MARCONI CORPORATION plc MARCONI · PDF file29025 TOC 1 Project Marlin Prospectus 3.8.7 p15 AOG...

29025 FS 1 Project Marlin Prospectus 3.8.7p15 psAOG 14 SEP 00 17:39

R. R. DONNELLEY LON(•• ) ATL26696/20000 011 44 20 7330 1600 CB 01 SEP 00 22:30

As filed with the Securities and Exchange Commission on September▲▲▲15

▲, 2000.

Registration No. 333-12430

SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

AMENDMENT NO.▲▲2

TOFORM F-1

REGISTRATION STATEMENT UNDERTHE SECURITIES ACT OF 1933

MARCONI CORPORATION plcMARCONI plc

(Exact name of Registrant as specified in its charter)England and Wales

(State or other jurisdiction ofincorporation or organization)

4813(Primary Standard IndustrialClassification Code Number)

Not Applicable(I.R.S. Employer

Identification Number)

One Bruton StreetLondon W1J 6AQ

England011-44-20-7493-8484

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

Patricia A. HoffmanMarconi Inc.

1500 Mittel BoulevardWood Dale, Illinois 60191-1073

U.S.A.630-238-3995

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:David O. Brownwood, Esq.Cravath, Swaine & Moore

33 King William StreetLondon EC4R 9DU

England

Edward F. Greene, Esq.Cleary, Gottlieb, Steen & Hamilton

Level 5 City Place House55 Basinghall StreetLondon EC2V 5EH

EnglandApproximate date of commencement of proposed sale to the public: As soon as practicable on or after theeffective date of this Registration Statement.If any of the securities being registered on this Form are to be offered on a delayed or continuous basispursuant to Rule 415 under the Securities Act of 1933, please check the following box. □

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under theSecurities Act of 1933, please check the following box and list the Securities Act registration statementnumber of the earlier effective registration statement for the same offering. □

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933,please check the following box and list the Securities Act registration statement number of the earliereffective registration statement for the same offering. □

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933,please check the following box and list the Securities Act registration statement number of the earliereffective registration statement for the same offering. □

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. □

CALCULATION OF REGISTRATION FEE

Title of each class ofsecurities to be registered

Amountto be

registered

Proposedmaximum

offering priceper unit(1)

Proposedmaximumaggregate

offering price(1)Amount of

registration fee

Bonds $1,800,000,000 $1,800,000,000 $1,800,000,000 $475,200(2)Guarantee of the bonds by Marconi plc $1,800,000,000 $1,800,000,000 $1,800,000,000 —(3)

(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under theSecurities Act of 1933.

(2)▲Of this total registration fee, $396,000 was previously paid.

(3) No separate registration fee is required for the guarantee of the bonds.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary todelay its effective date until the Registrant shall file a further amendment which specifically states thatthis Registration Statement shall thereafter become effective in accordance with Section 8(a) of theSecurities Act of 1933 or until the Registration Statement shall become effective on such date as theSecurities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

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R. R. DONNELLEY LON(•• ) ATL74600/20000 (LOGO) 011 44 20 7330 1600 CB 01 SEP 00 22:30

PROSPECTUS▲

▲▲▲

$1�▲800�000�000

Marconi Corporation plc$

▲▲▲900�000�000 73⁄4% BONDS DUE 2010

$▲▲▲▲900�000�000 83⁄8% BONDS DUE 2030

Interest payable on▲▲March 15 and

▲▲September 15

We may redeem any of the bonds at any time at the redemption price described in thisprospectus plus accrued interest� In addition� we may� in the event of changes in the tax lawsof the United Kingdom or in other circumstances that we describe in this prospectus� redeemall of the bonds of any series at 100% of their principal amount plus accrued interest�

Marconi plc� which indirectly owns 100% of us and is the top company of the Marconi group�will guarantee the bonds� The guarantee may terminate at any time�

We have applied to list the bonds on the Luxembourg Stock Exchange in accordance with itsrules�

Investing in the bonds involves risks. See ‘‘Risk Factors’’ beginning on page 9.

▲▲73⁄4% BONDS—PRICE

▲▲99.264% AND ACCRUED INTEREST, IF ANY

▲▲83⁄8% BONDS—PRICE

▲▲99.178% AND ACCRUED INTEREST, IF ANY

Price to Public

UnderwritingDiscounts andCommissions

Proceeds toMarconi

Corporation plc

Per 2010 bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99�264% �650% 98�614%Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $893�376�000 $5�850�000 $887�526�000

Per 2030 bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99�178% �875% 98�303%Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $892�602�000 $7�875�000 $884�727�000

The Securities and Exchange Commission and state securities regulators have not approved ordisapproved these securities or determined if this prospectus is truthful or complete� Anyrepresentation to the contrary is a criminal offense�

▲▲Morgan Stanley & Co. Incorporated expect

▲s to deliver the bonds to purchasers on September

▲19, 2000.

MORGAN STANLEY DEAN WITTER

CREDIT SUISSE FIRST BOSTON

J)P) MORGAN * CO)

MERRILL LYNCH * CO)

SALOMON SMITH BARNEY

UBS WARBURG LLC

September▲14� 2000

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R. R. DONNELLEY LON(•• ) LONHTS /20000 011 44 20 7330 1600 CB 01 SEP 00 22:30

TABLE OF CONTENTS

Page

Prospectus Summary . . . . . . . . . . . . . . . . . . . 2Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Cautionary Note Regarding Forward-

Looking Statements . . . . . . . . . . . . . . . . . . 11Presentation of Financial and Other

Information . . . . . . . . . . . . . . . . . . . . . . . . . . 12Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 13Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . 14Ratio of Earnings to Fixed Charges . . . . . 15Exchange Rate Information . . . . . . . . . . . . . 16Selected Consolidated Financial

Information . . . . . . . . . . . . . . . . . . . . . . . . . . 17Pro Forma Combined Statement of

Operations for the year ended March31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Management’s Discussion and Analysisof Financial Condition and Results ofOperations . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Overview of Our Businesses . . . . . . . . . . . . 41History and Recent Developments . . . . . . 44Our Communications Networks

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Our Communications Services

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Our Mobile Communications Business . . 58

Page

Our Systems Businesses . . . . . . . . . . . . . . . . 65Our Other Businesses . . . . . . . . . . . . . . . . . . 75Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Intellectual Property . . . . . . . . . . . . . . . . . . . 80Environmental and Other Regulation . . . 81Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 83Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 85Share Ownership . . . . . . . . . . . . . . . . . . . . . . 97Certain Relationships and Related

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 98Description of Other Indebtedness . . . . . . 100Description of the Bonds . . . . . . . . . . . . . . . 102Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . 131Notice to Canadian Residents . . . . . . . . . . 133Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 134Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134Service of Process and Enforcement of

Civil Liabilities . . . . . . . . . . . . . . . . . . . . . . 134Where You Can Find More

Information. . . . . . . . . . . . . . . . . . . . . . . . . . 135Index to Consolidated Financial

Information . . . . . . . . . . . . . . . . . . . . . . . . . . F-1

You should rely only on the information contained in this document. We have notauthorized anyone to provide you with information that is different. This document may beused only where it is legal to sell these securities. The information in this document may onlybe accurate on the date of this document.

We have not taken any action that would permit a public offering to occur in anyjurisdiction other than the United States. Persons who possess this prospectus should learnabout and observe any restrictions as to the offering of the bonds and the distribution of thisprospectus.

Dealer prospectus delivery obligation

Until▲October 9, 2000 (25 days after the commencement of the offering), all dealers that

effect transactions in these securities in the United States, whether or not participating in thisoffering, may be required to deliver a prospectus. This is in addition to the dealers’ obligationto deliver a prospectus when acting as an underwriter and with respect to unsold allotments orsubscriptions.

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PROSPECTUS SUMMARY

We are a global group focused primarily on the communications market. Ourcommunications business activities include developing and supplying communications and datanetworking equipment and services. In addition, we have businesses that focus on medical,commerce and data systems markets for high technology products and services.

Our businesses

We operate three communications businesses:

communications networks, a U.S.-based business that designs and suppliescommunications systems comprising a broad range of products including:

• optical networks systems, which use optical fiber as the medium to transport data;

• access systems, which connect consumers and businesses to communicationsnetworks;

• broadband switches, which are very high capacity devices that directcommunications traffic; and

• software management systems that monitor and control communications trafficflow over communications networks and are sold along with our communicationsnetworks products.

communications services, a U.K.-based business that:

• installs networks;

• supports the communications equipment of our communications customers; and

• offers a broad range of services in planning, building and operating networks to meetthe increasing outsourcing requirements of existing operators and the needs of thoseoperators who require complete networks.

mobile communications, an Italian-based business that:

• designs, develops and integrates communications and information technologiesinto wireless communications systems for security forces and other uses; and

• is in the early stages of developing a product offering for the next generation ofpublic mobile networks. These networks will provide high capacity wirelesscommunications to and from mobile phones with fixed-line quality sound, fastdata transmission and video capability.

We operate three U.S.-based systems businesses:

• medical systems, which includes medical imaging equipment, radiology supportand an emerging business, Healthcare Information Systems;

• commerce systems, which includes retail automation systems, petroleumequipment, systems integration and service management and an emergingbusiness, Marconi Online; and

• data systems, which includes digital imaging systems and supplies and anemerging business, Marconi InfoChain.

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In addition to our principal businesses, we invest in technology start-up and early stagebusinesses that may have growth potential or technology that is complementary to our principalbusinesses. We also retain other businesses with a view to development or disposal.

Our group strategy

The increase in data traffic and the demand for greater network capacity, or bandwidth, hascreated growth opportunities in the communications and information technology markets. Ourstrategy is to build on our experience in developing and supplying very high capacitycommunications networks and information technology products and services to offer completedifferentiated network solutions on a global basis.

In implementing our strategy, the initial priority will be the continuing development of ourcommunications businesses and the pursuit of other profitable development opportunitiesthroughout the Marconi group, particularly those which may offer cross-selling opportunitieswith our communications businesses.

Formation of Marconi plc

Marconi plc was incorporated as a public limited company under the laws of England andWales on September 17, 1999. It is a recently formed holding company with a limited operatinghistory in its current form. Marconi plc was formed as the result of a reorganization of TheGeneral Electric Company, p.l.c. (GEC), a U.K.-based company, which divested its defenseelectronics and defense systems businesses and retained its communications and intelligentelectronics businesses under a new holding company named Marconi plc. In connection with thereorganization, on November 26, 1999 Marconi plc issued ordinary shares to each of the formershareholders of GEC. As a result of the issuance of shares, shareholders of GEC becameshareholders of Marconi plc and GEC became an indirect wholly owned subsidiary of Marconiplc. GEC was subsequently renamed Marconi Corporation plc.

Our principal executive offices and the principal executive offices of Marconi plc are locatedat One Bruton Street, London W1J 6AQ, England (telephone: ++44-20-7493-8484).

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The offering

Bonds offered $▲900,000,000 principal amount of

▲73⁄4% bonds due

2010 and $▲900,000,000 principal amount of

▲83⁄8%

bonds due 2030.

Maturity The▲73⁄4% bonds will mature on

▲September 15, 2010

and the▲83⁄8% bonds will mature on

▲September 15,

2030.

Interest rate and payment dates We will pay interest on the▲73⁄4% bonds at the rate of

▲73⁄4% per year and on the

▲83⁄8% bonds at the rate of

▲83⁄8% per year, in each case on

▲March 15 and

▲September 15 of each year, beginning on

▲▲March 15,

2001.

Optional redemption We may redeem the bonds in whole or in part at anytime at a redemption price described in thisprospectus plus accrued interest to the date ofredemption.

Covenants The indenture includes the following provisions:

• the indenture limits our ability to merge orconsolidate with another company, or transfer orsell all or substantially all of our assets.

• the indenture limits our ability to create liens.

• the indenture limits the ability of Marconi plc toguarantee debt securities which we may issue inthe future.

• the indenture limits our ability to enter into saleand leaseback transactions.

• the indenture does not, however, limit theamount of debt we may issue and does notprovide you as holders with any protectionshould there be a highly leveraged transactioninvolving us.

Ranking The bonds will rank at least equal to all of the otherexisting and future senior unsecured debt of MarconiCorporation plc.

Form of bonds and book-entry system The bonds will be represented by one or more globalbearer securities that are deposited with The Bank ofNew York, as depositary. As investors, you will holdbeneficial interests in the bonds through TheDepository Trust Company (DTC) and DTC and itsdirect and indirect participants will record ownershipof the beneficial interests on their books. We will notissue certificated bonds except in limitedcircumstances that we explain in this prospectus.Settlement of the bonds will occur through DTC insame-day funds.

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Taxation Except in limited circumstances that we explain inthis prospectus, if the U.K. tax authorities require usto make a deduction on a payment made on thebonds, we will make an increased payment so thatyou will receive the same amount as the originalpayment before the deduction. If we are required tomake such an increased payment, we may redeem allof the bonds at a price equal to 100% of the principalamount of the bonds plus accrued interest.

Governing law The bonds will be governed by the laws of the Stateof New York.

Listing and trading We have applied to list the bonds on the LuxembourgStock Exchange.

Guarantee Marconi plc, of which we are a wholly ownedsubsidiary, will guarantee the bonds. The guaranteewill terminate if Marconi plc no longer guarantees ourbank loans, which may occur at any time. See‘‘Description of the Bonds—The guarantee’’.

Ratio of earnings to fixed charges

The following table sets forth the ratio of earnings to fixed charges for each of the last fivefiscal years:

1996 1997 1998 1999 2000

21.4 12.0 16.9 28.0 (0.4)

The consolidated ratios of earnings to fixed charges of Marconi Corporation plc werecomputed by dividing earnings by fixed charges. For this purpose, earnings are the sum ofincome (loss) from continuing operations, before adjustment for minority interests inconsolidated subsidiaries or income or loss from equity investees, fixed charges and distributedincome of equity investors. Fixed charges are interest, whether expensed or capitalized, and suchportion of rental expense that can be demonstrated to be representative of the interest factor inthe particular case.

For the year ended March 31, 2000 earnings were insufficient to cover fixed charges asevidenced by a less than one-to-one coverage ratio as shown above. Additional earnings of £318million were necessary for the year ended March 31, 2000 to provide a one-to-one coverage ratio.The ratio of earnings to fixed charges before adjusting earnings for amortization charges andpurchased in-process research and development would have been 3.0 for the year ended March31, 2000 and 29.4 for the year ended March 31, 1999.

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Summary consolidated financial information

The following summary consolidated income statement data for each of the fiscal yearsended March 31, 2000 and 1999, and the consolidated balance sheet data as of March 31, 2000and 1999, have been derived from the audited consolidated financial statements, prepared inaccordance with U.S. generally accepted accounting principles (U.S. GAAP), that are includedelsewhere in this prospectus. The summary consolidated financial information for the fiscal yearsended March 31, 1998, 1997 and 1996 has been derived from other Marconi information. Theinformation set forth below is not necessarily indicative of future operations and should be readin conjunction with ‘‘Management’s Discussion and Analysis of Financial Condition and Resultsof Operations’’ and the consolidated financial statements, related notes and other financialinformation included elsewhere in this prospectus. Amounts are presented in accordance withU.S. GAAP.

The data for each of the five fiscal years ended March 31, 2000 excludes discontinuedoperations. During the fiscal year ended March 31, 2000 the international aerospace, navalshipbuilding, defense electronics and defense systems business was separated and wassubsequently merged with BAE Systems.

We have not presented separate financial statements or other financial disclosures regardingMarconi Corporation plc. There is no difference between the consolidated assets, liabilities andresults of operations of Marconi plc and the consolidated assets, liabilities and results ofoperations of Marconi Corporation plc, except for non-interest bearing intercompany loanstotalling £304 million payable by Marconi Corporation plc group companies to other companiesin the Marconi plc group which are not subsidiaries of Marconi Corporation plc. Thesedifferences are not material.

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Summary consolidated financial information—(continued)

Fiscal year ended March 31,

1996 £ 1997 £ 1998 £ 1999 £ 2000 £ 2000 $

(In millions, except share data)Consolidated income statement dataRevenues (1)

Communications networks . . . . . . . . . . . . . . . . . . . . . . . * * 1,232 1,343 2,535 4,036Communications services . . . . . . . . . . . . . . . . . . . . . . . . * * 221 244 543 865Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . * * 262 271 295 470Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 755 898 1,010 1,608Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 336 385 388 618Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 186 218 235 374Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 842 430 431 686

Total Marconi group . . . . . . . . . . . . . . . . . . . . . . . . . . 4,155 4,247 3,834 3,789 5,437 8,657Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,371 1,403 1,199 1,279 1,940 3,089Operating income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378 269 375 376 (282) (448)Income/(loss) from continuing operations before

income taxes and minority interests . . . . . . . . . . . . . . . . 733 346 571 1,351 (303) (482)Earnings per share—basic

Income/(loss) from continuing operations(£ per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.17 £0.06 £0.15 £0.32 £(0.14) $(0.23)

Earnings per share—dilutedIncome/(loss) from continuing operations

(£ per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.16 £0.06 £0.15 £0.32 £(0.14) $(0.23)Cash dividends declared per common share(2)

(£ per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.11 £0.13 £0.13 £0.12 £ 0.11 n/a($ equivalent per share) . . . . . . . . . . . . . . . . . . . . . . . . . . $0.18 $0.21 $0.21 $0.20 $ 0.17 n/a

Other information (3,4)Operating income before non-recurring items,

purchased in-process research anddevelopment and amortization of goodwill andother intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 367 433 512 691 1,100

Cash provided by/(used for) operating activities . . . . . . * * * (149) 431 686Cash provided by/(used for) investing activities . . . . . . * * * 503 (2,980) (4,745)Cash provided by financing activities . . . . . . . . . . . . . . . . * * * 189 1,676 2,669

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Summary consolidated financial information—(continued)

March 31,

1996 1997 1998 1999 2000 2000

£ £ £ £ £ $

(In millions)Consolidated balance sheet dataTotal assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,989 6,876 7,058 8,292 9,999 15,919Long-term debt (excluding current maturities) . . . — — 49 53 939 1,495Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . 5,299 5,097 4,975 5,547 4,061 6,466

(1) The analysis of revenues by segment presented reflects the reportable segments of theMarconi group for the fiscal year ended March 31, 2000, identified in accordance withStatement of Financial Accounting Standards (‘‘SFAS’’) No. 131: ‘‘Disclosures aboutSegments of an Enterprise and Related Information’’. The information necessary to presentan analysis of revenues by these reportable segments for fiscal years 1996 and 1997 is notavailable and, accordingly, is not presented.

(2) Dividend payments were made out of profits which included profits from discontinuedoperations.

(3) We believe that the other information provides useful information regarding our ongoingprofitability. Operating income before non-recurring items, purchased in-process researchand development and amortization of goodwill and other intangibles should not beconsidered in isolation or as a substitute for operating income/(loss) prepared in accordancewith U.S. GAAP.

(4) The information necessary to present an analysis of cash flow activities for fiscal years 1996,1997 and 1998 is not available and, accordingly, is not presented.

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RISK FACTORS

You should consider the following risks and uncertainties described below and otherinformation in this prospectus before deciding to invest in the bonds.

We face intense competition from larger organizations in acquiring and developing technologyand this may limit our ability to grow profitably

We produce substantially all of our products for highly competitive markets, mostimportantly the telecommunications and intelligent electronics systems industries. Largercompetitors with greater resources than us may be able to spend more time and money onresearch and development and may be in a better position to acquire or develop proprietarytechnology. For example, our competitors include Nortel and Lucent Technologies incommunications and GE in medical systems. This may limit our ability to develop competitivenew products which may reduce our revenues and profits.

We face fierce competition to hire and retain high technology workers in the communicationsindustry, which may result in delays or an inability to develop new products

Our continued success depends substantially on our ability to hire, retain and motivate anumber of highly skilled technology specialists, including those with expertise in importantemerging technologies. Because the number of people with key high technology skills is limited,suppliers compete vigorously for their services and frequently attempt to lure them away fromtheir competitors. A number of our competitors in the communications industry (Lucent, Nortel,Alcatel) have greater financial and technological resources, are better known and are moreestablished in the industry than we are and, accordingly, may be in a better position to attractsuch employees. The potential consequences of our loss of, or our inability to attract a sufficientnumber of, key workers include delays or inability to develop new products, with a consequentreduction in sales and profits. Alternatively we may have to offer more attractive remunerationpackages than our competitors and this might reduce our margins.

The loss of British Telecom as our customer would materially reduce our revenues and profits

For the year ended March 31, 2000, sales to British Telecom represented £605 million, or11%, of our total revenues. The loss of or any substantial reduction in orders by British Telecomwould materially reduce our revenues and profits.

Our larger competitors may be in a position to secure components from third-party suppliers ina market showing signs of shortage, which could cause us delays in deliveries or price increases

We are dependent on third party suppliers of electronic components. The componentssupply market is showing signs of shortage, with consequent delays on deliveries. The cost ofcomponents may increase and ultimately some components may be unavailable at any cost. Wemay not have as much influence as our larger competitors to secure supplies. As a consequencethis may cause:

• delays in our deliveries to our customers resulting in contractual penalties and loss of futurebusiness;

• unavailability of components, also resulting in contractual penalties and loss of futurebusiness; and

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• price increases, which would reduce our margins if we are unable to pass on the costincreases to our customers.

Newly identified, developing and emerging businesses may fail to reach their full potential,adversely affecting our results

We have a number of newly identified, developing and emerging businesses. For example, inour mobile communications business, we are developing products for the next generation ofpublic mobile networks. These networks will provide wireless communications to and frommobile phones with fixed-line quality sound, fast data transmission and video capability. Oursystems businesses also include developing and emerging businesses. These businesses may failto reach their full potential and may, in the event of failure, absorb material costs andmanagement resources and reduce our profits.

There is currently no public market for the bonds; investor interest is unknown; investors mayhave difficulty selling the bonds

The bonds are new securities for which there is currently no public market. We cannotpredict whether and to what extent investor interest in the bonds will cause a trading market forthe bonds to develop, or how liquid that market will be. Marconi Corporation plc has not issuedbonds in the United States before this offering. If a liquid trading market for the bonds does notdevelop the price of the bonds may decline, and investors may have difficulty selling the bonds.

Our holding company structure may affect our ability to satisfy our obligations under the bonds

The subsidiaries of Marconi Corporation plc conduct substantially all of the operations ofand directly own substantially all of the assets of the Marconi group. You should be aware thatthe subsidiaries have no obligation, contingent or otherwise, to pay any amount under the bondsor to make any funds available for such payment. Therefore, Marconi Corporation plc’s operatingcash flow and its ability to meet its debt obligations, including the bonds, will depend on thecash flow provided by its subsidiaries in the form of loans, dividends or other payments toMarconi Corporation plc as a shareholder. The ability of the subsidiaries to make such paymentswill depend on their earnings, tax considerations and legal restrictions. In the event ofinsolvency, liquidation, dissolution or reorganization of any of the subsidiaries, the creditors ofeach subsidiary would be entitled to payment in full from such subsidiary’s assets. After payingtheir own creditors, the subsidiaries may not have any remaining assets for distribution toMarconi Corporation plc as a shareholder and, consequently, there may not be any assetsavailable for payment to the holders of the bonds. At March 31, 2000, the subsidiaries of MarconiCorporation plc had total liabilities of £5,078 million, including £2,380 million owed to MarconiCorporation plc.

10



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements concerning our business, operationsand financial performance and condition. You can identify these statements by words such as‘‘anticipate’’, ‘‘assume’’, ‘‘believe’’, ‘‘estimate’’, ‘‘expect’’, ‘‘intend’’, ‘‘may’’, ‘‘plan’’, ‘‘positioned’’,‘‘should’’, ‘‘will’’, ‘‘would’’ and other similar expressions which are predictions of or indicatefuture events and future trends. These forward-looking statements involve known and unknownrisks, uncertainties and other factors which are in some cases beyond our control and may causeour actual results, performance or achievements to differ materially from those expressed orimplied by such forward-looking statements. Factors that may cause such differences include butare not limited to the risks described under ‘‘Risk Factors’’ as well as the following:

• any major disruption in production at our key facilities;

• changes in environmental, tax and other laws and regulations, which, among otherthings, could cause us to incur substantial additional capital expenditures and operationand maintenance costs; and

• adverse changes in the markets for our products, including as a result of increasedcompetition in the highly competitive international markets for such products.

11



PRESENTATION OF FINANCIAL AND OTHER INFORMATION

We state our financial statements in U.K. pounds sterling. In this prospectus references topounds sterling, pounds or £ and to pence or p are to the currency of the United Kingdom,references to euro or € are to the common legal currency of the members of the Europeanmonetary union, and references to U.S. dollars, U.S.$ or $ are to the currency of the UnitedStates.

This prospectus also contains translations of pound sterling amounts into U.S. dollaramounts at specified rates. Unless otherwise stated, the U.S. dollar equivalent for amounts inpounds sterling is based on the noon buying rate in the City of New York for cable transfers inpounds sterling as certified for customs purposes by the Federal Reserve Bank of New York onMarch 31, 2000, which was $1.5922 to £1. This rate differs from the rates used in the preparationof our consolidated financial statements included in this prospectus. These translations areprovided solely for your convenience. You should not construe these translations asrepresentations that the pound sterling amounts actually represent such U.S. dollar amounts orcould be converted into U.S. dollars at the rates indicated or at any other rates. See ‘‘ExchangeRate Information’’ for historical information regarding the noon buying rate.

Some of the market share information and other statements in this prospectus regarding ourposition relative to our competitors with respect to the manufacture or distribution of particularproducts are not based on published statistical data or information obtained from independentthird parties. Rather, such information and statements reflect our management’s best estimatesbased upon information obtained from our customers and from trade and business organizationsand associations and other contacts within the industries in which we compete. Unless otherwisespecified or the context otherwise requires, market share and market data are based on fiscal2000 sales.

The information concerning Alstom and other associates contained in this prospectus,including financial information, has been taken from or based upon publicly available documentsand, where applicable, records on file with the SEC, supplemented by additional informationobtained in our capacity as shareholders.

Our fiscal year ends on March 31. Unless otherwise specified, all references in thisprospectus to our fiscal year refer to a twelve-month financial period ending March 31. Forexample, fiscal 1998 represents the fiscal year beginning on April 1, 1997 and ending on March31, 1998.

The consolidated financial statements contained in this prospectus have been prepared inaccordance with U.S. GAAP.

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

12



USE OF PROCEEDS

We estimate that Marconi Corporation plc will receive net proceeds from the sale of the$

▲900 million principal amount of

▲73⁄4% bonds due 2010 and the $

▲900 million principal amount

of▲83⁄8% bonds due 2030 of approximately $

▲▲1.77 billion, after deducting underwriting discounts

and commissions and estimated offering expenses.

We plan to use the net proceeds of the offering to reduce the amounts outstanding underMarconi Corporation plc’s 1998 credit facility. At

▲▲▲▲September 14, 2000, $

▲3.1 billion and €400

million were outstanding under the 1998 credit facility, which amounts bear interest at theLondon inter-bank offered rate plus 0.175% per year. Such amounts were used to finance thegeneral corporate purposes of Marconi plc and its subsidiaries and to finance, in part, theacquisitions of Reltec and Fore Systems. Our use of the net proceeds of this offering will reducethe outstanding amounts under the 1998 credit facility to $

▲1.3 billion and €

▲400 million

▲.

13



CAPITALIZATION

The following table sets forth our consolidated capitalization at March 31, 2000:

• on an actual basis; and

• on an as adjusted basis to reflect the issuance of the bonds we offer in this prospectusand the application of the net proceeds we receive from this offering, as described in‘‘Use of Proceeds’’.

You should read this table in conjunction with ‘‘Selected Consolidated FinancialInformation’’, ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations’’ and the consolidated financial statements, related notes and other financialinformation contained elsewhere in this prospectus.

March 31, 2000

Actual

As adjusted forthe offering of

bonds

(In millions) £ $(1) £ $(1)

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 555 884 555 884

Short term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,830 2,913 719 1,144Long term debt

Finance leases and debenture loans . . . . . . . . . . . . . . . . . . . . . . . . 39 62 39 62Marconi Corporation plc eurobonds . . . . . . . . . . . . . . . . . . . . . . . . 900 1,433 900 1,433Marconi Corporation plc $900 73⁄4% bonds due 2010 . . . . . . . — — 565 900Marconi Corporation plc $900 83⁄8% bonds due 2030 . . . . . . . — — 565 900

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,769 4,408 2,788 4,439

Shareholders’ equityOrdinary shares, par value £0.05 per share; 6,000,000,000

shares authorized at March 31, 2000; 2,723,996,450 sharesoutstanding at March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 217 136 217

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 774 486 774Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,577 5,695 3,577 5,695Accumulated other comprehensive income/(loss) . . . . . . . . . . . (138) (220) (138) (220)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,061 6,466 4,061 6,466

Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,830 10,874 6,849 10,905

(1) Solely for your convenience, we have translated pounds sterling amounts into U.S. dollarsand U.S. dollars into pounds sterling at the noon buying rate on March 31, 2000 of $1.5922to £1. See ‘‘Presentation of Financial and Other Information’’ and ‘‘Exchange RateInformation’’.

14



RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth the ratio of earnings to fixed charges of Marconi Corporationplc for each of the last five fiscal years:

1996 1997 1998 1999 2000

21.4 12.0 16.9 28.0 (0.4)

The consolidated ratios of earnings to fixed charges of Marconi Corporation plc werecomputed by dividing earnings by fixed charges. For this purpose, earnings are the sum ofincome (loss) from continuing operations, before adjustment for minority interests inconsolidated subsidiaries or income or loss from equity investees, fixed charges and distributedincome of equity investors. Fixed charges are interest, whether expensed or capitalized, and suchportion of rental expense that can be demonstrated to be representative of the interest factor inthe particular case.

For the year ended March 31, 2000, earnings were insufficient to cover fixed charges asevidenced by a less than one-to-one coverage ratio as shown above. Additional earnings of£318,000,000 were necessary for the year ended March 31, 2000 to provide a one-to-one coverageratio. The ratio of earnings to fixed charges before adjusting earnings for amortization charges andpurchased in-process research and development would have been 3.0 for the year endedMarch 31, 2000 and 29.4 for the year ended March 31, 1999.

15


R. R. DONNELLEY LON(•• ) LONHTS /20000 (START PAGE) 011 44 20 7330 1600 CB 01 SEP 00 22:30

EXCHANGE RATE INFORMATION

The following table sets out, for the periods and dates indicated, information concerning thenoon buying rates for pounds sterling expressed in U.S. dollars per pound sterling. We have notused these rates to prepare our consolidated financial statements.

Year ended December 31, High Low Average (1)End ofperiod

1996 1.71 1.49 1.57 1.711997 1.70 1.58 1.64 1.641998 1.72 1.61 1.66 1.661999 1.68 1.56 1.61 1.622000 (through

September 13, 2000) 1.65 1.40 1.53 1.41

(1) The average of the noon buying rates on the last business day of each month, or any shorterapplicable period, during the period.

The noon buying rate on▲▲▲September 13, 2000 was £1.00 = $1.4125

▲.

16



SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following selected consolidated income statement data for each of the fiscal years endedMarch 31, 2000 and 1999, and the consolidated balance sheet data as of March 31, 2000 and1999, have been derived from the audited consolidated financial statements, prepared inaccordance with US generally accepted accounting principles (U.S. GAAP), that are includedelsewhere in this prospectus. The selected consolidated financial information for the fiscal yearsended and as of March 31, 1998, 1997 and 1996 has been derived from other Marconiinformation. The information set forth below is not necessarily indicative of future operationsand should be read in conjunction with ‘‘Management’s Discussion and Analysis of FinancialCondition and Results of Operations’’ and the consolidated financial statements, related notesand other financial information included elsewhere in this prospectus. Amounts are presented inaccordance with U.S. GAAP.

The data for each of the five fiscal years ended March 31, 2000 excludes discontinuedoperations. During the fiscal year ended March 31, 2000 the international aerospace, navalshipbuilding, defense electronics and defense systems business was separated and wassubsequently merged with BAE Systems.

We have not presented separate financial statements or other financial disclosures regardingMarconi Corporation plc. There is no difference between the consolidated assets, liabilities andresults of operations of Marconi plc and the consolidated assets, liabilities and results ofoperations of Marconi Corporation plc, except for non-interest bearing intercompany loanstotalling £304 million payable by Marconi Corporation plc group companies to other companiesin the Marconi plc group which are not subsidiaries of Marconi Corporation plc. Thesedifferences are not material.

