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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 000-50709

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 ý    NO o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES ý    NO o

        As of August 5, 2004, 200,585,153 shares of the Registrant's common stock was outstanding.

Part I. Financial Information

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Part I. Financial Information

Marconi Corporation plc and subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

3

Marconi Corporation plc and subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to condensed consolidated financial statements

4

Marconi Corporation plc and subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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*

The distribution made to creditors under the scheme of £340 million has been reported 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.

6

Marconi Corporation plc and subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

See notes to condensed consolidated financial statements.

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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.

        During the second quarter of fiscal 2004, the Company adopted a segmentation of its business along geographic lines, separating the North American ring-fenced business from the businesses in Europe and rest of the world. The ring-fenced organization was implemented in order to comply with the requirements of the indentures of the Company's post-restructuring Junior and Senior Notes.

        In light of the redemption in full of the Company's Junior Notes during March 2004 and the announced sale of the Company's Outside Plant and Power business ("OPP"), this segmentation no longer reflects the way in which the business is being managed. As a result, effective from this quarter ended June 30, 2004, the Company has adopted a new management reporting structure, which splits the business into three reportable segments:

•

Optical and Access Networks;



•

Broadband Routing and Switching ("BBRS"); and



•

Network Services.

        Optical and Access Networks aggregates the activities of the Optical Networks and Access Networks operating segments, which also includes the payphones and interactive systems activities previously reported under 'Other Network Equipment'. BBRS comprises the equipment and services activities of the BBRS business. Network Services aggregates the activities of the Installation, Commissioning and Maintenance ("IC&M") and Value Added Services ("VAS") operating segments.

Basis of preparation

        The condensed consolidated financial statements as at June 30, 2004 and for the three months ended June 30, 2004 and 2003, 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 June 30, 2004 and for each period 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, 2004, included in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission ("Form 10-K").

        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 10-K for the year ended March 31, 2004. The results of operations for the three months ended June 30, 2004 are not necessarily indicative of the operating results to be expected for the year ending March 31, 2005. Certain amounts in prior periods' financial statements and related notes have been reclassified to conform to the current period presentation.

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        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 (loss)/income as a separate component of shareholders' equity.

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:

Recently issued accounting pronouncements—not yet adopted

•

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act"). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. On May 19, 2004, the FASB issued FASB Staff Position ("FSP") FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP FAS 106-2 requires us to follow the provisions of Statement of Financial Accounting Standard ("SFAS") 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions, when accounting for the effects of the federal subsidy. FSP FAS 106-2 is effective for the first interim or annual period beginning after June 15, 2004. When FSP FAS 106-2 becomes effective it supersedes FSP FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which allows the Company to defer recognizing the effects of the Act until appropriate authoritative guidance has been issued and is effective. The Company participates in a number of post-retirement benefit plans, which have a measurement date of March 31, 2004. The Company has elected to adopt the provisions of SFAS No. 106, Employers' Accounting for Post-retirement Benefits Other Than Pensions, to the provisions of the Act under the guidance given in FSP FAS 106-2 for its financial period beginning after June 15, 2004. Therefore, the accumulated postretirement benefit obligation and net periodic postretirement benefit cost contained in the Company's condensed consolidated financial statements do not reflect the effects of the Act. The Company is still reviewing the potential impacts of the Act on its post-retirement benefit plans including whether the benefits under its plans are actuarially equivalent to Medicare Part D.



