was in line with our
strategy to focus technical and commercial resources on the
service provider and government sectors. Also, partially
offsetting the increase in BBRS equipment sales were reduced
sales in APAC, in particular Japan, where market conditions
remain difficult.

In the three months ended September 30, 2003
North America, EMEA and APAC accounted for 87%, 11% and 2% of
total BBRS equipment revenues, respectively.

Access Networks

Access Networks revenues of
£48 million, decreased £21 million or 30% in
the three months ended September 30, 2003 as compared with
£69 million in the three months ended
September 30, 2002. Increased sales of our Access Hub were
more than offset by declines across all other product lines.
Fixed Wireless Access products accounted for approximately 38%
of Access Network revenues in the three months ended
September 30, 2003, an increase from 30% in the three
months ended June 30, 2003 as a direct result of increased
demand for these products from wireless operators in Germany.
Sales of these products in the three months ended
September 30, 2003 were lower than in the three months
ended September 30, 2002 as a result of a decline in other
sales in Central European markets.

Sales of our Access Hub represented approximately
20% of Access Network revenues in the three months ended
September 30, 2003, twice the level of sales in the three
months ended September 30, 2002. This was a result of
increased sales to customers, Telecom Italia and Wind in Italy.
Voice Systems and other legacy narrowband access products
accounted for 25% and 17% of Access Network revenues,
respectively, in the three months ended September 30, 2003.
Sales of these product lines fell as a result of an intelligent
network software upgrade carried out in the UK in the three
months ended September 30, 2002 as well as generally weaker
market demand for narrowband products among our major customers.

During the three months ended September 30,
2003, EMEA, CALA and APAC accounted for 94%, 4% and 2% of Access
Network revenues, respectively.

North American Access (NAA)

NAA revenues of £30 million in the
three months ended September 30, 2003, increased
£7 million or 30% as compared to £23 million
in the three months ended September 30, 2002. This
£7 million increase was primarily a result of the
acceleration of ADSL roll-outs and upgrade programs
(particularly at BellSouth). All of NAA sales are generated in
the North American market.

We are currently managing our NAA business for
value and ultimately for disposal. We expect to use the net cash
proceeds from its disposal to pay down our Notes.

Outside Plant and Power (OPP)

OPP equipment revenues of £39 million
in the three months ended September 30, 2003, increased
£5 million or 15% as compared with
£34 million in the three months ended
September 30, 2002. We have been successful in securing a
number of new wins for outside plant and power systems,
primarily resulting from increased demand by North American
wireless operators and these have led to the increase in
equipment sales in the three months ended September 30,
2003.

In the three months ended September 30,
2003, North America and CALA accounted for 92% and 8% of OPP
revenues, respectively.

We are currently managing our OPP business for
value and ultimately for disposal. We expect to use the net cash
proceeds from this disposal to pay down our Notes.

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Other Network Equipment

Other Network Equipment mainly comprised sales of
our Interactive Systems, payphones and internet terminal. Other
Network Equipment revenues of £16 million, increased
£1 million or 7% as compared with
£15 million in the three months ended
September 30, 2002 and resulted mainly from shipments of
multi-media terminals to Telefonica (Spain) and payphones to
customers in APAC.

Network Services

Network Services revenues of
£138 million or 35% of total Network revenues in the
three months ended September 30, 2003, decreased
£60 million or 30% as compared to
£198 million or 41% of total Network revenues in the
three months ended September 30, 2002.

Installation, Commissioning and Maintenance
(IC&M)

IC&M revenues of £62 million in the
three months ended September 30, 2003, decreased
£7 million or 10% as compared to £69 million
in the three months ended September 30, 2002. This was due
to the reduction in volumes of Network Equipment deliveries,
partially offset by a stable level of revenues under ongoing
support contracts.

During the three months ended September 30,
2003, EMEA accounted for 96% of IC&M sales, with the balance
mainly in APAC.

Value Added Services (VAS)

VAS revenues of £76 million in the
three months ended September 30, 2003, decreased
£53 million or 41% as compared to
£129 million in the three months ended
September 30, 2002.

There were three main factors behind this
substantial decline in sales:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the completion in the year ended March 31,
    2003 of a key phase of a long-term service contract in Saudi
    Arabia and a general slowdown in customer spending across the
    Middle East following the recent conflict in the region;
|
| |  | a reduction in the level of wireless software and
    services revenues due to continued weak market conditions,
    particularly in the US; and                                                                                          
|
| |  | the disposal of our SMS subsidiary completed in
    December 2002, which generated revenues of £10 million
    in the three months ended September 30, 2002.                                                                              

During the three months ended September 30,
2003, EMEA, North America and CALA accounted for 90%, 8% and 2%
of VAS revenues, respectively.

Six months ended September 30, 2003
compared with six months ended September 30, 2002

Network Equipment

Network Equipment revenues of
£480 million or 63% of total Network revenues,
decreased £120 million or 20% as compared with the
£600 million or 60% of sales from continuing
operations in the six months ended September 30, 2002.
Revenues were down across all major product and service areas,
with the exception NAA revenues, in both our Europe/RoW and US
businesses in the six months ended September 30, 2003 as
compared to the six months ended September 30, 2002. The
most marked declines occurred in the three months ended
June 30, 2003 as compared to the three months ended
June 30, 2002.

Optical
Networks

Optical Network revenues of
£165 million in the six months ended
September 30, 2003, decreased £77 million or 32%
from £242 million in the six months ended
September 30, 2002. This decrease was due to the decline in
demand for optical equipment described above as well as the
shift in our customers

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investment from optical transmission networks
towards broadband access roll-outs. Also, in the six months
ended September 30, 2002, we completed a number of new ON
build projects, mainly for Wind and Vodafone in Italy, which
have not been repeated in the six months ended
September 30, 2003.


BBRS
Equipment

BBRS equipment revenues of £66 million
in the six months ended September 30, 2003, decreased
£7 million or 10% as compared with
£73 million in the six months ended September 30,
2002. The majority of the decline occurred in the three months
ended June 30, 2003 as compared with the three months ended
June 30, 2002 resulting mainly from reduced revenues
through indirect channels in APAC and EMEA. In North America, a
lower level of revenues to enterprise customers, as described
above, was more than offset by an increase in revenues to the US
Federal Government in the six months ended September 30,
2003.

Access
Networks

Access Network revenues of £92 million
in the six months ended September 30, 2003, decreased
£36 million or 28% as compared with
£128 million in the six months ended
September 30, 2002. In the three months ended June 30,
2003, we experienced a sharp decline in sales of access products
in the German market, which improved with increased demand for
fixed wireless access products from wireless operators in the
three months ended September 30, 2003.

North
American Access (NAA)

NAA revenues of £55 million in the six
months ended September 30, 2003, increased
£7 million or 15% as compared with
£48 million in the six months ended September 30,
2002. While revenues were flat in the three months ended
June 30, 2003 as compared with the three months ended
June 30, 2002, growth in the three months ended September
2003 as compared with the three months ended September 30,
2002 was mainly driven by BellSouths accelerated ADSL
roll-out program.

Outside
Plant and Power (OPP)

OPP revenues of £74 million in the six
months ended September 30, 2003, decreased
£6 million or 8% as compared with
£80 million in the six months ended September 30,
2002. Modest growth in the three months ended September 30,
2003 as compared with the three months ended September 30,
2002 was driven by increased sales of OPP equipment to North
American wireless operators, but were not sufficient to offset
lower revenues in the three months ended June 30, 2003 as
compared with the three months ended June 30, 2002, which
were largely due to the significant reductions in capital
expenditure by telecom network operators in the US and Mexico.

Other
Network Equipment

Other Network Equipment revenues of
£28 million in the six months ended September 30,
2003, decreased £1 million or 3% as compared with
£29 million in the six months ended September 30,
2002. This decrease was mainly due to the disposal of our South
African legacy operations, which more than offset increased
sales of payphones in the six months ended September 30,
2003.

Network Services

Network Services revenues of
£276 million or 37% of total Network revenues,
decreased £116 million or 29.6% as compared to
£392 million in the six months ended
September 30, 2002. The decrease in VAS revenues of
£91 million resulted primarily from significantly
lower sales in the Middle East, a lower level of sales of
wireless software and services, particularly in the US, and the
disposal of our SMS subsidiary. All of these trends are
described in more detail above. The £25 million
decrease in IC&M revenues resulted from the lower level of
revenues in our Optical Networks and Access Networks activities.