17



SELECTED CONSOLIDATED FINANCIAL INFORMATION — (continued)


(In millions, except share data)1996 1997 1998 1999 2000 2000

£ £ £ £ £ $Consolidated income statement dataRevenues (1)

Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 1,232 1,343 2,535 4,036Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 221 244 543 865Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 262 271 295 470Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 755 898 1,010 1,608Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 336 385 388 618Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 186 218 235 374Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * * 842 430 431 686

Total Marconi group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,155 4,247 3,834 3,789 5,437 8,657Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,371 1,403 1,199 1,279 1,940 3,089Operating expensesSelling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . 710 837 536 597 1,066 1,697Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 255 248 214 384 611Amortization of goodwill and other intangibles . . . . . . . . . . . . . 34 42 40 92 495 788Purchased in-process research and development . . . . . . . . . . . . — — — — 277 441

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993 1,134 824 903 2,222 3,537Operating income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378 269 375 376 (282) (448)Other income/(expense)—net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 77 196 975 (21) (34)Income/(loss) from continuing operations before income

taxes and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 733 346 571 1,351 (303) (482)Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (228) (135) (102) (458) (84) (134)Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (49) (53) (12) (3) (5)Income/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . 454 162 416 881 (390) (621)

Earnings per share—basicIncome/(loss) from continuing operations (£ per share) . . . £0.17 £0.06 £0.15 £0.32 £(0.14) $(0.23)

Earnings per share—dilutedIncome/(loss) from continuing operations (£ per share) . . . £0.16 £0.06 £0.15 £0.32 £(0.14) $(0.23)

Cash dividends declared per common share(2)£ per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.11 £0.13 £0.13 £0.12 £0.11 n/a$ equivalent per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.18 $0.21 $0.21 $0.20 $0.17 n/a

Other information (3,4)Operating income before non-recurring items, purchased

in-process research and development and amortizationof goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . 410 367 433 512 691 1,100

Cash provided by/(used for) operating activities . . . . . . . . . . . . . * * * (149) 431 686Cash provided by/(used for) investing activities . . . . . . . . . . . . . * * * 503 (2,980) (4,745)Cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . * * * 189 1,676 2,669

March 31,

(In millions)1996 1997 1998 1999 2000 2000

£ £ £ £ £ $Consolidated balance sheet data

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,989 6,876 7,058 8,292 9,999 15,919Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,506 4,642 4,854 5,990 3,676 5,853Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,558 1,665 1,939 2,734 5,922 9,428Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,440 1,505 1,820 2,602 4,844 7,712Long-term debt (excluding current maturities) . . . . . . . . . . . — — 49 53 939 1,495Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 114 144 11 16 25Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,299 5,097 4,975 5,547 4,061 6,466

18



SELECTED CONSOLIDATED FINANCIAL INFORMATION — (continued)

(1) The analysis of revenues by segment presented reflects the reportable segments of theMarconi group for the fiscal year ended March 31, 2000, identified in accordance withStatement of Financial Accounting Standards (‘‘SFAS’’) No. 131: ‘‘Disclosures aboutSegments of an Enterprise and Related Information’’. The information necessary to presentan analysis of revenues by these reportable segments for fiscal years 1996 and 1997 is notavailable and, accordingly, is not presented.

(2) Dividend payments were made out of profits which included profits from discontinuedoperations.

(3) We believe that the other information provides useful information regarding our ongoingprofitability. Operating income before non-recurring items, purchased in-process researchand development and amortization of goodwill and other intangibles should not beconsidered in isolation or as a substitute for operating income/(loss) prepared in accordancewith U.S. GAAP.

(4) The information necessary to present an analysis of cash flow activities for fiscal years 1996,1997 and 1998 is not available and, accordingly, is not presented.

19



PRO FORMA COMBINED STATEMENT OF OPERATIONSfor the year ended March 31, 2000

(Unaudited)

The unaudited pro forma combined statement of operations of Marconi plc for the fiscal yearended March 31, 2000 has been prepared to illustrate the effects of the acquisition of Fore Systemsand the proposed debt offering.

The unaudited pro forma combined statement of operations gives pro forma effect to the ForeSystems acquisition as if it had occurred on April 1, 1999, the beginning of the period presented. Itdoes not purport to be indicative of the results of operations that would have actually been obtainedhad the transactions been completed as of the assumed dates and for the period presented, or whichmay be obtained in the future. The pro forma adjustments are described in the accompanying notesand are based upon available information and assumptions that we believe are reasonable.

The unaudited pro forma combined statement of operations should be read in conjunction withthe separate historical consolidated financial statements of Marconi and Fore Systems and the notes tothose statements and ‘‘Management’s Discussion and Analysis of Financial Condition and Results ofOperations’’ included elsewhere in this prospectus.

The pro forma financial information has been prepared for illustrative purposes only. Because ofits nature, it may not give a true picture of the profits which would have been reported if the ForeSystems acquisition and the debt offering had occurred on the dates assumed.

20



PRO FORMA COMBINED STATEMENT OF OPERATIONS — (continued)

Historical

(In millions, except share data)

Marconi plcconsolidated

year ended March 31,2000

Fore Systemsperiod April 1,1999 to June 16,

1999Note 1

Foreadjustments

Note 2

Pro formacombined

Pro formaeffects ofthe debtofferingNote 3

Pro formacombined

£ £ £ £ £ £

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,437 64 — 5,501 — 5,501Direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,497 38 — 3,535 — 3,535

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 1,940 26 — 1,966 — 1,966Operating expenses

Selling, general and administrative . 1,066 32 — 1,098 — 1,098Research and development . . . . . . . . . 384 12 — 396 — 396Amortization of goodwill and other

intangibles . . . . . . . . . . . . . . . . . . . . . . . 495 2 62 559 — 559Purchased in-process research and

development . . . . . . . . . . . . . . . . . . . . . 277 — (174) 103 — 103

Total operating expenses . . . . . . . . . . . . . . . 2,222 46 (112) 2,156 — 2,156Operating income/(loss) . . . . . . . . . . . . (282) (20) 112 (190) — (190)

Other income/(expense)Gain on sale of investments . . . . . . . . 4 — — 4 — 4Equity in net income of affiliates . . . 83 — — 83 — 83Interest income . . . . . . . . . . . . . . . . . . . . 106 1 — 107 — 107Interest expense . . . . . . . . . . . . . . . . . . . . (214) — (42) (256) (90) (346)

Income/(loss) from continuingoperations before income taxes andminority interests . . . . . . . . . . . . . . . . . . . . (303) (19) 70 (252) (90) (342)

Income tax provision . . . . . . . . . . . . . . . . . . . (84) 5 13 (66) 27 (39)Minority interests . . . . . . . . . . . . . . . . . . . . . . (3) — — (3) — (3)

Income/(loss) from continuingoperations . . . . . . . . . . . . . . . . . . . . . . . . . . . (390) (14) 83 (321) (63) (384)

Discontinued operationsGain on discontinued operations,

net of income tax . . . . . . . . . . . . . . . . 675 — — 675 — 675

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 (14) 83 354 (63) 291

Earnings per share dataBasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.11 £ 0.11Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.10 £ 0.11Average ordinary shares

outstanding . . . . . . . . . . . . . . . . . . . . . .Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,696.9 2,696.9Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,737.4 2,737.4

Note 1: Fore Systems pre-acquisition resultsFore Systems was acquired on June 17, 1999 and consolidated from the date of acquisition.

This adjustment reflects the operations of Fore Systems for the period April 1, 1999 to June 16,1999.

The income statement for the period April 1, 1999 to June 16, 1999 has been translated intosterling using the exchange rate $1.611 to £1.

21



PRO FORMA COMBINED STATEMENT OF OPERATIONS — (continued)

Note 2: Fore Systems adjustmentsThe acquisition of Fore Systems was accounted for by the purchase method of accounting.

An allocation of the purchase price has been made to the major categories of assets and liabilitiesbased on available information. The results of the purchase price allocation are set out in detailin Note 3 in the Marconi plc consolidated financial statements for the year ended March 31,2000. Based on this allocation, goodwill and other intangible amortization expense would haveincreased by £62 million had the acquisition occurred on April 1, 1999. In-process research anddevelopment of £174 million was identified on this transaction which is reversed.

We believe that the impact of adopting the financing arrangements related to the acquisitionof Fore Systems on April 1, 1999 would have been to increase the interest expense incurred by£42 million. We estimate the income tax benefit resulting from this financing is £13 million.

Note 3: Pro forma effects of the debt offeringThe proposed debt offering results in the following pro forma adjustments:

(1) increase in interest expense of £▲90

▲million due to the $1,

▲▲800 million of bonds being

assumed to be in issue for the entire year; and

(2) related tax effect of the interest expense adjustment of £▲▲27 million.

We have translated U.S. dollars into pounds sterling at the average rate for the fiscal yearended March 31, 2000 of $1.62 to £1.

22



MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the discussion and analysis below in conjunction with ‘‘SelectedConsolidated Financial Information’’ and the consolidated financial statements and the relatednotes and the descriptions of our businesses included elsewhere in this prospectus.

Overview

We are a global group focused primarily on the communications market. Ourcommunications business activities include developing and supplying communications and datanetworking equipment and services. In addition, we have businesses that focus on medical,commerce and data systems markets for high technology products and services. Our operationscomprise principally:

• communications networks;

• communications services;

• mobile communications;

• medical systems;

• commerce systems; and

• data systems.

The formation of Marconi plc

Marconi plc was incorporated on September 17, 1999. Its ordinary shares were listed on theLondon Stock Exchange on November 30, 1999 when it became the new holding company of theremaining businesses of Marconi Corporation plc (formerly The General Electric Company, p.l.c.(GEC)). This followed the separation of GEC’s international aerospace, naval shipbuilding,defense electronics and defense systems business and the subsequent merger of this businesswith BAE Systems. This business has been included as a discontinued operation in ourconsolidated financial statements. The following discussion of our businesses and results ofoperations relates only to our continuing operations.

Acquisitions and dispositions

Acquisitions

During the two years ended March 31, 2000 we made the following significant acquisitions:

• Reltec in April 1999 for approximately $1.8 billion (approximately £1.0 billion)(excluding assumed debt of £0.2 billion);

• Fore Systems in June 1999 for approximately $4.5 billion (approximately £2.9 billion);and

• Siemens’ 40% interest in GPT in August 1998 for a total consideration of £700 millionof which £610 million was settled in cash and the balance by the sale of our 49.9%interest in Siemens GEC Communications Systems to Siemens.

Other acquisitions in the same period, which were not significant, include:

March 2000 acquisition of 8,864,292 Series C shares of Ten Square (formerly known asiAMnetworks), representing approximately 22.5% of the Series C shares andapproximately 10% of the total share capital of Ten Square.

March 2000 a further 10% interest in Xcert following the acquisition of an initial 15%interest in August 1999.

23



March 2000 the vending machine business and assets of Harvest Electronics.

March 2000 Scitec’s Australian communications solutions business.

January 2000 the public networks business of Bosch.

December 1999 Nokia’s transmission equipment business.

December 1999 27% of Atlantic Telecom’s equity and the formation of a strategicrelationship with Atlantic Telecom (such 27% interest was diluted to a19.7% interest as a result of Atlantic Telecom’s acquisition of FirstTelecom).

September 1999 the high field whole body magnetic resonance imaging business of SMIS.

August 1999 the business and assets of RDC Communications.

March 1999 the remaining 66.6% of Telephone Manufacturers of South Africa notalready owned.

February 1999 Tetrel.

February 1999 Logitron.

December 1998 Electronic Automation.

November 1998 the computed tomography division of Elscint. Computed tomography (or CTas it is more commonly known) is an imaging technology which producescomputer generated images of the body in cross sectional planes.

August 1998 a further 11.1% interest in Avery India to increase Avery Berkel’s interest inAvery India from 39.9% to 51%.

Dispositions

During the two years ended March 31, 2000, in addition to the separation of GEC’sinternational aerospace, naval shipbuilding, defense electronics and defense systems business,and the sale of the interest in Siemens GEC Communications Systems to Siemens mentionedabove, we sold a 26% interest in Alstom for £952 million in June 1998 upon its initial publicoffering.

Other dispositions, which were not significant, in the period include:

March 2000 Marconi Communications, Network Components & Services—Europe andShanghai Reltec Communications Technology Co. to Viasystems.

March 2000 the facilities management and processing services businesses of Easams toItnet.

Recent developments

Acquisitions and dispositions since March 31, 2000 are discussed in ‘‘History and RecentDevelopments’’.

24



Results of operations

Since Marconi is a U.K. company and produces its U.K. annual financial statements underU.K. GAAP, the chief decision maker evaluates segment performance using measures determinedunder U.K. GAAP.

The financial statements of Marconi plc included in this registration statement have beenprepared under U.S. GAAP which includes (in footnote 19 of the financial statements) segmentalanalysis on a U.K. GAAP basis, reconciled in total to a U.S. GAAP basis. In the followinganalysis:

• revenues are discussed on a segmental basis under U.S. GAAP, which is the same asunder U.K. GAAP, with one exception in ‘other’ for joint ventures which is explainedbelow; and

• operating profits are discussed on a segmental basis under U.K. GAAP.

As part of the discussion, both revenues and profits are reconciled in total to a U.S. GAAPbasis. A brief explanation of the primary differences between U.K. and U.S. GAAP is alsoincluded. In addition, gross profit, operating expenses and other income/expenses are discussedon a U.S. GAAP basis in total.

Revenues-U.K. GAAP

The primary revenue performance measure is revenue on a U.K. GAAP basis. Revenuesattributable to joint ventures (that is equity share in affiliates) are included in U.K. GAAPrevenues but excluded from U.S. GAAP revenues. All Marconi’s joint ventures are in ‘‘Other’’ forthe purposes of segment analysis. The following is a reconciliation from the U.K. GAAP basis tothe U.S. GAAP basis for the fiscal years ended March 2000, 1999 and 1998:

1998 1999 2000

(In millions) £ £ £Net revenues per segments-U.K. GAAP . . . . . . . . . . . . . . . . . . . . . . . . 4,162 4,090 5,724Less: joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (328) (301) (287)

Revenues-U.S. GAAP 3,834 3,789 5,437

The discussion on revenues which follows uses the U.S. GAAP basis.

Revenues by geographical region-U.S. GAAP

The following table presents Marconi’s revenues by geographical region and the approximatepercentage of total revenues for the fiscal years ended March 31, 2000, 1999 and 1998:

1998 1999 2000

(In millions) £% oftotal £

% oftotal £

% oftotal

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . 1,558 41 1,454 38 1,726 32The Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,171 30 1,266 33 2,499 46Rest of Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 17 747 20 850 15Africa, Asia and Australia . . . . . . . . . . . . . . . . 449 12 322 9 362 7

3,834 100 3,789 100 5,437 100

Total revenues increased by £1,648 million, or 43.5%, to £5,437 million in fiscal 2000compared to £3,789 million in fiscal 1999. Growth in revenues in fiscal 2000 before takingaccount of the impact of acquisitions was £375 million, or 9.9%. The main acquisitions in theyear, Fore Systems and Reltec, contributed revenues of £412 million, and £826 million,respectively. These acquisitions were primarily responsible for the increase of £1,233 million, or97.4%, in revenues from the Americas between fiscal 2000 and fiscal 1999.

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Total revenues decreased by £45 million, or 1.2%, to £3,789 million in fiscal 1999 comparedto £3,834 million in fiscal 1998. The decrease resulted from the sale of GEC PlesseySemiconductors, Magec Aviation and Marconi Instruments which contributed £394 million ofrevenues in 1998. This was offset by an increase of £258 million, or 6.7%, as a result of growthin the businesses before taking into account the impact of acquisitions. The acquisition of Elscintin the year and the acquisitions of Marsh and Salzkotten in the previous year contributed to anincrease in revenues of £91 million. The geographical split of revenue remained broadlyconsistent between fiscal 1999 and fiscal 1998.

Segmental discussion

Revenues by segment—U.S. GAAPThe following table presents Marconi’s revenues by segment and the approximate percentage

of total revenues for the fiscal years ended March 31, 2000, 1999 and 1998:1998 1999 2000

(In millions) £ % of total £ % of total £ % of totalCommunications networks . . . . . . . . . . . . . . . . 1,232 32 1,343 35 2,535 47Communications services . . . . . . . . . . . . . . . . . 221 6 244 7 543 10Mobile communications . . . . . . . . . . . . . . . . . . 262 7 271 7 295 5Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . 755 20 898 24 1,010 19Commerce systems . . . . . . . . . . . . . . . . . . . . . . . 336 9 385 10 388 7Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 4 218 6 235 4Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 842 22 430 11 431 8

3,834 100 3,789 100 5,437 100

Communications networksRevenues for this segment increased by £1,192 million, or 88.8%, to £2,535 million in fiscal

2000 compared to £1,343 million in fiscal 1999. Of this increase optical networks accounted forgrowth in revenues of £239 million (17.8% growth in revenues of communications networks).The increase resulted from the continued strength in demand for digital transmission equipmentduring fiscal 2000. In addition, revenues increased as a result of:

• the acquisition of Fore Systems, which contributed sales in broadband switching of£363 million (27.0% growth in revenues of communications networks); and

• the acquisitions of Reltec and the Bosch public networks business which increased salesin access systems by £573 million (42.7% growth in revenues of communicationsnetworks).

Revenues for the communications networks segment increased by £111 million, or 9.0%,to £1,343 million in fiscal 1999 compared to £1,232 million in fiscal 1998. This was primarilythe result of a growth in revenues of £118 million, or 9.6%, of optical networks, mainly:

• a £167 million increase in sales of digital transmission equipment during fiscal 1999;offset by

• a reduction of £48 million from reduced prices as a result of increased competitioninternationally in digital transmission equipment; and

• a reduction in sales of the fiber optic cables business during fiscal 1999.

Communications servicesRevenues for the communications services segment increased by £299 million, or 122.5%, to

£543 million in fiscal 2000 compared to £244 million in fiscal 1999. The increase in revenuesexcluding the impact of acquisitions was £82 million, or 33.6%, as a result of higher demand. Inaddition, revenues increased as a result of the acquisitions of Fore Systems and Reltec whichcontributed £49 million and £165 million, respectively.

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Revenues for the communication services segment increased by £23 million, or 10.4%, to£244 million in fiscal 1999 compared to £221 million in fiscal 1998. The increase in revenueswas due to:

• increased sales in Hong Kong;

• additional demand for support services mainly related to sales of digital transmissionequipment;

• new maintenance contracts for large scale enterprises and governments (notably for theSaudi Arabian National Guard); and

• the winning of outsourcing orders for NTL and London Underground.

Mobile communications

Revenues for the mobile communications segment increased by £24 million, or 8.9%, to£295 million in fiscal 2000 compared to £271 million in fiscal 1999. The increase in revenueswas primarily the result of strong growth in sales of mobile radio systems known as privatemobile radios.

Revenues for the mobile communications segment increased by £9 million, or 3.4%, to£271 million in fiscal 1999 compared to £262 million in fiscal 1998. The increase in revenueswas primarily the result of short-term contracts for equipment and spares for the Italian army andnavy.

Medical systems

Revenues for the medical systems segment increased by £112 million, or 12.5%, to£1,010 million in fiscal 2000 compared to £898 million in fiscal 1999. The increase in revenueswas primarily the result of the full year impact of the acquisition of the Elscint computedtomography (CT) division. Additional revenues resulted from:

• the launch of a new CT medical scanner which produces computer generated images ofthe body in multiple cross sectional planes; and

• stronger demand in magnetic resonance imaging (MRI) equipment, which uses powerfulmagnets and radio frequency systems to produce three dimensional computer generatedimages of the body; offset by

• the withdrawal from low margin X-ray markets.

Revenues for the medical systems segment increased by £143 million, or 18.9%, to £898million in fiscal 1999 compared to £755 million in fiscal 1998. The increase in revenues wasprimarily due to strong demand in CT and MRI systems and imaging supplies. In addition,revenues also increased due to expanding the distribution network through acquisition ofdistribution centers and the acquisition part way through the year of Elscint’s CT division.

Commerce systems

Revenues for the commerce systems segment increased by £3 million, or 0.8%, to £388million in fiscal 2000 compared to £385 million in fiscal 1999. The increase in revenues was theresult of:

• a full year contribution from Logitron; and

• favourable currency movements; offset by

• lower industry demand resulting from purchase decision deferrals by major oilcustomers as a result of unprecedented industry consolidation.

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Additionally, a year-on-year comparison is affected by the surge in demand in fiscal 1999 asa result of environmental legislation on underground storage tanks.

Revenues for the commerce systems segment increased by £49 million, or 14.6%, to£385 million in fiscal 1999 compared to £336 million in fiscal 1998. The increase resulted fromthe inclusion of a full year of revenues from the Salzkotten acquisition made in fiscal 1998 andfrom increased sales in the United States. Revenues in the United States benefited from increaseddemand, particularly for card reader equipped petroleum dispensers and in response to theimpact of U.S. federally-mandated requirements to replace underground gas and oil storage tanksby December 1998.

Data systems

Revenues for the data systems segment increased by £17 million, or 7.8%, to £235 million infiscal 2000 compared to £218 million in fiscal 1999. The increase in revenues was primarily theresult of increased demand for new models and the impact of sales and marketing programs.

Revenues for the data systems segment increased by £32 million, or 17.2%, to £218 millionin fiscal 1999 compared to £186 million in fiscal 1998. The increase in revenues was primarilydue to a full year’s contribution of £39 million from Marsh, which was acquired in January 1998.

Other

Revenues for other businesses increased by £1 million, or 0.2%, to £431 million in fiscal2000 compared to £430 million in fiscal 1999. The increase in revenues was primarily the resultof:

• a small increase in sales in Marconi Applied Technologies and Woods Air Movement;offset by

• the sale of the managed services division of Easams; and

• weak market conditions for GPT Payphones in the Far East.

Revenues for the other businesses decreased by £412 million, or 48.9%, to £430 million infiscal 1999 compared to £842 million in fiscal 1998. The decrease in revenues was primarily theresult of:

• the disposal of GEC Plessey Semiconductors and Marconi Instruments; and

• the weakness in Far Eastern markets, which led to a decline in the export sales ofWoods Air Movement and GPT Payphones.

Reconciliation of operating profit information to U.S. GAAP

The chief decision maker evaluates profit performance using measures determined underU.K. GAAP. The primary profit performance measure is ‘‘operating profit before exceptionalitems and goodwill amortisation.’’

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The following is a reconciliation from the U.K. GAAP operating profits based on our segmentanalysis to the U.S. GAAP measure of income from continuing operations before income taxesand minority interests for the three fiscal years ended March 31, 2000:

(In millions)1998 1999 2000

£ £ £

Total segment operating profit-U.K. GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448 508 750U.S. GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 36 (129)

Adjusted operating profit 466 544 621Operating exceptional items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (51) (106)Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33) (25) (25)Goodwill and other intangibles amortization and purchased

in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (92) (772)Other income / (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 975 (21)

Income from continued operations before income taxes and minorityinterest-U.S. GAAP 571 1,351 (303)

The discussion which follows uses the U.K. GAAP measure of ‘‘operating profit beforeexceptional items and goodwill amortization’’ to compare segmental performance in fiscal 2000to fiscal 1999. Further information explaining the total segment operating profit reconciliationabove and the main differences between the U.K. GAAP measures reviewed by the chief decisionmaker and the U.S. GAAP financial statements follows the segmental profits discussion.Operating profits are discussed on a segmental basis under U.K. GAAP. Segmental costinformation for fiscal 1998 is not available as a result of the reorganizations of the business.Accordingly the discussion is limited to fiscal 1999 and fiscal 2000.

Segment operating profit-U.K. GAAP

Total segment operating profit on a U.K. GAAP basis increased by £242 million, or 47.6%, to£750 million in fiscal 2000 compared to £508 million in fiscal 1999.

1999 2000

(in millions) £ £

Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 416Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 73Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 26Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 76Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 49Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 59Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 51

508 750

Communications networks

Operating profit increased by £169 million, or 68.4%, to £416 million in fiscal 2000compared to £247 million in fiscal 1999. Access systems operating profit increased by £69million, with the acquisition of Reltec contributing £41 million and continuing strong demandfor switching systems contributing £28 million. The acquisition of Fore Systems contributed £53million to the increase in broadband switching profits. Ongoing strong demand for digitaltransmission equipment saw optical networks systems profit increase by £43 million.

Operating margins decreased to 16.4% in fiscal 2000 compared to 18.4% in fiscal 1999mainly as a result of higher company funded research and development costs, which rose from9.1% of segment sales in fiscal 1999 to 10.7% of segment sales in fiscal 2000.

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Communications services

Operating profit increased by £41 million, or 128.1%, to £73 million in fiscal 2000 comparedto £32 million in fiscal 1999. The acquisition of Reltec and Fore Systems increased operatingprofit by £33 million, while increased sales of higher value added support services, offset byhigher overheads to support this growth, added £8 million to operating profit.

Operating margins increased to 13.4% in fiscal 2000 compared to 13.1% in fiscal 1999. Thisis principally due to increased sales of higher value added support services, from both theacquisitions of Fore Systems and Reltec and organic growth.

Mobile communications

Operating profit increased by £10 million, or 62.5%, to £26 million in fiscal 2000 comparedto £16 million in fiscal 1999. Increased sales of private mobile radio products contributed £3million to operating profit. Overhead efficiencies and increased grants received from the Italiangovernment to reimburse expenditure on secure communications product developmentcontributed a further £13 million. An increase of £8 million in privately funded research anddevelopment partially offset these increases.

Operating margins increased to 8.8% in fiscal 2000 compared to 5.9% in fiscal 1999. This isprincipally due to the increased sales of private mobile radio equipment and the increased grantsreceived from the Italian government.

Medical systems

Operating profit increased by £27 million, or 55.1%, to £76 million in fiscal 2000 comparedto £49 million in fiscal 1999. Of the increase, £9 million was the result of the full year impact ofthe acquisition of the Elscint CT business. A further £8 million of the increase was attributable tospending reductions achieved with the elimination of less profitable X-ray product offerings andthe integration of the CT business of Elscint into existing operations. Product cost reductions inthe nuclear and MRI businesses achieved an increase of £6 million.

Operating margins increased to 7.5% in fiscal 2000 compared to 5.5% in fiscal 1999. This isprincipally due to product cost reductions achieved in the nuclear and MRI businesses.Overhead efficiencies, which arose from the integration of Elscint and the elimination of lessprofitable X-ray products, also improved operating margins.

Commerce systems

Operating profit increased by £4 million, or 8.9%, to £49 million in fiscal 2000 compared to£45 million in fiscal 1999. The increase in operating profit was primarily the result of the fullyear impact of the fiscal 1999 acquisition of Logitron, which increased operating profit by£3 million. Reductions in volume in the North American and European markets were offset byoverhead efficiencies.

Operating margins increased to 12.6% in fiscal 2000 compared to 11.7% in fiscal 1999. Thiswas principally due to increased gross margins due to improvements in cost and overheadefficiencies.

Data systems

Operating profit increased by £2 million, or 3.5%, to £59 million in fiscal 2000 compared to£57 million in fiscal 1999. The increase was due principally to the increase in demand for newmodels.

Operating margins decreased to 25.1% in fiscal 2000 compared to 26.1% in fiscal 1999. Thedecrease was a direct result of a change in product mix.

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Other

Operating profit decreased by £11 million, or 17.7%, to £51 million in fiscal 2000 compared to£62 million in fiscal 1999. Increases in operating profit of £8 million in Marconi property and £3million in Marconi Applied Technologies were offset by decreases in operating profit of £4 millionin Avery Berkel, £4 million in Marconi Software Solutions and increased corporate operating costsof £12 million primarily as a result of increased staff costs and lower other income.

U.S. GAAP adjustments

U.S. GAAP adjustments as related to the information reported on a segment basis are theresult of differences in the accounting for pensions and post retirement benefits, reorganizationcosts and employee share options. These are explained in more detail in footnote 19 of thefinancial statements.

Operating exceptional items

Under U.K. GAAP, amounts included within operating profit may be separately disclosed ifthey are unusual in size or nature and are not expected to recur. These items are referred to asoperating exceptional items. There is no equivalent term or treatment in U.S. GAAP and theitems are included in the appropriate line item in arriving at operating income. In the fiscal yearsended 31 March, 2000, 1999 and 1998 these primarily related to year 2000 systems rectificationcosts and costs of reorganizing acquired and continuing businesses. These items are explainedmore fully within the selling, general and administrative expenses section below.

Joint ventures

Under U.K. GAAP, operating profit from joint ventures is included within consolidatedoperating income. Under U.S. GAAP the equity in net income of affiliates is included withinother income / (expense), net. All joint venture income relates to ‘‘Other’’ for the purposes ofsegment analysis.

Goodwill and other intangibles amortization and purchased in-process research anddevelopment

These are U.S. GAAP items and are discussed in more detail below.

Other income / expense, net

These are U.S. GAAP items and are discussed in more detail below.

Group discussion

In the remaining discussion and analysis U.S. GAAP measures of profits and expenses asthey appear in our consolidated statement of income are used and significant changes areattributed to segments where appropriate.

Gross profit1998 1999 2000

(In millions, except percentages) £ £ £

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,199 1,279 1,940Gross margin % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.3% 33.8% 35.7%

Gross profit increased by £661 million, or 51.7%, and the gross margin increased 1.9percentage points in fiscal 2000 compared to fiscal 1999. The major reason for the increase ingross profit was the acquisitions of Fore Systems and Reltec. The improvement in gross marginswas mainly in the communications networks and communications services segments due to ForeSystems where average gross margin was higher than that of our other businesses.

31



Gross profit increased by £80 million, or 6.7%, and the gross margin increased by 2.5percentage points in fiscal 1999 compared to fiscal 1998. The major reason for the increase wasan overall favorable product mix in the communications networks segment with higher grossmargin in digital transmission products and software. There were manufacturing cost reductions,offset by price reductions on hardware sales.

Operating expenses—selling, general and administrative

1998 1999 2000


Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . 536 597 1,066As a percentage of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0% 15.8% 19.6%As a percentage of revenues excluding year 2000 costs and other

non-recurring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5% 14.6% 16.1%

Selling, general and administrative expenses increased by £469 million, or 78.6%, andincreased 3.8 percentage points as a percentage of revenues in fiscal 2000 compared to fiscal1999. The increase was as a result of several different factors. In the communications networksand communications services segments, Fore Systems and Reltec, which were acquired in theyear, had higher average selling, general and administrative expenses expressed as a percentageof revenue than our other businesses. In addition, investment in expanding the direct sellingcapability of our businesses in the communications networks and communications servicessegments increased the level of selling, general and administrative expenses. The expenditure onyear 2000 systems rectification was £21 million higher in fiscal 2000 than in fiscal 1999 primarilyin the communications networks and communications services segments. The Marconi group hasundergone significant internal reorganization over the past two fiscal years reflecting the changein focus of the business. Expenditure on reorganizing acquired and continuing businesses(primarily in the communications networks and communications services segments) totalled £87million in fiscal 2000 compared to £22 million in fiscal 1999. Marconi has share option planswhich are compensatory in nature. The compensation expense included in selling, general andadministrative in fiscal 2000 was £95 million in fiscal 1999. The reasons for the increase were:

• £38 million due to the separation of the discontinued operations which accelerated thevesting date for some variable plan options over GEC shares; and

• £57 million due to the introduction of a stock appreciation rights scheme in the year.

Upon launch in November 1999 Marconi carried out a major branding campaign which cost£24 million in fiscal 2000.

Selling, general and administrative expenses increased £61 million, or 11.4%, and increased1.8 percentage points as a percentage of revenues in fiscal 1999 compared to fiscal 1998. Themain reasons for the increase were:

• an increase of £13 million in expenditure across all segments preparing for the year 2000systems issue; and

• an increase of £13 million on expenditure on internal reorganizations, primarily withrespect to the creation of Marconi Communications following the acquisition of the 40%interest in GPT that we did not already own. Marconi Communications wassubsequently reorganized into the communications networks, communications servicesand mobile communications segments; offset by

• the disposal of Marconi Instruments (in ‘‘Other’’) which had higher selling, general andadministrative expenses as a percentage of revenues than our other businesses.