•

On March 17-18, 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments

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("EITF 03-01"). EITF 03-01 is applicable to (a) debt and equity securities within the scope of Statement 115, (b) debt and equity securities within the scope of Statement 124 and that are held by an investor that reports a performance indicator, and (c) equity securities not within the scope of Statement 115 and not accounted for under Accounting Principles Board Opinion ("APB") 18's equity method (e.g. cost method investments). EITF 03-01 provides a step model to determine whether an investment is impaired and if an impairment is other-than-temporary. In addition, it requires that investors provide certain disclosures for cost method investments and, if applicable, other information related specifically to cost method investments, such as the aggregate carrying amount of cost method investments, the aggregate amount of cost method investments that the investor did not evaluate for impairment because an impairment indicator was not present, and the situations under which the fair value of a cost method investment is not estimated. The disclosures related to cost method investments should not be aggregated with other types of investments. The EITF 03-01 impairment model shall be applied prospectively to all current and future investments within the scope of the Issue, effective in reporting periods beginning after June 15, 2004. The disclosure requirements are effective for annual periods for fiscal years ending after June 15, 2004. The Company is currently assessing the impact that EITF 03-01 will have on its financial statements but it does not expect such impact to be material.

2. Selected balance sheet information

Restricted cash

        Cash balances pledged or advanced as collateral are considered to be restricted cash. At June 30, 2004 and March 31, 2004, the total restricted cash was £114 million and £124 million respectively. Of the total restricted cash balance, £77 million (£85 million at March 31, 2004) relates to cash collateral placed against bonding facilities, £19 million (£18 million at March 31, 2004) relates to cash in insurance reserves, £11 million (£11 million at March 31, 2004) relates to cash deposited against secured loans in Italy and £7 million (£10 million at March 31, 2004) relates to cash held in a Mandatory Redemption Escrow Account ("MREA").

Inventories

        Inventories are comprised of the following at June 30, 2004 and March 31, 2004.

3. Employee stock option plans

        The Company operates 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. A summary of the terms of both these plans is included in Note 17, Employee stock option plans, of the Company's Consolidated Financial Statements included in its Form 10-K for the year ended March 31, 2004. The Company accounts for such employee share plans under APB No. 25, Accounting for Stock Issued to Employees.

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        As at June 30, 2004, nil cost options over 17,740,000 shares have been granted under the nil cost senior management share option plan and options over 6,150,000 shares have been granted under the market value employee share option plan.

        As at June 30, 2004, options over 336,000 shares and 198,966 shares had been exercised under the nil cost senior management share option plan and market value employee share option plan, respectively.

        As at June 30, 2004, options over 80,000 shares and 137,681 shares had lapsed under the nil cost senior management share option plan and market value employee share option plan, respectively.

        The Company recognized compensation expense in the three months ended June 30, 2004 of approximately £17 million. Had compensation cost for the employee share plans been determined consistent with the fair value methodology of SFAS 123, the Company's net (loss)/income would have been as follows:

        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:

4. Debt and credit facilities

Short-term debt

        The Company's short-term borrowings consist primarily of secured bank loans and current maturities of long-term debt.

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Long-term debt

Financial Restructuring

        On May 19, 2003, the Company issued the following debt as part of its Financial Restructuring:

•

U.S.$717 million 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.$487 million 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 the Company's option, in kind, by issuing additional Junior Notes at a rate of 12% per annum.

        The aggregate fair value on May 19, 2003 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 and is fair valued at the end of each period. The fair value of the embedded derivative at June 30, 2004 was approximately £19 million in relation to the Senior Notes.

Early debt repayment

        On March 8, 2004, the Company completed the final redemption of the aggregate principal amounts of the Junior Notes.

        The Company made redemptions and repurchases totaling U.S.$42 million (approximately £23 million) of the aggregate principal amount of the Senior Notes in the three month period ended June 30, 2004, as follows:

•

On April 1, 2004, the Company repurchased an additional U.S.$4 million of the aggregate principal of the Senior Notes and, on April 2, 2004, the Company repurchased an additional U.S.$11 million of the aggregate principal of the Senior Notes.



•

On April 22, 2004, the Company redeemed an additional U.S.$27 million of the aggregate principal of the Senior Notes. This partial mandatory redemption primarily resulted from releases of cash collateral following the expiry of certain performance bonds and letters of credit, proceeds from disposals of miscellaneous assets and the receipt of approximately U.S.$10 million into the MREA as a result of the second and third mandatory redemptions of Senior Notes that were previously repurchased by the Company.