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Other

The Other segmental revenues activities consisted
of UMTS and Tetra revenues, which were disposed of in July 2003
and March 2003, respectively.

Segmental operating (loss)/profit 
old segment basis

The table below presents a summary of
U.K. GAAP segmental operating (loss)/profit (defined as
operating (loss)/profit before central and head office costs,
goodwill amortization and U.K. GAAP operating exceptional
segmental items). A reconciliation of U.K. GAAP segmental
operating (loss)/profit to operating (loss)/profit on a
U.S. GAAP basis together with a description of the
differences between U.K. and U.S. GAAP is presented in
note 10 of the notes to our condensed consolidated
financial statements contained elsewhere herein.

|                  |                          |                    |     |                  |   |      |     |      |   |  |     |     |   |  |      |      |  
|----------------- | ------------------------ | ------------------ | --- | ---------------- | - | ---- | --- | ---- | - |  | --- | --- | - |  | ---- | ---- | -
|                  |                          |                    |     |                 
|                  |                          | Three months ended |     | Six months ended
|                  |                          | September 30       |     | September 30    
|U.K. GAAP         |                          | 2003               |     | 2002             |   | 2003 |     | 2002
|(in millions)     |                          | £                  |     | £                |   | £    |     | £   
|                  |                          |                   
|                  |                          |                   
|Network Equipment |                          |                    | (19 | )                |   |      | (83 | )    |   |  | (51 | )   |   |  | (179 | )   
|Network Services  |                          |                    | 12  |                  |   |      | 7   |      |   |  | 17  |     |   |  | 5    |     
|Other             |                          |                    |    |                  |   |      | (12 | )    |   |  | (5  | )   |   |  | (24  | )   
|                  |                          |                   
|                  | Segmental operating loss |                    |     | (7               | ) |      |     | (88  | ) |  |     | (39 | ) |  |      | (198 | )
|                  |                          |                   

We recorded segmental operating losses of
£7 million and £39 million in the three and
six months ended September 30, 2003 as compared to
segmental operating losses of £88 million and
£198 million in the three and six months ended
September 30, 2002. These improvements of
£81 million or 92.0% and £159 million or
80.3% in the three and six months ended September 30, 2003
as compared with the three and six months ended
September 30, 2002, respectively were achieved as a result
of the cost reduction initiatives to improve gross margin and
operating costs discussed earlier.

Network Equipment

The Network Equipment segmental operating loss of
£19 million in the three months ended
September 30, 2003, decreased £64 million or
72.1% compared to £83 million in the three months
ended September 30, 2002, while Network Equipment segmental
operating loss of £53 million in the six months ended
September 30, 2003, decreased £128 million or
71.5% compared to £179 million in the six months ended
September 30, 2002. The improvements were driven primarily
by the substantial cost reductions in our supply chain together
with savings across all areas of operating expense. These
savings more than offset the impact of the 11.6% and 20.0%
declines in Network Equipment revenues in the three and six
months ended September 30, 2003, respectively as compared
with three and six months ended September 30, 2002.

Network Services

The Network Services segment operating profit of
£12 million in the three months ended
September 30, 2003, increased £7 million or 71%
as compared to a profit of £7 million in the three
months ended September 30, 2002, while Network Services
segmental operating profit of £17 million in the six
months ended September 30, 2003, increased
£12 million or 240% compared to £5 million
in the six months ended September 30, 2002. These increases
were driven mainly by improved utilization of resources in this
labor-intensive activity.

Other

The Other segmental operating losses consisted of
the operating losses of UMTS and Tetra, which were disposed of
in July 2003 and March 2003, respectively.

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Liquidity and capital resources

Operating activities

Net cash used in operating activities of
continuing operations was £70 million in the six
months ended September 30, 2003. This resulted primarily
from the income from continuing operations of
£2,795 million, net of the gain on extinguishment of
liabilities of £2,695 million, the gain on settlement
of equity forward contracts of £123 million, the gain
on sale of affiliates of £94 million, partially offset
by depreciation and amortization of £65 million.

Net cash used in operating activities of
continuing operations was £454 million in the six
months ended September 30, 2002. This resulted primarily
from the loss from continuing operations £803 million,
changes in operating assets and liabilities, net of the effect
of extinguishment of liabilities of £46 million and
changes in current and deferred taxes of £27 million,
partially offset by a provision for related party receivable of
£186 million, an impairment of long-lived assets of
£52 million, an impairment of investments in
securities of £40 million, equity in net loss of
affiliates of £59 million and depreciation and
amortization of £97 million.

Investing activities

Net cash provided by investing activities of
£139 million in the six months ended
September 30, 2003 was primarily due to proceeds from the
sale of long-lived assets of £30 million, proceeds
from the sale of investments in securities of
£23 million and disposal of interests in related
parties of £104 million, partially offset by purchases
of property, plant and equipment of £12 million and
purchases of interests in related parties of
£6 million.

Net cash provided by investing activities of
£369 million in the six months ended
September 30, 2002 was primarily due to cash received from
disposals of interests in related parties of
£375 million and proceeds from the sale of long-lived
assets of £15 million, partially offset by purchases
of property, plant and equipment of £20 million.

Total Network Equipment and Network Services
capital expenditures were £12 million in the six
months ended September 30, 2003. We have continued to
maintain capital expenditures well below the level of
depreciation expense, which was £42 million in the six
months ended September 30, 2003. During the six months
ended September 30, 2003, capital expenditures were
primarily related to the Optical Networks and BBRS businesses.

We currently expect the level of our capital
expenditures to remain below the level of depreciation expense.

Financing activities

Net cash provided by financing activities of
£314 million in the six months ended
September 30, 2003 was primarily due to restricted cash
transferred from restricted accounts of £754 million,
partially offset by cash paid in connection with the Financial
Restructuring of £330 million and term loan repayments
of £106 million, which represented early repayments of
our Junior Notes.

Net cash used by financing activities of
£878 million in six months ended September 30,
2002 was primarily due to restricted cash transferred to
restricted accounts of £761 million and repayments on
short-term borrowings of £141 million, partially
offset by cash provided by related parties of
£24 million.

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Contractual obligations and other
commercial commitments

The following tables summarize our actual
contractual obligations and commercial commitments at
September 30, 2003:

|                        |  |                                                 |    |       |  |      |    |      |  |      |    |            |  |             |    |  |  |  |    |  |  |  |     |  |  |  |     | 
|----------------------- |  | ----------------------------------------------- | -- | ----- |  | ---- | -- | ---- |  | ---- | -- | ---------- |  | ----------- | -- |  |  |  | -- |  |  |  | --- |  |  |  | --- | 
|                        |  |                                                 |    |      
|                        |  | Amounts expiring in fiscal year ended March 31, |    | Total
|                        |  | 2004                                            |    | 2005  |  | 2006 |    | 2007 |  | 2008 |    | Thereafter |  | Obligations
|(in millions)           |  | £                                               |    | £     |  | £    |    | £    |  | £    |    | £          |  | £          
|                        |  |                                                
|                        |  |                                                
|Contractual obligations |  |                                                 |    |       |  |      |    |      |  |      |    |            |  |             |    |  |  |  |    |  |  |  |     |  |  |  |     | 
|Long-term debt          |  |                                                 | 2  |       |  |      | 5  |      |  |      | 5  |            |  |             | 4  |  |  |  | 4  |  |  |  | 636 |  |  |  | 656 | 
|Operating leases        |  |                                                 | 11 |       |  |      | 19 |      |  |      | 17 |            |  |             | 16 |  |  |  | 14 |  |  |  | 60  |  |  |  | 137 | 
|                        |  |                                                
|Total                   |  |                                                 | 13 |       |  |      | 24 |      |  |      | 22 |            |  |             | 20 |  |  |  | 18 |  |  |  | 696 |  |  |  | 793 | 
|                        |  |                                                

|                                      |  |                                                 |    |      |  |      |    |      |  |      |    |            |  |       |    |  |  |  |    |  |  |  |    |  |  |  |     | 
|------------------------------------- |  | ----------------------------------------------- | -- | ---- |  | ---- | -- | ---- |  | ---- | -- | ---------- |  | ----- | -- |  |  |  | -- |  |  |  | -- |  |  |  | --- | 
|                                      |  |                                                 |    |     
|                                      |  | Amounts expiring in fiscal year ended March 31, |    |     
|                                      |  | 2004                                            |    | 2005 |  | 2006 |    | 2007 |  | 2008 |    | Thereafter |  | Total
|(in millions)                         |  | £                                               |    | £    |  | £    |    | £    |  | £    |    | £          |  | £    
|                                      |  |                                                
|                                      |  |                                                
|Other commercial commitments          |  |                                                 |    |      |  |      |    |      |  |      |    |            |  |       |    |  |  |  |    |  |  |  |    |  |  |  |     | 
|Bank bonds or surety bonds            |  |                                                 | 43 |      |  |      | 41 |      |  |      | 12 |            |  |       | 40 |  |  |  | 18 |  |  |  | 14 |  |  |  | 168 | 
|Undrawn customer financing commitment |  |                                                 |   |      |  |      | 2  |      |  |      |   |            |  |       |   |  |  |  |   |  |  |  |   |  |  |  | 2   | 
|                                      |  |                                                
|Total                                 |  |                                                 | 43 |      |  |      | 43 |      |  |      | 12 |            |  |       | 40 |  |  |  | 18 |  |  |  | 14 |  |  |  | 170 | 
|                                      |  |                                                