32



Operating expenses-research and development1998 1999 2000


Charged in direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 73 87Charged in operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 214 384

Total research and development expenses . . . . . . . . . . . . . . . . . . . . . . 270 287 471As a percentage of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0% 7.6% 8.7%

Research and development expenses increased £184 million, or 64.1%, and increased 1.1percentage points as a percentage of revenues in fiscal 2000 compared to fiscal 1999. This wasprimarily in the communications networks segment as a result of the acquisitions of ForeSystems and Reltec, which contributed an additional £113 million of research and developmentexpenditure. The main focus of the fiscal 2000 research and development expense was thecontinued development of photonics, access, broadband or very high capacity switching andnetwork management products. Photonics products combine the use of light (photons) andelectronics. Network management products monitor and control the flow of communicationstraffic over a network.

Research and development expenses increased £17 million, or 6.3%, and increased 0.6percentage points as a percentage of revenues in fiscal 1999 compared to fiscal 1998. The mainfocus of the fiscal 1999 research and development expense was (in the communications networksand mobile communications segment) with respect to the development of a range of:

• photonics products;

• enhancing our access products;

• developing other products for the next generation public and private networks that weenvisage will replace the existing public and private networks;

• digital private mobile radio systems; and

• new radio and encryption products.

Total operating expenses-in-process research and development1998 1999 2000

(In millions) £ £ £

In-process research and development expenses . . . . . . . . . . . . . . . . . . . . — — 277

In connection with the acquisitions in the communications networks and communicationsservices segments of Fore Systems and Reltec during fiscal 2000 £174 million of the purchaseprice for Fore Systems and £103 million for Reltec has been allocated to purchased in-processresearch and development costs. Both of these amounts have been written off in fiscal 2000.

The projects to which purchased in-process research and development has been allocated areset out below.

(In millions) £

Fore SystemsBig fast switch. A new Asynchronous Transfer Mode (ATM) switch to be

capable of switching at very high speeds (240 Gbps to 480 Gbps). ATMorganizes digitized voice and other data into small packets and transmitsthem at high speed over a communications network . . . . . . . . . . . . . . . . . . . . . . 85

Asynchronous Transfer Mode (ATM) switches. Known as our ASX1000 andASX4000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Other projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

174

33



(In millions) £

ReltecA project to produce a very high capacity platform enabling service

providers to maximise their use of optical fiber which extends to within500 feet of the end user. We call this project the MX platform . . . . . . . . . . . . . 63

Cable that enhances the performance of the MX platform. We call this cablethe deep fiber hybrid co-axial cable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Other projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

103

Further details are set out in footnote 3 of our consolidated financial statements.

Total operating expenses—goodwill and other intangible amortization

1998 1999 2000


Goodwill and intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 92 495

Goodwill and intangible amortization expense increased £403 million, or 438%, in fiscal2000 compared to fiscal 1999. The increase in the charge was primarily as a result of theacquisition of Fore Systems (£272 million) and Reltec (£103 million) within the communicationsnetworks and communications services segments.

Goodwill and intangible amortization expense increased £52 million, or 130%, in fiscal 1999compared to fiscal 1998. The increase in the charge was a result of the purchase of Siemens’ 40%interest in GPT and acquisitions in the systems businesses.

Total other income/(expense), net, income tax expense and minority interest

1998 1999 2000


Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 850 4Equity in net income of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 87 83Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 93 106Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28) (55) (214)

Other income/(expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 975 (21)

Income/(loss) before income taxes and minority interests . . . . . . . . 571 1,351 (303)

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) (458) (84)Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.9% 33.9% 27.7%

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (12) (3)

Other income/(expense), net was a net expense of £21 million in fiscal 2000, a net income of£975 million in fiscal 1999, and a net income of £196 million in fiscal 1998.

The main component of the total balance in fiscal 2000 was interest expense of £214 millioncompared to interest expense of £55 million in fiscal 1999 and £28 million in fiscal 1998. Theincrease in interest expense reflects the additional funding required for the acquisitions of Reltecand Fore Systems in fiscal 2000 and the share repurchase program effected in late fiscal 1999.

The main component of the total balance in fiscal 1999 was the gain realized on the sale ofinvestments of £850 million. £841 million of this gain related to the sale of a 26% holding inAlsthom following its initial public offering in June 1998. Alsthom was the new holding

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company of GEC Alsthom, which had previously been a 50-50 joint venture between GEC andAlcatel. In addition, equity in net income of affiliates decreased in fiscal 1999 compared to fiscal1998 as a result of the reduction in the equity stake in Alsthom.

Income tax expense in fiscal 2000 was £84 million compared to £458 million in fiscal 1999and £102 million in fiscal 1998.

In fiscal 2000 there was a tax charge despite the book loss. This was primarily due to non-deductible goodwill amortization (£148 million in terms of tax) and taxes recorded on disposals(£47 million). These amounts were partially offset by income from investments which attract noadditional U.K. tax (£14 million) and a benefit for the impact of non-U.K. tax rate differences(£6 million). The fiscal 1999 rate exceeded the U.K. statutory rate of 31% primarily due to non-deductible goodwill amortization and the tax rate differential on non-U.K. profits.

The fiscal 1998 tax rate was lower than the U.K. statutory rate of 31%. This was due to therecording of a tax benefit relating to the book versus tax difference in the basis of Alstom shareswhich were to be disposed of in fiscal 1999. This amount was partially offset by non-deductiblegoodwill amortization and the tax rate differential on non-U.K. profits.

Total minority interest expense decreased to £3 million in fiscal 2000 from £12 million infiscal 1999 and from £53 million in fiscal 1998. This was primarily as a result of the purchase ofthe 40% minority interest in GPT from Siemens in August 1998.

Liquidity and capital resources

Each of our segments produced and is expected to continue to produce sufficient cash tofinance its working capital needs and long-term debt. The sector specific, long-term debtincluding finance leases is not material. Long-term debt is arranged and drawn down centrally.Companies which have been acquired are generally owned by corporate intermediary holdingcompanies rather than within segments and therefore the cost of those acquisitions is not fundedby the segments. Historical trends are not necessarily indicative of the future.

Capital expenditures are budgeted, reported and controlled on a segmental basis. An analysisof segmental capital expenditure and commitments is included below.

We control acquisitions centrally. Because of the uncertainty surrounding potentialacquisitions, they are not budgeted but central control of prospective acquisitions allows ourgroup treasury to plan resources to meet our needs.

In addition we monitor capital employed which includes the majority of the businesses’ netassets but excludes those balances such as cash, debt and liabilities for corporate taxes whichcentral functions (treasury and tax) oversee. We monitor the trends in capital employed becauseit is an indicator of how effectively the segments are using their fixed assets and working capital.

Responsibility for the management of working capital, other than cash, is undertaken by theindividual businesses. Cash balances at individual businesses are reported to group treasury on aweekly basis and group treasury seeks explanations for any significant movements.

Our group treasury oversees the management of our cash and borrowings. Each business hasits own bank accounts. The main centres for cash management are in the United Kingdom andUnited States, where cash management is conducted by our group treasury staff who operate asystem under which the cash balances of the businesses are effectively combined so that the cashsurpluses in bank accounts can be applied to offset cash deficits in other accounts. We managethe resultant net balances of all the accounts on a daily basis. A net surplus is invested with, or anet deficit is funded by, the group’s bankers. In this way, the funding requirements of ourbusinesses are met, and economies are achieved, by combining our liquid resources.

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1999 2000

(In millions) £ £

Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (149) 431Cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 (2,980)Cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 1,676

During the years ended March 31, 2000 and 1999, the Marconi group funded its liquidityrequirements mainly through a combination of internally generated funds, bank borrowings, debtissues in the capital markets, the disposal of non-core businesses and cash received as a result ofthe separation of GEC’s international aerospace, naval shipbuilding, defense electronics anddefense systems business and its subsequent merger with BAE Systems.

At March 31, 2000 and 1999, the Marconi group had total borrowings of £2,769 million and£904 million respectively, comprising:

• eurobonds with principal amount of £900 million and £nil, respectively;

• syndicated bank loans of £1,612 million and £619 million, respectively; and

• other borrowings of £257 million and £285 million, respectively.

For the same period, the Marconi group had cash and equivalents and short-terminvestments of £733 million and £1,498 million, respectively. The increase in the net borrowingsresulted mainly from the acquisitions of Reltec and Fore Systems within the communicationsnetworks and communications services segments for an aggregate consideration of £3.9 billion.

For fiscal 2000, cash provided by operating activities totalled £431 million and cash used foroperating activities in fiscal 1999 totalled £149 million. The difference was due mainly tochanges in the group’s working capital.

Cash used for investing activities in fiscal 2000 totalled £2,980 million and cash provided byinvesting activities totalled £503 million in fiscal 1999. The group’s main investing activities infiscal 2000 were:

• £3,974 million for acquisitions, mainly within the communications networks andcommunications services segments for Reltec and Fore Systems; and

• the group received net proceeds of £1,179 million from the separation of thediscontinued operations. The proceeds were used to repay amounts outstanding underthe group’s syndicated credit facilities.

In fiscal 1999 the main investing activities were:

• cash receipts from investments in affiliates, in the form both of dividends and proceedsfrom the sale of investments, totalling £1,475 million; and

• expenditure on acquisitions, spread across all segments, totalling £958 million.

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Capital expenditure for the fiscal years 2000 and 1999 were £299 million and £171 million,respectively analyzed by segment as follows:

1999 2000

(In millions) £ £

Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 174Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 16Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 14Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 62

171 299

Total capital expenditure in the group increased by £128 million, or 74.8%, to £299 millionin fiscal 2000 compared to fiscal 1999.

Capital expenditure within communication networks increased by £119 million, or 216.4%,to £174 million in fiscal 2000 from £55 million in fiscal 1999. The acquisitions of Fore Systemsand Reltec contributed £64 million and £35 million respectively to this increase. Fore Systemspurchased its building, which was previously leased, for £40 million. The increase inexpenditure was also due to the acquisition and upgrading of test equipment and otherinformation technology infrastructure which was required for the expansion of the business.

Capital expenditure decreased within medical systems by £16 million, or 53.3%, to£14 million in fiscal 2000 compared to £30 million in fiscal 1999. A decrease of £7 million wasdue to a reduction in the expenditure on new buildings and renovating of existing buildings fromthe levels in fiscal 1999. In addition, in fiscal 2000 there was £5 million less expenditure on newinformation technology systems.

Capital commitments increased by £19 million, or 47.5%, to £59 million in fiscal 2000compared to £40 million in fiscal 1999. Commitments were increased by £10 million with theexpansion of the communications networks business, primarily at Fore Systems and £8 millionwithin Fibreway for its network and £8 million within Marconi Applied Technologies. Theseincreases were offset by a £10 million reduction at medical systems following the completion ofsubstantially all of the Cleveland rebuilding program.

Cash provided by financing activities for the fiscal years 2000 and 1999 totalled £1,676million and £189 million, respectively. The increase mainly reflected the borrowings used tofund the group’s acquisitions.

The Marconi group has two committed multi-currency revolving credit facilities syndicatedwith its main relationship banks, with HSBC Investment Bank plc as agent, amounting in total to€8.2 billion. One facility for €5.8 billion has two tranches: one for €1.3 billion expiring onMarch 22, 2001; and another for €4.5 billion expiring on March 25, 2003, subject to anextension, at the banks’ discretion, for any period up to March 25, 2005. Borrowings under thisfacility bear interest at the London interbank offered rate plus 0.175% per annum. This facilityincludes covenants, warranties and events of default. The other credit facility for €2.5 billionand expiring on June 3, 2000 has been extended in a reduced amount of €2.4 billion to expire onJune 2, 2001. Borrowings under this facility bear interest at the London interbank offered rateplus 0.25% per annum. This facility includes covenants, warranties and events of default. At

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March 31, 2000, drawings under these facilities amounted to £1,612 million, resulting in unusedcommitments of £3,495 million.

The Marconi group completed two eurobond issues on March 30, 2000. These issues include€500 million of bonds due March 30, 2005 bearing interest at 5.625% per annum, and €1 billionof bonds due March 30, 2010 bearing interest at 6.375% per annum. The eurobonds are listed onthe London Stock Exchange. They are governed by two trust deeds entered into with The LawDebenture Trust Corporation p.l.c. as trustee for the bondholders. The trust deeds include eventsof default normally found in eurobond issues, such as a breach by us of our payment and otherobligations under the trust deeds, defaults under other agreements to which we are a party, andbankruptcy and other insolvency events involving us.

We, like our competitors, are facing demand to provide financing to our customers. We haveresponded by developing financing arrangements that are attractive to our customers whilelimiting the risk to us. The terms facilitate the sale, transfer or disposal of the resultant loans,investments and other obligations to financial institutions and investors.

We plan to continue to explore and consider new sources, arrangements or transactions torefinance existing debt, increase our liquidity or decrease our leverage, including among otherthings, the future issuance of public or private equity or debt and the negotiation of new oramended credit facilities.

We believe that cash and cash equivalents, internally generated funds, borrowings underexisting credit facilities, and future financing sources will be sufficient to meet our liquidity andcapital requirements for the next twelve months. Although in the past we have been able torefinance our indebtedness or obtain new financing, we cannot assure you that we will be able todo so in the future or that the terms of such financings would be favorable.

Market risk

Our treasury activities are co-ordinated by our treasury which operates in accordance withpolicies approved by our board. It does not operate as a profit center. Treasury advisesoperational management on treasury matters and undertakes all derivative transactions exceptcertain forward exchange contracts relating to the hedging of foreign currency transactionexposures arising in the operating businesses which are managed by those operating units asdescribed below.

Interest rate risk

Our policy is to maintain at least 50% of debt at fixed rates of interest. At March 31, 2000,79% of our interest-bearing borrowings were at fixed rates after taking account of interest rateswaps. Of this total, 55% were at fixed dollar rates of interest and 24% were at fixed euro rates ofinterest.

The term structure of interest rates is managed in observance of this policy using derivativefinancial instruments such as interest rate swaps and non-leveraged cancellable swaps.

Due to the high proportion of fixed rate debt, our interest expense is only exposed to interestrate movements in its floating rate debt, cash and investments and the net position on ourfloating rate debt, cash and investments is favorable. We are principally exposed to changes inshort term interest rates in pounds sterling, euro and U.S. dollars due to this floating rateexposure. A one percentage point increase in market interest rates would have increased interestincome by £13 million (1999: £19 million) and increased interest expense by £10 million (1999:£14 million) which, combined, would have reduced loss from continuing operations beforeincome taxes in fiscal 2000 by approximately £3 million (1999: increased profit by £15 million).

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Foreign exchange risk

We are a global communications and information technology company, and as such weconduct a significant portion of our business activities outside the United Kingdom in currenciesother than sterling. Our principal exchange rate exposures relate to U.S. dollar/pounds sterlingand euro/pounds sterling exchange rates for both transactional and translation related exposures.We enter into foreign currency forward exchange contracts in the ordinary course of business toprotect ourselves from adverse currency rate fluctuations on firm contracts where cash receipts orpayments are in a foreign currency different from that of the Marconi business which iscontracting with customers or suppliers. These contracts are executed with creditworthy banks.

Our policy permits the use of derivative instruments in respect of certain longer-termcommercial contracts, denominated in foreign currency, in order to protect the period fromtender to contract effectiveness. These transactions are carried out by specialist treasurypersonnel. We had no contracts of this type in place at March 31, 2000, and no materialpositions existed during the year then ended.

The impact on earnings of changes in exchange rates related to transactional exchange rateexposures are eliminated through the use of forward foreign exchange contracts as soon as a firmcommitment arises.

We also have overseas subsidiaries that earn profits in foreign currencies. It is our policy notto use derivatives to hedge exposures arising from the translation of these overseas profits intopounds sterling. However, over 99% of gross borrowings were denominated in foreign currenciesin order to form a hedge for our investments in currencies other than sterling. Of these, 56%,denominated in U.S. dollars, formed a hedge for our investment in the United States, and 43%,denominated in euro, formed a hedge for our investment in the eurozone.

Under U.K. tax regulations, we are exposed to tax on changes in the translations into sterlingof its foreign currency borrowings. Marconi has entered into derivative contracts with certain ofits banks to eliminate the cash flow exposure resulting from these tax payments.

If the pound had strengthened such that the average exchange rates used in the translation ofour overseas earnings changed by 10%, our reported income from continuing operations wouldhave been reduced by 6.7%, in the year ended March 31, 2000 (1999: 1.9%).

Share price risk

We have issued share options to our employees under a number of different option plans.Options may be satisfied by way of a transfer of existing Marconi ordinary shares acquired in themarket by an employee trust or other vehicle, or by an issue of new Marconi shares. It isintended, as a matter of general policy, to use existing shares to satisfy options under the plans.In order to hedge part of the potential cost of the plans, the Marconi Employee Trust has enteredinto contracts to purchase shares in the future at prices dependent upon the price at the date ofcontract. If the share price were to fall by 10%, the fair value of these contracts would fall by £19million. We may use new shares, where appropriate, to satisfy options under the plans.

Inflation

We believe that inflation has not had a material impact on our results of operations for thefiscal years ended March 31, 2000, 1999 and 1998.

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Recent accounting pronouncements

In June 1999, the Financial Accounting Standards (FASB) Board issued SFAS No. 137:‘‘Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date ofFASB No. 133 an amendment of FASB Statement No. 133’’, which defers the effective date ofSFAS 133: ‘‘Accounting for Derivative Instruments and Hedging Activities’’ to all fiscal quartersof all fiscal years beginning after June 15, 2000. We will adopt SFAS No.133 for the year endingMarch 31, 2002. SFAS 133 requires that all derivatives instruments be recorded on the balancesheet at their fair value. Changes in fair value of derivatives are recorded each period in currentearnings or other comprehensive income, depending on whether a derivative is designated aspart of a hedge transaction and, if it is, the type of hedge transaction. We are currently evaluatingthe impact of this statement.

During the year ended March 31, 2000, we adopted Statement of Position (SOP) No. 98-1:‘‘Accounting for the costs of Computer Software Developed or Obtained for Internal Use’’. SOPNo. 98-1 provides guidance on accounting for computer software costs that are developed orobtained for internal use and requires that only certain costs of acquiring or developing internal-use software be capitalized and amortized to expense over the expected useful life of thesoftware. The adoption of SOP No. 98-1 did not have a material impact on its results ofoperations, financial position or cash flows.

During the year ended March 31, 2000, we adopted SOP No. 98-5: ‘‘Reporting on the Costs ofStart-up Activities’’. SOP No. 98-5 provides guidance on the financial reporting of start-up costsand organization costs and requires such costs to be expensed as incurred. The adoption of theSOP 98-5 did not have a material impact on our results of operations, financial position or cashflows.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101: ‘‘RevenueRecognition’’, which provides guidance on the recognition, presentation and disclosure ofrevenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that mustbe met to recognize revenue and provides guidance for disclosures related to revenue recognitionpolicies. The adoption of SAB 101 did not have a material impact on our results of operations,financial position or cash flows.

Euro

On January 1, 1999, eleven member countries of the European Union established fixedconversion rates between their existing sovereign currencies, and adopted the euro as their newcommon legal currency. The legacy currencies will remain legal tender in the participatingcountries for a transition period between January 1, 1999 and January 1, 2002. During thetransition period, cash-less payments can be made in euro. Between January 1, 2002 and July 1,2002, the participating countries will introduce euro notes and coins and withdraw all legacycurrencies so that they will no longer be available.

We have subsidiaries in most of the European countries which are converting to the euro,including major subsidiaries located in Italy and Germany. To ensure that all eurozonesubsidiaries convert in a timely and efficient manner, we have established a euro programmanagement office, comprising a program director, a technical director and administrativesupport, working with representatives drawn from the businesses to actively support and co-ordinate a euro program throughout the Marconi group. The program’s objectives are for alleurozone subsidiaries to be compliant before January 1, 2002 (the earliest date for theintroduction of euro denominated notes and coins); and for us to be capable of conductingcommercial and financial transactions, and account and report in euros, as and when required.

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OVERVIEW OF OUR BUSINESSES

IntroductionWe are a global group focused primarily on the communications market. In addition, we

have businesses that focus on medical, commerce and data systems markets for high technologyproducts and services. Our communications business activities include developing and supplyingcommunications and data networking equipment to telephone companies and providers ofinternet services for their public networks, also known as carrier, service provider or corenetworks, and to large corporations, government departments and agencies, utilities andeducational institutions for their private networks, also known as enterprise networks. We alsodevelop and supply advanced electronic and information technology products and services to awide range of retailers, manufacturers and other businesses and institutions internationally.

Our operations comprise principally:• Communications networks. Our communications networks business is a U.S.-based

business that designs communications systems, comprised of our own products andthose of third parties, to provide complete communications solutions to our customersin the public network and private network markets internationally. We supply telephonecompanies and providers of internet services with a broad range of products for theirpublic networks, including optical networks systems, access systems, broadband, or veryhigh capacity, switches and software management systems which are sold along withour communications networks products. We also supply large corporations, governmentdepartments and agencies, utilities and educational institutions with a broad range ofswitching equipment for their private networks in small areas such as an office orbuilding.

• Communications services. Our communications services business is a U.K.-basedbusiness that focuses on providing services in response to operators’ increasingoutsourcing of network design and planning, network building and deployment andnetwork operation and maintenance in the highly competitive global communicationsmarket. We provide a broad range of support services to the communications industryworldwide tailored to suit customers’ needs, and we also support our owncommunications and information technology products.

• Mobile communications. Our mobile communications business is an Italian-basedbusiness that designs, develops and integrates communications and informationtechnologies into wireless communications systems for security forces and other uses.This business is also in the early stages of developing a product offering for the nextgeneration of public mobile networks. These networks will provide high capacitywireless communications to and from mobile phones with fixed-line quality sound, fastdata transmission and video capability. Mobile communications’ main activities includesecure communications for military use, private mobile radio systems such as those usedby emergency services and public mobile networks.

• Systems. Our systems businesses are U.S.-based businesses that supply advancedelectronic and information technology systems to customers in more than 100 countries.Our customers include hospitals, major retailers and oil companies, food and beveragecompanies, pharmaceutical and chemical manufacturers, and companies in theautomotive and aviation industries. In addition, as information technology andcommunications converge, our systems businesses are well-positioned to develop andsupply new products and services in cooperation with other Marconi group businesses.Our systems businesses include medical systems, commerce systems and data systems.

In addition to our principal businesses, we invest in technology start-up and early stagebusinesses that may have growth potential or technology that is complementary to our principalbusinesses. We also retain other businesses with a view to development or disposal.

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R. R. DONNELLEY LON(•• ) ATL74600/20000 (CHART) 011 44 20 7330 1600 CB 01 SEP 00 22:30

Corporate structure

Set forth below is a simplified legal structure chart of principal Marconi group companies asat March 31, 2000. It does not show all intermediate companies. As at March 31, 2000, allcompanies shown were wholly owned indirectly by Marconi plc unless otherwise stated. Thedotted lines show how these companies fit within our business groups.

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Our group strategy

The increase in data traffic and the demand for greater network capacity, or bandwidth, hascreated growth opportunities in the communications and information technology markets. Ourstrategy is to build on our experience in developing and supplying very high capacitycommunications networks, known in the industry as broadband, and information technologyproducts and services to develop a global business, offering differentiated solutions that benefitour customers.

Our strategic priorities are to:

• continue to focus on developing new technologies and technically innovative productsthat add value to our customers and differentiate us in the marketplace;

• broaden our geographic reach in our target markets;

• take advantage of technological and market discontinuities to develop and establish newvalue adding businesses within the Marconi group; and

• be cost-competitive in all business activities and efficiently direct resources in researchand development, manufacturing and marketing.

In pursuit of these objectives, we will seek to:

• facilitate existing service providers’ migration from legacy networks to broadbandnetworks for voice, video and data and to develop and deploy new and complete publiccommunications networks to enable newcomers to enter the market;

• develop and deploy complete and ready to operate solutions for network operators byplanning, building and operating networks;

• participate in the development of new mobile communications that will utilize our newand complete broadband public network products;

• use our broadband communications capability, our established positions in each of oursystems businesses, our customer relationships and our knowledge of markets andcustomer needs to develop new converged technological solutions and related softwareapplications and services;

• develop comprehensive capabilities for customers who wish to rent softwareapplications, known in the industry as software applications hosting, particularly in thetelecommunications, healthcare, logistics and retail markets;

• use our varied technologies and experience across the Marconi group to develop newproducts and services and to cross-sell those products and services to our customers;and

• continue to pursue acquisitions that enhance our technology portfolio and meet ourreturn on investment criteria.

In implementing our strategy we will direct our activities to the creation of shareholdervalue. The initial priority will be the continuing development of our communications networksand services businesses and the pursuit of other profitable development opportunities throughoutthe Marconi group, particularly those which may offer cross-selling opportunities with ourcommunications business.

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HISTORY AND RECENT DEVELOPMENTS

We have a long history of innovation and technological breakthroughs that can be traced tothe Marconi Company, the world’s first wireless telegraph company, established by GuglielmoMarconi in 1897. The General Electric Company, p.l.c. (GEC), now called Marconi Corporationplc, which is now a wholly-owned subsidiary of Marconi plc, was incorporated as a publiclimited company in England in 1900 under the name The General Electric Company (1900)Limited and can trace its origins back to 1886.

Early history

In the late 1960s, GEC significantly expanded its presence in the electrical industry. In 1967,GEC acquired Associated Electrical Industries. In 1968, GEC merged with The English ElectricCompany which included, among other entities, the Marconi Company.

During the late 1970s and 1980s, GEC acquired several of the key businesses that currentlycomprise our systems business sector. In 1979, GEC acquired Videojet, now a part of our datasystems business. In March 1981, GEC acquired 80% of Picker, now a part of our medicalsystems business and obtained full ownership in 1985. In August 1987, GEC acquired Gilbarco,now a part of our commerce systems business.

In the late 1980s, GEC strengthened its position in the telecommunications and defenseelectronics industries. In March 1988, GEC formed GPT, a joint venture with Plessey. Followingthe acquisition in 1989 and restructuring of Plessey by GEC-Siemens, GEC increased its interestin GPT to 60%, with Siemens owning the remaining 40%. GEC also acquired Plessey’s navalsystems and avionics businesses and its U.K. cryptography operations. In 1989, GEC establishedtwo 50-50 joint ventures: GEC Alsthom with Alcatel; and the GDA businesses.

In the 1990s, GEC further strengthened its position in defense electronics by acquiring theavionics, naval and defense systems businesses of Ferranti. In 1995, GEC acquired VickersShipbuilding. GEC also established joint ventures in space systems with Matra in 1990, in sonarsystems with Thomson-CSF in 1996 and in missiles, ground and naval radar systems and airtraffic control with Finmeccanica in 1998.

In 1998, GEC implemented a strategy of focusing its activities on defense electronics,communications and intelligent electronics businesses and divested a number of non-core assets.In June 1998, GEC reduced its 50% stake in GEC Alsthom by way of an initial public offering toa 24% interest in Alstom (the new holding company of GEC Alsthom). In June 1998, GECacquired the U.S. defense company Tracor. In August 1998 GEC bought out Siemens’ 40%minority stake in GPT. Following this acquisition, GEC formed Marconi Communications byplacing the businesses of GPT, Marconi in Italy, GEC Hong Kong and GEC’s telecommunicationsinterests in South Africa under the same management structure.

Separation of defense electronics and systems business; reconstruction of the Marconi group

In the second half of 1998, GEC’s board conducted a detailed review of the future of theinternational aerospace, naval shipbuilding, defense electronics and defense systems business,which it concluded would be better positioned in the long term as part of a larger combineddefense business. This resulted in its announcement in January 1999 that GEC and BAE Systemshad reached agreement on the principal terms of a proposed reconstruction which would involvethe separation of the business under review from GEC’s other business, the merger of thatbusiness with BAE Systems and the reorganization of GEC’s remaining businesses under a new

44



holding company, Marconi plc. Shareholders of GEC became shareholders of Marconi plc andGEC became an indirect wholly-owned subsidiary of Marconi plc and was renamed MarconiCorporation plc. These transactions were completed on November 29, 1999.

We have implemented a strategy of focusing the remaining business on communications andintelligent electronics and have continued to divest non-core assets. In April 1999, we acquiredReltec, a company that provides telecommunications access products. In June 1999, we acquiredFore Systems, a company that provides broadband switches. In August 1999, we acquired thebusiness of RDC Communications, a company that provides wireless networking products. InDecember 1999, we formed a strategic partnership with Atlantic Telecom in which GEC acquired27% of Atlantic Telecom (which was diluted in June 2000 to a 19.7% interest as a result ofAtlantic Telecom’s acquisition of First Telecom). We also reorganized Marconi Communicationsand most of our other telecommunications interests into communications networks,communications services and mobile communications. In December 1999, we also acquired theequipment transmission business of Nokia. In January 2000 we acquired the public networksbusiness of Bosch. In March 2000, we acquired the Australian communications solutionsbusiness of Scitec and 10% of the total share capital of Ten Square.

Recent developments

Since March 31, 2000, we have made one material acquisition and one material disposal:

• in June 2000, we acquired Metapath Software International (MSI), a Delaware companyheadquartered in London, England, for total consideration of $618 million, consisting of$309 million in cash and 21,960,808 new Marconi shares. In addition, compensation ofup to a value of approximately $245 million may be due in relation to warrants andshare option packages. MSI is a global provider of software and services used in thewireless telecommunications market to launch and support mobile voice and dataservices. MSI has over 100 customers in more than 60 countries across North America,Europe, Asia, South America and Africa.

• in June 2000, we sold Avery Berkel to Weigh-Tronix for approximately £103 million(subject to adjustments), payable in cash and notes plus warrants to subscribe for 5% ofthe equity of Weigh-Tronix.

Since March 31, 2000, we have made the following acquisitions and disposal, which, in theaggregate, were not material:

In April 2000, we:

• acquired the assets and assumed the liabilities relating to the business of The SoftwareWorks!, a California-based back-office software company;

• acquired 486,224 shares of, or 0.9% of the equity in, Viewlocity, a Delaware companythat provides e-business integration and software services;

• acquired the entire issued share capital of VMC marketing consulting, an Austriancompany;

• acquired Intervest; and

• acquired the 30% interest we did not already own in Marconi Commerce Systems LatinAmerica.

In May 2000 the contractual arrangements between Fibreway and British Waterways wererestructured and we sold 10% of our equity interest in Fibreway to British Waterways.

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In June 2000, we:

• acquired Systems Management Specialists (SMS), a U.S.-based provider of data centersand information technology outsourcing services, for consideration in Marconi plcshares. SMS provides infrastructure and expertise in providing a secure service wherethe use of software programs is provided to customers on a rental basis, known asapplication hosting and will enhance our ability to offer value-added applicationsservices.

• entered into an agreement to sell our 50% interest in Comstar to MetromediaInternational Group.

In July 2000, we:

• acquired Davies Industrial Communications, a U.K.-based provider of personal radioequipment; and

• acquired Albany Partnership.

In September 2000, we agreed to acquire an initial 15% ownership interest in netdecisionsHoldings Limited, a U.K.-

▲based provider of e-commerce and digital services, for approximately

£60 million. We have also committed to purchase up to an additional 7% ownership interest innetdecisions over the next two years.

We are currently in advanced negotiations to acquire a U.S.-▲based provider of access device

products for a total consideration of approximately $300 million. Substantially all of theconsideration is expected to consist of newly issued Marconi plc ordinary shares, with thebalance to be paid in cash.

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OUR COMMUNICATIONS NETWORKS BUSINESS

Our communications networks business is a U.S.-based global business that designscommunications systems, comprised of our own products and those of third parties, to providecomplete communications solutions to our customers in the public and private network marketsinternationally. We supply telephone companies and providers of internet services with a broadrange of products for their public networks, including optical networks systems, access systems,broadband switches, and software management systems. We also supply large corporations,government departments and agencies, utilities and educational institutions with a broad range ofswitching equipment for their private networks in small areas such as an office or building.

Aggregate sales for all of communications networks’ activities for the fiscal year endedMarch 31, 2000 were £2,535 million compared to £1,343 million in our 1999 fiscal year.Communications networks’ aggregate sales for the fiscal year ended March 31, 2000 represented46.6% of the Marconi group’s total sales for the same period (35.4% in 1999).

Our communications networks business is headquartered in Pittsburgh, Pennsylvania.

Products and services that provide communications solutions

Our communications networks products are used in:

• optical networks systems, which use optical fiber as a medium to transport data;

• access systems, which connect businesses and consumers to communications networks;and

• broadband switches, which are very high digital data capacity devices that switch androute communications traffic.