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        The following table sets forth the mandatory reductions in principal under the terms of all long-term debt agreements for each of the next five fiscal years based upon the amounts outstanding at June 30, 2004:

        Short-term debt of approximately £14 million is also repayable upon demand.

5. Business restructuring charges

        As a result of an operational review in September 2001, following a sudden and significant downturn in trading in the global telecommunications markets, a period of restructuring began with the focus of reducing group indebtedness. This restructuring, which will be completed in fiscal 2005, has spanned fiscals 2002, 2003 and 2004.

        When management reviews the operating income performance of the segments described in note 9, management uses the U.K. generally accepted accounting principles ("GAAP") operating (loss)/profit before central and head office 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 June 30, 2004 following the implementation of actions required to achieve these objectives.

Employee severance

        As a consequence of the objective to reduce the annual operating cost base, the Company recorded a charge of £5 million during the three months ended June 30, 2004 associated with redundancy payments for approximately 200 employees. Management expects that the majority of the remaining balance of £10 million at June 30, 2004, which covers approximately 300 further employees, will be paid out in fiscal 2005.

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        In the three months ended June 30, 2003, the Company recorded a charge of £9 million to reflect the charges associated with redundancy payments for approximately 300 employees, while cash payments of £12 million were made in the same period.

Site rationalization

        The charge of £3 million in respect of site rationalization in the three months ended June 30, 2004 represents additional costs associated with closing and consolidating various sites around the world as part of the business restructuring. Cash payments of £3 million were made in respect of these site closures and consolidations.

        In the three months ended June 30, 2003, the Company recorded a charge of £2 million and made cash payments of £2 million in respect of these site closures and consolidations.

Contractual commitments and other restructuring

        The Company made no cash payments in respect of contractual commitments and other restructuring in the three months ended June 30, 2004. The balance of £1 million at June 30, 2004 represents outsourcing costs associated with the restructuring program.

        In the three months ended June 30, 2003 the Company made no cash payments in respect of these other restructuring associated costs.

Advisor fees

        The charge of £1 million in respect of advisor fees for the three months ended June 30, 2004 represents charges from the Company's external advisors with respect to services rendered in the period related to the Financial Restructuring.

        In the three months ended June 30, 2003, the Company recorded a charge of £42 million and made cash payments of £22 million in respect of advisor fees.

6. Goodwill

        The changes in the carrying amount of goodwill for the three months ended June 30, 2004, are as follows:

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7. Intangibles, net

        The changes in the carrying amount of intangibles for the three months ended June 30, 2004, are as follows:

        Intangible amortization expense based on June 30, 2004 intangibles for the next two years is expected to be:

8. Other comprehensive (loss)/income

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

9. Segment and related information disclosures

        In the second quarter of fiscal 2004, the Company adopted a segmentation of its business along geographic lines, separating the North American ring-fenced business from the businesses in Europe and rest of the world. The ring-fenced organization was implemented in order to comply with the requirements of the indentures of the Company's post-restructuring Junior and Senior Notes.

        In light of the redemption in full of the Company's Junior Notes during March 2004 and the announced sale of the Company's OPP business, this segmentation no longer reflects the way in which the business is being managed. As a result, effective from the first quarter ended June 30, 2004, the Company has adopted a new management reporting structure, which splits the business into three reportable segments:

•

Optical and Access Networks;



•

BBRS; and



•

Network Services.

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        Optical and Access Networks aggregates the activities of the Optical Networks and Access Networks operating segments, which now also includes the payphones and interactive systems activities previously reported under Other Network Equipment. BBRS comprises the equipment and services activities of the BBRS business. Network Services aggregates the activities of the IC&M and VAS operating segments.

        Prior period information has been restated to reflect the adoption of these new segments.