Contract bonding facilities

We had £168 million of bank bonds or
surety bonds, guaranteeing our performance in respect of certain
contracts, outstanding as at September 30, 2003 with both
banks and insurance companies worldwide as compared with
£163 million at March 31, 2003. Following the
Financial Restructuring, we entered into a new committed
Super-priority Performance Bonding Facility that allows us to
procure a further £50 million of performance bonding,
of which £6 million has been drawn at
September 30, 2003. A number of our performance bond
arrangements carry rights for us to call for cash collateral,
either unconditionally or upon the occurrence of certain events.
We estimate that as at September 30, 2003, performance
bonds with a face value of approximately £43 million
had varying conditional or unconditional rights to call for cash
collateral. As part of our restructuring, substantially all new
bonds currently have to be cash collateralized. Of the
£135 million of collateral at September 30, 2003,
£25 million related to collateral on bonds, which have
been retired and rolled into collateralization of the new
Super-priority Performance Bonding Facility, and
£10 million was collateral against bonds issued in
favor of companies, which have now been sold. In the latter
case, we are in the process of procuring the release of this
collateral.

Customer financing commitments

At September 30, 2003, we had vendor finance
commitments to customers of approximately £40 million
as compared with £42 million at March 31, 2003,
of which £38 million had been drawn at both
September 30, 2003 and March 31, 2003. We have not
issued any new customer finance commitments during the six
months ended September 30, 2003 and did not require cash
resources to fund these activities during the six months ended
September 30, 2003.

Pensions

During the three months ended September 30,
2003, the Trustees of the our U.K. pension plan agreed the value
to be transferred to the Merloni pension plan in respect of the
accrued benefits of the employees

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who transferred to Merloni upon completion of the
sale of the groups 50 per cent stake in General
Domestic Appliances in 2001. Consistent with previous
transactions, the transfer value was calculated on a share of
funds basis provided for in the sale agreement and consistent
with the amount assumed therein. As previously disclosed in our
Form 20-F for the year ended March 31, 2003, the
Trustees were not bound by the provisions in the original sale
agreement and reserved the right to pay the lower statutory
minimum transfer value, which could have exposed Marconi to a
maximum liability of £14.7 million. This potential
exposure is now remote.


On March 26, 2003, we signed a funding
agreement with the U.S. Pensions Benefit Guaranty
Corporation (PBGC) for the defined benefit plans of our
U.S. businesses. Under the agreement, the
U.S. businesses commenced contributions from June 2003 for
the normal cost of the plans at U.S.$6 million
(approximately £3.8 million) per annum plus enhanced
contributions of U.S.$9 million (approximately
£5.7 million) per annum. Additionally, proceeds from
any disposal of a U.S. business shall be used to fund plan
deficits, prior to the remaining proceeds being used to pay down
the Junior or Senior Notes. At September 30, 2003, the plan
deficit were approximately U.S.$32.8 million (approximately
£19.7 million).

IT outsourcing agreement

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

The IT service contract is for a period of
10 years with a right to terminate without cause, but
subject to a number of penalties, after 2 years and
contains an obligation for us to repurchase 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, we have not quantified this obligation at
September 30, 2003.

Current liquidity position

At September 30 2003, our cash and cash
equivalents totaled £772 million as compared with
£1,156 million at March 31, 2003, of which
£156 million (£515 million at March 31,
2003) was denominated in sterling, £417 million
(£282 million at March 31, 2003) in US dollars,
£172 million (£306 million at March 31,
2003) in euro and the balance of £27 million
(£53 million at March 31, 2003) in other
currencies. Of the £772 million at September 30,
2003, £210 million is classified as restricted cash,
and £562 million is free cash available to us. The
£210 million of restricted cash is comprised of
£135 million collateral against present and future
bonding facilities, £41 million in an escrow account
to meet any claims for collateral on existing performance bonds
and guarantees, £13 million deposited against secured
loans in Italy, £19 million in our captive insurance
company and £2 million in the Mandatory Redemption
Escrow Account. The £562 million of free cash
available to us is comprised of £497 million of
available Treasury deposits and £65 million of global
working capital balances within our subsidiaries and cash in
transit.

Our outstanding borrowings at September 30,
2003 were £634 million (net of debt discount of
approximately £39 million) consisted primarily of the
U.S.$717 million (£432 million at
September 30, 2003) of Senior Notes due in April 2008, and
the U.S.$318 million (approximately £191 million
at September 30, 2003) of Junior Notes due in October 2008
as compared with £4,416 million at March 31,
2003. The £3,782 million reduction primarily reflects
the extinguishment of £4,299 million of debt,
partially offset by the issuance of new Junior and Senior notes
totaling U.S.$ 1,204 million (approximately
£729 million at September 30, 2003), which were a
result of the completion of our Financial Restructuring, net of
repayments on the Junior Notes through September 30, 2003
of approximately U.S.$169 million (approximately
£106 million).

The repayments on the Junior Notes resulted from
the mandatory partial redemptions of the Junior Notes completed
on July 31, 2003 (US$66 million, approximately
£41 million) and September 30, 2003

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(US$103 million, approximately
£65 million). In addition, we transferred proceeds
from the sale of our stake in Bookham Technology plc from
available Treasury deposits to the Mandatory Redemption Escrow
Account (MREA) on September 30, 2003. These
were used to fund a further mandatory partial redemption of the
Junior Notes on October 17, 2003 (U.S.$29 million,
£17 million) further reducing the principal amount of
Junior Notes outstanding to US$289 million (approximately
£174 million) at that date.


Financial Restructuring

On May 19, 2003, we concluded our Financial
Restructuring and the Schemes of Arrangement for the Marconi
Corporation plc and Marconi plc became effective. The
Marconi Corporation plc. Scheme of Arrangement cancelled
specific borrowings and creditors amounting to approximately
£4.8 billion in consideration for which we paid
£340 million of cash, issued new debt securities of
approximately £756 million and issued one billion
(200 million after five for one share consolidation) new
ordinary shares with a nominal value of £50 million.

On May 19, 2003, our previously agreed
settlement with the ESOP derivative banks relating to the ESOP
derivative transactions became effective and we paid
£35 million to the ESOP derivative banks.

The terms of the indentures governing our new
Senior and Junior Notes significantly restrict our ability to
borrow additional funds. Under the terms of these indentures, no
external borrowings other than in the U.S. working capital
facility referred to below, are permitted other than under
certain restricted circumstances. In addition, our
U.S. based businesses have been ringfenced, and generally
may no longer be funded by other members of the group outside of
the ringfence. No external borrowing facilities are permitted
for these U.S.-based businesses, other than a committed
$22.5 million (approximately £14 million) working
capital facility. In addition, certain forms of liquidity
available to us, including disposals and release of restricted
cash, are subject to terms whereby, under certain circumstances,
the cash will be required to be used to redeem the Junior Notes,
or, in the event that there are no Junior Notes outstanding, the
Senior Notes, at a cost of 110%.

Board Appointments

On July 24, 2003, we announced the
appointment of Pavi Binning as Chief Financial Officer. He
took up the role and joined the Board of Marconi
Corporation plc on his departure from Diageo Plc,
which was in October 2003. At the same time, Chris Holden,
stepped down as Interim Chief Financial Officer and board member
and took up the position of Group Financial Controller on a
permanent basis. Pavi Binning was granted one million
options (after one-for-five share consolidation) under the
Senior Management nil cost Share Option Plan.