We also sell, along with our communications networks products, software managementsystems that monitor and control communications traffic over communications networks.

Optical networks

We produce a comprehensive range of equipment that service providers use to transmit voiceand data over fiber optic networks. Our current transmission systems are based on the twostandard technologies used for transmission systems in the world today: synchronous digitalhierarchy (SDH), a common standard for digital transmission in Europe and parts of Asia, andthe equivalent U.S. digital transmission standard, known as SONET. We are the world leader inSDH, with over 30% market share.

Our SDH transmission equipment comprises all four elements of an optical network:

• products used for inserting or removing individual traffic streams into and out of anSDH transmission ring without disturbing other traffic streams being transported throughthe same SDH transmission ring, known as add-drop multiplexors. Multiplexing is thecombination of two or more data streams in a single transmission channel.

• products used for re-configuring and re-connecting entire streams of traffic, known ascross-connects.

• systems which provide the transmission link between add-drop multiplexors and cross-connects. These systems are used to transmit digital communications down the opticalfiber link and are known as line systems.

• systems which enable network operators to manage traffic on their networks. Thesesystems are known as software management systems.

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We have also developed transmission systems that use a new technology, dense wavedivision multiplexing, or DWDM. This uses multiple wavelengths of light in the same opticalfiber which increases the capacity of each fiber, and results in the faster transmission ofinformation than single wavelength SDH or SONET networks. We recently launched the world’sfirst optical add-drop multiplexor capable of adjustment from a remote location. This deviceinserts and removes individual optical communication traffic streams into and out of atransmission ring without disturbing other traffic streams. It uses a light source known as a laserthat produces discrete channels of light at multiple wavelengths. The selected wavelength can bechanged remotely from the operators’ computer terminals, which facilitates re-routing of traffic touncongested wavelengths. In addition, as our laser can operate at any of the multiplewavelengths, lower inventories of spare lasers may be carried. We expect to ship this productlater this year.

We plan to have a complete optical system (including add-drop multiplexors, cross-connectsand line systems) available by the end of this year. We have recently agreed to provide BritishTelecom with DWDM and new high performance SDH equipment and related services for its newEuropean all optical network.

Access systems

We design, manufacture, sell and support a broad range of equipment that connects the enduser to a telephone company’s switch or local office. This is known as access equipment and isused in the last mile of a network towards the end user. The last mile is known as the local loop.We supply both wireline and wireless access systems that enable users to access a networkquickly and reliably by providing high capacity transmission of voice, video and data services.

Our wireline systems extend fiber from the telephone company’s switch to a location close tothe user, with copper wire providing the remainder of the route. These systems include:

• deep fiber, which extends fiber optic cables to within 500 feet of a user and transmits asignal over copper or coaxial cable for the last few hundred feet. This allows for veryhigh speed data transmissions over a single fiber feed to the curb: evolving from 25Mbpsto rates exceeding 155Mbps, with the final delivery rate dependent on the type of finallink installed. The fastest of these currently has downstream data rates to the end user ofup to 8 Mbps. This also allows for economic costs which in many configurations arecomparable to the traditional low speed copper systems. We have recently agreed toprovide BellSouth with deep fiber. We rank second in the U.S. fiber-based access marketwith a 30% market share (Frost & Sullivan 2000 report for 1999) and second in theoverall access market in Western Europe with a 17% market share.

• transmission and multiplexing equipment which bundles a number of individual phoneline signals into a single digital signal for local traffic between the telephone company’sswitch and a remote location close to the user. This enables multiple voice calls to becombined into a single signal and transmitted over a single connection which is usuallyoptical fiber. These products are known as next-generation digital loop carriers.

• devices that substantially increase the capacity of copper cables used to connect endusers to a network. These systems are known as digital subscriber line systems. We havedeveloped products for use with our deep fiber systems, known as asymmetric digitalsubscriber line systems. These products provide high data transmission rates from thenetwork to the user, but lower rates from the user to the network. We are currentlydeveloping symmetric digital subscriber line systems to transmit data to and from theuser at the same quick rate.

Our wireless access system enables telecommunications operators to provide an alternativesolution for residential and small office subscribers with data and internet access at speeds inexcess of 4 Mbps.

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Broadband switchingWe supply:• a broad range of switches that use asynchronous transfer mode (ATM) technology, the

dominant technology for large switches used for the internet;• printed circuit boards comprising electronic circuitry to connect workstations to

communications networks, known in the industry as ATM network interface cards;• internet protocol (IP) switches, which are switches that use a set of rules governing the

format and timing of data transmission that is exchanged between computers used byMicrosoft and UNIX operating systems and the internet; and

• IP switches for small computer networks.

We rank second in the world core ATM switch market (large ATM switches with capacitiesof 20 Gbps or more that are used in telecommunications core networks) with an 18% marketshare by revenue (RHK, March 30, 2000 report for 1999). We rank first in the world ATM localarea network switch market with a 33% market share. A local area network is a network ofcomputers or workstations connected together in a small area such as an office or building.

We are developing a new standard which will extend the strengths of ATM networks to IPenvironments. We chair the standards committee, a global industry group responsible fordevising a common industry protocol that will identify whether a packet of digital informationrequires a special quality of service as it travels through a network. Packets labeled as voice orvideo need to be sent through the network in their proper sequence and without disruption ordelay, thus enhancing reliability of carrier and enterprise network service. This standard isknown as multi-protocol label switching (MPLS).

We are developing a faster switch that we are designing to be capable of switching at240 Gbps with a plan to double its capacity to 480 Gbps.

In addition, we are developing other systems that will enhance voice, video and data totravel across the internet.

Overview of the communications marketThere are two global communications network markets: the public network market, which

includes telephone companies and companies that provide internet services, and the privatenetwork market, which includes large corporations, government departments and agencies,utilities and educational institutions. Each of these markets has experienced a tremendousamount of growth in recent years, largely in response to increased demand for internet accessand fast, reliable transmission of voice, video and data traffic.

The market for technologies that provide communications network solutions is already large,and we believe it will continue to grow as companies and others in the public network andprivate network markets seek to improve their existing networks and establish new networks tomeet the demands of their customers. For example, synchronous digital hierarchy or SDHequipment, a standard for digital transmission, is forecast to grow at a compound annual growthrate of 20% in Europe from 1999 to 2003 (RHK, September 17, 1999). The market for densewavelength division multiplexing or DWDM, which uses multiple wavelengths of light in asingle fiber, is forecast to grow at a compound annual growth rate of 47% from 1999 to 2003 inNorth America and 50% per year in Europe for the same period (RHK, March 3, 2000 andSeptember 17, 1999). The worldwide market for asynchronous transfer mode or ATM switches,the dominant technology used in the internet, is forecast to grow at a compound annual growthrate of 14% from 1999 to 2003.

We also believe that as the public network market and the private network market grow theywill converge: technologies that provide communications solutions for the public network marketwill be applied to provide solutions for the private network market, and vice versa.

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The public network market

Historically, state-owned or state-regulated monopolies have operated public networks,which traditionally transmitted voice calls between users in such states. Recent privatization andderegulation of public networks has led to the entrance of a large number of new companies intothe public network market.

We believe the key drivers of growth in the public network market are:

• Growth in data traffic. In recent years there has been a rapid increase in the volume ofdata transmitted over public networks, primarily as a result of the emergence of theinternet and the increased use of digital technology. As data traffic over public networksgrows, it is increasingly using up the limited available capacity, causing congestion.Currently, the amount of voice traffic and data traffic being transmitted over publicnetworks is about the same, although in some networks, data traffic already exceedsvoice traffic. Data traffic is increasing at a faster rate than voice traffic and we expect thistrend to continue. We also expect that within the next two to three years serviceproviders will make available improved mobile data services to mobile telephone users,which is likely to further increase data traffic over public networks commonly used forthe non-wireless transmission element of the mobile service and this will furtherexacerbate network congestion.

• Deregulation and privatization. Since the mid-1980s the process of privatizing state-owned operators and deregulating state-regulated commercial operators has accelerated.Existing telephone companies and providers of internet services have been put underpressure to invest heavily in networks to meet the competition provided by newtelephone companies and providers of internet services. We expect that the continuingtrend of deregulation, privatization and the resulting entry of newcomers to the publicnetwork market will lead to continued growth in the demand for cost-effective,innovative telecommunications network systems and solutions.

The competitive environment in the public network market is causing both existing and newoperators to focus on data networking technologies which can increase capacity and satisfy thedemand for data transmission services. We expect operators will seek to install new highcapacity broadband upgrades which are capable of transferring data more rapidly across existingnetworks to meet demand for bandwidth. Eventually, continued bandwidth upgrades will resultin networks becoming prohibitively complex and costly. Consequently, in the longer term, webelieve operators will ultimately seek to build completely new public networks that areoptimized for data traffic while maintaining quality of service for voice and multimediaapplications.

The private network market

Private networks transmit primarily data over a network of computers or workstationsconnected together in a small area such as an office or building for large corporations,government agencies and other organizations.

We believe the key drivers of growth in the private network market are:

• Growth in traffic. In recent years private networks, like public networks, haveexperienced a rapid increase in the volume of data traffic, which needs a large amountof capacity, or bandwidth. In addition, large corporations, government agencies andother organizations have experienced a rapid increase in the demand for voice and videotraffic. Existing private networks cannot ensure delay-sensitive traffic (such as voice andvideo) will be delivered without interruptions that can have an unacceptable impact onservice because private networks are not capable of identifying different types of traffic,determining which type of traffic requires transmission priority. We believe that data,

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voice and video traffic over private networks will continue to grow and aggravatenetwork congestion.

• Need for network reliability and quality of service. Large corporations, governmentagencies and other organizations are increasingly relying on their networks to conductbusiness. In recent years there has been a substantial increase in the number ofemployees working outside the office with remote access to private networks. E-mail hasbecome a critical communications medium within and among enterprises. In addition,there has been a substantial increase in the number of business-to-business and business-to-consumer transactions taking place over the internet. These trends have madenetwork reliability and quality of service critical for many large corporations,government agencies and other organizations. We believe these customers will requiremanagement systems to manage work flow, diagnose and repair problems and monitortheir private networks on an around-the-clock basis to ensure reliable transmission andquality of service.

As a result of the increase in delay-sensitive traffic over private networks and the increasingneed for network reliability and quality of service, we believe large corporations, governmentagencies and other organizations will seek to install new systems which provide solutionscapable of transmitting voice and video traffic without disruption or delay. In the short term, weexpect large corporations, government agencies and other organizations will upgrade theirexisting networks to meet demand for reliable, quality multimedia services. In the long term, weexpect that the amount of multimedia traffic will increase significantly, but continued upgradesof the existing packet-based networks will be unreliable with respect to delay-sensitive traffic. Webelieve large corporations, government agencies and other organizations will ultimately seek tobuild completely new private networks that are optimized for multimedia traffic.

Technological convergence

We see a strong technological interdependency between new public networks and the newprivate networks that we expect will develop. For example, both telephone companies andproviders of internet services, as well as large corporations, government agencies and otherorganizations are exploring the ability to merge their data, voice and video transmissionnetworks.

Strategy

• Focus on developing and supplying complete, next generation communicationssystems. We intend to facilitate existing service providers’ migration from legacynetworks to broadband networks for voice, video and data and to develop and deploynew and complete public communications networks to enable newcomers to enter themarket:

• in optical networks, we intend to build on our strength in synchronous digitalhierarchy (SDH), a standard for digital transmission, and also focus on densewavelength division multiplexing (DWDM), which uses multiple wavelengths oflight in a single fiber, and plan to supply an all-optical network. We also intend tounify our software management systems and employ open interfaces to facilitatecoordination with other systems.

• in access systems, we intend to build on our position in deep fiber and deploy fibercloser to the user as well as supply products which provide high capacity datatransfer to and from the end user. These products include asymmetric digitalsubscriber line, symmetric digital subscriber line and wireless products.

• in broadband switching, we intend to focus on developing a range of large scalecarrier class ATM switches and enterprise internet protocol (IP) switches using a

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new standard which will allow voice and video to travel over the internet. Thisstandard is known as multi-protocol label switching (MPLS), and supports highcapacity, high quality service.

• Increase the amount of outsourced manufacturing. We currently outsource some of themanufacturing of our products to reduce costs and maintain our focus on developingvalue-added products and network solutions for our customers. We intend to increasethe amount of manufacturing we outsource to reduce capital employed and increaseoperating flexibility.

• Pursue cross-selling opportunities. Communications networks provides a natural routeto market for our communications services business, which, until recently, was part ofour communications networks business. In addition, communications networks providestechnologies that may be applied in the development of products and systems by otherbusinesses in the Marconi group. These opportunities encourage the development ofapplications that have very high capacity communications requirements. We intend topursue these opportunities to expand our customer base and increase revenues.

Customers

Our communications networks business has customers in 90 countries. Our major publicnetwork customers include Ameritec, AT&T, Bell Atlantic, BellSouth, British Telecom, Cable &Wireless, Deutsche Telekom, France Telecom, GTE, Level 3 Communications, MCI Worldcom,SBC, Sprint, Telebras, Telecom Italia, Telefonica, Telstra and USWest. Our major private networkcustomers include Delta Airlines, Microsoft, Shell and Unisys. Except for British Telecom, eachof our customers accounted for less than 5% of Marconi plc’s total revenues for the fiscal yearended March 31, 2000. For the same period British Telecom accounted for approximately 11% ofMarconi plc’s total revenues. We are targeting existing customers in the public network andprivate network markets. We are also targeting customers of our systems businesses.

Sales, marketing and distribution

Communications networks sells its products and services using its own dedicated sales forceas well as local partners and distribution partners. In the fiscal year ended March 31, 2000,communications networks made approximately 80% of its total sales through direct sales effortsand 20% through distributors.

Communications networks’ sales force includes sales and marketing organizations in threeregions: the Americas; Europe, the Middle East and Africa; and Asia Pacific. We have specializedproduct marketing groups which support these organizations internally and a central marketingstaff which provides strategic direction and customer and market communications support forthese organizations externally. Each of these regional organizations has responsibility for accountmanagement, sales and contract negotiation.

Communications networks’ distribution partners include Ericsson, Italtel, Nokia, Sagem andSiemens in Germany, Belgium, Australia and The Netherlands. We signed a seven-yearagreement with Ericsson in July 1999 that allows Ericsson to market the full range of oursynchronous digital hierarchy (SDH) equipment to its worldwide customer base. We also enteredinto a four-year agreement with Nokia in November 1999 to market our synchronous digitalheirarchy (SDH) and dense wavelength division multiplexing (DWDM) systems.

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Research and development

Communications networks spent approximately £308 million on research and developmentin the fiscal year ended March 31, 2000, and £156 million in the year ended March 31, 1999.Approximately 12% (1999: 20%) of this amount was customer funded while the remainder wascompany funded.

Communications networks’ current research and development programs are focused on:

• further enhancing its existing optical networking product range;

• developing a range of next generation photonics products (products which make use ofboth light (photons) and electronics);

• enhancing access network products; and

• developing switching products for new public and private networks.

On March 30, 2000, communications networks and the University of Cambridge in theUnited Kingdom announced a project to build a communications research center to developtechnology for the internet and data transmission. Communications networks committed £40million to build the center and for an extensive research program for an initial period of sixyears.

Competition

The public network and private network markets in which our communications networksbusiness operates are highly competitive. Communications networks’ principal competitors in thepublic network market include Alcatel, Cisco Systems, Lucent Technologies, Nortel and Siemens.The primary method of competition in the public network market is the widespread use of openbids for public network equipment purchases. Service providers use a combination of factors toevaluate bids, including price, technical compliance, ability to deliver in the required timescaleand provide after-sales support and long term visibility.

In the private network market, our principal competitors include Cabletron, Cisco Systems,Lucent Technologies and Nortel. The primary method of competition in the private networkmarket is by a combination of open bids and selection/endorsement. Selection criteria are similarto those in the public network market, although long term visibility is not as important aselection factor in the private network market.

A number of our competitors have substantial technological and financial resources(including research and development resources) and operate in all significant market segments ofthe industry. As the public network and private network markets converge, other specialistcompanies in the information technology sector may also emerge as strong competitors.

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OUR COMMUNICATIONS SERVICES BUSINESS

We created our communications services business by separating all of the serviceorganizations from within our communications networks business and bringing together ourconsultancy, project management and field services and support capabilities into a dedicatedgroup. We created a separate business in order to focus on providing services in response tooperators’ increasing outsourcing of network design and planning, network building anddeployment and network operation and maintenance in the highly competitive globalcommunications market. We provide a broad range of support services to the communicationsindustry worldwide tailored to suit customers’ needs, and we also support our owncommunications and information technology products.

Aggregate sales of all communications services activities for the fiscal year ended March 31,2000 were £543 million, compared to £244 million in our 1999 fiscal year. This amount of salesrepresents 9.9% of the Marconi group’s total sales for the same period (6.4% in 1999).

Communications services is headquartered in Coventry, England.

Service offerings

Our communications services business provides plan, build and operate support services tonetwork operators in many countries around the world. We have over 6,000 employees in over60 countries, and an established in-country presence in the United States, Germany, Italy, theUnited Kingdom, Saudi Arabia and Australia. Our recent acquisitions of Bosch’s public networksystems business in Germany and Scitec’s communications business in Australia have extendedour territorial presence.

Our plan services include business consultancy, network architecture, technical consultancy,custom network management and financing. Our recent acquisitions have enhanced our technicalexpertise. For example, our acquisition of Reltec provided us with an enhanced capability inhigh-speed connections between a network and the consumer known as deep fiber access. Thesesystems extend fiber to within 500 feet of the user. Our acquisition of Fore Systems provided uswith expertise in very high-capacity devices known as broadband switches that direct traffic overa network. Our acquisition of MSI broadened our capabilities in the wireless market. We alsohave expertise in arranging and providing tailored financing structures, including private financefor government customers, pay-as-you-go and pay-as-you-grow packages where the serviceoffering is paid for under a long-term service contract with no sale of equipment to the customer,and special structure finance companies for larger deals.

Our build services include network design, project management and build, networkintegration and testing services. Network build services currently represent the largest portion ofour revenues.

Our operate services include network operation, network upgrades, web-based support,service management, maintenance, service provisioning, engineering support, technical educationand marketing and selling services. We have twelve telephone call centers (three in each of theUnited States, the United Kingdom and the rest of Europe and one in each of Canada, Japan andAustralia) offering around-the-clock telephone assistance to customers. We also have fournetwork operating centers (one in each of the United States, the United Kingdom, Germany andAustralia) for remote monitoring, fault diagnosis and network repair. We can support theMarconi product range as well as products supplied by other communications companies. Inaddition, our acquisition of SMS broadened our capabilities in providing a service wheresoftware programs are rented to users, known in the industry as software hosting applications.

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Our service contracts generally include a combination of plan, build and operate services.Examples include:

• a contract with Atlantic Telecom to provide project management, site identification,refurbishment, fiber deployment, installation and commissioning, and maintenance andsupport;

• a contract with UUNet to provide support services;

• a three-year, £50 million contract with Sangcom, the Saudi Arabia national guard, forfully-managed network services and a separate, eight-year, £200 million contract forupgrades; and

• a contract for the upgrade of communications infrastructure on the west coast mainlinerailway in the United Kingdom.

Overview of the communications services market

The growth in demand for data transmission and an increasingly liberalized and competitivecommunications market has created challenges for network operators and service providers.Existing operators need to upgrade their networks with very high-capacity, broadband equipmentto make the best use of existing investment and support new data and mobile services. As aresult, existing operators have been outsourcing the building and maintenance of their networksso they may focus on improving their services. New operators, on the other hand, need to installcomplete new networks quickly in order to compete effectively with existing operators and eachother. As a result, new operators outsource the planning, building and operating of thesecomplete new networks so that they do not have to recruit the necessary skilled workforce andcan focus their attention on customer service. In addition, new operators generally requireinnovative financing as well as assistance in marketing and selling their products to endconsumers.

We estimate the global communications support services market for wide area networks,public networks, corporate premises equipment, network integration and support services will be$82 billion for 2000, and will grow annually at a rate of 15% for the next three years. Wide areanetworks link the private networks of large corporations, government agencies and otherorganizations. The figures exclude third generation mobile networks that will provide wirelesscommunications to and from mobile phones with fixed-line quality sound, fast data transmissionrates and video capability. We believe both existing and new network operators will requiresupport services on a global scale and on an around-the-clock basis to meet their customers’needs for fast and reliable communications services.

Strategy

We intend to take advantage of the growth in demand for internet and mobile services by:

• Becoming a leader in providing complete networks. We intend to build on our abilityto offer support services that an operator needs to plan, build and operate a networkquickly and reliably. We will continue to help existing operators to migrate their lowcapacity, narrowband networks to very high capacity, broadband networks so that theymay make the best use of existing investment. We also intend to continue to address theoutsourcing requirements of new operators by providing initial planning, assistance withregulatory approvals and complete, ready to operate build services, network operationand maintenance.

• Growing our business organically and through acquisitions and the development ofpartnerships. We plan to grow organically and through strategic acquisitions of and

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partnerships with other service providers to improve our geographical coverage andbroaden our expertise. We intend to target Brazil, Spain and the Far East, markets whichwe believe are liberalizing, to support existing customer developments.

• Developing a systems integration capability. We intend to further develop ourcapability to integrate different application software to help different application systemswork together. For example, we intend to provide a system that allows internet protocol(IP) billing systems and customer relationship management packages to work together.Internet protocol is a set of rules governing the format and timing of data transmissionthat are exchanged between computers using Microsoft and UNIX operating systems andby internet.

• Developing global support standards and global service. We intend to further developa uniform standard of service in all key markets through our telephone call centers andnetwork operating centers.

• Developing software application hosting capabilities. We intend to build on the assetsand capabilities of our recent acquisitions to provide a service where softwareapplications are rented to users, known in the industry as software hosting applications,for application service providers and to make available software applications that oursystems businesses are developing.

• Pursuing cross-selling opportunities. Our communications networks business providesa natural route to market for our communications services business which, untilrecently, was part of our communications networks business. In addition, we are in aunique position to build on the existing relationships between our system’s businessesand their customers. We intend to pursue these opportunities to expand our customerbase and increase revenues.

See also ‘‘Risk Factors—Newly identified, developing and emergent businesses may fail toreach their full potential, adversely affecting our results.’’

Customers

Our customers include many of the world’s leading service providers and major transport,health, finance, government and enterprise organizations worldwide. Our main public networkcustomers include Atlantic Telecom, Bell South, British Telecom, Cable & Wireless, Colt,Deutsche Telekom, NTL, Omnitel, Sprint, Telecom Italia, Telstra and Viag. Our main privatenetwork customers include Adelphia Business Solutions, Delta Airlines, Hong Kong Mass TransitRailway Corporation, Italian Railways, London Underground, Railtrack, Shell and Thrucomm.We target customers in the service provider, large scale ‘‘carrier class’’ markets and in the new,fast growing applications markets. British Telecom accounted for approximately 11% of Marconiplc’s total revenue for fiscal 2000. For the same period, none of our other customers accountedfor 5% or more of Marconi plc’s revenues for the fiscal year ended March 31, 2000.

Sales and marketing

Communications services uses communications networks as a primary marketing channel toservice providers. Additionally, communications services has its own sales and marketingpersonnel to address other markets like transport and utilities.

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Competition

The market for global services today is still emerging, and there are no dominantcompetitors. Major telecommunications vendors such as Nortel, Lucent Technologies, Alcatel andCisco Systems are extending their service capabilities to offer total solutions, in directcompetition to us. Major information technology and system integrators such as IBM, EDS andCSC are now offering telecommunications solutions to their customers. Furthermore,independent service and support organizations such as Dimension Data and Telindus offer abroad portfolio of services.

The market for support services is also fragmented. Currently a small number of companieshave positions in specific territories. For example, communications services has a competitiveposition in the United Kingdom, Siemens has a competitive position in Germany and Alcatel hasa competitive position in France.

This market however, has recently begun to consolidate. Participants in the global servicesmarket are pursuing acquisitions to strengthen the depth and breadth of service skills and toexpand territorial presence. For example, Nortel recently acquired Clarify and LucentTechnologies recently acquired INS. Communications services has also made recent acquisitions.See ‘‘History and Recent Developments’’.

The principal method of competition for plan, build and operate services is through openbidding. Services may also be sold as a part of, or linked to, equipment sales.

We believe the key success factors required to take advantage of the growth in demand forservice-oriented solutions in the carrier, service provider and enterprise markets, are:

• global support capability with network operation centers;

• the ability to put in place innovative financial packages, public/private finance consortiaand special purpose finance vehicles;

• the ability to deliver total solutions;

• knowledge of new broadband, or very high capacity, networks; and

• the ability to manage the transfer of employees as part of outsourcing contracts.

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OUR MOBILE COMMUNICATIONS BUSINESS

Our mobile communications business is based in Italy and designs, develops and integratescommunications and information technologies into wireless communications systems for securityforces and other uses. This business is also in the early stages of developing a product offeringfor the next generation of public mobile networks, the so called third generation networks. Thesenetworks will provide wireless communications to and from mobile phones with fixed-linequality sound, fast data transmission and video capability. Mobile communications’ mainactivities include secure communications, private mobile radio systems and public mobilenetworks.

Aggregate sales of all mobile communications activities for the fiscal year ended March 31,2000 were £295 million, compared to £271 million in our 1999 fiscal year. Mobilecommunications’ aggregate sales for the fiscal year ended March 31, 2000 represented 5.4% ofthe Marconi group’s total sales for the same period (7.2% in 1999).

Mobile communications is headquartered in Genoa, Italy.

Products, services and customers

Secure communications

Secure communications designs and implements tactical networks, infrastructure networks,command and control systems, naval systems and avionics systems that provide communicationsservices to military and security organizations like armed forces and police forces. Its productsinclude:

ground systems

• communications networks based on encrypted switched radio and optical fiber links thatprovide integrated communications services at a national level;

• mobile networks, installed in vehicles or on man packs, based on encrypted single-channel and multi-channel radio links that enable secure communications andintegrated communications services for ground military operations;

• command and control systems, implemented on distributed computer networks, whichsupport and automate the planning and control of military deployment at operationallevels from field staff to individual units; and

• auxiliary equipment, such as field telephones, portable computers, power supplymanagement systems and antenna masts, for tactical communications.

avionics systems

• communication, navigation and identification systems for helicopters and fixed-wingaircraft;

• on-board opto-electronic sensors for aircraft and vehicles capable of detecting hostilelaser designators; and

• electro-luminescent display panels for aircraft instruments.

naval systems

• internal and external communications services for naval ships and submarines.

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satellite systems

• ground stations for military and civilian satellites ranging from large earth stations tomobile units.

Our secure communications customers include the armed forces of Brazil, Bulgaria,Denmark, Finland, Germany, Greece, Italy, Malaysia, Romania, Turkey, the United Kingdom, theUnited States and NATO and major aerospace contractors such as Alenia Aerospazio, BritishAerospace, Boeing and Lockheed Martin. None of our customers accounted for 5% or more ofMarconi plc’s revenues for the fiscal year ended March 31, 2000. We will continue to target thesetypes of customers.

Private mobile radio systems

Our private mobile radio business provides private mobile radio systems to police forces,ambulance services, fire departments, utilities, transportation organizations, air traffic controlorganizations and security services. Our private mobile radio systems use analog technology andthe European standard for private digital mobile radio systems, called terrestrial trunked radio orTETRA. Our analog products include user terminal systems. Our TETRA products include:

• switching and control nodes suitable for small, medium and large networks;

• radio base stations using 400 MHz and 800 MHz frequency bands; and

• a range of user terminals and relevant accessories like hand portable, vehicular stationand fixed station communications devices.

We supply software applications, dispatching systems and network management systems forboth analog and TETRA systems. In addition, we supply a full range of services that cover allproject phases, working with the customer to devise technical systems that meet the customer’sneeds, engineering and customizing of products, installation, commissioning and other fieldactivities and post-sale customer support.

We also provide ground-to-air radio communications equipment for air traffic controlsystems.

Our private mobile radio customers include the Italian Ministries of Interior, Justice, Financeand Defense and public utilities including regional gas, electric and transportation companies inBelgium, Germany, Italy, Portugal, Russia, Saudi Arabia and the United Kingdom. We supplycommunications equipment and systems to civil and military air traffic control authorities inmore than 30 countries. None of our customers accounted for 5% or more of Marconi plc’srevenues for the fiscal year ended March 31, 2000. We target emergency services, governmentdepartments, utilities, transportation and security organizations.

Public mobile networks

We currently market base stations and controllers for public mobile networks, which complywith the global system for mobile communciations known as GSM. GSM is the standard whichhas been adopted in Europe and, to a certain extent and on a non-standardized basis, in Japanand the United States. These base stations and controllers will incorporate upgrades to the GSMtechnology that increase data transmission rates. Base stations transmit and receive signals thatenable wireless telephone calls and text messages to be exchanged between users. Controllersmanage a group of base stations in a network and connect calls and messages.

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We are also in the early stages of developing a product offering for the next generation ofpublic mobile networks, the so called third generation networks. These networks will providewireless communications to and from mobile phones with fixed-line quality sound, fast datatransmission and video capability. We plan to offer a complete third generation public mobilenetwork offering, including base stations, controllers, switches and control nodes, handsets andnetwork management systems to operators who provide wireless communication services toindividual users. Our third generation public mobile network offering will use technology thatwill comply with the standard wireless technology defined by the European TelecommunicationsStandardization Institute for third generation networks, called universal mobile terrestrial serviceor UMTS. We are building on the experience we have gained since 1989 in developing andsupplying GSM base stations and controllers to develop UMTS base stations and controllers forthird generation public mobile networks. We will source the remaining elements of our thirdgeneration public mobile network offering from our communications networks business and thirdparty suppliers.

UMTS has a smaller cell size, the area covered by a fixed radio transmitter/receiver, thanGSM. UMTS therefore requires a greater number of cells to give equivalent network coverageover a certain area. The process for identifying and acquiring sites, obtaining necessary approvalsfor and deploying base stations is time-consuming and expensive, so additional base stations candelay the installation of a third generation public mobile network. We are focusing ontechnologies that will minimize the number of base stations and increase the speed of installationof a third generation public mobile network. For example, we are investigating:

• beam-forming antennae which will be installed on top of base stations and will extendthe radial range of a base station, increase network coverage in underserved areas orwithin buildings and decrease interference at base stations. This will permit operators tohave broader network coverage using fewer base stations, particularly in remote areas;and

• a compact version of our base station which will permit operators to install an initialnetwork consisting of a limited number of base stations and then progressively expandnetwork coverage as the number of users of third generation public mobile networksgrows and fill in gaps where demand for service is particularly high with mini basestations.

We previously sold our GSM products through an exclusive arrangement with Siemens. Thisarrangement was terminated in 1999. Since that time we have been preparing a direct salesinitiative to attract customers to our new products. We recently began marketing our secondgeneration and upgraded base stations and controllers, as well as our third generation publicmobile networks products, which are currently in development. We are targeting existingoperators for upgrades and successful applicants for third generation license for our new thirdgeneration products. We do not yet have customers for these products.

Overview of the mobile communications market

Secure communications market

The market for secure communications includes armed forces, domestic police forces andother organizations that require particularly secure, communications services capable ofmaintaining communications links under harsh environmental conditions. The United Statesrepresents approximately 44% of the world market for secure communications (Fact Sheet,Center for Defense Information, February 7, 2000)

Following a period of low demand since the end of the cold war, the market for securecommunications has experienced growth. The growing use of armed forces in internationalpeace-keeping and civil defense operations has caused defense budgets to increase, particularly

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for sophisticated communications equipment. Military personnel and military organizations haveincreasingly been relying on sophisticated communication to make more effective use of limitedpersonnel.

Consolidation in the U.S. and European defense industries has caused defense companies inthese markets to outsource non-core defense activities such as secure communications. As aresult of these trends, the annual growth rate in worldwide defense (communications andelectronics) spending is expected to be approximately 3% to 10% for the period 1999 through2003 (National Defense Budget Estimates for FY 2001, U.S. Department of Defense, Office of theUnder Secretary of Defense (Comptroller) dated March 2000, and Procurement Programs (P-1),Fiscal Year 2001, Office of Under Secretary of Defense (Comptroller) February 2000).