Segmental performance

        The U.S. Financial Accounting Standards Board standard—SFAS No. 131—Disclosure about Segments of an Enterprise and Related Information, requires the Company to determine and review its segments as reflected in the management information systems reports that its managers use in making decisions. As the Company is an English company and prepares its consolidated statutory financial statements under U.K. GAAP, its chief operating decision-maker evaluates the Company's 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 and head office costs, goodwill amortization, share option costs and exceptional items 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)/profit before central and head office costs, goodwill 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)

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(1)

Discontinued operations in the three months ended June 30, 2003 relate to North American Access ("NAA").

Major customers

        British Telecommunications plc ("BT") accounted for 26% and 25% of revenues for the three months ended June 30, 2004 and 2003 respectively.

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

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

Revenue

(1)

OPP is not classified as a discontinued operation under U.K. GAAP in the three months ended June 30, 2004 and 2003.

Operating (loss)/income

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U.K.—U.S. GAAP adjustments

        A description of the significant U.K. GAAP to U.S. GAAP adjustments as they relate to segment information is provided in note 10, Segment and related information disclosures, in the Form 10-K for the year ended March 31, 2004.

10. Commitments and contingencies

Legal proceedings

        The Company is subject to the legal proceedings set out in note 11, Commitments and contingencies, of the annual report on Form 10-K for the year ended March 31, 2004. Other than as noted below, there have been no material developments in these legal proceedings for the three months ended June 30, 2004 nor has there been a material new legal proceeding that has arisen in this period.

        On January 12, 2004 Marconi Communications, Inc, or MCI, entered into a letter of understanding ("LOU") wherein it agreed to pay Telcordia U.S.$23.5 million in exchange for a license for Marconi Communications, Inc. and all affiliated Marconi companies under Telcordia's ATM patent portfolio and as full and final settlement of all litigation with Telcordia. A settlement agreement in which Marconi agreed to make a one-time payment of U.S.$21 million (approximately £12 million) was signed on June 24, 2004. As a consequence of settling this claim, we have made a release of £2 million of excess provision to our operating results in the quarter ended June 30, 2004. This is included within 'Other income' in the Company's condensed consolidated financial statements.

        There is an outstanding tax dispute between the Indian tax authorities and Marconi Corporation plc, or Marconi Corporation, The English Electric Company Limited, or English Electric, and Associated Electrical Industries Limited, or AEI. In 1989/90, as part of the reorganization of the Company's European operations, Marconi Corporation, English Electric and AEI transferred their shareholdings in The General Electric Company of India Limited, or GEC India, The English Electric Company of India Limited, or EE India, and GEC Power Engineering Services of India Limited, or GEP India, to a Dutch company, GEC Alsthom NV, or Alsthom. The Indian tax authorities claim that this transfer gives rise to an Indian capital gains tax charge for each of Marconi Corporation, English Electric and AEI, although this is one of the issues in dispute. An advance Indian capital gains tax payment had to be made before the Indian authorities would issue a no-objection certificate, which was required before the transfer could proceed. This advance payment was based on the value of GEC India, EE India and GEP India at the date of the no-objection certificate. The Indian tax authorities have, however, assessed Marconi Corporation, English Electric and AEI to tax on the basis of the value of GEC India, EE India and GEP India at the date of the actual transfer, which could give rise to a tax liability of up to £11 million, of which £3 million relates to Marconi Corporation. Marconi Corporation, English Electric and AEI are disputing this liability and the basis of valuation in the Indian courts and in pursuance of interim orders of the Indian Court have deposited £2.7 million with the Indian tax authorities. In January 2004, the case was heard in the Calcutta High Court on a point of tax law. In July 2004, the High Court rejected Marconi's appeal and Marconi will seek leave to appeal to the Supreme Court; it is unknown whether leave to appeal will be granted. Any exposure under the litigation has been fully provided in the Company's condensed consolidated financial statements; if leave to appeal is refused a cash payment of approximately £5 million in tax and interest is anticipated. Also in July 2004, the Indian tax tribunal ruled in favor of Marconi in an associated penalty case. It is not known at this stage whether the Indian Revenue will appeal this decision. Again, any exposure under the litigation has been fully provided in the Company's condensed consolidated financial statements.