On August 19, 2003, we announced the
appointment of Douglas McWilliams, founder and Chief
Executive of the Centre for Economics and Business Research, as
a non-executive Board director. The appointment became effective
after our Annual General Meeting on September 8, 2003.

Payment of interest

In the three months ended September 30,
2003, we paid interest of £16 million on our Junior
and Senior Notes and paid an additional £10 million in
respect of the 10% redemption premium due as a result of the
partial redemption of our Junior Notes. In addition, we have
elected to make the second coupon payment due on our Junior
Notes on October 31, 2003 in cash (approximately
£4.3 million).

Cash requirements

Our cash requirements in fiscal 2004 include
funding operations including spending on R&D, the
operational and Financial Restructuring, capital expenditures
and debt service costs.

We have funded our activities through cash
generated from our operational activities, the proceeds of
disposals, bank borrowings and the sale of debt securities in
the debt capital markets. Following the Financial Restructuring,
we are reliant on our cash balances to meet short- and
medium-term cash requirements.

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Employee stock option plans

On June 24, 2003, as we previously
announced, we granted 15,230,000 nil cost share options (after
the one-for-five share consolidation) to our executive
directors and senior managers. A further 1,000,000 nil cost
share options (after the one-for-five share consolidation)
were granted in the quarter ended September 30, 2003.

On June 30, 2003, as we previously
announced, we granted 5,862,000 market value share options
(after the one-for-five share consolidation) to certain
employees. A further 213,000 market value share options (after
the one-for-five share consolidation) were granted in the
three months ended September 30, 2003.

Application of critical accounting
policies

Preparation of our financial statements requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses.
Management believes the most complex and sensitive judgments,
because of their significance to the consolidated financial
statements, result primarily from the need to make estimates
about the effects of matters that are inherently uncertain. Our
Operating and Financial Review and Prospects and note 2 to
our audited Consolidated Financial Statements in our
Form 20-F for the year ended March 31, 2003 describe
the significant accounting estimates and policies used in
preparation of our financial statements. Actual results in these
areas could differ from managements estimates. There have
been no significant changes in our critical accounting policies
during fiscal 2004.

See note 1 to the condensed consolidated
financial statements contained elsewhere herein for recently
issued accounting pronouncements that have not yet been adopted
by us.

Risk Factors

Set forth below and elsewhere in this report and
in other documents we file with the SEC are risks and
uncertainties that could cause actual results to differ
materially from the results contemplated by the forward-looking
statements contained in this report

We have significant debt outstanding and
significant debt service requirements, which make us more
vulnerable to economic downturns and reduces our
flexibility.

We have significant debt outstanding. As at
September 30, 2003 our total long-term debt net of debt
discount of approximately £39 million was
approximately £614 million. This is likely to limit
our ability to obtain additional financing on satisfactory terms
to fund working capital, capital expenditures, product
development efforts and acquisitions of new assets in excess of
those in our current business plan. In addition, we will be
required to devote a significant proportion of our cash flow
from operations to the payment of interest on our debt
obligations, thereby reducing the funds available for other
purposes. Our level of debt and the fixed nature of a portion of
our debt service costs will make us more vulnerable to economic
downturns, reduce our flexibility to respond to changing
business and economic conditions and limit our ability to pursue
business opportunities, to finance our future operations or
business needs and to implement our business strategies.

We are required to comply with restrictive
covenants and affirmative financial covenants, which
significantly limit our financial and operational
flexibility.

The terms of the instruments governing our
outstanding Notes and our credit facilities require us and our
subsidiaries to comply with restrictive covenants and, from and
after September 30, 2005, to comply with some affirmative
financial covenants. These restrictive covenants, among other
things, restrict our and our subsidiaries ability to:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | incur additional indebtedness,                                   
|
| |  | pay dividends on and redeem our and our
    subsidiaries shares,
|
| |  | redeem some subordinated obligations,                            

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| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | make investments,                                                                     
|
| |  | undertake sales of assets,                                                            
|
| |  | engage in certain transactions with affiliates,                                       
|
| |  | sell or issue capital stock of subsidiaries,                                          
|
| |  | permit liens to exist,                                                                
|
| |  | operate in other lines of business,                                                   
|
| |  | engage in certain sale and leaseback
    transactions, and                            
|
| |  | engage in mergers, consolidations or sales of all
    or substantially all our assets.

Restrictions stemming from these covenants and
from the need to comply with the affirmative financial covenants
will significantly limit our financial and operational
flexibility and could have a significant adverse effect on our
business, results of operations and financial condition.

Our ability to satisfy our affirmative financial
covenants will be affected by changes affecting our business,
results of operations and financial condition and, is therefore,
subject to the other risks described in this quarterly report. A
failure to comply with the restrictive covenants or the
affirmative financial covenants would, if not cured or waived,
constitute an event of default under some of our debt
obligations. The occurrence of an event of default in respect of
any of these debt obligations may permit acceleration of all
amounts borrowed thereunder. This acceleration in turn could
constitute a cross-default under other borrowing arrangements to
which we, or our subsidiaries are party. In such circumstances,
there can be no assurance that we would have sufficient
resources to repay the full principal amount of our debt
obligations. If this were to occur, our shareholders might then
receive no return on their investment. Moreover, a failure to
comply with restrictive covenants constituting an event of
default under one of our credit facilities would permit the
lenders under that facility to terminate their commitments to
make further extensions of credit thereunder. This would likely
have a material adverse effect on our business, results of
operations and financial condition.

The telecommunications industry is
experiencing a severe downturn, many of our customers have
reduced, and some are continuing to reduce, capital expenditure
and, as a result, demand for our products and services has
declined and may continue to decline.

The telecommunications industry is currently
experiencing a prolonged and severe downturn. Many of our
current and potential customers are network operators that have
or have had high levels of indebtedness and, in some cases,
emerging or weak revenue streams. Adverse economic conditions,
network over-capacity due to excess build-out, lack of funding
for telecommunications development and overspending on license
fees have forced network operators to undertake extensive
restructuring and cost-cutting initiatives. In light of market
conditions, many of our customers have delayed delivery of
orders previously placed and have implemented drastic reductions
in capital expenditure in 2002 and 2003 as compared to 2001, and
may further reduce capital expenditure. As a result, demand for
our products and network rollout services, has declined.

Our near-term financial objectives do not depend
on assumptions or expectations of improvement in market
conditions for the telecommunications industry or improvement in
current levels of sales in our businesses. However, they do
assume that there will not be a further material deterioration
in current market conditions or a material decline in sales
levels. Additionally, achievement of our longer-term financial
objectives will depend upon an increase in our sales volumes
based on an improvement in demand for our products and services,
due to a recovery of the industry or otherwise. Consequently, if
demand remains weak for our products and services, resulting
from the financial condition of our customers, market and
industry conditions or otherwise, it is likely to have a
material adverse effect on our business, results of operations
and financial condition in the longer term. In particular, this
may affect our ability to achieve our profitability and cash
flow objectives and, consequently, it may impact on our future
funding requirements.

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We cannot assure you that the telecommunications
market will improve within any particular timeframe or at all,
or that it will not experience subsequent, and possibly more
severe and/or prolonged, downturns in the future.

Rationalization and consolidation in the
industry may cause us to experience a loss of customers and
increased competition.

The downturn in the telecommunications industry
may cause rationalization and consolidation in the industry.
Some network operators may merge and we and one or more of our
competitors may each supply products to the companies that
merge. This rationalization and/or consolidation could result in
our dependence on a smaller number of customers, purchasing
decision delays by the merged companies and/or our playing a
lesser role, or no longer playing a role, in the supply of
communications products to the merged companies.

A rationalization of industry participants could
also increase the supply of used communications products for
resale by affected industry participants, resulting in increased
competition and pressure on pricing for our products. In
addition telecommunications equipment suppliers may enter into
business combinations, or may be acquired by or sell a
substantial portion or their assets to other competitors
resulting in accelerated product development, increased
financial strength, or a broader base of customers, creating
even more powerful or aggressive competitors.

We are currently not profitable, have been
experiencing net cash outflows and will need to effect further
changes in our business in order to achieve our near-term
financial objectives.