Private mobile radio systems market

The market for private mobile radio systems includes public safety organizations such aspolice forces, fire departments, ambulance services, utilities, transport organizations, air trafficcontrol authorities and security services that require special communications services. Thesecustomers require a communications system with a high level of call privacy and security, fastcall connection speed, guaranteed connections even when the system is busy, simultaneous voiceand data transmission, group calling, direct mode operations (handset direct to handset forcommunications in remote areas) and rugged and reliable service in time-critical situations thatpublic mobile networks cannot provide.

The European Telecommunications Standardization Institute has adopted terrestrial trunkedradio or TETRA as the standard digital technology in Europe for private mobile radio services.Many countries in Asia have also adopted TETRA as their standard. The U.S. private mobileradio market, which represents approximately half of the world private mobile radio market, usesa variety of technologies without a clear standard, and currently TETRA is not used in theUnited States. Our mobile communications business is participating in discussions with otherEuropean and U.S. private mobile radio providers concerning the adoption of TETRA in theUnited States, but we cannot be certain of success. We believe, however, that demand for TETRAwill increase as world markets, which may include the United States, adopt the TETRA standardfor their private mobile radio systems. We estimate the TETRA market will grow at an annualrate of 100% and will represent a £2.6 billion opportunity over the next five years.

Public mobile networks technology and market

The market for public mobile networks serves operators that provide wirelesscommunications services to individual users. These services were first developed and deployedin the 1980s. The first generation of public mobile networks was based on analog technology andprovided simple voice calls. Users, however, experienced poor call quality and clarity, high callprices and limited call options.

The second generation of public mobile networks was developed in the 1990s based ondigital technology. Second generation public mobile networks provide better call quality andclarity, lower call prices and a broader range of service options, including limited text messagingand basic data services, than first generation networks.

There are currently three principal digital technologies that second generation public mobilenetworks use to enable users to make wireless calls. In FDMA (frequency division multipleaccess), each call is transmitted within a separate narrow frequency band. In TDMA (timedivision multiple access), each frequency band is divided into specific time slots, commonly ten

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separate slots for each frequency. Each caller is assigned a specific time slot. In CDMA (codedivision multiple access) each caller is assigned a unique code which identifies the callstransmitted over a wide frequency range. GSM uses mixed FDMA and TDMA. CDMA and TDMAare the most prevalent second generation technologies used in the United States, but not on astandardized basis. FDMA, TDMA and CDMA are incompatible with each other, which means,for example, that a user on a GSM system cannot make calls from a GSM handset in an areausing TDMA or CDMA technology unless the user has a special dual-band, dual-mode handset.

Growth in the worldwide public mobile networks market is increasing at a rapid rate. Inaddition, users are increasingly demanding data transmission and internet access from theirhandsets. Existing second generation technology for public mobile networks is incapable ofmeeting these demands as it can transmit data only at very slow speeds. Some public mobilenetworks providers are upgrading existing second generation technology with hardware andsoftware changes to increase data transmission speed and bandwidth. For public mobilenetworks using GSM there are two types of upgrades. Neither of these upgrades, however, hasthe speed or bandwidth to keep pace with the growth in the number of users and their increasingdemand to access the internet and to transmit data with their handsets. These upgrades also donot improve voice quality of mobile telephone calls. Substantially improved data transmissionrates (which will be available in the third generation systems described below) are required tomeet users’ increased voice, data and multimedia needs in the longer term.

Public mobile networks providers are developing a third generation technology to providethe greater bandwidth and functionality that existing second generation technologies and theirupgrades are incapable of providing. Third generation public mobile networks will furtherimprove call quality and clarity, making mobile communications very similar to fixed-linecommunications. It will also broaden service options as it will be able to support high resolutionvideo or multimedia applications at much faster and more reliable data transmission rates thancurrently provided by second generation public mobile networks and upgrades. While the rangeof services offered over third generation public mobile networks will be determined by the needsof the market over time, we believe multimedia services will feature prominently and are likelyto include, in addition to conventional mobile voice and data services, high speed internet andintranet access, video telephone and conferencing, entertainment services and direct instantaccess to home or office information technology systems.

Two types of third generation technology are currently being developed. The EuropeanTelecommunications Standardization Institute has selected UMTS as the standard wirelesstechnology eventually to replace GSM in Europe. The U.K. government has auctioned licenses forthird generation public mobile networks, and other European governments are assigning licensesfor third generation public mobile networks, to operators so that third generation public mobilenetworks can be launched in Europe by January 1, 2002. Japan has also adopted UMTS as itsthird generation standard to replace a variety of existing second generation technologies, and hasauctioned third generation licenses for third generation mobile networks to operators so thatthird generation networks can be launched by the end of the third calendar quarter of 2001.

The United States may adopt CDMA2000 as its third generation standard technology toreplace a variety of existing second generation technologies, and is expected to launch thirdgeneration networks in 2003. CDMA2000, like UMTS, is based on CDMA (Code DivisionMultiple Access) technology, one of the wireless technologies currently used in the UnitedStates, but UMTS and CDMA2000 are not compatible.

We expect demand for UMTS-based public mobile networks will increase dramatically in2001 and 2002 as third generation networks are launched in Japan and Europe and will continue

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to grow as third generation networks in these areas are built out. The high cost of licenses willincrease pressure on operators to roll out their networks quickly to recover their costs inrevenues from their customers.

Strategy

Our strategy is to focus on the third generation public mobile market using our experience inGSM, as we believe the third generation public mobile market represents the greatest opportunityfor our mobile communications businesses, and to develop our existing secure communicationsand private mobile radio businesses. We intend to implement our strategy by:

• Developing a complete third generation public mobile network offering with specialtechnical features at competitive cost. We will use our experience to develop certainproducts which, together with equipment sourced from our communications networksbusiness and third parties, will provide our customers with a complete third generationpublic mobile network offering.

• Marketing second generation public mobile network products and upgrades. Weintend to market our second generation products and upgrades to establish credibilitywith operators in the public mobile networks market and to help operators migrate fromsecond generation public mobile networks to third generation public mobile networks.

• Broadening our TETRA product offering. We intend to broaden the range of specialservices our TETRA products offer to increase our private mobile radio market share.

See also ‘‘Risk Factors—Newly identified, developing and emerging businesses may fail toreach their full potential, adversely affecting our results.’’


Our mobile communications business distributes its products and services through directsales and through third party distributors. Occasionally our secure communications business useslocal agents in markets outside the United Kingdom and Italy.


Our mobile communications business spent £54 million on research and development inthe fiscal year ended March 31, 2000. Of this amount, £13 million was funded by grants from theItalian government for research in secure communications and £28 million was funded by othercustomers. We intend to allocate the largest portion of research and development investment toour public mobile networks business for the development of third generation public mobilenetworks products. We expect that research and development costs to develop third generationpublic mobile networks products will increase substantially in the next fiscal year in preparationfor the launch of third generation public mobile networks in Europe by 2002.

Competition

The secure communications market is fragmented because of the high level of specializationamong industry suppliers and the domination of national champions in the United States andWestern Europe. The major competitors in this market are European-based companies BAESystems, Ericsson Microwave Systems, European Aeronautic Defence and Space Co., Rohde &Schwarz, Tadiran and Thomson-CSF and American-based companies Harris, Raytheon andRockwell. The principal method of competition is a two step process. The first step is todemonstrate compliance with the criteria of the relevant government agency or company. Thesecond step is to submit a competitive bid. Local manufacturing arrangements and price areimportant factors in the selection process. Increasingly, secure communications products are

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being supplied as a subcontract of a prime contract package proposed by manufacturers ofplatforms such as ships, aircraft and vehicles. In this case, important factors in being selected asa subcontractor are price and a good track record with platform manufacturers for being a low-risk supplier.

The private mobile radio market is currently dominated by Motorola, followed by Comnet-Ericsson, Matra and Nokia. The principal method of competition is by open bid. The key driversfor competitive positioning are brand strength and organization size, custom-tailored solutionscapability, in-country business operations and installed base and pricing. We believe we have anopportunity to compete in this market by developing and marketing our TETRA products. Webelieve TETRA products have the following competitive advantages:

• custom-tailored solutions capability;

• cost-effectiveness;

• good fit in target vertical markets; and

• applications for vertical markets.

The market for public mobile networks is currently dominated by Alcatel, Ericsson,Motorola, Nokia, Nortel and Siemens. As we expect high demand for third generation networkequipment, the principal method of competition will be the ability to provide a complete productoffering that meets customer requirements. We believe we may have an opportunity to competein this market by developing third generation technology compliant with UMTS, the new mobilestandard for Europe and Japan.

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OUR SYSTEMS BUSINESSES

Our systems businesses are U.S.-based global businesses that supply advanced electronic andinformation technology systems to customers in more than 100 countries. Our customers includehospitals, major retailers and oil companies, food and beverage companies, pharmaceutical andchemical manufacturers, and companies in the automotive and aviation industries. In addition,as information technology and communications converge, our systems businesses are well-positioned to develop and supply new products and services by linking with other Marconigroup businesses. Our systems businesses include medical systems, commerce systems and datasystems.

Aggregate sales of all systems’ activities for the fiscal year ended March 31, 2000 were £1,633million, compared to £1,501 million in our 1999 fiscal year. Systems’ aggregate sales for the fiscalyear ended March 31, 2000 represented 30% of the Marconi group’s total sales for the sameperiod (39.6% in 1999).

Our systems businesses are headquartered in Arlington, Virginia.

Products and services

Our systems businesses operate over 25 manufacturing and research facilities in eightcountries. Throughout the production process, we seek to minimize costs while adhering to strictquality standards by outsourcing the manufacture of component parts. As a result, most ofsystems’ manufacturing facilities focus on the assembly and testing of final products.

Medical systems

Medical systems offers competitive product lines in computed tomography (CT) scanners,magnetic resonance imaging (MRI) systems and nuclear cameras under the brand names‘‘Marconi’’ and ‘‘Picker’’. In addition, medical systems is North America’s largest supplier ofradiological supplies. Medical systems also provides radiology information systems.

• CT scanners. CT scanners use X-rays from which computer-generated images arecreated. The images show organs in a cross-sectional plane, providing information thatin the past could only be obtained by exploratory surgery. Among medical systems’ keyproducts is the Mx8000 CT scanner, an advanced multi-slice scanner, which serves as astand-alone diagnostic tool and at the heart of an interventional suite that combines CT,X-ray and image-guided tools. This suite enables physicians to examine a patient fromhead to toe in less than 60 seconds and treat trauma, stroke, heart attack and otherailments in a single episode of care. We have a 21% share of the CT market (TMG 1999report).

• Nuclear cameras. Nuclear cameras are used to track injected radioactive trace isotopesas they travel through the body to help physicians determine how the body isfunctioning. IRIX is medical systems’ brand name for one of its nuclear cameras. It helpsphysicians improve the early detection, diagnosis and localized treatment of cancer. Wehave a 15% share of the nuclear camera market (Frost & Sullivan 1999 report).

• MRI systems. MRI systems use powerful magnets and radio frequency systems to mapthe distribution of hydrogen molecules in the body to produce three dimensionalcomputer-generated images of the body. With MRI, it is possible to see with clarity the

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brain and nerves of the spinal cord, making MRI the preferred method for imaging thebrain and spine. Medical systems recently introduced the 1.5T Eclipse system, an opticaltracking applications suite that enhances the physician’s view during a procedure byproviding a link between the image on the monitor and the instrument in thephysician’s hand. This coordination enables minimally invasive procedures to beplanned and performed with precision and safety. We have a 10% share of the MRImarket (TMG 1999 report).

• Healthcare Information Systems. With radiology information systems, medical imagesare created digitally, thus eliminating the need for film and allowing physicians to storeimages and view them from any location. Healthcare Information Systems is an emergingbusiness being developed from radiology information systems. Healthcare InformationSystems will store patient information electronically and connect hospitals with remotefacilities to enable healthcare professionals and patients to view health records fromeither location using broadband, or very high capacity, communications systems andfilmless imaging equipment.

Commerce systems

Commerce systems is the leading manufacturer and distributor of fuel dispensing equipmentin the United States, the world’s largest market for such products. We offer our products underthe brand name ‘‘Gilbarco’’. In addition to petroleum equipment, commerce systems alsoprovides retail automation systems and knowledge systems. It is building on its existing installedbase to address retailers’ growing need for remote site monitoring services and informationmanagement software as well as electronic content and application services.

• Retail automation. This business provides systems for attended and unattended pointsof sale for retailers for in-store and outdoor applications. Its in-store cashiers’ systemsinclude its G-SITE system, a point-of-sale system that integrates credit card processing,pump control and cash register functions which provides an integrated system forpetroleum retail. Its Passport system is a PC-based open architecture point-of-sale systemfor convenience store, grocery and high volume retail locations for fuel and non-fuelapplications. Its outdoor products include its e-CRIND system, which combines internettechnology and multimedia features to allow advertising and promotions at the pumpwhile progressing credit card transactions, and its TRIND system, which is a wirelesselectronic customer relationship management system that recognizes customers as theydrive on to a site using radio frequency technology and allows the consumer to buy fueleven more quickly without inserting a credit card. G-SITE, Passport, e-CRIND andTRIND are Gilbarco brand names for important product lines.

• Petroleum equipment. This business provides fuel pumps and dispensers thatincorporate many enhanced automation features. Its major product line has been theAdvantage, a multi-product dispenser introduced in 1990. It also manufactures theDimension, a multi-product dispenser exported to South America and Europe, and theLegacy, a line of single and dual dispenser electronic pumps. It also remanufacturesdispensers. Its latest dispensers, Encore and Eclipse, will replace the Advantage productline. Encore and Eclipse were designed after a consumer research campaign to providethe greatest possible ease of use and allow for customers to select merchandise and otherscreen content material over the internet. Advantage, Dimension, Legacy, Encore andEclipse are Gilbarco brand names for important product lines.

• Marconi Online. This business was launched in May 2000 to expand our presence inretail automation systems. We have entered into a five-year alliance under which we

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expect Coca-Cola and its bottlers to invest $100 million in our intelligent vendingtechnology to link more than 500,000 soft drink vending machines worldwide.

Data systems

Data systems designs, develops, manufactures, distributes, sells and supports industrial,graphic and bar code inkjet printers, laser coding systems and inks and fluids under the brandnames ‘‘Videojet’’, ‘‘Marsh’’ and ‘‘Cheshire’’. We are a leader in the industrial product markingand coding systems market. Additionally, our data systems business intends to provide anexpanded range of services through its InfoChain business which offers products for supplychain management.

• Digital imaging systems. This business provides inkjet printing and laser imagingsystems that apply large, small and micro high resolution images on many differenttypes of materials and surfaces. These systems are used on a wide variety of differentproducts, such as food and beverage containers, automotive and aerospace parts,cosmetics, electronic components and cables, pharmaceuticals and personal care itemsas well as printed materials. Inkjet printing products include industrial, graphics and barcode printers. Excel, our high-end fully-featured model, and the Videojet 37 series, ourentry-level model which supports many foreign languages for use in lesser developedcountries, are used in industrial applications. PrintPro is a graphics printer used forpromotional mail. Overture is a bar coding printer for cartons and packages. Excel andPrintPro are Videojet brands and Overture is a Marsh brand. Laser imaging technologyapplies energy, rather than ink, which etches surfaces to create permanent markings. Ourlaser printer is LaserPro DM, a Videojet brand.

• Digital imaging supplies. This business offers a broad range of inks and fluids that arecompatible with many printing systems and product surfaces and that provide customerswith consistent operation in challenging imaging and ambient environments. Forexample, we supply inks which are suitable for printing on extruded plastic as it exits aheat-forming tunnel, coding on ice cream packages as they enter the freezing chamberand printing on cold, wet substrate moving at high speeds (like beverage bottles on afilling line). InkSource is our global ink brand.

• InfoChain. InfoChain is an emerging business which intends to provide a range ofproducts and services, including data application, automated data capture and internet-based services, that help customers manage their supply chains. Supply chainmanagement systems monitor and manage goods and provide real-time informationconcerning the status of products as they move from suppliers, manufacturers anddistributors to end consumers.

Overview of systems’ markets

Medical diagnostic imaging technologies and market

The main imaging technologies used in the medical diagnostic imaging market are computedtomography (CT) scanners, which create computer-generated images from X-rays, magneticresonance imaging (MRI) systems, which create computer-generated images from mappinghydrogen molecules in the body, nuclear cameras, which create computer-generated images fromtracking radiation emitted from injected trace isotopes, X-ray and ultrasound. Radiologyinformation systems tie these technologies to the healthcare services industry. We focus on CT,MRI, nuclear medicine and radiology information systems because they have higher profit

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margins and growth potential than X-ray and ultrasound products as a result of their fast pace oftechnological change and their ability to facilitate more advanced diagnostic and treatmentprocedures.

We estimate that the global market for medical imaging equipment (excluding ultrasoundand X-ray) will be in excess of $8 billion in 2000. Of that total, North America will account forapproximately 51%, the European Union will account for approximately 18% and Japan willaccount for approximately 19%.

We believe there are four major trends driving growth in the medical imaging market:

• Convergence of diagnostic and healthcare information systems. The growth of newinformation technologies and deployment of broadband, or very high capacity, voice,video and data networks offer healthcare providers greater efficiencies and new revenuestreams in healthcare information management. The availability of high-speedcommunications networks is driving demand for applications that unite informationstreams such as diagnostic images, patient records and billing data and more effectivelycreate, carry and store information. This trend is likely to accelerate first in NorthAmerica and then in the United Kingdom, Europe and Asia, following the anticipatedbuild-out of broadband networks.

• Aging populations in developed countries. According to the U.S. Bureau of the Census,International Database, 43.1% of the U.S. population, 49.7% of Germany’s populationand 51.0% of Japan’s population is 40 years of age or older. Because medical imagingcan be used for the early diagnosis and treatment of medical conditions and peoplerequire more medical care as they grow older, use of medical imaging equipment islikely to increase in the major established markets. As usage reaches capacity limits, weexpect demand for new equipment to increase.

• Increasing standards of living in developing countries. Standards of living indeveloping countries are rising, giving populations in these countries wider access tohealth care. We believe that as standards of living continue to rise, demand for medicalimaging equipment will also continue to rise.

• Advances in computing and communication technology. The focus of research anddevelopment in the medical imaging market is not on basic sensing technologies, butrather on the computer hardware and software to analyze sensing data and integratesensing data from a variety of source technologies. New applications andenhancements of medical imaging are aimed primarily at improving productivity andefficiency to allow medical professionals to improve patient care better throughearlier and more accurate diagnoses. This continual improvement in medical imagingequipment and the gradual obsolescence of the installed base is likely to createdemand for new medical imaging equipment.

Retail automation and petroleum dispensing markets

We produce products for the retail industry that provide payment systems, inventory control,forecourt device control, merchandising information and business management control.Dispensers used for the measurement and dispensing of fuel for the automobile and truckpopulation use high accuracy low volume meters with sophisticated valve control to provideblended products. Pollution control recovers harmful vapors that may escape using patentedactive vapor recovery technology.

Based on our internal estimates, the retailing fueling market is approximately $2.6 billionworldwide of which approximately 42% is in North America and approximately 29% is inEurope. An additional $2.4 billion is estimated for retail automation products outside retail

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petroleum marketing, with an additional $5 billion estimated for other retail automation networkand support services.

We believe the main drivers of growth in both the retail automation and the petroleumdispensing markets are:

• Technological developments. Advancing technology is significant in electronicretailing. As retail automation technologies improve, we believe retailers will use themincreasingly as tools for marketing and customer convenience. For example, commercesystems has recently introduced fuel dispensers with screens to provide information tocustomers while they are using the dispenser. In addition, while the United States hasalready installed retail automation products like in-pump card readers, other regions,most notably Europe, Latin America, and the Far East, are just beginning to implementretail automation products. Once these products become available to consumers in thesemarkets, we believe the demand will accelerate.

• Outsourcing trends. Driven by the need to improve efficiencies, international oilcompanies are consolidating into a smaller number of larger industry participants, eachwith a broader geographic scope and increased market influence. Other retailers are alsofocusing on their core functions of production and distribution to compete moreaggressively in their markets. As a result, oil companies and other retailers areoutsourcing processes which are not central to their mission and we believe this hasgenerated demand for complete and ready to operate maintenance and upgradeprograms. Customers are increasingly showing interest in additional value-addedservices such as collection, analysis and reporting of sales, inventory, and equipmentstatus data.

In addition to the technological developments and outsourcing trends, we believeenvironmental regulation is a substantial driver of growth in the petroleum dispensing market.Countries around the world are beginning to adopt more stringent air quality standards, whichhas created demand for vapor recovery products. We believe this market will continue to grow asenvironmental standards become stricter and more countries begin to adopt them.

Variable imaging market for data systems

The variable imaging marketplace includes a range of products and services that generatehuman and machine readable codes on items to manage and track their use and to generate andmanage personalized documents such as promotional mail.

Our data systems business serves primarily the industrial product and package markingmarket, which we estimate was approximately $1.3 billion in 1999 and will grow annually at arate of 6% from 1999 to 2002. Our data systems business also markets imaging products in thegraphic arts, mailing and commercial printing markets and in the related area of postal encodingsystems, segments which are not independently monitored for growth and performance.

We believe the main drivers of growth in the variable imaging market are:

• Product identification. Quality control legislation and concern for the safety of certainconsumer products such as food, recreational items and pharmaceuticals has resulted inincreasing demand for data imaging on a variety of surfaces. Products such as meat anddairy items under the control of government agencies like the U.S. Department ofAgriculture require markings that indicate the time the goods were processed or the timewhen freshness can no longer be assured. Food producers and manufacturers in theUnited States, Europe and increasingly Asia require identification or similar consumerinformation in order to develop business in export markets where these markings arerequired by law.

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• Customized imaging. As new packaging processes and materials are introduced, theopportunity to provide a range of custom imaging solutions has accelerated. Customersseek imaging products that meet production environment requirements as well as imagedurability and readability. The advent of laser imaging, which generates a high energylight source to etch surfaces, has provided many customers, particularly those using highdensity plastics or paperboard, with a flexible, permanent marking system. Inkjet fluidsare also taking on new attributes that enhance not only their effectiveness but theircomplementary impact on products. Using inkjet technology, images can be applied incolors or with characteristics that can match or contrast with the manufacturer’s markingto draw attention to code or conceal them, depending on the customer’s requirements.Capabilities range from inks that allow automotive and aerospace users to meetdurability requirements in harsh environments and can print on unusual surfaces tofluids that can be used in contact with human consumable items such as prepared foodsand medicines.

• Service-based sales relationships. Customers in the variable imaging market havetraditionally acquired equipment from manufacturers through large, infrequent, outrightpurchases. Additional requirements such as supplies, parts and services are thenprocured as needed, throughout the asset life of the equipment purchase and beyond,but not necessarily from the original equipment supplier. Customers in this market arenow looking for ways to combine the equipment and additional imaging requirements ina complete and flexible service-based relationship. This approach has the benefits to thecustomer of not only reducing burden on purchasing and production management, butalso equipment downtime, and providing access to new technology and capabilitywithout large capital investment.

Supply chain logistics management market

Companies are increasingly demanding supply chain management systems to improvecompetitiveness and profitability. AMR Research predicts that the overall supply chainmanagement market will grow 42% to $5.4 billion in 2000. AMR Research also predicts that thesupply chain management market will continue to grow over the next five years at a compoundannual growth rate of 40%, representing a $20.3 billion opportunity by the end of 2004 (TheEnterprise Applications Report 1999–2000, Market and Analysis Review Series � 2000 AMRResearch, Inc.).

Strategy

• Expand into related applications markets. We intend to build on our large installedbase and expand our product offerings in the information management, systemsintegration, service and automated identification markets.

• medical systems intends to develop its Healthcare Information Systems business andoffer patients and healthcare professionals the ability to access and view medicalrecords from any location, whether within a single department or hospital, across ahospital network or via the internet.

• commerce systems intends to develop its Marconi Online business and offerretailers point of sale data management services, and it has recently entered into acontract with Coca-Cola, one of the world’s largest users of vending machines, toprovide data management services.

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• data systems intends to assist customers in converting from analog printing to digitalimaging techniques, targeting commercial print applications including wide formatgraphics, tag, ticker and cards and digital imaging of paperboard packaging anddisplays. It is also actively developing its InfoChain business, an emerging servicesprovider that offers supply chain management systems.

• Pursue organic growth opportunities. We intend to expand sales through continuednew product development of new products and by increasing the level of softwaresystems integration and service in our product offerings.

• medical systems plans to offer innovative solutions to its customers, such asimproved computed tomography (CT) scanners, which create computer-generatedimages from X-rays, magnetic resonance imaging, (MRI) systems, which createcomputer-generated images from mapping hydrogen molecules in the body, andnuclear cameras, which create computer-generated images from tracking radiationemitted from injected trace isotopes, to enable quicker and more accurate diagnoses.

• commerce systems is introducing new dispensers that are capable of performinginnovative tasks such as handling new modes of payment at the pump, reading barcodes, generating coupons and accessing the internet.

• data systems has a number of technology developments underway in the areas ofcoding, marking and addressing to increase the use of inkjet and laser imaging, andplans to enhance its sales support and integration services through its e-commerceweb site.

• Expand our international market positions. We intend to build on our installed base toenhance our position in international and developing markets.

• medical systems, which already sells its products in over 100 countries, will expandits international presence by selling its products and services in developingcountries where demand for improved health care is increasing.

• commerce systems, which also sells its products in over 100 countries, hasexpanded its presence in and intends to further expand in Latin America and theAsia Pacific region.

• data systems, which sells its products in over 65 countries, intends to broaden itsdistribution in Asia and increase its market share in Europe and the Middle East.

• Develop and market state-of-the-art technologies. We intend to bring state-of-the-arttechnologies to market by drawing upon our resources, knowledge and proprietaryintellectual property.

• medical systems intends to focus on improving the technology for CT, MRI andnuclear medicine equipment to offer quicker and more accurate diagnoses.

• commerce systems intends to focus on developing information intensive newproducts such as back-office and home-office station management, accounting andreporting packages to offer retailers point of sale data management systems.

• data systems intends to focus on developing innovative fluids and expanding therange and capability of its coding and imaging products to meet the needs ofcustomers converting from analog to digital printing techniques.

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See also ‘‘Risk Factors—Newly identified, developing and emerging businesses may fail toreach their full potential, adversely affecting our results.’’

Customers

Our systems businesses apply advanced electronic and information technology solutions tobusiness and institutional customers in over 100 countries. Our customers include hospitals,major retailers and oil companies, food and beverage companies, pharmaceutical and chemicalmanufacturers and the automotive and aviation industries. None of our customers accounts for5% or more of Marconi plc’s revenues for the fiscal year ended March 31, 2000.

Medical systems has a global customer base, with customers in over 100 countries. In theUnited States, medical systems has established relationships with several multi-hospital systemssuch as Tenet, community health systems, group purchasing organizations such as AmeriNet, oneof the largest group purchasing organizations in the United States, and the federal governmentand its agencies, including the U.S. Department of Veterans Affairs and the U.S. Department ofDefense. Medical systems’ key customers include private university hospitals in the UnitedStates, including the University of Utah, the University of Maryland Medical Center, UniversityHospital in Cleveland, Ohio, University of Pennsylvania Hospital and the Brooke Army MedicalCenter, as well as St. James Leeds in the United Kingdom. Outside the United States, medicalsystems is a supplier to governments and their healthcare agencies and has establishedrelationships with many multi-hospital systems and group purchasing organizations. We willcontinue to target these types of customers.

Commerce systems has customers in over 100 countries worldwide. Its customers includemultinational and major oil companies, independent petroleum retailers and a growing list ofnew entrants into the petroleum retailing market such as hypermarkets, quick service restaurants,discount chains and others. Its top ten direct customers, all of which are oil companies, typicallyaccount for approximately 25% of its revenues. We will continue to target these types ofcustomers.

Data systems has customers for digital imaging products in over 65 countries worldwide andan installed base of over 90,000 units. Over 49% of its sales are made in the United States.Digital imaging customers include postal companies and consumer and industrial producers suchas food packaging companies, beverage companies, household goods providers, pharmaceuticaland medical supply companies, chemical manufacturers, and electronics, automotive andaviation companies, including Siemens, Japan Ministry of Post and Telecommunications,Toshiba, Coca-Cola, Unilever, Standard Brands, PepsiCo and Anheuser-Busch. The InfoChainbusiness targets as customers many Fortune 500 companies already served by data systems, inaddition to trucking companies, distribution and service fleets, shipping and transportationcompanies and financial institutions such as banks and insurance companies. We will continueto target these types of customers.


Our systems businesses distribute their products either through direct sales, third partydistributors or both, depending on the product and the location of the customer.

Approximately 70% of medical systems’ sales are direct sales to customers. Medical systemsalso uses distributors in remote areas.

Approximately 60% of commerce systems’ sales are typically made through distributors.

Data systems has a large worldwide network including 20 direct operations and more than120 distributors. All direct and indirect locations provide sales, support and service with direct

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links to a broader range of corporate capabilities. In addition, data systems provides customerswith the ability to purchase fluids and repair parts direct from the factory through ane-commerce website.


Our systems businesses spent approximately £73 million on research and development inthe fiscal year ended March 31, 2000. Systems allocates the largest portion of research anddevelopment investment to medical systems. Medical systems spent $68.8 million, or 10.1% ofequipment sales, on research and development for the year ending March 31, 2000. Substantiallyall of systems’ research and development is company funded.

Competition

Our systems businesses compete in a number of different markets. Although all of themarkets are highly competitive, the basis and nature of competition vary significantly among thebusinesses. Despite these differences, technological competence and innovation, excellence indesign, high product performance, quality of service and pricing are among the factors affectingcompetition. Systems seeks to differentiate itself from competition by increasing the level ofsoftware, systems integration and service in its product offerings. We expect that thisdifferentiation will increase as medical systems develops its Health Care Information Systemsbusiness, commerce systems develops its Marconi Online business and data systems develops itsInfoChain business. Each of these businesses plans to use the skills and experience of ourcommunications networks and communications services businesses.

The medical diagnostic imaging market in which medical systems competes is led by a fewlarge companies, including, in addition to medical systems, GE, Siemens, Philips, Hitachi andToshiba. Principal methods of competition are technological advancement, sales and servicemarket coverage and availability of financing and service. We believe medical systems has acompetitive position due to its broad and technologically advanced product line, its servicecapabilities and its 86-year history in the industry.

The retail automation market and petroleum dispensing market in which commerce systemscompetes are highly competitive. Recent consolidation in the industry has further intensified thiscompetition. Competitors in the retail automation market include Radiant Systems, Sun Systems,Production Engineering Company, Wincorp, Bullock, Autogas, Canmax, Prodata, Pinnacle,Comdata, Veriphone, PDI and Nitsuko. These firms vary greatly in both their geographic scopeand the range of products they offer. Some, like Canmax, are custom software developers ofhardware platforms supplied by others. Principal methods of competition are productfunctionality and reliability, service and support coverage and price. Commerce systems’principal competitors in the petroleum dispensing market, Tokheim Corporation and the WayneDivision of Halliburton, are both global market participants with broad product lines. In addition,there is a significant number of small regional or national companies supplying these products tomore geographically focused markets. Most notable of these is Tatsuno, a Japanese company withan established in-country presence as well as an aggressive export program to the Pacific Rimand elsewhere in the world. We believe that commerce systems is well positioned as a marketleader due to its technological strengths, relationships with key customers, worldwidedistribution network and broad product range.

The variable imaging market in which data systems competes is highly competitive.Principal competitors in the area of inkjet printing technology include Domino Printing Sciences,

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Imaje (a division of Dover International), Willett International, Markem Corporation and ScitexDigital Printing. Domino Printing Sciences is also a principal competitor in the area of laserimaging technology. All of data systems’ principal competitors in the variable imaging markethave a global presence and have direct sales channels or indirect distribution. Principal methodsof competition are product reliability, print quality, price, the ability to meet customerapplication requirements such as harsh operating environments or unique substrates or surfaces,and breadth of product line as customers generally prefer to deal with a common supplier formultiple applications. The supply chain management systems market is still emerging and thereare no dominant competitors. We anticipate our likely competitors in this market will be IBM(e-business), Symbol Technologies (data acquisition) and the major accounting firms that havebusiness consulting groups. We believe data systems enjoys a competitive position based on itsworldwide distribution network, wide product range of equipment and large existing customerbase.