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        In November 2002 MCI brought a claim against Brambles Enterprises Limited ('Brambles') in the English High Court for non-payment of invoices totaling U.S.$997,271, U.S.$200,000 for future milestone payments (both exclusive of interest and costs) plus damages arising from various breaches (being of an agreement for the development and supply by MCI of RFID tags and readers). Brambles filed a counter-claim against MCI alleging various breaches of contract by MCI and claiming damages of approximately U.S.$1,055,510 (U.S.$455,510 being the expenses incurred in obtaining a short-term replacement for the RFID system and U.S.$600,000 being estimated costs of a new development program for the full system). In January 2004 Brambles amended its counter-claim specifying additional heads of damage and pleading estimated losses at between U.S.$6.52 million and U.S.$24.21 million. On July 14, 2004 the claims were discontinued by the court on the consent of the parties who reached a settlement agreement. The terms of the settlement are confidential but no payments are due by MCI and all claims between the parties are fully and finally satisfied.

        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 its 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 FASB Interpretation ("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 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 £6 million.

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

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        In addition, the Company's Senior 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 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 Notes as applicable. The potential amount of future payments under the guarantees is the same as under the Senior 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 as of June 30, 2004 was £232 million (net of debt discount of approximately £13 million).

        Apart from the New Bonding Facility Agreement, the above-mentioned documents have been entered into in connection with the Company's Senior 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 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 June 30, 2004, the fair value of the Company's guarantees that were issued or modified after December 31, 2002 was not material.

Asset purchase obligations

        An information technology outsourcing agreement was signed with Computer Sciences Corporation International Systems Management Inc. ("CSC") in May 2003. Under the terms of the agreement, property, plant and equipment with an approximate book value of £17 million and approximately 400 employees were transferred to CSC in exchange for cash proceeds of £26 million. In addition to the transfer of employees and assets, the Company novated existing service and maintenance contracts to CSC.

        The IT service contract is for a period of ten years with a right to terminate without cause, but subject to a number of penalties after two years and contains an obligation for the Company 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 June 30, 2004.

Sale of NAA

        In connection with the sale of NAA, which was completed on February 20, 2004, the Company provided certain indemnities to the purchaser, Advanced Fibre Communications, Inc. ("AFC"). Under the terms of the asset purchase and sale agreement ("the Agreement"), the Company indemnified AFC for losses arising from an inaccuracy or breach of covenant, obligations, representation or warranty made by the Company in the documents delivered in connection with the Agreement. In addition, the Company provided indemnities in respect of assets, liabilities and obligations that were not transferred to AFC; obligations to customers as a result of sale made prior to the transaction; claims by specified parties to an interest in intellectual property and technology transferred to AFC; and any failure by the

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Company to comply with bulk sales laws. The Company performed a valuation exercise to determine the fair value of such indemnities at March 31, 2004 and attributed a value of £Nil to the obligations.

Product warranty reserves

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

11. Investment in affiliates

Easynet

        The Company disposed of its entire stake in Easynet Group plc ("Easynet") in fiscal 2004. The Company affected this disposal through a share 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 further share 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 has representatives on the board of Easynet.

        Before expenses the disposal on July 4, 2003, raised approximately £40.5 million while 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 the Junior Notes.

12. Assets held for sale and discontinued operations

Discontinued operations related to OPP:

        The Company established a formal plan for the disposal of the OPP business during the quarter ended June 30, 2004 and on July 7, 2004 announced the sale of the OPP business. On July 29, 2004, the Company received regulatory approval for the sale. Completion is now subject only to customary closing conditions and is expected to occur by the end of August 2004. OPP has been classified as an asset held for sale in the condensed consolidated balance sheet, and its results are included in discontinued operations in the condensed consolidated statement of operations, in accordance with SFAS No 144, Accounting for the impairment or disposal of long-lived assets.