We are currently not profitable. We have not made
an operating profit in the last two fiscal years. We do not
expect trading conditions in the telecommunications market to
improve in the near-term and, as discussed above, we cannot be
sure that those conditions will improve at all. Accordingly, our
ability to become profitable and generate positive cash flow in
the future depends significantly on improving gross margins
through changes in product mix, achieving operating efficiencies
and reducing operating costs as well as there being no further
material decline in sales.

If sales in our Network Equipment and Network
Services businesses continue to decline materially for a
prolonged period, it is unlikely that we will be able to return
to and maintain profitability or generate positive cash flow
solely through gross margin improvements and operating cost
reductions.

Because of these risks and uncertainties, as well
as the other risks and uncertainties discussed in this quarterly
report, we cannot be certain that our actual experience will
correspond with our assumptions and expectations. Thus, we
cannot be certain that we will be able to return to
profitability or generate positive operating cash flows within a
particular timeframe or at all. Moreover, even if we do attain
profitability and positive cash flow, we may not be able to
sustain or increase this from quarter to quarter or from year to
year.

If we fail to become and remain profitable and to
generate positive cash flow it will affect our ability to pay
dividends on the ordinary shares. In addition, we may find that
we have limited or no ability to raise additional capital
through offerings of debt or equity securities in the capital
markets in the near or medium term.

A relatively small number of customers account
for a large proportion of our business. In particular, the loss
of British Telecommunications plc as a customer would have a
significant adverse effect on our results.

A relatively small number of customers account
for a significant proportion of our revenues. In the three
months ended September 30, 2003, sales to our 10 largest
customers represented approximately 52 percent of our total
sales. Because of this concentration, adverse changes that
affect only a small number of customers or customer
relationships could have a significant adverse effect on our
results.

British Telecommunications plc and its
subsidiaries, BT, are of particular importance to us. In the
three months ended September 30, 2003, sales to BT
represented approximately 19 percent of our total sales. The

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loss of BT as a customer, or any substantial
reduction in orders by BT, particularly for the products and
services of our Network Equipment and Network Services
businesses would have a significant adverse effect on our
results.


We operate in a highly competitive and rapidly
changing market and may be unable to invest sufficiently in
research and development to sustain or increase sales of our
products.

Our products are sold in markets that are
characterized by rapid adoption of new technologies, many new
product introductions, shortening product lifecycles, aggressive
pricing practices and evolving industry standards. If our
products cease to be competitive, we would be likely to lose
customers and sales, which would materially adversely affect our
business, results of operations and financial condition.

The process for developing new products based on
rapidly moving technologies for broadband fixed networks and
optical networks is complex and variable. It requires innovative
solutions that are cost effective and based on accurate insights
into technology and trends. Success depends on the timely and
effective introduction of new products or enhancements to
existing products in a way that meets customer needs and
differentiates our products from those offered by our
competitors. At the same time, these new product introductions
must achieve market acceptance, anticipate and accommodate
emerging industry standards and be compatible with current and
competitor products. If there is an unforeseen change in one or
more of the technologies affecting telecommunications, our
products may cease to be competitive.

As part of our cost reduction effort, we have
refocused and significantly reduced our spending on research and
development. We are aiming to reduce overall research and
development spending, with a target spend of around 10% of total
sales. We have focused more of our research and development
expenditure on key products. Moreover, this focusing of
expenditure requires us to predict which product technologies
will be key to our customers and their networks in the future.
There is no certainty that we make the correct predictions of
those needs or are able to adapt our business quickly enough to
meet those needs. However, this may not be sufficient to
maintain the competitiveness of our key products or enable us to
increase our market share in key market segments. Moreover, as
discussed above, we will be subject to restrictive covenants and
other limitations and are likely to have difficulty obtaining
additional sources of financing, which may affect our ability to
increase spending or otherwise develop our technologies
effectively.

A number of our competitors have greater
financial and technological resources than we do and, therefore,
are in a better position to invest in developing and acquiring
proprietary technology, to expand into new business segments and
geographies and to increase their market shares. Some of our
larger competitors have greater geographic reach and presence in
certain regions of the world, which enables them to service more
effectively those geographies, and win more business there than
we can. We may not be able to develop new products and services
at the same rate, maintain compatibility of our products with
competitors products or keep up with technology market
trends. If our products and services are not competitive, it is
likely that we will lose customers and business, our revenues
will decline and our business will be materially adversely
affected.

Many of our current and planned products are
highly complex and may contain defects or errors that are
detected only after deployment in communications networks. If
that occurs, our reputation may be
harmed.

Our products are highly complex and some of them
can only be fully tested when deployed in communications
networks or with other equipment. From time to time, our
products have contained undetected defects, errors or failures.
The occurrence of any defects, errors or failures could result
in cancellation or orders, product returns, diversion of our
resources, legal actions by our customers or our customers
end-users and other losses to us our customers and end-users.

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Rapid changes to existing regulations or
technical standards or the implementation of new regulations or
technical standards upon products and services not previously
regulated could be disruptive, time consuming and costly to
us.

Many of our products and services are developed
in reliance upon existing regulations and technical standards,
our interpretation of unfinished technical standards or the lack
of such regulations and standards. Rapid changes to existing
regulations and technical standards or the implementation of new
regulations and technical standards upon products and services
not previously regulated could adversely affect development,
demand, sale and warranty of our products and services, thus
increasing our costs and decreasing the demands for our products
and services.

We are dependent on key management personnel
and skilled technology workers whose departure could adversely
affect our ability to develop our products and operate our
business.

The overall headcount of our businesses has been
reduced to approximately 14,100 at September 30, 2003 from
14,700 at June 30, 2003, excluding the impact of our
discontinued operations (medical systems, data systems and
mobile communications). This reduction has been due to the
implementation of cost-reduction plans and disposals of assets
and businesses. Included in the number of employees that have
left us are managers with many years of experience in the
management and operations of our business as well as highly
skilled technology workers and other employees with years of
operational experience in our business. Further workforce
reductions are planned and could include key employees with
valuable skills and knowledge whose departure would adversely
affect our ability to continue to develop new, and enhance
existing, products.

At the same time, the uncertainties associated
with headcount reductions and our prospects generally may cause
key employees to leave and otherwise increase employee and
management turnover, which may contribute to and result in
inefficiencies in running our business. In addition, our new
incentive arrangements that were implemented in connection with
our restructuring may be perceived as unattractive in comparison
with those offered by our competitors, which may make it more
difficult to retain personnel and attract qualified replacements
for those who leave. The loss of additional key managers and
highly skilled technology workers may result in our inability to
develop new products on a timely basis, improve current
technologies or operate our business efficiently.

We rely on the continued performance of third
parties in relation to some of our outsourcing
arrangements.

We rely on outsourcing arrangements for
information technology and the manufacture of some products and
components and are considering further potential outsourcing
opportunities in our supply chain and logistics organization. If
the third parties on whom we rely or will rely in relation to
these outsourcing arrangements do not fulfill their obligations
under such contracts, or seek to terminate or change the terms
of their contracts due to perceived uncertainty with respect to
our ongoing ability to perform under such contracts, or if we do
not otherwise properly manage these relationships, such supplies
or services could be severely disrupted or reduced. A
significant increase in the price of key supplies or services or
constraints on suppliers capacities, particularly during
periods of significant demand, in the absence of an alternative
supplier, would adversely affect our business. Moreover,
outsourcing initiatives ultimately may not yield the benefits we
expect, and may raise product costs and delay product production
and service delivery.

Measures to reduce operating costs could
adversely affect relations with our employees, our suppliers
and/or our partners, which could disrupt our business.

In order to further reduce operating costs, we
continue to reduce the size of our workforce, in part through
further rationalization of our activities and outsourcing
initiatives. We are also seeking to renegotiate some existing
contracts with suppliers and partners in order to obtain more
favorable terms. The implementation of these plans may increase
demands on, and/or negatively impact relations with, our
employees, suppliers, customers and partners. That negative
impact may result in a decline in employee morale, labor
disruptions, strikes and/or labor-related lawsuits against us,
our suppliers, or partners. Any of these results could diminish
the efficient operation of our business, disrupt services at our
facilities, our

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suppliers or partners and inhibit the realization
of the operating cost reductions that are fundamental to our
financial objectives, which would have a material adverse effect
on our business, financial condition and results of operations.


