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

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

Fiscal 2004 significant developments:

Financial Restructuring:

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

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

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Cash: £340 million in cash;



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



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



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

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

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

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

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

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

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

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

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

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

Sale of NAA:

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

Sale of Easynet Group plc ("Easynet"):

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

Organizational structure:

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

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Principal operations:

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

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



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



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Italy: Genoa, Marcianise and Pisa;



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Germany: Backnang, Offenburg, Frankfurt and Radeberg;



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Spain: Madrid;



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Australia: Melbourne and Sydney;



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China: Beijing, Guilin, Hong Kong and Shanghai;



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Malaysia: Daralam and Kuala Lumpur;



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New Zealand: Auckland;



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India: New Delhi;



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Saudi Arabia: Riyadh;



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United Arab Emirates: Dubai;



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South Africa: Johannesburg;



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Brazil: São Paulo and Votorantim;



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Mexico: Naucalpan de Juarez and Huixquilucan Edo de Mexico.

Core businesses:

        We divide our Core activities into two main business types:

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



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

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

Customers:

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

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

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Europe: British Telecommunications plc ("BT"), the Metro City Carriers in Germany, E-Plus, Telecom Italia, O ₂ and Vodafone Group;



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

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

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

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

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

Sales, marketing and distribution:

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

Partners:

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

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



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



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

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Network Equipment:

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

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

Overview of the public network market and competition:

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

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

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

Optical Networks

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

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

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

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

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

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

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

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

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

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

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

Broadband Routing and Switching

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

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

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

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

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Asynchronous transfer mode, or ATM;



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Internet protocol, or IP; and



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

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

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

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

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

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

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

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

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

Access Networks

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

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

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

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



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



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Fixed Wireless: Our Mobile Digital Radio System ("MDRS") product family encompasses our point-to-point portfolio that offers long- and short-haul SDH transmission for services ranging from trunk networking, local access bypass and mobile network feeder applications. Our Mobile Digital Multipoint System ("MDMS") point-to-multi-point portfolio offers cost-effective broadband wireless solutions ranging from 2.4 Gigahertz ("Ghz") to 32 Ghz, depending on the country's frequency allocation, and supports subscriber voice and broadband data, using both standards-based and optimized techniques. Our radio planning and installation services enhance our ability to offer customized, cost-effective solutions for network operators and service providers. The main customers of our range of fixed wireless access products include Vodafone, O ₂ and E-Plus all in Germany.



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

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Outside Plant and Power

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

        Our OPP business has three primary product lines:

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



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



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

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

Other Network Equipment businesses

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

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

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

Network Services:

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

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

Overview of the Network Services market

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

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

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

Service offerings

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

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

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

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



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

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

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

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

Value-Added Services ("VAS"):

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

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



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



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

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

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

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

Other:

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

Research and Development:

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

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

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

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

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

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



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



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

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

Intellectual property:

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

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

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

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

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

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

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



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



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



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



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

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

Environmental And Other Regulations

Environmental, and employee health and safety matters

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

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

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

Other government regulation

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

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

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