        The results of operations, assets and liabilities and cash flows of OPP have been treated as discontinued for all periods reported. The cash proceeds, when received, will be paid into the MREA, which will be used to fund a further mandatory redemption of the Company's Senior Notes.

        In accordance with EITF No. 87-24, Allocation of Interest to Discontinued Operations, interest expense of approximately £4 million and £3 million, for the three months ended June 30, 2004 and 2003 respectively, has been allocated to OPP in relation to the portion of the Senior Notes that will be mandatorily redeemed as a result of the sale of the OPP business.

Discontinued operations related to NAA:

        On February 20, 2004, the Company completed the sale of its NAA business for cash proceeds of £121 million, net of costs. The results of operations, assets and liabilities and cash flows of NAA have been classified as discontinued for all periods reported.

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        In accordance with EITF No. 87-24, Allocation of Interest to Discontinued Operations, interest expense of approximately £2 million, for the three months ended June 30, 2003, has been allocated to NAA in relation to the portion of the Junior Notes that were mandatorily redeemed as a result of the sale of the NAA business.

Discontinued operations related to the mobile businesses:

        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.

        Results from discontinued operations for the three months ended June 30, 2004 and 2003 are as follows:

        Net assets and liabilities held for sale at June 30, 2004 and March 31, 2004 are comprised of the following:

        The above assets and liabilities held for sale include only those assets and liabilities that are being disposed of as part of the sale of the OPP business.

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13. Pension and other post-retirement benefits

        The following table sets forth the components of pension and other post-retirement benefits cost for the three months ended June 30, 2004 and 2003:

Employer contributions

        The Company previously disclosed in its financial statements for the year-ended March 31, 2004 that it expected to contribute £10 million to its domestic pension plan, the G.E.C. 1972 Plan ("the U.K. plan") in fiscal 2005. As of June 30, 2004, the Company has made contributions to the U.K. plan of £2.6 million.

14. Shareholders' 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.

        As part of the Financial Restructuring that took place in May 2003, the Company issued warrants exercisable at £1.50 per share (£7.50 per share following the one-for-five share consolidation that occurred in September 2003), to subscribe for up to 50 million ordinary shares (10 million after the one for five share consolidation that occurred in September 2003). As at June 30, 2004, warrants to subscribe for 9.9 million ordinary shares were outstanding.

        As a result of the Financial Restructuring that took place in May 2003, the Company is restricted from paying dividends under the terms of its Senior Notes. Accordingly, the Company's Board of Directors does not expect to declare a dividend for the foreseeable future.

15. Earnings per share

        Basic earnings per share is based on the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share includes additional ordinary shares that would have been

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outstanding if potential ordinary shares, consisting of stock options with a dilutive effect, had been issued.

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

16. Related party transactions

        The table below provides details of the revenues and purchases that the Company and its subsidiaries had with associates, which are not consolidated, during the three months ended June 30, 2004 and 2003. It also provides details of the receivable and payable balances with these associates as at June 30, 2004 and March 31, 2004. All transactions are in the ordinary course of business.

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17. Subsequent events

        On July 7, 2004 the Company entered into an agreement to sell the OPP business for cash consideration of U.S.$375 million to Emerson. On July 29, 2004, the Company received regulatory approval for the sale. Completion of the sale remains subject to customary closing conditions but is expected by the end of August 2004.

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 10-K filed on June 14, 2004 with the Securities and Exchange Commission.

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.

Overview

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

        On July 7, 2004 we entered into an agreement to sell our Outside Plant & Power ("OPP") business for cash consideration of U.S.$375 million. On July 29, 2004, the Company received regulatory approval for the sale. Completion of the sale remains subject to customary closing conditions but is expected by the end of August 2004. As a result of this agreement, under U.S. GAAP, OPP has been treated as an asset held for sale for all periods presented in the financial statements. Under U.K. GAAP, OPP remains part of our continuing operations.