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OUR OTHER BUSINESSES

In addition to our principal businesses, we invest in technology start-up and early stagebusinesses that may have growth potential or technology that is complementary to our principalbusinesses. We also retain, with a view to development or disposal, other businesses that maynot fit in our business model. We have categorized these companies into three groups:

Emerging technologies

Emerging technology businesses are those which we believe have the potential to support thestrategic plans of our core businesses by widening their range of technologies, accelerating thedevelopment cycles of new products and services or otherwise generating attractive financialreturns. We will develop these technology activities by investing in external companies throughour newly formed Marconi Ventures (a capital fund to which we have initially allocated $100million) and by identifying internal projects which could be developed as stand-alonebusinesses. Where appropriate, we intend to invest alongside other Marconi group businesseswith related or complementary strategies. Our strategy is to continue to develop these newactivities and ultimately leverage them with one of our core business divisions or otherwiserealize their value to the Marconi group. Early stage businesses in which we have investedinclude the following:

• Xcert. We own a 25% stake in Xcert, a Delaware company that provides digitalcertificate software products and services for the internet and offers solutions to thesecurity issues of internet communications and on-line transactions.

• Ten Square. We own a 10% stake in Ten Square (formerly known as iAMnetworks),which develops and delivers digital media promotions, entertainment and communityservices messages at point-of-sale devices worldwide, securely over the internet. Weinvested in Ten Square jointly with our commerce systems business.

• Viewlocity. We own a 0.9% stake in Viewlocity, a global provider of e-businessintegration software and services that enable trading communities and their members toconduct business-to-business e-commerce in real time. Viewlocity creates tradingcommunity infrastructure solutions that allow integration and synchronization amongmultiple software applications, databases and communication protocols among tradingpartners.

See also ‘‘Risk Factors—Newly identified, developing and emergent businesses may fail toreach their full potential, adversely affecting our results.’’

Development businesses

We are continually reviewing our development businesses to determine which we willdevelop as emerging technologies and which we will dispose of as non-core businesses. Wecurrently identify the following businesses as development businesses:

• Fibreway. This business, which is owned 90% by us and 10% by British Waterways,has an installed fiber optic communications backbone in the United Kingdom which itleases to telecommunications operators and large corporations to provide broadband, orvery high capacity, communication capability. In November 1999, in conjunction withour communications services business, we announced a strategic partnership withAtlantic Telecom to provide dedicated fiber trunk for Atlantic Telecom to extend its

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regional coverage in Scotland to a U.K. national service and eventually an internationalservice when Fibreway completes the links to the transatlantic connection and Europeancontinental connections across the English Channel and the North Sea. In May 2000 weannounced that we, together with British Waterways, were examining the strategicoptions for Fibreway and that we were considering some form of separation of Fibrewaylater in 2000.

• GPT Payphones. This company supplies a range of modular payphones for outdoorand indoor applications and has an installed base over 800,000 units. GPT Payphones isfocusing on developing a new range of payphones which have internet capability.

• Marconi Software Solutions. This business provides systems integration andapplication development capabilities using Oracle, web-based, Java, C++ and othersoftware language support. Marconi Software Solutions works on projects within theMarconi group and externally. It is actively involved with several projects throughoutthe Marconi group in the capacity of project management and business consultancy. Anexample is the support for InfoChain, a data systems business, in the development of adatabase infrastructure. It is also involved in development work for novel solutions likeinternet protocol (IP) billing reports for use in the telecommunications market. Itscompetitors include information technology service companies IBM, EDS and AndersenConsulting.

• Marconi Applied Technologies. This business designs, manufactures and supplieselectronic components and systems for a range of sectors including communications,industrial, medical and science, military, safety and security. Its products include freeelectron tube technology for radio-frequency and microwave components and circuits, aswell as solid state charge coupled devices, solar cells and chemical sensors. Its maincompetitors are Thompson Tube Electronique, Communications Power Industries andLitton Electron Devices. The competition is more fragmented in the solid state marketthan in the market for tube devices. Marconi Applied Technologies does not face asingle or concentrated group of competitors.

Non-core businesses

Our non-core businesses are all being managed for value rather than growth, as they do notfit Marconi’s business model. We are continuing to assess ways in which we can maximize thevalue of the Marconi group’s current interest, which may involve further disposals in the nearterm. The discussion below includes businesses we sold since the end of fiscal 2000 as theyremain in our financial statements for that period. We currently identify the following businessesas non-core businesses:

• Woods Air Movement. This business manufactures a wide range of fans and airmovement equipment. We announced in November 1999 our intention to sell thiscompany, and the sale process is currently underway.

• Avery Berkel. This business manufactures weighing and food processing products. Wesold Avery Berkel to Weigh-Tronix in June 2000 for £103 million (subject toadjustments), payable in cash and notes plus warrants to subscribe for 5% of the equityof Weigh-Tronix.

• Comstar. This business is a 50-50 joint venture formed in 1989 with MGTS (Moscow’stelephone network operator). Comstar provides international and inter-citytelecommunications services primarily to business customers in Russia. In June 2000 weentered into an agreement to sell our interest in this business to MetromediaInternational Group.

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• Buzton. This business is a joint venture formed in 1994 to provide communicationsservices primarily to business customers in Tashkent, Uzbekistan. We hold a 50% stake,and two Uzbekistan state telecommunications agencies, TCIL and TCN, each hold a 25%stake.

• General Domestic Appliances (GDA). This company is a 50-50 joint venture formed in1989 with GE. It manufactures, sells and services domestic appliances, includingwashing machines and dryers, electric and gas cookers, refrigerators and dishwashers.GDA’s brands include Hotpoint, Creda Cannon, Redring and Xpelair. GDA is the leadingsupplier of white goods in the United Kingdom.

• Alstom. We currently hold a 24% stake in Alstom with registration rights for ourshares. Alstom is a French-based company that designs, manufactures and commissionsequipment and systems for the power generation and transmission industries and forrailway support and industry. Alstom is the new holding company of the former GECAlsthom group, which was a 50-50 joint venture with Alcatel until June 1998 when bothwe and Alcatel reduced our respective stakes to 24% each in Alstom.

• Marconi property. This business provides property advice to Marconi companiesworldwide and manages a number of U.K. properties which are held for income,development or disposal.

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FACILITIES

Our headquarters and registered office are located at One Bruton Street, London, W1J 6AQ,England.

We have production facilities in the United Kingdom, continental Europe, North America,Africa, Asia and Australasia. We own or lease all of our principal manufacturing facilities. Ourprincipal facilities are as follows:

Owned property Principal use Building or site area

Highland Heights(Cleveland), Ohio

Medical systemsoffice, assembly, distributionand research and development

755,000 sq. ft. on 58.78 acres(part under construction)

Greensboro, NorthCarolina

Commerce systemsfactory, offices and warehouse

598,000 sq. ft. on 61.2 acres

Coventry, England Communications networksand communications servicesoffices, research anddevelopment

861,100 sq. ft. on 150 acres

Liverpool, England Communications networksresearch and development andmanufacturing

608,200 sq. ft. on 22.5 acres

Lorain (Cleveland), Ohio Communications networksmanufacturing, engineeringand administration offices

333,570 sq. ft. in five separatebuildings and sites in closeproximity

Warrendale (Pittsburgh),Pennsylvania

Communications networksoffices, research anddevelopment andmanufacturing

464,396 sq. ft. on 101.38 acres

Leased property Term Principal use Building or site area

Wood Dale, Illinois Lease to November 30,2011

Data systemsoffice, warehouse andlaboratories

250,355 sq. ft. on15.28 acres

London, England Lease to June 23, 2018 Marconi headquarters,offices

43,820 sq. ft.

We announced in May 2000 our plan to build a new facility in Ansty, England, to replaceour existing facility in central Coventry, England. Other than this, we believe that our principalmanufacturing facilities are suitable and adequate for their use. Use of these facilities may varywith economic and other business conditions, but none of the principal plants is idle.

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R. R. DONNELLEY LON(•• ) LON00000/20000 (START PAGE) 011 44 20 7330 1600 CB 01 SEP 00 22:30

EMPLOYEES

At March 31, 2000, we had 49,363 full-time employees worldwide (excluding share ofemployees in joint ventures). The following table shows our average number of full-timeemployees by business and geographic location for the periods indicated (excluding employeesin discontinued operations);

Year endedMarch 31,

1999 2000

(thousands)

Employees by businessCommunications businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 28Systems businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 11Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10

37 49

Employees by locationUnited Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17The Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 17Rest of Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8Africa, Asia and Australasia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7

37 49

Membership of our employees in trade unions varies from country to country, and we haveentered into various collective bargaining agreements. It is our practice to renew or replace ourvarious labor arrangements relating to continuing operations as and when they expire and we arenot aware of any material arrangements whose expiry is pending and which is not expected to besatisfactorily renewed or replaced in a timely manner. We have not experienced any materialwork stoppages or strikes in the past three fiscal years. We believe that relations with ouremployees are generally good.

We require a sufficient number of highly skilled technology specialists. The supply of suchemployees is highly limited, and competition to hire and retain them is consequently andincreasingly intense. Competition raises the cost of hiring and retaining these employees andincreases employee turnover as competitors seek to lure away employees with particularly rare orsought-after skills. We are continually seeking to recruit skilled high-technology workers andbelieve that we offer compensation, benefits and opportunities for development and advancementwhich will attract and retain a sufficient number of such employees.

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INTELLECTUAL PROPERTY

We own a number of patents, trademarks and registered trademarks throughout the world.We have a number of patent and know-how (and other) licenses from third parties relating toproducts 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 or jointventures, we may not always retain proprietary rights to the products we develop. Generallyspeaking, our joint venture agreements provide that proprietary technologies developed in jointventures will remain the property of the entity that develops them. However, these agreementstypically also give us the non-exclusive right, subject to non-competition provisions, to use andcommercially exploit such technologies for the duration of the joint venture.

We rely on patents, trademarks, trade secrets, copyrights, confidentiality provisions andlicensing agreements to establish and protect our proprietary technology and to protect againstclaims from others. Infringement claims have been and may continue to be asserted against us oragainst our customers in connection with their use of our systems and products. We cannotensure the outcome of any such claims and, should litigation arise, such litigation could becostly and time-consuming to resolve and could result in the suspension of the manufacture ofthe products utilizing the relevant intellectual property. In each case, our operating results andfinancial condition could be materially affected. See ‘‘Legal Proceedings’’.

The ‘‘Marconi’’ trademark used by many of our businesses is identified with and importantto the sale of our products and services. It is either registered or the subject of an application forregistration in approximately 120 territories, including all of those territories which we currentlyview as being our major trading territories. We do not believe that any patent, trademark,registered trademark, license or other intellectual property right other than the ‘‘Marconi’’trademark is material, by itself, to our business.

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ENVIRONMENTAL AND OTHER REGULATION

Environmental, health and safety regulation

We are subject to increasingly stringent regulation under various U.K., U.S., EU and othernational and local laws and regulations relating to employee safety and health, and to thehandling, and emission into the environment, of various substances that our facilities use.

In the United Kingdom, the United States and elsewhere, we are subject to environmentallaws governing the cleanup of soil and groundwater contamination. These laws may imposestrict, joint and several, and retroactive liability on us for the costs of investigating and cleaningup releases of hazardous materials at sites currently or formerly owned, operated or leased by us.This liability may also, in certain circumstances, include the cost of cleaning up historicalcontamination, whether or not caused by us. Several of our facilities are located in areas inwhich industrial activities have been ongoing for many years.

We are currently conducting investigation and cleanup of approximately 20 sites, principallyin the United States, the United Kingdom, the Netherlands and Germany, either pursuant to adirective from the appropriate governmental authority, as part of a group of named potentiallyresponsible parties, or voluntarily, in connection with the acquisition or disposition of property.Based on the estimates of our consultants and our past experience with comparable investigationand remediation activities, we do not believe that the costs associated with any of these activitieswill, either individually or in the aggregate, have a material adverse effect on our financialcondition or results of operations.

The European Commission has issued proposals for two directives which, if implemented,will require member states of the EU to meet certain targets of collection, re-use and recovery ofwaste electrical and electronic equipment. In the United Kingdom it is likely that theseobligations would be achieved through legislation placing the responsibility for meeting theseobligations on the producers of the equipment. Producers may also be required to phase outcertain hazardous materials from the equipment. Other member states of the EU are likely toimplement similar requirements. It is possible that this proposed legislation, if implemented,would significantly increase costs to producers of electrical and electronic equipment.

Our facilities are subject to regular internal environmental, health and safety auditsgoverning all aspects of employee protection, materials handling and environmental compliance.We have not incurred material capital expenditures for environmental, health or safety mattersduring the past three years, nor do we anticipate having to incur material capital expendituresduring the current or the succeeding fiscal year. We believe that any non-compliance or liabilityunder current environmental laws and regulations will not have a material adverse effect on ourfinancial condition or results of operations as a whole.

Other government regulation

Our products are subject to industry-specific government regulation and legislation in theUnited States, the EU and throughout the world:

• our communications networks business must comply with U.S. Federal CommunicationCommission requirements and regulations governing communications products sold inthe United States;

• our data systems business must comply with the U.S. Food and Drug Administrationregulation governing food additives and colorants for ink products;

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• our medical systems business is subject to the U.S. Food and Drug Administration’s‘‘Quality Systems Regulations for Medical Devices’’ which governs the manufacturing,design control and testing of health care equipment, including medical imaging systems;and

• our commerce systems business is subject to regulations of the U.S. National Institute ofStandards and Technology and the U.S. National Conference on Weights and Measurescovering the design and control of liquid measuring devices and national andinternational standards governing both the commercial and environmental aspects ofpower operating petroleum product dispensing devices.

In each of these industries, our businesses would suffer if they failed to obtain or lost thecertifications, clearances and authorizations required to participate in new or existing projects.Further, we could be subject to fines, criminal sanctions or the revocation of important licensesand certifications if we fail to comply with government regulations. While we believe that oursystems of obtaining and maintaining industry and regulatory certification and compliance areadequate, new and more stringent government regulation or industry oversight might makecompliance more difficult or more costly and have an adverse impact on our businesses.

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LEGAL PROCEEDINGS

We are not and have not been engaged in, nor (so far as we are aware) do we have pendingor threatened by or against us, any legal or arbitration proceedings which may have or have hadin the recent past (including at least the 12 months immediately preceding the date of thisdocument) a significant effect on our financial position as a whole, except as set out below:

• Fore Systems, together with six of its former directors and officers, are defendants in aconsolidated class action lawsuit filed in the United States District Court for the WesternDistrict of Pennsylvania on behalf of a putative class of persons (other than defendants andtheir respective affiliates) who purchased Fore Systems securities during the period July 19,1996 through April 1, 1997, inclusive. Plaintiffs allege that, during this period, Fore Systemsmisrepresented material facts relating to its results of operations, competitive position andfuture prospects and concealed its alleged deterioration, declining growth and inability tocompete successfully until the preliminary release of its projected results of operations forthe fiscal year ended March 31, 1997. Plaintiffs also allege that Fore Systems’ financialstatements for the fiscal quarters ended September 30, and December 31, 1996 hadimproperly recognized revenues on sales to certain customers. Plaintiffs seek unspecifiedcompensatory damages, counsel and expert fees and other costs of suit and unspecifiedrelief. Defendants have denied all allegations of wrongdoing. Discovery in this case closedon August 14, 2000. No date has been set for trial.

• Fore Systems is a defendant in a lawsuit filed by Bell Communications Research, Inc.(formerly known as Bellcore, now named Tel

▲cordia Technologies) on October 14, 1998 in

the United States District Court for the District of Delaware. Tel▲cordia alleges that Fore

Systems has infringed and continues to infringe four patents owned by Tel▲cordia, and seeks

unspecified damages for past infringement and an injunction against future infringement.Fore Systems has denied infringement and asserted the affirmative defenses of invalidity,unenforceability, laches, equitable estoppel, implied license, misuse and unclean hands. Inaddition, Fore Systems has counterclaimed for a declaratory judgment on non-infringement,invalidity, unenforceability, laches, equitable estoppel, implied license, misuse, and uncleanhands and asserted affirmative claims seeking damages for reformation of contract based onfraud, breach of the covenant of good faith and fair dealing, fraud, negligentmisrepresentation, and common law unfair business practices and competition. Discovery inthis case has closed.

▲The court denied summary judgment motions filed by both of the

parties. The trial for the case has been postponed indefinitely pending the resolution ofTel

▲cordia’s motion requesting certification of a number of claim construction issues for

appeal.• Fore Systems is a defendant in a second lawsuit filed by Tel

▲cordia on June 8, 1999 in

the United States District Court for the District of Delaware. Tel▲cordia’s second lawsuit

alleges that Fore Systems has infringed two additional Tel▲cordia patents. Fore Systems

has denied infringement and asserted the affirmative defenses of invalidity,unenforceability, laches, equitable estoppel, implied license, misuse and unclean hands.In addition, Fore Systems has counterclaimed for a declaratory judgment on the issues ofnon-infringement, invalidity and unenforceability and has alleged that Tel

▲cordia

infringed one of Fore Systems’ patents. Discovery in this case has closed. The plaintiffhas filed summary judgment motions which are pending before the court. The case hasbeen scheduled for trial in November 2000.

• Fore Systems, Marconi Corporation plc and 13 persons who were then directors and/orsenior executives of Fore Systems are defendants in a consolidated lawsuit filed in theUnited States District Court for the Western District of Pennsylvania on behalf of thepublic stockholders of Fore Systems (other than the defendants and their respectiveaffiliates) relating to Marconi Corporation plc’s tender offer for Fore Systems’ shares andthe treatment afforded the individual defendants’ options in that tender offer and the

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related merger transaction. Plaintiffs allege that Fore Systems and the individualdefendants made inadequate disclosures concerning the options and the terms of themerger in Fore Systems’ Schedule 14D-9 and assert claims in relation to the fairness ofthe merger consideration and that the individual defendants breached their fiduciaryduty for their alleged actions relating to the grant of options and the negotiation anddisclosure of the terms of the merger. Plaintiffs further allege that Marconi Corporationplc, as part of the tender offer, agreed to cash out unvested options held by theindividual defendants and that such agreement constituted (1) additional considerationin violation of SEC Rule 14d-10 under the U.S. Securities Exchange Act of 1934 and (2)a ‘‘side purchase’’ in violation of SEC Rule 10b-13 under the Exchange Act. Plaintiffsseek class certification, an award of damages, costs of suit, including attorneys’ fees andexperts’ fees and other disbursements, and other unspecified relief. On March 21, 2000,the court denied defendants’ motions to dismiss. The court has set a discovery deadlineof December 31, 2000. No date has been set for trial.

We intend to defend all claims vigorously. While we believe we have meritorious defenses,the duration and outcome of the litigation are not predictable at this point.

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MANAGEMENT

The following table sets forth certain information regarding the directors of MarconiCorporation plc:

Name Age Title

Lord Simpson of Dunkeld . . . . . . . . . . 58 Director

John Charles Mayo, CBE . . . . . . . . . . . 44 Director

Robert Ian Meakin . . . . . . . . . . . . . . . . . 51 Director

The directors in the table above also act as directors of Marconi plc, as discussed more fullybelow. Marconi Corporation plc does not have executive officers.

The following table sets forth certain information regarding the directors and executiveofficers of Marconi plc.

Name Age Title

Chairman:Sir Francis Roger Hurn . . . . . . . . . . . . . 62 Chairman

Executive directors:Lord Simpson of Dunkeld . . . . . . . . . . 58 Chief Executive

Michael John Donovan . . . . . . . . . . . . . 47 Chief Executive Officer, MarconiSystems

John Charles Mayo, CBE . . . . . . . . . . . 44 Finance Director

Robert Ian Meakin . . . . . . . . . . . . . . . . . 51 Personnel Director

Michael William John Parton . . . . . . . 46 Chief Executive Officer, MarconiCommunications Networks

Non-executive directors:Sir William Martin Castell . . . . . . . . . 53 non-executive director

The Rt. Hon. The Baroness LydiaSelina Dunn, DBE . . . . . . . . . . . . . . . 60 non-executive director

Sir Alan Walter Rudge, CBE . . . . . . . . 62 non-executive director

Hon. Raymond George HardenberghSeitz . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 non-executive director

Nigel John Stapleton . . . . . . . . . . . . . . . 53 non-executive director

Executive officers:Norman Charles Porter . . . . . . . . . . . . . 48 Company Secretary

Jeffrey Isaac Gordon . . . . . . . . . . . . . . . . 51 General Counsel

Jack Raymond Fryer . . . . . . . . . . . . . . . 61 Strategic Planning Director

Jeffrey Steven Brooks . . . . . . . . . . . . . . 51 Chief Marketing Officer

Sandro Gualano . . . . . . . . . . . . . . . . . . . 64 Chairman of Marconi MobileCommunications

Neil David Sutcliffe . . . . . . . . . . . . . . . . 38 Chief Executive Officer, MarconiCommunications Services

Jan Niel Viljoen . . . . . . . . . . . . . . . . . . . . 39 Chief Technology Officer

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Chairman

Sir Francis Roger Hurn was appointed to the board of directors and as Chairman in October1999 having previously been appointed to similar positions in GEC in December 1998. Sir Rogeralso serves as Chairman of the nomination committee. From November 1991 to November 1996,Sir Roger was Chairman and Chief Executive of Smiths Industries and from November 1996 toNovember 1998 he was Chairman. Sir Roger is Chairman of Prudential, a non-executive directorof Imperial Chemicals Industries, Deputy Chairman of Glaxo Wellcome and Chairman of theCourt of Governors at the Henley Management College. Sir Roger has announced that he intendsto step down from the chairmanship of Marconi at the end of the next annual general meeting ofshareholders in July 2001.

Executive directors

Lord Simpson of Dunkeld was appointed to the board of directors and as Chief Executive inOctober 1999 having previously been appointed to the GEC board of directors in July 1996 and asChief Executive (formerly entitled Managing Director) in September 1996. Lord Simpson alsoserves as Chairman of the executive committee. From 1991 to 1994, Lord Simpson was Chairmanand Chief Executive of Rover, from 1992 to 1994 he was Deputy Chief Executive of BritishAerospace and from April 1994 to September 1996 he was Chief Executive of Lucas Industries.Lord Simpson is a non-executive director of Imperial Chemical Industries, Alstom and Nestle.Lord Simpson intends to step down as chief executive of Marconi at the end of his five yearcontract in July 2001 and it is intended that he will become chairman replacing Sir Roger Hurnwho has announced his intention to retire from Marconi.

Michael John Donovan was appointed to the board of directors in January 2000. He joinedGEC in October 1998 as Chief Executive of GEC’s industrial electronics group in the UnitedStates (which subsequently became Marconi Systems and our other businesses) and wasappointed Chief Executive for our systems business and our other businesses. Mr. Donovan helda number of senior management positions in Rover from 1976 to 1991 and in Vickers from 1991to 1994. In 1994, Mr. Donovan joined British Aerospace as Chief Executive at Avro International.In April 1996, he was appointed Chief Executive for regional aircraft and in May 1997, he wasappointed President of Aero International (regional).

John Charles Mayo, CBE was appointed to the board of directors and was appointedFinance Director in October 1999, having previously been appointed to similar positions in GECin October 1997. From May 1993 to September 1997, Mr. Mayo was Finance Director of Zeneca.Mr. Mayo is a non-executive director of Alstom. It is intended that Mr. Mayo will become thenew chief executive of Marconi in July 2001 following the retirement of Sir Roger Hurn and hisreplacement as chairman by the current chief executive Lord Simpson.

Robert Ian Meakin was appointed to the board of directors and was appointed PersonnelDirector in October 1999 having previously been appointed GEC’s Personnel Director inNovember 1996 and to the GEC board of directors in October 1998. From 1992 to 1996, Mr.Meakin was Director of Personnel at British Aerospace. Mr. Meakin is on the board of directorsof Young Enterprise, is a member of the Steering Board at the Radiocommunications Agency andis Chairman of the Education and Training Export Group of the U.K. Department of Trade andIndustry and of the U.K. Department for Education and Employment.

Michael William John Parton, Chief Executive Officer of Marconi CommunicationsNetworks, was appointed to the board of directors in January 2000. Mr. Parton held a number offinance appointments in ICL from 1978 to 1980 and STC Telecommunications from 1986 to 1991.Mr. Parton joined GEC as Finance Director of GPT in 1991, was appointed Managing Director ofGPT’s public networks group in 1995, Managing Director of GEC’s industrial electronics group in1997 and Chief Executive of Marconi Communications in July 1998.

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Non-executive directors

Sir William Martin Castell was appointed to the board of directors in October 1999 havingpreviously been appointed a director of GEC in October 1997. From 1987 to 1989, Sir Williamwas Commercial Director on the board of directors of Wellcome. Sir William has been ChiefExecutive of Nycomed Amersham (formerly known as Amersham International) since 1990.

The Rt. Hon. The Baroness Lydia Selina Dunn, DBE was appointed to the board ofdirectors in October 1999 having previously been appointed a director of GEC in July 1997. From1988 to 1995, Baroness Dunn was Senior Member of the Hong Kong Executive Council and from1985 to 1998, she was Senior Member of the Hong Kong Legislative Council. Baroness Dunn isan executive director of John Swire & Sons and is a non-executive deputy chairman of HSBCHoldings.

Sir Alan Walter Rudge, CBE was appointed to the board of directors in October 1999having previously been appointed a director of GEC in November 1997. Sir Alan also serves asChairman of the remuneration committee. From April 15, 1999 to June 15, 1999, Sir Alan wasnon-executive Chairman of MSI. From 1996 to 1997, Sir Alan was Deputy Chief Executive ofBritish Telecom. In 1994 he was President of the Institution of Electrical Engineers. Sir Alan isChairman of W.S. Atkins and ERA Technology and is a non-executive director of Great UniversalStores and MSI Cellular Investment Holdings. Sir Alan is also a Fellow of the Royal Academy ofEngineering and the Royal Society.

Hon. Raymond George Hardenbergh Seitz was appointed to the board of directors inOctober 1999 having previously been appointed director of GEC in December 1994. From 1991 to1994, Mr. Seitz was U.S. Ambassador to the United Kingdom. Mr. Seitz is Vice Chairman ofLehman Brothers International (Europe), a non-executive director of British Airways, Cable andWireless, Rio Tinto and Telegraph Group and Chairman of Authoriszor. Mr. Seitz is also a trusteeof the National Gallery and the Royal Academy.

Nigel John Stapleton was appointed to the board of directors in October 1999 havingpreviously been appointed a director of GEC in July 1997. Mr. Stapleton also serves as Chairmanof the audit committee. From January 1993 to September 1999, Mr. Stapleton held seniormanagement positions in Reed Elsevier, where he was Co-Chairman and Co-Chief Executive fromAugust 1998 to September 1999. From 1968 to 1986, Mr. Stapleton held a number of finance andgeneral management positions with Unilever. Mr. Stapleton is Chairman of Veronis, SuhlerInternational, and is a non-executive director of Sun Life & Provincial Holdings, CentaurCommunications and AXA U.K. Investments. Mr. Stapleton is also a member of the U.K.Financial Reporting Review Panel.

Executive officers

Norman Charles Porter was appointed Company Secretary in September 1999 havingpreviously been appointed Company Secretary of GEC in April 1991. He is a member of theCouncil of the Electrical and Electronics Industries Benevolent Association.

Jeffrey Isaac Gordon joined us as General Counsel in November 1999 having previouslyheld senior positions at the U.S. law firm Mayer, Brown & Platt in Chicago and in London wherehe was the head of international practice.

Jack Raymond Fryer was appointed Strategic Planning Director of GEC in November 1996and in November 1998 also assumed responsibility for Technology and IT. Mr. Fryer held anumber of senior management positions with Rolls-Royce from 1961 to 1975, Rank Xerox from1975 to 1986 and Lucas Industries from 1986 to 1996. In December 1999, Mr. Fryer became anon-executive director of MDIS and in August 2000, he was appointed as non-executivechairman of Fibreway.

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Jeffrey Steven Brooks was appointed Chief Marketing Officer in March 2000 having previouslybeen Senior Vice President, Brand Management and Corporate Marketing at Nortel. Mr. Brooks hasheld senior marketing and communications positions in Bay Networks in 1998, Digital EquipmentCorporation from 1994 to 1997 and Sony Corporation of America from 1979 to 1994.

Dr. Sandro Gualano joined us in 1964 and has held a number of senior managementpositions and is presently Chairman of Marconi Mobile Communications. Dr. Gualano wasappointed Chairman and Managing Director of Marconi in Italy in 1995, Managing Director ofMarconi Finanziaria in 1996 and Chairman of Marconi Communications in 1998. In 1993, Dr.Gualano was placed under preliminary investigation by the Italian prosecution authorities, alongwith the heads of a number of suppliers to Italian state-owned entities. The investigation relatedto the alleged corruption of officials of an Italian state-owned entity during the period 1988 to1992. The preliminary investigation has not yet been completed. Dr. Gualano strongly denies theallegations. Dr. Gualano has been nominated for appointment as the Commissioner of theNational Air Traffic Control Agency in Italy. The nomination is subject to approval by the Italiangovernment. In the meantime, Dr. Gualano will continue in his current role at Marconi.

Neil David Sutcliffe was appointed Chief Executive Officer of Marconi CommunicationServices in November 1999 having previously been Managing Director of strategic networks, theEuropean services business of GPT from 1998. He was a systems engineer with British Aerospacefrom 1984 to 1988 and a manufacturing consultant with Coopers and Lybrand from 1988 until hejoined GPT in 1992.

Jan Niel Viljoen was appointed Chief Technology Officer in January 2000 having previouslybeen Senior Vice President and General Manager of Fore Systems’ service provider business.Mr. Viljoen joined Fore Systems in 1996 upon its acquisition of Nemesys Research where he wasChief Executive Officer.

The executive directors are also executive officers.

Board system

We are controlled through a board of directors. Our operating subsidiaries are managed bythe Chief Executive Officers for the business segments under which they are organized.

The board is responsible for our strategic direction including approval of business strategyand the annual plans designed to meet the strategy, interim and full year accounts, accountingpolicies and dividends and our system of governance and internal control.

Our board currently consists of 11 members: the Chairman, 5 non-executive directors and5 executive directors (including the Chief Executive). There is a clear division of responsibilitybetween the Chairman and the Chief Executive. The Chairman is responsible for running theBoard and ensures all directors receive sufficient relevant information on financial, business andcorporate matters to enable them to participate effectively in board decisions. The ChiefExecutive’s primary role is the coordination of our businesses and the development andimplementation of strategy. Accordingly, no single individual has unfettered powers of decision.

The board meets at least six times a year, and holds additional meetings when circumstancesrequire. Non-executive directors meet with the Chairman and Chief Executive at least once a year todiscuss a wide range of matters affecting us. All directors have access to such information as theyrequire to enable them to participate in consideration of matters to be decided by the board and itscommittees (discussed below). Directors also receive appropriate training on appointment and then asnecessary. Directors attend an induction program which aims to provide an understanding of us, ourstrategy, structure, geographical spread of operations, financial position, the industries in which we

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operate, our products and technologies, our people and, where appropriate, legal responsibilities as adirector. The directors have access to the advice and services of the Company Secretary and there isan approved procedure by which all directors can obtain independent professional advice infurtherance of their duties. This procedure is reviewed by the board periodically.

The nomination committee recommends the appointment of directors and, in accordancewith the provisions of our Articles of Association, the board appoints directors. We may also, byordinary resolution, appoint a director. At every annual general meeting of shareholders, one-third of the directors (or the nearest to one-third if not a multiple of three) are required to retirefrom office although a director who is willing may be re-appointed as a director. If we do not fillthe vacancy at the meeting at which a director retires by rotation or otherwise, a director is, ifwilling to act, deemed to be re-elected if the vacancy is not filled. Directors are required to retirefrom office at the annual general meeting after which he or she reaches 70 years of age, althoughsuch director may be re-appointed as a director on an annual basis after reaching 70 years of age.Directors may be removed or suspended from office at any time by an ordinary resolution. Adirector must resign from office if he or she ceases to be a director by virtue of the U.K.Companies Act 1985, is prohibited by U.K. law from being a director, becomes bankrupt, suffersfrom mental disorder, is absent for more than six consecutive months without permission fromthe board or is requested to resign in writing by not less than three-quarters of the otherdirectors.