In Europe, particularly, employees are protected
by laws giving them, through local and central work councils,
rights of consultation with respect to specific matters
regarding their employers business and operations,
including the downsizing or closure of facilities and employee
terminations. These laws and collective bargaining agreements,
to which our suppliers, partners or we may be subject, could
impair our flexibility as we continue to pursue reductions in
operating expenses.

Our financial reporting systems require
significant operational resources.

As a result of our rapid expansion in 1999 and
2000, the number of different acquired systems and the disposal
of a number of businesses, the operation of our financial
reporting systems has required and will continue to require
considerable personnel resources. Taken together with the
demands of our restructuring, this has placed significant
pressure on the resources of our finance department. We are also
in the process of implementing a number of changes to our
consolidation and financial reporting systems, with a view to
streamlining the existing reporting processes. Although we
currently believe that our financial reporting systems are, and
without the changes referred to above would remain, fit for this
purpose, the continued effectiveness of these systems following
our restructuring is dependent on a combination of the continued
availability of sufficient finance team resources and any
changes that are made to the financial reporting system being
successfully implemented.

Funding of pension plans may become more
difficult.

The interaction of poor equity markets and low
interest rates over the last few years has had a significant
negative impact on the funded status of, and liabilities under,
our defined benefit pension plans and contribution obligations
under such plans. We either sponsor such plans or are exposed to
liabilities with respect to plans sponsored by affiliates or
former affiliates. It is possible that unless equity markets
and/or interest rates improve, such obligations may require us
and/or our affiliate sponsoring companies to those plans to make
additional contributions. Likewise, changes in the statement of
investment principles of the GEC 1972 Pension Plan, or U.K.
plan, the actuarial assumptions employed in conjunction with any
such plans or legislation could also result in a need for us
and/or our affiliates to make additional contributions to such
plans.

If the U.K. plan is wound up, it is unlikely that
it will have sufficient assets to discharge in full all
liabilities, calculated on a winding-up rather than an on-going
basis. No plans have been made to wind up the U.K. plan but
should such a decision be made, we would be required to make
good any statutory debt. If a statutory debt were to arise, the
size of the debt could have a materially detrimental effect on
our resources. The significance of the potential detrimental
effect should be seen against our estimate that, as at
March 31, 2003, the value of the U.K. plans
assets was £2.2 billion and the value of its
liabilities was £2.4 billion. There is no guarantee
that the value of the U.K. plans assets will not
deteriorate nor that legislation will not be introduced to
oblige employers to make further contributions to pension plans
which are not fully funded on a specified basis which is
stricter than that required by current legislation. In its Green
Paper published on December 17, 2002, the
U.K. Government has said that it is considering replacing
the statutory minimum funding requirement with a scheme-specific
minimum funding level, which could be higher.

In the United States Marconi Corporation plc was
required in March 2003 to enter into an agreement with the
Pension Benefit Guaranty Corporation or PBGC, an entity created
under US law that insures to an extent benefits under
US defined benefit plans. This agreement was entered into
by reason of our Financial Restructuring of May 2003. Under this
agreement Marconi is required to cause US $2.25 million to
be contributed at the end of each calendar quarter to the two US
defined benefit plans maintained by Marconi affiliates in the
United States. Marconi is also required to cause the annual
normal cost associated with the continuation of benefits to be
contributed to the plans. For the calendar year 2003 these
additional normal costs and other amounts required to be
contributed by virtue of the agreement with the PBGC are
anticipated to be US $9.7 million to the US Marconi defined
benefit plans. Based on estimates determined as of

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October 1, 2003 one of the US plans was
underfunded by US $10.4 million and the other
US plan was underfunded by US$8.5 million on a
FAS 87 basis. Further the US Congress is considering
amending US law governing defined benefit plan contribution
obligations to increase plan sponsor funding obligations
commencing at some point in the future. The various funding
obligations referred to above will continue with respect to a
plan until the earlier of (1) the date all the liabilities
of the plans is assumed by another entity, or (2) the date,
not less than 5 years after March 2003, on which
Marconis debt rating is rated BBB by Standard and
Poors and Baa2 by Moodys or (3) the date, not
less than 5 years after March 2003, on which the plan is
funded on a termination basis for a period of 2 plan years.
These contribution obligations and the underfunding of the
US defined benefit plans may have an adverse affect on our
business, results of operations and financial condition.


If we fail to protect our intellectual
property rights our business and prospects may be
harmed.

Intellectual properties, such as patents, are
vital to our business and developing new products and technology
that are unique to us is critical to our success. We have
numerous patents and numerous pending patents, but we cannot
predict whether any patents, issued or pending, will provide us
with any competitive advantage, or will be challenged by third
parties. Moreover, our competitors may already have applied for
patents that, once issued, could prevail over our patent rights
or otherwise limit our ability to sell our products. Our
competitors also may attempt to design around our patents or
copy or otherwise obtain and use our proprietary technology. In
addition, patent applications that we have currently pending may
not be granted. If we do not receive the patents we seek, or if
other problems arise with our intellectual property, our
competitiveness could be significantly impaired, which would
limit our future revenues and harm our prospects.

There is a risk that third party intellectual
property rights will be asserted against us.

We rely on patents, trademarks, trade secrets,
design rights, copyrights, confidentiality provisions and
licensing agreements to establish and protect our proprietary
technology and to protect against claims from others.
Infringement claims have been and may continue to be asserted
against us or against our customers in connection with their use
of our systems and products. We cannot ensure the outcome of any
such claims and, should litigation arise, such litigation could
be costly and time-consuming to resolve and could result in the
suspension of the manufacture of the products utilizing the
relevant intellectual property. In each case, our operating
results and financial condition could be materially affected.

The adverse resolution of litigation against
us could negatively impact our business.

We are currently a defendant in a number of
lawsuits, are and may in the future be subject to other
litigation arising in the normal course of our business.
Litigation may be time consuming, expensive and distracting from
the conduct of our business and the outcome of litigation is
difficult to predict. The adverse resolution of some lawsuits
could have a material adverse effect on our business, results of
operations and financial condition.

The ringfencing of our U.S. operations
will give rise to operational and financial inefficiencies and
other costs, which may adversely affect our business and the
market price of our ordinary shares.

Some of our U.S. businesses have been
contractually separated or ring-fenced from the rest
of our group in connection with the restructuring. This
U.S. ringfencing may have significant implications for you.

The covenants in the indentures governing our
outstanding Notes regulate the type of financial, operational
and other dealings that the non-ringfenced entities can have
with the ringfenced entities. These covenants also require us to
separate the North American Access business, BBRS business and
OPP business into separate subsidiaries within the
U.S. ringfencing no later than May 19, 2005. Moreover,
the non-ringfenced entities are generally prohibited from
providing funding for any of the ringfenced entities and,
following the separation of the three principal businesses
within the U.S. ringfencing, the North American Access
business, BBRS business and OPP business will generally be
prohibited from providing funding to each other. The ringfenced
entities have entered into various agreements with the
non-ringfenced entities necessary to ensure that those dealings
that they are permitted to engage in with each other will be
provided

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in the ordinary course of business on an
arms-length basis or otherwise as permitted by the
covenants in those indentures. The arrangements for the
provision of such services may lead to higher costs for us as a
whole, which may affect our results of operations.


In addition to the foregoing, the operational and
financial inefficiencies and other costs associated with the
U.S. ringfencing arrangements could have an adverse effect
on our business and on the market price of the ordinary shares.

The funding status of our U.S. pension
plans and the agreement entered into by us with the Pension
Benefit Guaranty Corporation with respect to those plans could
delay or adversely affect the terms of the sale of our
U.S. businesses.

The funding status of some tax-qualified defined
benefit plans subject to the regulation of the Pension Benefit
Guaranty Corporation, or PBGC, in the United States could result
in action being taken by the PBGC that might delay or otherwise
adversely affect the sale of our U.S. businesses or assets
used therein, or the net proceeds realized therefrom. The
likelihood of that type of action will depend in part on the
funded status of those plans at the time of any such sale, the
creditworthiness of the purchaser following that sale and the
extent to which the purchaser assumes pension liabilities in any
such sale. Although we have entered into a memorandum of
understanding with the PBGC with a view to making an adverse
action less likely, under this memorandum of understanding
specified conditions must be satisfied in connection with any
such sale. To the extent that these matters give rise to any
delay or other adverse consequences with respect to the sale of
our U.S. businesses, holders of ordinary shares could be
adversely affected.

We are subject to environmental, health and
safety laws, which could be costly and could restrict our future
operations.