        During the current quarter we have adopted a new segmentation, which we describe more fully on page 29.

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Revenues

        Our sales performance in the first quarter of fiscal 2005 has confirmed our view that we are now seeing stability in customer demand for telecommunications equipment and services, particularly in our major European markets. Total revenues of £289 million in the three months ended June 30, 2004, declined 0.7% as compared to £291 million in the three months ended June 30, 2003, but increased 3% on a constant currency basis. The 12% decline compared to revenues of £329 million in the three months ended March 31, 2004 was in line with the typical seasonal trend of lower spending by a number of our major customers at the beginning of the fiscal year. All of the above revenue figures exclude revenues from our OPP business, which has been treated as an asset held for sale, as noted above.

        During the three months ended June 30, 2004, our customers have continued to endorse our next generation network technology. In the U.K., Kingston Communications ("Kingston") accepted eight Marconi SoftSwitches into its next generation network while British Telecom ("BT") announced its 21^st Century Network transformation plans including a live voice trial combining Marconi's SoftSwitch and Multi-Service Access Node, which will commence from October 2004. In addition, in June 2004, Australia's main telecommunications operator, Telstra, awarded us a new multi-year frame contract for its next generation optical transport network. Our Network Services business recorded a number of business wins during the quarter. These included a four-year contract renewal for cable support services to BT, valued at an estimated £360 million and a further order for work from Toll Collect in Germany.

Operational performance

        Seasonally lower production volumes and the impact of business mix resulted in a gross margin of 32.5% of total revenues in the three months ended June 30, 2004, compared to 33.3% in the last quarter of fiscal 2004 (on a like-for-like basis after reflecting the positive 1.8% impact of the cost reclassification (previously disclosed in our Form 10-K for the year ended March 31, 2004) on the reported margin for the three months ended March 31, 2004, which is described in more detail on page 33). The change in business mix was driven primarily by the non-recurrence of the previously disclosed high margin wireless software sale in the previous quarter and an overall higher proportion of sales of Network Services, that carry lower margins than Network Equipment.

        This was, however, a significant increase on the gross margin of 26.5% of total revenues (on a like-for-like basis after reflecting the positive 2% impact of the cost reclassification on the reported margin) for the three months ended June 30, 2003. This resulted mainly from the benefits of ongoing cost reduction and efficiency improvement programs within our manufacturing, supply chain, procurement and product engineering operations.

        Operating loss of £36 million improved £22 million in the three months ended June 30, 2004, as compared to £58 million in the three months ended June 30, 2003. The improvement was driven primarily by the improvement in gross margin described above, and is offset by a net £1 million increase in operating expenses, a description of which commences on page 37.

Cash and debt

        At June 30, 2004, our total cash balance (including restricted cash) totaled £473 million. We used £9 million of net operating cash during the three months ended June 30, 2004, which includes a payment of approximately £12 million in full and final settlement of previously disclosed lawsuits with Telcordia and a further £14 million to cover operational restructuring costs. We expect to incur a further £21 million of restructuring cash costs during the current fiscal year, in line with the guidance we provided in May 2004.

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        In total, during the three months ended June 30, 2004, we recorded a cash outflow of £36 million, of which £23 million related to repayments of our Senior Notes.

        Upon completion and receipt of proceeds from the OPP disposal, we will use the gross cash proceeds to fund a further partial redemption of the Senior Notes at 110% of par value. On a pro-forma basis at June 30, 2004, we had net cash of £376 million (the pro-forma figure is stated after cash proceeds of U.S.$375 million (£207 million) from the OPP disposal have been utilized to fund a mandatory redemption of our Senior Notes at 110% (£188 million reduction in principal amount of Senior Notes and £19 million redemption premium)), before the impact of tax and transaction costs. We are targeting to repay the remaining balance of the Senior Notes as soon as possible (approximately £57 million of principal on a pro-forma basis) and continue to focus on delivering sustainable free cash flow.