The board has delegated certain powers and duties to committees constituted by it, andreceives regular reports of their proceedings. The Company Secretary acts as secretary to allboard committees. The board committees include an audit committee, a nomination committee, aremuneration committee and an executive committee. The audit, nomination and remunerationcommittees are comprised only of non-executive directors. The executive committee is comprisedof both executive directors as well as certain other executive officers. The quorum for meetingsfor each of these committees is three members in person or in telephonic or electroniccommunication. For the executive committee, two of the three members must be executivedirectors.

The audit committee meets at least three times a year. Its duties include reviewing the scopeand results of any audit. It meets regularly with our management, as well as with internalauditors, to review the effectiveness of corporate controls and accounting policies, as well asmatters raised in regular reports to it and the full year and interim financial statements prior totheir submission to the board. Our auditors are able to attend meetings and have the opportunityto raise matters or concerns in the absence of executive directors.

The nomination committee meets as and when required to do so. It reviews the boardstructure, considers candidates for appointment as directors and makes appropriaterecommendations to the board.

The remuneration committee meets formally at least twice a year and makes decisions onbehalf of the board on the contracts of service and remuneration packages of executive directorsand the Chairman. The remuneration committee also determines the framework within whichexecutive remuneration is more generally determined and, in its review of executive directors’ pay,takes account of the remuneration of the other members of the executive committee. Theremuneration committee has access to and takes professional advice from inside and outsideMarconi. The remuneration committee also takes the advice of the Chairman and Chief Executive,as appropriate, on the performance of the executive directors. All members of the remunerationcommittee are independent non-executive directors and have no personal financial interest in thematters to be decided by the remuneration committee, no potential conflicts of interests arisingfrom cross-directorships and no day-to-day involvement in the running of our business.

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The executive committee meets bi-monthly and comprises executive directors and certainother executive officers. It approves our business plan and budget and strategies in areasincluding technology, people, information technology and corporate communications prior tosubmission to the board for approval. It also approves day-to-day matters of a routine nature.

Directors’ emoluments

Emoluments

The names of our current directors appear in the table and paragraphs above. Our foundingdirectors during fiscal 2000 were D.H. Reid and N.C. Porter, both of whom were appointed onSeptember 17, 1999 and resigned on October 4, 1999. With the exception of M.J. Donovan andM.W.J. Parton, both of whom were appointed on January 1, 2000, all of the current directors wereappointed on October 4, 1999. Sir Christopher Harding was appointed as non-executive directoron October 4, 1999 but ceased to be a director upon his death on December 13, 1999. Thefollowing table shows emoluments paid or payable to our directors for the period to March 31,2000.

Salaryandfees

Otherbenefits Bonus

Excludingpension

contributionsPension

contributions

Gains madeon the

exercise ofshare options

2000Total

1999Total

2000Total

1999Total

2000Total

1999Total

£000 £000 £000 £000 £000 £000 £000 £000 £000Sir Roger Hurn . . . . . . . . . . . . . . . . . 250 16 — 266 89 — — — —

Lord Simpson . . . . . . . . . . . . . . . . . . 669 221 338 1,228 1,085 352 182 — —M.J. Donovan . . . . . . . . . . . . . . . . . . . 87 14 44* 145 — 21 — — —J.C. Mayo . . . . . . . . . . . . . . . . . . . . . . 515 167 260 942 877 259 212 — —R.I. Meakin . . . . . . . . . . . . . . . . . . . . . 283 153 143 579 489 226 167 — —M.W.J. Parton . . . . . . . . . . . . . . . . . . 94 28 87* 209 — 42 — — —

Sir William Castell . . . . . . . . . . . . . 25 — — 25 25 — — — —The Rt. Hon. The Baroness

Dunn . . . . . . . . . . . . . . . . . . . . . . . . 25 — — 25 25 — — — —Sir Alan Rudge . . . . . . . . . . . . . . . . . 26 — — 26 25 — — — —Hon. Raymond G. H. Seitz . . . . . . 25 — — 25 25 — — — —N.J. Stapleton . . . . . . . . . . . . . . . . . . 28 — — 28 25 — — — —

* Represents the period January 1, 2000 to March 31, 2000.

The following table shows emoluments paid or payable to all directors and all executiveofficers as a group for the period to March 31, 2000:

Salaryandfees

Otherbenefits Bonus

Excludingpension

contributionsPension

contributions

Gains madeon the

exercise ofshare options

2000Total

1999Total

2000Total

1999Total

2000Total

1999Total

£000 £000 £000 £000 £000 £000 £000 £000 £000Total for all directors and

executive officers . . . . . . . . . . . . . 3,685 1,015 1,375 6,075 2,665 1,392 878 111 —

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The emoluments for all directors, except for M.J. Donovan and M.W.J. Parton, are for the fullfiscal years 2000 and 1999 and include emoluments paid to them by GEC. The emolumentsshown in the table above for M.J. Donovan and M.W.J. Parton are for the period beginningJanuary 1, 2000, the date of their appointment. The emoluments for the executive officers are inrespect of full years or, where appropriate, from their dates of appointment. D.H. Reid and N.C.Porter received no emoluments for the period in which they acted as directors. The emolumentspaid to Sir Christopher Harding from October 4, 1999 to December 13, 1999, the period duringwhich he acted as a non-executive director, were not material.

Executive directors receive taxable benefits, including an allowance under a company carplan.

All directors are reimbursed all necessary and reasonable expenses incurred in theperformance of their duties.

Short-term incentive bonus

Executive directors are eligible to participate in a short-term incentive plan. The plan paysbonuses only when an economic value added target (based on profitable growth) is met. Thepayment for on-target performance is 25% of basic salary, and the payment for performance atlevels exceeding the on-target level is subject to a maximum payment in any single year of 50%of base salary. Any incentive earned beyond this level is capped at 100% of basic salary and iscarried forward and paid in two equal instalments, but only to the extent that the economicvalue added target is achieved in future years. In considering the payment of short-term incentivebonuses, the remuneration committee also takes account of personal performance. During theperiod ending March 31, 2000, no such amounts were carried forward.

Service contracts

Each of the executive directors has a service contract with Marconi Corporation plc, ourwholly owned subsidiary. The contracts are subject to termination by either party giving no lessthan one year’s notice or, if not already terminated, on Lord Simpson reaching the age of 60years and the remaining executive directors on reaching the age of 62 years. It is intended thateach of the executive directors will, in due course, enter into service contracts with us insubstantially the same form and on substantially the same terms as their existing servicecontracts, which will in such circumstances be revoked.

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Pension, retirement and similar benefits

All executive directors are members of our pension plan, the G.E.C. 1972 Plan. Memberscontribute at the rate of 3% of salary and our contributions made during the year endedMarch 31, 2000 amounted to 6.6% of salary (1999: 6.6%).

We also operate funded unapproved retirement benefit plans (FURBS), company contributionsunder which are taxable, for the executive directors. We make annual payments to the FURBS tomeet our obligation under the plan to accumulate capital, equivalent in value to a two-thirds pensionat a normal retirement age of 62 in respect of M.J. Donovan, J.C. Mayo, R.I. Meakin and M.W.J. Partonand a normal retirement age of 60 for Lord Simpson. Pensionable salary for Lord Simpson isrestricted to £540,800 but subject to increase at the same percentage amount (if any) as the annualrate of increase in basic salary, with a maximum increase of 4% per year. The obligations take intoaccount the capital value of any relevant benefits in payment or otherwise arising from previousemployment together with the capital value of benefits from the G.E.C. 1972 Plan that are payable. Inthe event of cessation of employment before normal retirement age, or at retirement age, each of theexecutive directors is entitled to the cash amount held in the FURBS established for him.

The pension benefits earned by the directors under the G.E.C. 1972 Plan are as follows:

Length ofpensionable

service

Increase inaccruedpension

during theyear

Cost of pensionbenefitsaccrued

during theyear net ofmember’s

contributions

Accumulatedtotal accrued

pension atMarch 31, 2000

(years) £000 £000 £000M.J. Donovan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 2 2J.C. Mayo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 2 4R.I. Meakin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 11 5M.W.J. Parton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1 1 14Lord Simpson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 10 5

The pension entitlement shown is that which would be paid annually at normal retirementage based on service to March 31, 2000. The increase in accrued pension during the yearexcludes any increase for inflation.

The cost of pension benefits accrued during the year net of member’s contributions has beencalculated on the basis of independent actuarial advice. The cost of pension benefits accruedduring the year net of member’s contributions is a measure of the capital cost of providing futurepension payments and accordingly is a liability of the group’s pension arrangements and not asum paid or due to the directors of Marconi.

Members of the G.E.C. 1972 Plan have the option to make contributions to our selectedbenefit scheme (an additional voluntary contribution plan). Neither the contributions nor theresulting benefits to the selected benefit scheme are included in the above table.

During the year, we made the following payments to the trustee of the FURBS in respect ofindividual directors:

2000 £ 1999 £

Lord Simpson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,000 152,825J.C. Mayo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222,300 183,000R.I. Meakin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,320 150,578M.J. Donovan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,212 —M.W.J. Parton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,625 —

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Contributions paid into FURBS are determined each year based on actuarial advice to besuffiicient to meet the obligations and are periodically reviewed by the actuary.

M.J. Donovan and M.W.J. Parton became directors during fiscal 2000. The table above reflectscontributions that were paid into their FURBS, respectively, for the period during which theyserved as directors, in accordance with the terms of their employment contracts in effect prior totheir appointment as directors.

In the event of death in service, a lump sum of four times pensionable salary, plus additionalbenefits for a surviving spouse and/or child(ren), inclusive of any death benefits arising from theG.E.C. 1972 Plan will be held on trust for the benefit of dependants of each of M.J. Donovan, J.C.Mayo, R.I. Meakin, M.W.J. Parton and Lord Simpson.

Directors’ share options

The table below sets forth the interests of executive directors in options over ordinary sharesin GEC under the GEC share option plans for the period April 1, 1999, to November 28, 1999,and, subsequently, over Marconi ordinary shares under the Marconi 1999 share option plan andthe Marconi U.K. sharesave plan for the period November 30, 1999 to March 31, 2000:

At April 1, 1999

At November 29,1999 (or

subsequently onappointment)

Granted during theperiod At March 31, 2000 Exercisable

No.

Averageexercise

pricepence No.

Averageexercise

pricepence No.

Averageexercise

pricepence No.

Averageexercise

pricepence From To

M.J. Donovan . . . . . 266,271 338 266,271 801.5 266,271 338 Nov. 1999 Nov. 2009335,681 844* 335,681 844* Nov. 2002 Nov. 2009

J.C. Mayo . . . . . . . . . 1,167,960 423 1,442,791 342 1,442,791 801.5 1,442,791 342 Dec. 2000 Nov. 20091,442,791 801.5* Nov. 2002 Nov. 2009

R.I. Meakin . . . . . . . 258,255 423 319,024 343 319,024 801.5 320,319 344 Dec. 2000 Nov. 2009211,952 931.5 530,976 853* Nov. 2002 Jan. 2010

1,295 747.5

M.W.J. Parton . . . . 692,857 388 692,857 388 Nov. 1999 Nov. 2009684,360 801.5* 684,360 801.5* Nov. 2002 Nov. 2009

Lord Simpson . . . . 1,405,864 311 1,543,408 801.5 1,407,159 311 Dec. 2000 Nov. 20091,295 747.5 1,543,408 801.5* Nov. 2002 Nov. 2009

* Exercise price exceeded market price at March 31, 2000.

No pre-tax gains were made by the executive directors in the exercise of share optionsduring the period April 1, 1999 (or subsequently on appointment) to March 31, 2000. Noexecutive director had any share options which lapsed during this period. Options granted byGEC became exercisable on November 22, 1999. No options were exercised by any of theexecutive directors while they held office during the year ended March 31, 2000. J.C. Mayo,R.I. Meakin and Lord Simpson each undertook not to exercise their options at any time beforeNovember 30, 2000.

The mid-market price of our shares as at March 31, 2000 was 749 pence with a range duringthe period from November 30, 1999 (the first day of dealing in our shares) to March 31, 2000 of749 pence to 1,095.5 pence per share.

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The executive directors, along with those employees remaining in the Marconi group, weregiven the opportunity to exchange their GEC options for Marconi options on a value-for-valuebasis (which means that the option holder was kept in the same economic position after theexchange as before the exchange through an adjustment to the exercise price and an increase inthe number of shares under option).

All of the executive directors elected to exchange their options.

During the year to March 31, 2000, we introduced a personal shareholding policy in order toassist further in aligning the interests of executives and shareholders. The policy requiresexecutive directors to build up, over a period of time, a target shareholding of our shares with amarket value equal to three times annual base salary. The terms of Lord Simpson’s servicecontract with GEC made certain provisions for awards of shares to be made to him under therules of the GEC employee share plan and the grant of a notional option. Upon the reconstructionof GEC, the service contracts of executive directors were reviewed, and the remunerationcommittee decided, taking account of the restriction with regard to Lord Simpson’s notionaloption, to more closely align his incentive arrangements with those of the other executivedirectors. In exchange for the GEC share award and notional option held by Lord Simpson eachover 625,000 GEC shares at £3.84 per share, Lord Simpson received, subject to a limitationagreed by the remuneration committee in respect of the notional option, options over Marconishares, details of which are set out in the table above.

Employee share plans

We have developed a range of employee share plans which are designed to create incentivesfor employees and encourage them to become long-term shareholders. Some of these plans areavailable to all employees, according to their country of residence. Participation in some plans isat the discretion of the remuneration committee of the board. The main plans are describedbelow.

The Marconi U.K. sharesave plan

All U.K. resident employees and full-time executive directors are eligible to participate inthe U.K. sharesave plan. Under this plan, participants can purchase options with an exerciseprice not less than 80% of the market value of a Marconi ordinary share on the trading dayimmediately before the day invitations to participate are issued. Invitations to participate arenormally made during a six-week period after the announcement of our results of operations. Inorder to participate, each employee must enter into a savings contract with a specified financialinstitution under which they agree to make monthly contributions, which must not exceed £250per month in aggregate. The savings contracts will typically expire on the third or fifthanniversary of the date of grant. The number of Marconi ordinary shares over which a participantis granted an option will be the number that can be acquired, at the exercise price, with thesavings made plus interest on the maturity of the savings contract.

The Marconi international sharesave plan

The international sharesave plan, at the discretion of the board, permits employees who areresident outside the U.K. to participate in a share option plan that is substantially similar to theU.K. sharesave plan. Unlike the U.K. sharesave plan, under the international sharesave plan, thesavings plans may not generate the exact amount required to exercise the options because ofcurrency fluctuations and interest rate differences. Additional cash may be required when theoptions are exercised, however, any excess savings generated cannot be used to purchaseadditional shares.

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The Marconi launch share plan

Under this plan, employees at November 30, 1999 were, at the discretion of the board,granted the right to receive, free of charge, up to 1,000 Marconi ordinary shares, which would beexercisable provided that two conditions are met. The first condition is that the market price of aMarconi ordinary share must have doubled from 801.5p to £16.03 during the period betweenNovember 30, 1999 and November 30, 2004. The second condition is that a participant mustnormally remain in employment until November 30, 2002 or, if later, at the time that the firstcondition is met.

The Marconi long term incentive plan

Under the long term incentive plan, eligible employees may be granted performance-relatedawards entitling them, at the end of a three-year period, to be granted a right to call for a numberof Marconi ordinary shares without payment based on corporate performance over that period.Any right so granted will normally become exercisable in three equal tranches. The first tranchewill become exercisable immediately, and the second and third tranches will normally becomeexercisable on the first and second anniversaries of the date of grant. All full-time employees andexecutive directors are eligible to participate in the long term incentive plan, at the discretion ofthe remuneration committee.

The Marconi 1999 share option plan

All full-time employees and executive directors are eligible to be granted options under theoption plan at the discretion of the remuneration committee. Options may normally only begranted within six weeks after the announcement of our results of operations for any period, orany day on which the remuneration committee determines that exceptional circumstances justifya grant. Options granted to participants will not normally be exercisable unless our earnings pershare over a period of at least three financial years has exceeded the growth in the U.K. RetailPrice Index by at least an average of 3% per year. Options will entitle the option holder toacquire Marconi ordinary shares at a price per share determined by the remuneration committee,which must not be less than the market value of a Marconi ordinary share shortly before the dateof grant.

The Marconi associated companies share option plan

The associated companies option plan enables options to be granted to executives ofcompanies in which we have a direct or indirect equity interest of between 20% and 50%. Theterms of the associated companies option plan are substantially similar to the Marconi 1999share option plan.

The Marconi phantom option plan

In June 1999, the GEC remuneration committee adopted the phantom option plan for thepurpose of granting incentives relating to any increase in our value primarily to executives andemployees of Reltec and Fore Systems following our acquisition of those businesses. FromNovember, 1999, Marconi operated the phantom option plan and awards were made by referenceto Marconi shares and previous awards were adjusted so that they related to Marconi shares on avalue-for-value basis. A phantom option is similar to a share option except that it is a cash-basedaward granted in relation to a stated number of phantom units, each of which has the sameeconomic value as a Marconi ordinary share. Upon exercise of a phantom option, the holder isentitled to receive a cash payment equal to the difference between the base price of the phantom

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option (normally corresponding to the market value of a Marconi ordinary share at the time thephantom option is granted) and the market value of a Marconi ordinary share on the date ofexercise. Under the rules of the phantom option plan, Marconi may give notice to participantsthat it elects to substitute options to acquire real Marconi ordinary shares for phantom options. Ifsuch an election is made, a participant will be required on exercise to pay an amount equal tothe base price of the phantom options to Marconi and will receive Marconi ordinary shares.Options are normally exercisable between the third and tenth anniversaries of grant.

The Marconi U.S. employee share purchase plan

All part-time and full-time employees of Marconi’s U.S. businesses will be eligible toparticipate in the employee share purchase plan. Under this plan employees will be able toacquire ordinary shares with voluntary, after-tax payroll deductions in a manner which qualifiesfor favorable tax treatment under the provisions of section 423 of the U.S. Internal Revenue Code.The employee share purchase plan will enable employees to purchase shares at a price no lessthan the lower of 85% of the closing price of a share on the offering date and 85% of the closingprice of a share on the purchase date. The board may apply a smaller discount than 15% at itsdiscretion. Purchase rights are granted at the beginning of an offering period which may be aperiod of up to 27 months, or up to five years if the purchase price is determined solely byreference to the closing price of a share on the purchase date. No employee will be permitted topurchase shares pursuant to the employee share purchase plan at a rate which exceeds $25,000in any calendar year or a lower limit as Marconi may specify.

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SHARE OWNERSHIP

The directors of Marconi Corporation plc do not own shares of Marconi Corporation plc. Allof the shares of Marconi Corporation plc, which amounted to 2,825,012,659 as of March 31,2000, are owned by Yeslink Limited, a U.K. company that is wholly owned indirectly byMarconi plc.

The table below sets forth as of March 31, 2000, the security ownership in Marconi plc ofeach of the directors and all of the directors and executive officers as a group of Marconi plc. Toour knowledge, no person owns, directly or indirectly, more than 5% of the outstanding votingshares of Marconi plc.

Name of beneficial owner

Numberof shares

owned

Percentageof shares

owned

Sir Roger Hurn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,450 0.0000042Lord Simpson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,606 0.0000390M.J. Donovan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,232 0.0000085J.C. Mayo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164,388 0.0000602R.I. Meakin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800 0.0000039M.W.J. Parton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,776 0.0000105Sir William Castell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 0.0000036The Rt. Hon. The Baroness Dunn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 0.0000036Sir Alan W. Rudge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 0.0000036Hon. Raymond G.H. Seitz . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,027 0.0000040N.J. Stapleton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,572 0.0000049All directors and executive officers as a group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,862 0.0001745

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

All the contracts and other arrangements with Atlantic Telecom, Alstom and the jointventures described below have been on arm’s length terms. We may enter into arrangements withthese companies in the future, which will be on arm’s length terms.

Atlantic Telecom

We own 19.7% of the ordinary shares of Atlantic Telecom, a local exchange carrier withnetworks in Glasgow, Edinburgh, Aberdeen and Dundee. We originally acquired 27% of theordinary shares of Atlantic Telecom upon the formation of a strategic partnership with them inDecember 1999 pursuant to which:

• Atlantic Telecom acquired from us, in return for shares in Atlantic Telecom valued at£122 million at the time the strategic partnership was formed, 20-year exclusive rights touse dedicated fiber on a national broadband fiber optics network, along with certain pre-paid contractual commitments from us to provide software, equipment and maintenancenecessary for the fiber to carry telecommunications traffic;

• We invested £60 million in Atlantic Telecom; and

• We provided a £50 million vendor facility to Atlantic Telecom to finance purchases ofequipment from us over a three-year period.

Our 27% interest in Atlantic Telecom was diluted to a 19.7% interest as a result of AtlanticTelecom’s acquisition of First Telecom.

Alstom

We have a 24% stake in Alstom. Upon the initial public offering of Alstom in 1998 (prior towhich we had a 50% stake in GEC Alsthom, as it was called prior to the initial public offering)we entered into a transitional services agreement providing for the termination of existing groupservices provided by us to Alstom except that we would continue to provide transitional servicesin the fields of research and development, real estate management, bulk purchasing, andenvironmental advice and insurance. These transitional services are now largely completed.From time to time in the ordinary course of business we supply products or services to Alstomand Alstom supplies products or services to us.

Comstar

We have a 50-50 joint venture with MGTS (Moscow’s telephone network operator). The jointventure was formed in 1989 under the name Comstar. Our communications networks businesshas supplied the joint venture with equipment and services since formation to a value ofapproximately $70 million. In June 2000, we entered into an agreement to sell our interest in thisbusiness to Metromedia International Group for $60 million.

Buzton

We have a joint venture with two Uzbekistan state telecommunications agencies. We have a50% stake in the joint venture which was formed in 1994 under the name Buzton. Ourcommunications networks business has supplied the joint venture with equipment and servicessince formation to a value of less than $5 million.

Picker Financial

Picker Financial is a 50-50 joint venture between our medical systems business and CITFinancial established for the purpose of leasing medical systems’ equipment to customers andfinancing the purchase of equipment by customers.

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Sir Alan Rudge

Sir Alan Rudge, a non-executive director of Marconi and formerly a non-executive Chairmanof MSI, held a substantial number of options from MSI. He received from MSI approximately$5.3 million in respect of the cancelation of his options, which amount represented thedifference between the offer price in the MSI transaction ($17.50), and the exercise price of suchoptions. See ‘‘History and Recent Developments’’.

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DESCRIPTION OF OTHER INDEBTEDNESS

1999 credit facility

Marconi Corporation plc entered into a syndicated credit facility agreement on June 4, 1999.Marconi plc guarantees this facility.

The 1999 credit facility agreement provides for the banks to make available to Marconi plcand its subsidiaries a committed multicurrency revolving credit facility up to the amount of€2,500,000,000 for the period from June 4, 1999 until June 3, 2000. €2,402,000,000 of thisfacility has been extended until June 2, 2001. The rate of interest for each credit advance is equalto the aggregate of the London inter-bank offered rate plus 0.25% per annum. The facility may bemade in euro, pounds sterling, U.S. dollars or any other currency which is readily available andfreely transferable in the London foreign exchange market in sufficient amounts to fund anycredit advance.

The purpose of the revolving facility is to finance the general corporate purposes of Marconiplc and its subsidiaries.

The 1999 credit facility agreement includes covenants and warranties and events of default.

Marconi plc is liable to pay commitment fees at the rate of 0.10% per annum on theundrawn amount of this facility and a utilization fee on amounts outstanding in excess of€1,000,000,000.

1998 credit facility

Marconi Corporation plc entered into a syndicated credit facility agreement on March 25,1998. Marconi plc guarantees this facility.

The 1998 credit facility agreement provides for the banks to make available to Marconi plcand its subsidiaries a committed multicurrency 364-day revolving credit facility up to theamount of €1,500,000,000 and a 5-year committed multicurrency revolving credit facility up tothe amount of €4,500,000,000.

The purpose of the revolving facilities is:

• in the case of the 364-day facility, to finance the bridging and liquidity requirements ofMarconi plc and its subsidiaries; and

• in the case of the 5-year facility, to finance the general corporate purposes of Marconiplc and its subsidiaries.

Any borrowings under these facilities are unsecured and repayable (with a right to reborrow)on the last day of each borrowing period. €1,312,500,000 of the 364-day facility has beenextended to terminate on March 22, 2001, and the 5-year facility will terminate on March 25,2003 (subject to an extension, at the banks’ discretion, for any period up to March 25, 2005).

Borrowings bear interest at a rate equal to the aggregate of the London inter-bank offered rateplus 0.175% per annum. Borrowings may be made in euro, pounds sterling, U.S. dollars or inany other currency which is readily available and freely transferable in the London foreignexchange market in sufficient amounts to fund any credit advance.

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The 1998 credit facility agreement includes covenants and warranties and events of default.

Marconi plc is liable to pay commitment fees at the rate of 0.035% per annum under the364-day facility and 0.075% per annum under the 5-year facility and a utilization fee on amountsoutstanding under the 5-year facility in excess of €2,500,000,000.

Eurobonds

Marconi Corporation plc issued €1,000,000,000 6.375% bonds due 2010 and €500,000,0005.625% bonds due 2005 on March 30, 2000. Marconi plc guarantees the eurobonds. Theguarantee may terminate at any time.

The eurobonds are listed on the London Stock Exchange.

The eurobonds bear interest at a fixed rate per annum on their outstanding principal amountfrom and including March 30, 2000, payable annually in arrears on March 30th, the interestpayment date. The first interest payment date is March 30, 2001.

Marconi Corporation plc or any of its subsidiaries may purchase the eurobonds in anymanner and at any time.

The trust deeds governing the eurobonds provide for events of default, including:

• bankruptcy or insolvency of Marconi Corporation plc or Marconi plc;

• failure by Marconi Corporation plc to pay interest when due on the eurobonds if notcured within a period of 14 days;

• failure of Marconi Corporation plc or Marconi plc to perform or observe its obligationsunder the trust deeds governing the eurobonds (if not cured within a period of 30 days);

• an event of default under existing agreements for borrowed money causes amounts dueunder those agreements to become due prematurely, or Marconi Corporation plc orMarconi plc fails to make payment of the amounts when they become due within fivebusiness days of the due date for payment; and

• Marconi plc’s guarantee of the eurobonds is not, or is claimed by Marconi plc not to be,in full force and effect (other than following its termination in accordance with itsterms).

For so long as the eurobonds remain outstanding, Marconi Corporation plc has agreed that itwill not, without taking actions which satisfy the eurobond trustee or 75% of the holders of theeurobonds, create or have outstanding any mortgage, charge, pledge, lien or other securityinterest on any of its present or future assets or revenues to secure debt securities. Except for theguarantee of the eurobonds by Marconi plc, Marconi Corporation plc has agreed that it will not,without taking actions which satisfy the eurobond trustee or 75% of the holders of theeurobonds, permit to exist any other guarantee of or indemnity or any arrangement havingsimilar effect from Marconi plc relating to debt securities of Marconi Corporation plc. The LawDebenture Trust Corporation p.l.c., the eurobond trustee, has given its consent to Marconi plc’sguarantee of the bonds offered by this prospectus.

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DESCRIPTION OF THE BONDS

Marconi Corporation plc will issue:

•▲$900,000,000 principal amount of 73⁄4% bonds, due 2010 (the ‘‘2010 bonds’’); and

•▲$900,000,000 principal amount of 83⁄8% bonds, due 2030 (the ‘‘2030 bonds’’).

When we refer to ‘‘the bonds’’ below, we mean both tranches of bonds listed above.

The bonds are to be issued under an indenture, to be dated as of September 19▲, 2000

between Marconi Corporation plc, Marconi plc and The Bank of New York, as trustee. The termsof the indenture are governed by the U.S. Trust Indenture Act of 1939. A copy of the indenture isfiled as an exhibit to the registration statement of which this prospectus is a part.

A global security representing an interest in 100% of the 2010 bonds and a global securityrepresenting an interest in 100% of the 2030 bonds will be deposited with The Bank of NewYork, as depositary. The global securities will be deposited when the bonds are issued, and willnot have coupons for payment attached. The Bank of New York will hold the global securities forthe benefit of The Depository Trust Company or its successor or the nominee of either, asapplicable. The global securities will be held under a deposit agreement to be dated as ofSeptember 19, 2000,

▲among Marconi Corporation plc and the depositary. A copy of the deposit

agreement is filed as an exhibit to the registration statement of which this prospectus is a part.

The following is a summary of the indenture and the deposit agreement.

General

The 2010 bonds:

• are limited in aggregate principal amount to $▲▲900,000,000;

• will mature on▲September 15, 2010 at a price equal to 100% of their principal amount;

and

• will bear interest at the rate of▲73⁄4% per annum, from September 19

▲, 2000.

The 2030 bonds:

• are limited in aggregate principal amount to $▲900,000,000

▲;

• will mature on▲September 15, 2030 at a price equal to 100% of their principal amount;

and

• will bear interest at the rate of▲83⁄8% per annum, from September 19

▲, 2000.

Both the 2010 bonds and the 2030 bonds:

• are senior unsecured obligations of Marconi Corporation plc;

• rank equally with each other and at least equally with all other existing and futureunsecured obligations of Marconi Corporation plc;

• will be issued under the indenture;

• will be deposited with the depositary, under the deposit agreement, on or about

▲September 19, 2000;

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• will have principal and interest, and any additional amounts, as defined below, payablein U.S. dollars in immediately available funds;

• will have interest payable semi-annually on▲March 15 and

▲September 15 of each year

beginning on▲March 15, 2001, to the holders, as defined below, at the close of business

on the preceding▲March 1 and

▲September 1, respectively; and

• will be issued in denominations of $1,000 principal amount at maturity, and integralmultiples of $1,000.

The United Kingdom could require that we withhold amounts from payments on theprincipal or interest of the bonds for taxes or any other governmental charges. If the UnitedKingdom were to require withholding of this type, we would be required under the indenture topay you an additional amount so that the net amount you receive will be the amount specified inthe terms of the bonds to which you are entitled. You should refer to ‘‘—Additional amounts’’below for a list of the circumstances where we would not be required to pay these additionalamounts.

As we discuss more fully below, the bonds may be redeemed, as a whole or in part, at anytime at a redemption price we describe under ‘‘—Optional redemption’’ below, together withinterest on the bonds to the date fixed for redemption. In addition, the bonds may be redeemed,as a whole but not in part, at a redemption price equal to 100% of their principal amount,together with interest on the bonds to the date fixed for redemption, if Marconi Corporation plcwould be required to pay the additional amounts described in the preceding paragraph for thebonds. We describe these provisions more fully below under ‘‘— Optional tax redemption.’’

We make promises, or covenants, in the indenture. Some of our property may be subject to amortgage or other legal mechanism that would give our lenders preferential rights in thatproperty over other lenders, including you, if we fail to pay them back. These preferential rightsare called liens. We promise in the indenture that neither Marconi Corporation plc nor any of itsmaterial subsidiaries will become obligated on debt for borrowed money that is secured by a lienon any property or any equity interests that Marconi Corporation plc or its material subsidiariesown, without granting an equivalent or higher-ranking lien on the same property to holders ofthe bonds. We also agree that we will not permit there to be any guarantees from Marconi plc ofthe categories of our debt securities we describe below unless an equivalent guarantee fromMarconi plc is in place for the bonds. We do not need to comply with this restriction if theamount of all debt that would be secured by liens on this property or these equity interests,excluding permitted liens, plus attributable debt relating to sale and leaseback transactions,which we discuss below, is less than 15% of our consolidated shareholders’ equity. Somecategories of liens, such as liens existing on or before the date of the indenture and liens arisingas a matter of law, are not covered by this restriction. We discuss this restriction on liens andguarantees and list the categories of permitted liens and guarantees below under ‘‘—Certaincovenants—Limitation on liens and guarantees.’’

In addition, we promise in the indenture that neither Marconi Corporation plc nor any of itsmaterial subsidiaries will engage in sale and leaseback transactions unless they comply with theterms of the indenture. A sale and leaseback transaction is an arrangement in which MarconiCorporation plc or a material subsidiary leases from another person a property that it previouslyhad owned and sold to that person. We can enter into a sale and leaseback transaction if wewould be able to grant a lien on the property without granting an equivalent or higher-rankinglien to the holders of the bonds. We can also enter into sale and leaseback transactions if weapply the money generated by the sale of the leased property or an amount equal to the fair valueof the property, whichever is greater, either to an investment in another property or to the

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retirement of indebtedness for money borrowed, incurred or assumed. We discuss this restrictionin more detail below under ‘‘—Certain covenants—Limitations on sale and leasebacktransactions.’’