Our operations are subject to a wide range of
environmental, health and safety laws, including laws relating
to the use, disposal, clean up of, and human exposure to,
hazardous substances. Although we believe our reserves are
adequate to cover our environmental liabilities, factors such as
the discovery of additional contaminants, the extent or
remediation and compliance expenses, and the imposition of
additional cleanup obligations and other sites could cause our
capital expenditure and other expenses relating to the
remediation activities to exceed the amount reflected in our
environmental reserve and adversely affect our results of
operations or cash flows. Compliance with existing or future
environmental, health and safety laws could subject us to future
liabilities, cause the suspension of production, restrict our
ability to expand facilities, require us to acquire costly
pollution control equipment or incur other significant expenses
or modify manufacturing processes.

It is unlikely that we will pay dividends for
the foreseeable future.

We do not anticipate that we will pay dividends
on the ordinary shares in the foreseeable future. Moreover, even
if we have distributable reserves and become cash flow positive
and profitable and so are in a position to pay dividends, the
indentures governing our outstanding Notes significantly
restrict our ability to pay dividends. In connection with our
Financial Restructuring and associated capital reduction we were
required to create a special reserve that also restricts our
ability to pay dividends. In addition, Marconi Corporation plc
is a holding company and is wholly dependent on receiving funds
from its subsidiaries to pay dividends. Some institutional
investors may only invest in dividend-paying equity securities
or may operate under other restrictions that may prohibit or
limit their ability to invest in the ordinary shares. This may
reduce the demand for the ordinary shares until we are able to
pay dividends in respect of the ordinary shares, which may in
turn adversely affect the price of the ordinary shares in the
market.

We may be unable to repay our Notes at
maturity.

We currently intend to repay any principal amount
outstanding in respect of our outstanding Notes at their
maturity in part from cash generated by our group. Our ability
to generate significant positive cash flow in the future is
subject to significant risks and uncertainties. If we are unable
to generate sufficient cash to allow us to repay the Notes at
maturity, we would need to obtain other financing for this
purpose. However,

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also as discussed above, our ability to obtain
such financing may be extremely limited. Accordingly, we cannot
assure you that we will be able to repay any of the Notes at
their maturity.


Our Notes are subject to a redemption
obligation at a premium upon a change of control, which may
discourage potential bidders.

Upon the occurrence of specific kinds of change
of control or merger events, we will be required to offer to
repurchase all of our outstanding Notes at the greater of 110%
of their aggregate principal amount or a make-whole amount based
on 50 basis points above the yield on U.S. treasuries of
similar maturity plus, in each case, accrued and unpaid
interest. This obligation to redeem the Notes at a premium could
have the effect of deterring third parties who might otherwise
offer to acquire a controlling interest in us or could adversely
affect the terms on which any such offer is made. This
redemption obligation may accordingly have an adverse effect on
the market price of our shares and could deprive shareholders of
an opportunity to receive a premium for their shares upon a
change of control.

Pre-emptive rights for non-UK holders of
ordinary shares may not be available.

In the case of, amongst other things, an increase
of our share capital, existing shareholders are entitled to
pre-emptive rights pursuant to the U.K. Companies Act 1985 and
our articles of association, unless waived by a resolution of
the shareholders at a general meeting or in the circumstances
stated in our articles of association. Even where pre-emptive
rights apply, holders of the ordinary shares in the United
States, South Africa, Australia, Canada and other jurisdictions
outside the United Kingdom may in practice not be able to
exercise pre-emptive rights in respect of their ordinary shares
unless we decide to comply with applicable local laws and
regulations and, in the case of holders of the ordinary shares
in the United States, a registration statement under the
U.S. Securities Act of 1933 is effective with respect to
such rights, or an exemption from the registration requirements
thereunder is available. We intend to evaluate at the time of
any pre-emptive rights offering the costs and potential
liabilities associated with any registration statement and
compliance with other applicable local laws and regulations, as
well as the indirect benefits to us of thereby enabling or
facilitating the exercise by holders of the ordinary shares in
the United States and such other jurisdictions of their
pre-emptive rights for new securities in respect of their
ordinary shares. In addition, we will consider any other factors
we consider appropriate at the time, and then make a decision as
to how to proceed and whether to file a registration statement
or comply with those other applicable local laws and
regulations. We cannot assure you that any registration
statement with respect to the securities offered under a
pre-emptive issue would be filed or any of those other local
laws and regulations would be complied with to enable the
exercise of that holders pre-emptive rights.




Item 3. Quantitative and
Qualitative Disclosure About Market Risk

Market risk represents the risk of loss that may
impact our consolidated financial statements due to adverse
changes in financial market prices and rates. Our market risk
exposure is primarily a result of fluctuations in interest rates
and foreign exchange rates.

Financial Instruments

Our treasury activities are coordinated by our
treasury function, which operates in accordance with policies
and procedures approved by our Board of Directors. It does not
operate as a profit center. Treasury advises operational
management on treasury matters and undertakes all derivative
transactions, subject to the constraints outlined below. All
treasury related transactions undertaken by the our operating
businesses are required to be in accordance with guidelines laid
down by our central treasury function and comply with the group
risk management policies.

Under the terms of the new Senior and Junior
Notes that we issued in our Financial Restructuring, we are
permitted to use foreign exchange forwards and options to hedge
trade receivables and payables, or exposures arising from the
new Senior and Junior Notes. No other derivatives are permitted.

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

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Interest Rate Risk

Our interest expense is exposed to interest rate
movements in our floating rate debt, cash and investments. We
are principally exposed to changes in short-term interest rates
in pounds sterling and U.S. dollars. Our Senior Notes and
Junior Notes bear fixed rates of interest. Interest on the
Senior Notes is charged at 8% per annum, and Interest on the
Junior Notes is charged at 10% per annum interest if paid in
cash, or 12% per annum paid in kind through the issuance of
additional Junior Notes. As at September 30, 2003, 96% of
our borrowings were at fixed rates of interest. Consequently,
the exposure of our results to interest rates will be to changes
in the interest rates earned on our short-term bank deposits.
Under the terms of the Notes, no hedging of this risk is
permitted.

As a result, during the three and six months
ended September 30, 2003, a 1% increase in interest rates
would have led to a £2 million and
£4 million increase in interest income, respectively,
and no impact on interest expense.

Foreign exchange risk

We are a global communications company, and as
such we conduct a significant portion of our business activities
outside the United Kingdom in currencies other than sterling.
Our principal exchange rate exposures are 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. Our main trading
currencies are the U.S. dollar, sterling and the euro.

We have overseas subsidiaries that earn profits
or incur losses in their local currencies. It is not our policy
to use financial instruments to hedge the translation value of
our net overseas assets.

Following the Financial Restructuring, the
majority of our debt (93% as at September 30, 2003) is
denominated in U.S. dollars. It is not our intention to
hedge this risk using financial instruments due to the potential
cash flow impact of any hedging of our exposures. However, we
take this U.S. dollar exposure into account when
determining the appropriate currency mix of our cash balances.
As at September 30, 2003, £417 million of our
cash balances were denominated in US dollars,
£156 million were denominated in sterling, and
£172 million were denominated in euro. As at
September 30, 2003, we held approximately
157 million
(£110 million) of cash denominated in euro within the
U.K. as collateral against bonding facilities and to meet
potential cash requirements in the eurozone. Since this cash is
designated for euro-denominated cash flow requirements it is not
treated as a hedge for accounting purposes, and gains and losses
on retranslation of the cash into sterling are taken to other
income/(expense).

If the pound sterling had strengthened such that
the average exchange rates used in the translation of our
overseas earnings changed by 10%, our reported income from
continuing operations would have increased by 9.9% and 0.2% in
the three and six months ended September 2003, respectively.




Item 4. Controls and
Procedures

Evaluation of disclosure controls and
procedures.

Within the 90 days prior to the filing date
of this quarterly report, we performed an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness and design and operation of our
disclosure controls and procedures. Based upon that evaluation,
which will be used as input for further improvement actions, the
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective (as
defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934).

Changes in internal controls.

Since the date of the previously mentioned
evaluation, there have been no significant changes in our
internal controls or in other factors that could significantly
affect the controls. Therefore, no corrective actions were taken.