        The Board intends to maintain a strong cash position in order to support the organic development of the business and demonstrate financial strength, which the Board views as key to maintaining customer confidence. The Board will continuously monitor this position in light of market conditions and business performance.

Outlook

        We re-affirm our view that customer demand for telecom equipment and services is stabilizing, particularly in our major European markets. The 3% year-on-year revenue growth on a constant currency basis that we achieved in the first quarter of fiscal 2005 confirms our confidence in our full year revenue outlook for low single digit sales growth compared to fiscal 2004. This is based on our view of the expected like-for-like sales profile of our continuing operations and does not take into consideration any impact of future foreign exchange movements.

        From a product and service perspective, we expect relatively stable trading in Optical Networks, Broadband Routing and Switching ("BBRS") and Value-Added Services ("VAS"), with growth being generated in Access Networks and Installation, Commissioning and Maintenance Services ("IC&M"). This will be driven mainly by the expected ramp-up in deployment of our Access Hub to deliver broadband services from BT's 21^st Century Network.

        We continue to experience a strong level of interest in our next generation multi-service network offering through ongoing tenders and product trials and believe that we are well positioned for this to translate to growth opportunities for the business in the medium-term.

        Our gross margin improvement plans remain on track to deliver our fiscal 2005 targets, despite the impact from business mix recorded in the three months to June 30, 2004. We have revised our targets to reflect the impact of the planned OPP disposal. We are now targeting a gross margin of approximately 34% in fiscal 2005 compared to our previous target of approximately 33%, including OPP.

        The main drivers for the planned gross margin improvement are focused on product cost reduction, procurement and supply chain cost savings. We discuss these in more detail under "Gross Margin" on page 33. Given the long lead-times involved in many of the ongoing initiatives, we expect to realize a larger proportion of the planned improvements towards the end of the fiscal year

        This target takes into account the impact of the previously announced cost reclassification, effective from April 1, 2004, whereby we have reclassified certain costs, which were previously accounted for within direct costs and are now treated as operating expenses. This is described in more detail on page 33.

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Basis of presentation

        Our condensed consolidated financial statements as at June 30, 2004 and for the three months ended June 30, 2004 and 2003 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.

        During the second quarter of fiscal 2004, we adopted a segmentation of our business along geographic lines, separating our North American ring-fenced businesses from our businesses in Europe and the rest of the world. The ring-fenced organization was implemented in order to comply with the requirements of the indentures of our post-restructuring Junior and Senior Notes.

        In light of the redemption in full of our Junior Notes and the announced sale of our OPP business, this segmentation no longer reflects the way in which the business is being managed. As a result, effective from this quarter ended June 30, 2004, we have introduced a new structure, which splits the business into three reportable segments:

•

Optical and Access Networks;



•

BBRS; and



•

Network Services.

        Optical and Access Networks aggregates the activities of our Optical Networks and Access Networks operating segments, which now also includes our payphones and interactive systems activities previously reported under Other Network Equipment. BBRS comprises the equipment and services activities of our BBRS business. Network Services aggregates the activities of our IC&M and VAS operating segments.

        We will provide revenues, segmental operating profit/(loss) and net assets data for each of the three new segments. In addition, we will provide revenue analysis for the component activities within each segment.

        Comparative information has been restated to reflect the adoption of these new segments.

Assets held for sale and discontinued operations

        For the three months ended June 30, 2004 and 2003, OPP has been treated as an asset held for sale in the condensed consolidated balance sheet and discontinued operations in the condensed consolidated statement of operations. North American Access ("NAA") and the Mobile Communications businesses have been treated as discontinued for the three months ended June 30, 2003.

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Results of operations—Consolidated

        The following table presents our results of operations for the three months ended June 30, 2004 and 2003.