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Part II. Other Information






Item 1. Legal
Proceedings


In Part I, Item 8 of our annual report
on Form 20-F for the year ended March 31, 2003 we made
disclosure of the lawsuit filed by Bell Communications Research,
Inc, now known as Telcordia Technologies Inc., or Telcordia, on
October 14, 1998. On September 29, 2003, the district
court held a hearing in relation to that lawsuit to clarify its
previous claim construction ruling. Subsequent to the hearing
the district court issued an opinion clarifying its original
claim construction in a manner that will permit Telcordia to
maintain its claim for infringement of the remaining patent.

We are subject to the legal proceedings set out
in Part I, Item 8 of our annual report on
Form 20-F for the year ended March 31, 2003. Other
than as disclosed in the paragraph above there have been no
material developments to these legal proceedings in the six
months ended September 30, 2003 nor has there been a
material new legal proceeding that has arisen in this period.

We are also subject to legal proceedings, claims,
and litigation arising in the ordinary course of business. While
the outcome of these matters is currently not determinable, we
do not expect the ultimate costs to resolve these matters will
have a material adverse effect on our consolidated financial
position, results of operations, or cash flows.

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

On September 8, 2003 the Annual General
Meeting of Marconi Corporation plc was held at the Queen
Elizabeth II Conference Centre, Broad Sanctuary, Westminster,
London SW1P 3EE.

The following resolutions were voted on and
passed at that meeting.

|           |  |                                                                                                                                                                                                                                                                                                                                           |  |        |             |    |  |         |       |    |  |            |            |    |  |  |      |  |  |  |           |  |  |  |      | 
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------ | ----------- | -- |  | ------- | ----- | -- |  | ---------- | ---------- | -- |  |  | ---- |  |  |  | --------- |  |  |  | ---- | 
|           |  |                                                                                                                                                                                                                                                                                                                                           |  | FOR    |             |    |  | AGAINST |       |    |  | ABSTENTION |            |   
|           |  |                                                                                                                                                                                                                                                                                                                                           |  | Shares |             | %* |  | Shares  |       | %* |  | Shares     |            | %*
|Resolution |  |                                                                                                                                                                                                                                                                                                                                           |  |        |             |    |  |         |       |    |  |            |            |   
|1.         |  | To receive the accounts and reports of the
    directors and the auditors, for the year ended March 31,
    2003                                                                                                                                                                                                                          |  |        | 427,432,460 |    |  |         | 99.51 |    |  |            | 1,032,507  |    |  |  | 0.24 |  |  |  | 1,080,252 |  |  |  | 0.25 | 
|2.         |  | To approve the directors remuneration
    report for the year ended March 31, 2003                                                                                                                                                                                                                                                       |  |        | 416,417,346 |    |  |         | 96.94 |    |  |            | 12,044,290 |    |  |  | 2.80 |  |  |  | 1,080,476 |  |  |  | 0.25 | 
|3.         |  | To reappoint Mr M K Atkinson as a director of the
    Company                                                                                                                                                                                                                                                                             |  |        | 428,419,194 |    |  |         | 99.74 |    |  |            | 43,309     |    |  |  | 0.01 |  |  |  | 1,081,259 |  |  |  | 0.25 | 
|4.         |  | To reappoint Mr I M Clubb as a director of the
    Company                                                                                                                                                                                                                                                                                |  |        | 428,421,126 |    |  |         | 99.74 |    |  |            | 41,376     |    |  |  | 0.01 |  |  |  | 1,081,259 |  |  |  | 0.25 | 
|5.         |  | To reappoint Mr J F Devaney as a director of the
    Company                                                                                                                                                                                                                                                                              |  |        | 428,426,233 |    |  |         | 99.74 |    |  |            | 36,484     |    |  |  | 0.01 |  |  |  | 1,081,044 |  |  |  | 0.25 | 
|6.         |  | To reappoint Ms K R Flaherty as a director of the
    Company                                                                                                                                                                                                                                                                             |  |        | 428,428,563 |    |  |         | 99.74 |    |  |            | 36,130     |    |  |  | 0.01 |  |  |  | 1,081,054 |  |  |  | 0.25 | 
|7.         |  | To reappoint Mr C C Holden as a director of the
    Company                                                                                                                                                                                                                                                                               |  |        | 428,426,131 |    |  |         | 99.74 |    |  |            | 36,570     |    |  |  | 0.01 |  |  |  | 1,081,054 |  |  |  | 0.25 | 
|8.         |  | To reappoint Mr W K Koepf as a director of the
    Company                                                                                                                                                                                                                                                                                |  |        | 428,417,201 |    |  |         | 99.74 |    |  |            | 45,300     |    |  |  | 0.01 |  |  |  | 1,081,259 |  |  |  | 0.25 | 
|9.         |  | To reappoint Deloitte & Touche LLP as
    auditors of the Company and to authorise the directors to
    determine their remuneration                                                                                                                                                                                                      |  |        | 427,437,460 |    |  |         | 99.51 |    |  |            | 1,027,313  |    |  |  | 0.24 |  |  |  | 1,080,289 |  |  |  | 0.25 | 
|10.        |  | To approve the consolidation of the
    Companys share capital such that every five issued and
    unissued ordinary shares of 5p each in the capital of the
    Company be consolidated into one ordinary share of 25p with
    effect from the opening of business on the day following the day
    on which this Resolution is passed |  |        | 428,380,399 |    |  |         | 99.73 |    |  |            | 84,100     |    |  |  | 0.02 |  |  |  | 1,080,252 |  |  |  | 0.25 | 

* Percentage of total shares voted and
abstained

The terms of office of Mr M W J Parton and Mr M J
Donovan continued after the meeting.




Item 6. Exhibits and Reports on
Form 8-K

Exhibits and Reports on Form 8-K

(a)  Exhibits



|    |                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 | Form 122  Notice of consolidation,
    division, sub-division, redemption or cancellation of shares, or
    conversion, re-conversion of stock into shares, pursuant to
    section 122 of the Companies Act 1985 (England and Wales).



|      |                                                                                                                                                                                                          
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1* | Placing agreement dated July 4, 2003 between
    Marconi Corporation plc and Hoare Govett Limited relating to the
    placing of ordinary shares in the Easynet Group plc by Marconi
    Corporation plc.

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|      |                                                                                                                                                                                                               
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.2* | Placing agreement dated September 4, 2003
    between Marconi Corporation plc and Hoare Govett Limited
    relating to the placing of ordinary shares in the Easynet Group
    plc by Marconi Corporation plc.



|     |                                                                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350 as Adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                    
|    
|31.2 | Certification of the Chief Financial Officer
    pursuant to 18 U.S.C. Section 1350 as Adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.                                
|    
|32.1 | Certification of the Chief Executive Officer and
    Chief Financial Officer pursuant to 18 U.S.C. Section 1350
    as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002.

* Incorporated by reference on the Amended
Form F-1 filed with the SEC on October 1, 2003.

(b)  Reports of Form 8-K

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 2, 2003 related to its
listing on NASDAQ.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 2, 2003 related to confirmation
of changes to the Board.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 3, 2003 related to a notifiable
interest in the Company.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 3, 2003 related to the partial
redemption of the Companys 10% guaranteed junior secured
notes due 2008.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 7, 2003 related to its Industry
Analyst event.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 10, 2003 related to the
outsourcing of its microwave product manufacturing to Elcoteq
Network Corporation in Germany.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 10, 2003 related to the
parameters of the partial redemption of the Companys 10%
guaranteed junior secured notes due 2008 announced on
October 3, 2003.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 15, 2003 related to a
notifiable interest in the Company.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 23, 2003 related to its trading
update for the three months ended September 30, 2003.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 27, 2003 related to the date of
publication of its interim results for the three and six months
ended September 30, 2003 on November 13, 2003.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 29, 2003 related to a
notifiable interest in the Company.

Marconi Corporation plc filed a Current Report on
Form 8-K dated October 30, 2003 related to a
notifiable interest in the Company.

Marconi Corporation plc filed a Current Report on
Form 8-K dated November 6, 2003 related to the
delivery of the first units of its new optical multiservice
metro platform.

Marconi Corporation plc filed a Current Report on
Form 8-K dated November 12, 2003 related to the sale
of its interest in the Confirmant joint venture to Oxford
GlycoSciences.

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Signatures

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.



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



| |     |             
| | --- | ------------
| | By: | /s/ M SKELLY

| |                          
| | -------------------------
| |                          
| | Name: M Skelly           
| | Title:  Company Secretary

Date: November 12, 2003

84