When a principal or interest payment date, or a redemption date, falls on a Saturday,Sunday, legal holiday, or a day when banks are authorized or obligated to close in London,Luxembourg, or New York City, payment may be made on the next business day in London,Luxembourg, or New York City. Interest in respect of any period of less than one year will becalculated on the basis of a 360-day year of twelve 30-day months on an unadjusted basis.Neither the 2010 bonds nor the 2030 bonds will be entitled to the benefit of any sinking fund.

Marconi Corporation plc has applied to list the bonds on the Luxembourg Stock Exchange.

Claims of investors in the bonds will be effectively subordinated to the claims of holders ofdebt of Marconi Corporation plc’s subsidiaries as to the assets of these subsidiaries. In addition,claims of investors in the bonds will be effectively subordinated to the claims of holders ofsecured debt of Marconi Corporation plc and its subsidiaries on the collateral securing theseclaims. Marconi Corporation plc does not at present have any secured debt. Claims of MarconiCorporation plc as the holder of general unsecured intercompany debt will be similarlyeffectively subordinated to claims of holders of secured debt of its subsidiaries.

Neither the indenture nor the bonds will contain provisions which will afford investors inthe bonds protection in the event of a takeover, recapitalization or similar restructuring involvingMarconi Corporation plc that could adversely affect the investors.

For a description of our principal current indebtedness other than the bonds, see‘‘Description of Other Indebtedness.’’

Initial settlement for the bonds and settlement of any secondary market trades in the bondswill be made in same-day funds. Book-entry interests, described below, in the bonds will settlein DTC’s Same-Day Funds Settlement System.

Form of securities; settlement and clearance

General

Each tranche of the bonds will initially be represented by a global security in bearer form,without coupons attached, in a denomination equal to the aggregate principal amount of theoutstanding bonds of the tranche to be represented by that global security. Title to the globalsecurity will pass by delivery. The holder of any certificate representing any bonds, includingany global security (the ‘‘holder’’), is the person that has possession of the certificate, in the caseof a bearer certificate, and the person in whose name the certificate is registered, in the case of acertificate in registered form.

The global securities will be deposited on issue with the depositary. Under the depositagreement, the depositary will issue to DTC in New York certificateless depositary interests,which together represent a 100% interest in each underlying global security. The certificatelessdepositary interests will be registered in the name of DTC or its nominee. Upon acceptance byDTC of a certificateless depositary interest for entry into its book-entry settlement system,beneficial interests in the certificateless depositary interests will be issued by DTC and tradedthrough DTC’s book-entry system.

Book-entry interests will be held by or through persons that have accounts with DTC (‘‘directparticipants’’) or persons that hold interests through direct participants (‘‘indirect participants’’and, together with direct participants, ‘‘participants’’). The laws of some states may require that

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certain investors in securities take physical delivery of such securities in definitive form. Theselaws may impair the ability of investors to own book-entry interests.

Ownership of the book-entry interests will be shown on, and the transfer of ownership willbe effected through, records maintained by DTC or its participants. Book-entry interests will betransferable only as units in the same authorized denominations as the bonds to which theycorrespond. Unless any tranche of the bonds is exchanged in whole or in part for other securitiesof Marconi Corporation plc, or the applicable global security is exchanged for bonds in definitive,registered form (‘‘definitive securities’’), the certificateless depositary interest representing thetranche held by DTC may not be transferred except as a whole between DTC, a nominee of DTC,a successor of DTC or a nominee of this successor.

So long as the depositary or its nominee is the holder of the global security representing atranche of the bonds, the depositary or its nominee will be considered the sole holder of theglobal security for all purposes under the indenture. Except as we describe below under ‘‘—Issuance of definitive securities and termination of the deposit agreement,’’ no participant orother person will be entitled to have bonds registered in its name, receive or be entitled toreceive physical delivery of definitive securities or be considered the owner or holder of thebonds under the indenture or the deposit agreement. Accordingly, each person owning a book-entry interest must rely on the procedures of the depositary and DTC and, if the person is not adirect participant in DTC, on the procedures of the direct participant or other securitiesintermediary through which the person owns its interest, to exercise any rights and obligations ofa holder under the indenture, the bonds or the deposit agreement.

Payments on the global security

Payments of any amounts relating to any global security will be made through the payingagent or paying agents, as we describe below, to the depositary, as the holder of the globalsecurity. Marconi Corporation plc and its agents will be discharged, by payment to or to theorder of the depositary, from any responsibility or liability for each amount paid in this manner.Under the deposit agreement, the depositary will pay an amount equal to all these payments toDTC. None of Marconi Corporation plc, the trustee, the depositary or any of their agents willhave any responsibility or liability for any aspect of the records relating to payments made byDTC or its participants on account of book-entry interests or for maintaining, supervising orreviewing any records relating to the book-entry interests.

Information regarding DTC, Euroclear and Clearstream Banking

DTC, Euroclear and Clearstream, Luxembourg have advised Marconi Corporation plc of thefollowing information:

DTC

DTC is:

• a limited-purpose trust company organized under the New York Banking Law;

• a ‘‘banking organization’’ within the meaning of the New York Banking Law;

• a member of the Federal Reserve System;

• a ‘‘clearing corporation’’ within the meaning of the New York Uniform CommercialCode; and

• a ‘‘clearing agency’’ registered under Section 17A of the Exchange Act.

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DTC was created to hold securities of its participants and to facilitate the clearance andsettlement of transactions among its participants in these securities through electronic book-entrychanges in accounts of the participants, eliminating the need for physical movement of securitiescertificates. Participants include securities brokers and dealers, banks, trust companies, clearingcorporations and certain other organizations. Some of these participants, along with some of theirrepresentatives and others, own DTC. Access to the DTC book-entry system is also available toothers, such as banks, brokers, dealers and trust companies that clear through or maintain acustodial relationship with a participant, either directly or indirectly.

Marconi Corporation plc understands that DTC will take any action permitted to be taken bya holder of a beneficial interest in the bonds only at the direction of participants to whoseaccount with DTC book-entry interests are credited and only for the principal amount of thebook-entry interests as to which these participants have given such direction.

Euroclear and Clearstream, Luxembourg

Some beneficial owners of the bonds may hold their bonds through their accounts withEuroclear and Clearstream, Luxembourg, each of which is a participant in DTC. Euroclear andClearstream, Luxembourg, each holds securities for its account holders and facilitates theclearance and settlement of securities transactions by electronic book-entry transfer between itsaccount holders, eliminating the need for physical movements of certificates and any risk fromlack of simultaneous transfers of securities.

Euroclear and Clearstream, Luxembourg, provide various services including safekeeping,administration, clearance and settlement of internationally traded securities and securitieslending and borrowing. Euroclear and Clearstream, Luxembourg, also deal with domesticsecurities markets in several countries through established depositary and custodial relationships.Euroclear and Clearstream, Luxembourg, have established an electronic bridge between their twosystems across which their account holders may settle trades with each other.

Account holders in Euroclear and Clearstream, Luxembourg, are world-wide financialinstitutions including underwriters, securities brokers and dealers, banks, trust companies andclearing corporations. Indirect access to Euroclear and Clearstream, Luxembourg, is available toother institutions that clear through or maintain a custodial relationship with an account holderof either system.

Account holders’ overall contractual relations with Euroclear and Clearstream, Luxembourg,are governed by the respective rules and operating procedures of Euroclear and Clearstream,Luxembourg, and any applicable laws. Euroclear and Clearstream, Luxembourg, act under theserules and operating procedures only on behalf of their respective account holders. They have norecord of or relationship with persons holding through their respective account holders.

The deposit agreement

Redemption

In the event that a global security or any portion of a global security is redeemed, thedepositary will redeem an equal amount of the certificateless depositary interest or interestsissued to DTC.

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Issuance of definitive securities and termination of the deposit agreement

So long as DTC holds the certificateless depositary interest or interests representing a giventranche of the bonds, the book-entry interests will not be exchangeable for definitive securitiesexcept if:

• DTC notifies the depositary that it is unwilling or unable to continue to hold thecertificateless depositary interest or interests, or if at any time DTC is unable to or ceasesto be a clearing agency registered under the Exchange Act, and a successor to DTCregistered under the Exchange Act is not appointed by the depositary within 120 days;

• the depositary notifies Marconi Corporation plc and the trustee that it is unwilling orunable to continue to act as depositary, and Marconi Corporation plc is unable toappoint a successor depositary within 120 days;

• in the event of a winding-up of Marconi Corporation plc, Marconi Corporation plc failsto make a payment on a tranche of the bonds when due, or an event of default, asdefined below, has occurred and is continuing; or

• Marconi Corporation plc at its option and in its sole discretion determines that theglobal security representing a series of bonds should be exchanged for definitivesecurities.

To receive or direct the delivery of possession of any definitive securities, each personowning a book-entry interest must rely exclusively on the provisions of the deposit agreement,the rules or procedures of DTC and any agreement with any participant or any other securitiesintermediary through which that person holds its interest.

If definitive securities are issued by Marconi Corporation plc in exchange for a particularglobal security, the depositary will promptly notify DTC that the corresponding global securitywill be exchanged in whole or in part for definitive securities. Definitive securities will be issuedin such names and amounts as DTC may specify upon cancellation of the correspondingcertificateless depositary interests and all book-entry interests relating to the certificatelessdepositary interests. The depositary will promptly surrender the corresponding global securityheld by it to the trustee in connection with such exchange for cancellation.

Any definitive securities will be issued in registered form in the same authorizeddenominations as the bonds to which they correspond. Payments of principal, interest or otheramounts in respect of the definitive securities will be made to the person in whose name thedefinitive securities are registered in the register. Payments on definitive securities in U.S. dollarswill be payable at the Corporate Trust Office or agency of the trustee in New York City and at thespecified office of the paying agent in Luxembourg maintained for such purposes, againstsurrender of the relevant definitive securities in the case of payment of principal, and at otheroffices as may be designated from time to time. In addition, payments may be made by checkdrawn on a bank in New York or, at the request of the holder, by transfer to an account of theholder in New York. Definitive securities should be presented to any paying agent

▲for

redemption.

A definitive security may be transferred upon the surrender at the specified office of thetransfer agent of the certificate representing the definitive security to be transferred, together withany forms and other evidence that the transfer agent may reasonably require. In the event of apartial transfer of definitive securities, new definitive securities in permitted denominations willbe obtainable as soon as practicable at the office of the trustee

▲or any transfer agent. We will not

be required to transfer any definitive security during the period of 15 days preceding the duedate for any payment of principal, interest or other amounts, if any, due, or the date on whichthe bonds are scheduled for redemption.

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If any definitive security is mutilated, destroyed, stolen or lost, it may be replaced at thespecified office of the trustee or any transfer agent or paying agent. Replacement will be madeupon payment by the claimant of the expenses incurred by Marconi Corporation plc inconnection with such replacement, including the fees and expenses of the trustee, transfer agentor paying agent, together with any indemnity that such parties and Marconi Corporation plc mayreasonably require from the claimant. Mutilated definitive securities must be surrendered beforereplacements will be issued.

To the extent permitted by law, Marconi Corporation plc, the trustee and any agents of eitherof them will be entitled to treat the person in whose name any definitive securities are registeredas the absolute owner of such definitive securities. Holders of or owners of interests in any ofthe bonds should be aware that, under current U.K. law, payments, including payments ofinterest, on definitive securities will be subject to withholding in respect of U.K. income tax,currently 20%, subject to the availability of double tax treaty relief, if any. Subject to thelimitations we describe below, Marconi Corporation plc will, for either tranche of bonds, berequired to pay additional amounts on any definitive securities representing that tranche and, ifrequired to pay these additional amounts, may be entitled to redeem these bonds. See‘‘—Additional amounts’’ and ‘‘—Optional tax redemption.’’

Reports

The deposit agreement requires the depositary promptly to send to DTC a copy of anynotices, reports and other communications received relating to Marconi Corporation plc or thebonds.

Action by depositary

The deposit agreement requires the depositary to exercise any of its rights or powers vestedin it by the deposit agreement as requested by DTC, so long as the depositary has been offeredreasonable security or indemnity against the costs, expenses and liabilities that might be incurredby it in compliance with such request.

Amendment of deposit agreement

The depositary and Marconi Corporation plc may only amend the deposit agreement withoutthe consent of DTC or the owners of book-entry interests:

• to cure any ambiguity, omission, defect or inconsistency in the deposit agreement;

• to add to the covenants and agreements of the depositary or Marconi Corporation plc;

• to evidence or effectuate the assignment of the depositary’s rights and duties to aqualified successor;

• to comply with the Securities Act, the Exchange Act, the U.S. Investment Company Actof 1940, the U.S. Trust Indenture Act of 1939 or any other applicable law, rule orregulation; or

• to modify, alter, amend or supplement the deposit agreement in a manner that is notadverse to the interests of DTC or the owners of book-entry interests.

Resignation or removal of depositary

The depositary may at any time, following 60 days’ written notice to Marconi Corporationplc and DTC, resign as depositary. The depositary may be removed at any time upon 90 days’written notice or, under certain circumstances, immediately. A resignation or removal will

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become effective upon the appointment of a successor depositary. If Marconi Corporation plc isunable to appoint a successor depositary promptly, DTC or the depositary may, on behalf of itselfand all others similarly situated, at the expense of Marconi Corporation plc, petition any court ofcompetent jurisdiction for the appointment of a successor depositary, unless definitive securitieshave been issued for all outstanding bonds in accordance with the indenture.

Obligations of depositary

The depositary will assume no obligation or liability under the deposit agreement or anyagreement with DTC other than to use good faith and reasonable care in the performance of itsduties under the deposit agreement. Marconi Corporation plc will agree to indemnify thedepositary against certain liabilities incurred by it under the deposit agreement.

Status of the bonds

The bonds will constitute direct, unconditional, unsubordinated and, subject to theprovisions set forth below under ‘‘—Certain covenants—Limitations on liens and guarantees,’’unsecured obligations of Marconi Corporation plc. The bonds will rank equally amongthemselves and at least equally with all other present and future unsecured and unsubordinatedobligations of Marconi Corporation plc, but in the event of insolvency, only to the extentpermitted by applicable laws relating to creditors’ rights.

Because Marconi Corporation plc is a holding company, its rights and the rights of itscreditors to participate in the distribution of the assets of any of its subsidiaries upon theirliquidation or recapitalization will be subject to the prior claims of any of their creditors, exceptto the extent that Marconi Corporation plc may itself be a creditor with recognized claims againstthat subsidiary.

The guarantee

Marconi plc, which indirectly holds 100% of the capital stock of Marconi Corporation plc,will fully and unconditionally guarantee all payments of sums payable under the bonds byMarconi Corporation plc. Marconi plc guarantees the payments of these amounts when theybecome due and payable. You do not need to proceed against Marconi Corporation plc beforeyou can proceed against Marconi plc under the guarantee.

The guarantee will terminate on the date on which Marconi plc is unconditionally andirrevocably released from all its obligations as guarantor under the following facilities:

• the syndicated credit facility dated March 25, 1998 among Marconi Corporation plc,Marconi plc and the banks named in that facility;

• the syndicated credit facility dated June 4, 1999 among Marconi Corporation plc,Marconi plc and the banks named in that facility; and

• the eurobond trust deeds dated March 30, 2000 among Marconi Corporation plc, TheLaw Debenture Trust Corporation p.l.c. and Marconi plc.

The 1998 and 1999 credit facilities do not currently provide for circumstances in whichMarconi plc would be released as a guarantor under the facilities. However, each facility couldbe amended at any time with the consent of all the banks under the facility to release Marconiplc from its obligations as guarantor. In addition, unless the 1998 syndicated credit facility isamended or extended, Marconi plc will be released from its obligations as guarantor under thatfacility when it terminates on March 25, 2003. Unless the 1999 syndicated credit facility is

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amended or extended, Marconi plc will be released from its obligations as guarantor under thatfacility when it terminates on June 2, 2001. Marconi plc will be released from its obligations asguarantor under the eurobond trust deeds when it is released from its obligations as guarantorunder the 1998 and 1999 credit facilities. If the bonds are listed on the Luxembourg StockExchange at the time the guarantees are released and the rules of that stock exchange require usto do so, we will publish notice to holders in Luxembourg and notify the stock exchange in themanner described below under ‘‘—Notices and reports.’’

Paying agents

Marconi Corporation plc will maintain one or more paying agents for payments relating toeach tranche of the bonds. The Corporate Trust Office of the trustee in New York City will bedesignated as a paying agent. While any of the bonds are outstanding and listed on theLuxembourg Stock Exchange, Marconi Corporation plc will also maintain a paying agent and atransfer agent in Luxembourg through which payment of principal, interest and other amounts, ifany, may be made and through which the registration of transfer of bonds in definitive form, if any,may be effected. The paying and transfer agent in Luxembourg is Banque Internationale aLuxembourg, societe anonyme, 69 route d’Esch, L-2953 Luxembourg.

Marconi Corporation plc may at any time designate additional paying agents, rescind thedesignation of any paying agent or approve a change in the office through which any payingagent acts. Marconi Corporation plc will be required to maintain a paying agent in each place ofpayment for the bonds. The Company may not, however, at any time appoint or maintain apaying agent in the United Kingdom. So long as the bonds are listed on the Luxembourg StockExchange and the rules of that stock exchange require

▲us to do so, Marconi Corporation plc will

publish notice of any change in agents to holders in Luxembourg and notify the stock exchangein the manner described below under ‘‘—Notices and reports.’’

All monies paid by Marconi Corporation plc to a paying agent for the payment of principal,premium, if any, interest or other amount which remain unclaimed at the end of two years afterthe principal, premium if any, interest or other amount has become due and payable will berepaid to Marconi Corporation plc. The holder of the affected bonds after this repayment maylook only to Marconi Corporation plc for payment.

Additional amounts

All payments of principal, premium, if any, and interest made by Marconi Corporation plcon the bonds will be made without withholding or deduction for, or on account of, any presentor future taxes, duties, assessments or governmental charges of whatever nature imposed orlevied by or on behalf of the United Kingdom or by or within any political subdivision of theUnited Kingdom or any authority in the United Kingdom with the power to tax (each, a ‘‘taxingjurisdiction’’). Marconi Corporation plc will, however, withhold or deduct taxes, duties,assessments or governmental charges if it is required by law to do so.

If any deduction or withholding will at any time be required from any amounts to be paid byMarconi Corporation plc on any of the bonds, Marconi Corporation plc will pay to each holder ofthe bonds additional amounts as may be necessary in order that the net amounts paid to theholder after deduction or withholding will be at least equal to the amounts specified in the bondsas the amount to which the holder is entitled. Marconi Corporation plc will not, however, berequired to make any payment of additional amounts to a holder for or on account of:

1. any tax, duty, assessment or other governmental charge which was imposed, withheld ordeducted because of:

(a) the existence of any present or former connection between the holder or beneficialowner of the bonds and the relevant taxing jurisdiction other than the holding or

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ownership of bonds or the collection of principal of and interest if any, on, or theenforcement of, bonds; or

(b) where presentation is required, the presentation of a bond for payment:

(1) in the United Kingdom; or

(2) on a date more than 30 days after the date on which the payment became dueand payable or the date on which the payment is duly provided for, whicheveroccurs later, except to the extent that the holder would have been entitled toadditional amounts if it had presented such bond for payment before the end ofthe 30-day period;

2. any tax, duty, assessment or other governmental charge that is imposed, deducted orwithheld because of the failure to comply by the holder or the beneficial owner of abond or the beneficial owner of any payment on such bond with a request of MarconiCorporation plc addressed to the holder or the beneficial owner, including a request ofMarconi Corporation plc related to a claim for relief under any applicable double taxtreaty:

(a) to provide information concerning the nationality, residence, identity or connectionwith a taxing jurisdiction of the holder or beneficial owner; or

(b) to make any declaration or other similar claim to satisfy any information orreporting requirement,

if the information or declaration is required or imposed by a statute, treaty, regulation,ruling or administrative practice of the taxing jurisdiction as a precondition toexemption from withholding or deduction of all or part of the tax, duty, assessment orother governmental charge;

3. any tax, duty, assessment or other governmental charge which would not have beenimposed, withheld or deducted if presentation for payment had been made to a payingagent other than the paying agent to which the presentation was made;

4. any state, inheritance, gift, sale, transfer, personal property, wealth or other similar tax,duty assessment or other governmental charge; or

5. any combination of items 1, 2, 3 and 4 above.

You should understand any reference to any payment of principal, premium or interest onthe bonds in this prospectus to also include any payment of additional amounts on the bondsthat we may be required to make under the indenture, whether or not we mention additionalamounts.

Optional redemption

Marconi Corporation plc may redeem any or all of the bonds of either tranche at any timeupon notice to holders. If it decides to do so, Marconi Corporation plc will redeem these bondsat a redemption price equal to the greater of:

• 100% of the principal amount of bonds to be redeemed; or

• the sum of the present values of the remaining scheduled payments of principal andinterest on the bonds to be redeemed discounted to the date of redemption on a semi-annual basis, assuming a 360-day year consisting of twelve 30-day months, at theTreasury rate plus

▲25 basis points, in the case of the 2010 bonds, and

▲▲30 basis points, in

the case of the 2030 bonds;

plus in each case accrued and unpaid interest to the date of redemption. The Treasury rate isequal to the yield, as published by the Board of Governors of the Federal Reserve System, onactively traded U.S. Treasury securities with a maturity comparable to the remaining life of thebonds to be redeemed, as selected by Morgan Stanley & Co. Incorporated. If there is no such

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publication of this yield during the week preceding the calculation date, the Treasury rate will becalculated by reference to quotations from selected primary U.S. Government securities dealers inNew York City. The Treasury rate will be calculated on the third business day preceding theredemption date.

Marconi Corporation plc must give notice of redemption of the bonds between 30 and 60days before the date fixed for redemption. As long as the bonds being redeemed are listed on theLuxembourg Stock Exchange and the rules of that stock exchange require it to do so, MarconiCorporation plc will publish the notice to holders in Luxembourg in the manner described belowunder ‘‘—Notices and reports.’’

▲

Optional tax redemption

If at any time Marconi Corporation plc determines that:

• it would be obligated to pay additional amounts on a tranche of the bonds as a result ofany change in, or amendment to, the laws or any regulations or rulings promulgatedunder the laws of any taxing jurisdiction, or any change in official position regardingapplication or interpretation of the laws, regulations or rulings, including a holding by acourt of competent jurisdiction;

• the change, amendment, application or interpretation became effective on or after thedate of this prospectus; and

it cannot avoid the obligation to pay additional amounts on a tranche of the bonds bytaking reasonable measures available to it

then Marconi Corporation plc may redeem all but not just some of the bonds of that tranche,after giving notice to holders, at a redemption price equal to 100% of the principal amount of thebonds, together with accrued interest to the date fixed for redemption, if any.

Before giving any notice of redemption of the bonds, Marconi Corporation plc must deliverto the trustee:

• an opinion of independent legal counsel of recognized standing stating that MarconiCorporation plc is entitled under the indenture to effect such redemption; and

• a certificate setting forth a statement of facts showing the necessary conditions beforeMarconi Corporation plc can exercise its right to redeem have been satisfied.

In the event that the obligations of Marconi Corporation plc under either tranche of thebonds are assumed in accordance with the indenture by any successor corporation organizedunder the laws of a jurisdiction other than the United Kingdom, the successor will be entitled toredeem the bonds subject to the terms of the preceding two paragraphs, substituting the name ofthe successor corporation’s jurisdiction for the United Kingdom and the date of such assumptionfor the date of this prospectus. The successor corporation will not have this entitlement,however, if on or before the date of its assumption the relevant taxing authority had publiclyannounced that a change was to occur.

Marconi Corporation plc must give notice of redemption of any series of the bonds asprovided above between 30 and 60 days before the date fixed for redemption. However, MarconiCorporation plc may not give notice of redemption more than 60 days before the earliest date onwhich it would be required to pay additional amounts if a payment under the bonds was thendue. As long as the bonds being redeemed are listed on the Luxembourg Stock Exchange and therules of that stock exchange require it to do so, Marconi Corporation plc will publish the noticeto holders in Luxembourg in the manner described below under ‘‘—Notices and reports.’’ AfterMarconi Corporation plc has given notice, the bonds of the relevant tranche will become due andpayable on the date fixed for redemption.

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In that event, the bonds will be paid:

• at the redemption price;

• together with accrued interest to the date fixed for redemption;

• at the place or places of payment; and

• in the manner specified in the indenture.

Starting on the redemption date, if moneys for the redemption of the bonds called forredemption have been made available as provided in the indenture on the redemption date, thebonds being redeemed will cease to bear interest, and the only right of the holders of the bondswill be to receive payment of the redemption price and all unpaid interest accrued to the date ofredemption.

Certain covenants

The following covenants apply to the bonds.

Consolidation, merger, sale, conveyance or other transfer of assets

Under the bonds and the indenture, Marconi Corporation plc may consolidate with or mergeinto any other person, or sell, convey or transfer all or substantially all of its assets to any otherperson, and may permit any of its subsidiaries to enter into any of these transactions, if thetransactions would in the aggregate result in the consolidation, merger, sale, conveyance ortransfer of all or substantially all of the consolidated assets of Marconi Corporation plc and itssubsidiaries, without the consent of the holders, so long as:

1. immediately after giving effect to such transaction or transactions, no event of default,and no event which, after notice or lapse of time or both, would become an event ofdefault, has occurred and is continuing; and

2. the purchasing or transferee person, or the successor, continuing or resulting person inthe case of a merger or consolidation where Marconi Corporation plc is not the survivingperson, as the case may be:

(a) expressly assumes, by an amendment to the indenture and the bonds, theobligations of Marconi Corporation plc under the indenture and the bonds and thedue and punctual performance and observance of all the covenants and conditionsto be performed or observed by Marconi Corporation plc under the indenture andthe bonds; and

(b) if the person is organized under the laws of a jurisdiction other than the UnitedKingdom, agrees to assume Marconi Corporation plc’s obligations under the bondsto pay additional amounts as discussed under ‘‘—Additional amounts’’ above,substituting the name of the successor jurisdiction for the United Kingdom eachplace that it appears in that section.

When a purchasing or transferee person or the successor, continuing or resulting person, inthe case of a merger or consolidation where Marconi Corporation plc is not the surviving person,assumes all the obligations of Marconi Corporation plc under the indenture and the bonds inaccordance with this section, and all other requirements of this covenant have been met, MarconiCorporation plc will, without further action, be released from those obligations.

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An assumption of Marconi Corporation plc’s obligations under the bonds by any personmight be deemed for U.S. federal income tax purposes to be an exchange of the bonds for newbonds by the investors in the bonds, resulting in the recognition of gain or loss and possiblyother adverse tax consequences to the investors. Investors in the bonds should consult their owntax advisors regarding the tax consequences of an assumption.

Limitations on liens and guarantees

The indenture provides that, for so long as any of the bonds remains outstanding, neitherMarconi Corporation plc nor any of its material subsidiaries will create, incur or assume anyDebt secured by an encumbrance on any property or equity interests of Marconi Corporation plcor any of its material subsidiaries without effectively providing, when the Debt is created,incurred or assumed, that the bonds will be secured equally or prior to such Debt. MarconiCorporation plc or that material subsidiary, as the case may be, may also choose to provide thissecurity for any other of its existing or future Debt ranking at least equally with the bonds.

In addition, Marconi Corporation plc will not permit to exist, other than the guarantee of thebonds described above under ‘‘—The guarantee,’’ any guarantee or indemnity from Marconi plcor any arrangement having a similar effect relating to any Debt Securities of Marconi Corporationplc, without providing that the bonds will benefit from that guarantee, indemnity or similararrangement. Marconi Corporation plc may also choose to extend the benefit of that guarantee,indemnity or similar arrangement to any other of its existing or future Debt Securities ranking atleast equally with the bonds. As long as the guarantee remains in effect, Marconi plc mayguarantee any additional Debt Securities of Marconi Corporation plc or provide an indemnityrelating to any additional Debt Securities of Marconi Corporation plc, or make any arrangementhaving a similar effect relating to any additional Debt Securities of Marconi Corporation plc, ifMarconi Corporation plc certifies to the trustee that the guarantee of the bonds is substantiallyequivalent to the guarantee of or indemnity or arrangement relating to those additional DebtSecurities.

This restriction on liens and guarantees will not apply, however, to:

1. encumbrances:

• on property or equity interests existing at the time of acquisition of the property orequity interests;

• to secure the payment of all or part of the cost of the improvement, construction,alteration or repair of the property;

• in the case of equity interests, to secure any Debt incurred before, at the time of orwithin twelve months after the acquisition of the equity interests for the purpose offinancing all or any part of the purchase price of the equity interests; or

• in the case of other property, to secure any Debt incurred before the later of:

—the acquisition of the property;

—the completion of construction of the property, including any improvements,alterations or repairs on an existing property; or

—the commencement of commercial operations of the property;

for the purpose of financing all or any part of the purchase price of the property orall or any part of the cost of improvement, construction, alteration or repair of theproperty.

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2. encumbrances existing at the date of the indenture;

3. guarantees or indemnities or arrangements having a similar effect of Marconi plc existingat the date of the indenture;

4. encumbrances on property owned or held by any person or on equity interests of anyperson, in any case existing at the time:

• such person is merged into or consolidated or amalgamated with MarconiCorporation plc or the material subsidiary, as the case may be; or

• of a sale, lease or other disposition of all or substantially all of the property or stockof such person to Marconi Corporation plc or the material subsidiary, as the casemay be;

provided that the encumbrance was not incurred in anticipation of such merger,consolidation or amalgamation or sale, lease or other disposition;

5. encumbrances arising by operation of law;

6. any encumbrance arising out of or in connection with any pre-judgment legal process ora judgment or judicial award relating to security for legal costs;

7. any encumbrance the principal purpose and effect of which is to allow the setting-off ornetting of obligations (a) with those of a financial institution or (b) under swaps or otherderivative financial instruments, in each case arising or entered into in the ordinarycourse of the cash management activities of the Marconi group;

8. encumbrances arising in the ordinary course of business;

9. any retention of title reserved by any seller of goods or any encumbrance imposed,reserved or granted over goods supplied by a seller in the ordinary course of business;and

10. any extension, renewal or replacement or successive extensions, renewals orreplacements, as a whole or in part, of any encumbrance referred to in clauses (1) to (9)above or of any Debt secured by any of these encumbrances, so long as the principalamount of Debt secured by the encumbrance does not exceed the principal amount ofDebt so secured at the time of such extension, renewal or replacement, plus any relatedfees and expenses.

Marconi Corporation plc and its material subsidiaries may, however, create, incur or assumeDebt secured by an encumbrance or encumbrances on property or equity interests which wouldotherwise be subject to the restrictions listed above so long as the aggregate amount of such Debt,together with all other such Debt of Marconi Corporation plc and its material subsidiaries andtheir Attributable Debt in respect of sale and leaseback transactions, does not at the time exceed15% of Consolidated Shareholders’ Equity. The reference to Attributable Debt in the previoussentence does not include Attributable Debt for sale and leaseback transactions covered byclauses (1), (2) or (3) under ‘‘—Limitations on sale and leaseback transactions’’ below.

There is no limitation in the indenture on the ability of any subsidiaries of MarconiCorporation plc that are not material subsidiaries to create, incur, guarantee or assume anysecured or unsecured indebtedness. As of the date of this prospectus, subsidiaries of MarconiCorporation plc conduct substantially all of the operations and directly own substantially all ofthe assets of the Marconi group.

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Limitations on sale and leaseback transactions

The indenture provides that neither Marconi Corporation plc nor any of its materialsubsidiaries may enter into any arrangement with any person, other than a subsidiary, providingfor the leasing by Marconi Corporation plc or the material subsidiary, as the case may be, for aperiod, including renewals, in excess of three years, of any property which has been owned byMarconi Corporation plc or the material subsidiary, as the case may be, for more than 180 daysand which has been or is to be sold or transferred by Marconi Corporation plc or the materialsubsidiary, as the case may be, to that person (a ‘‘sale and leaseback transaction’’). MarconiCorporation plc and its material subsidiaries may, however, enter into a sale and leasebacktransaction if, after giving effect to the sale and leaseback transaction, the aggregate amount of allAttributable Debt relating to all of their sale and leaseback transactions plus all secured Debtcreated, incurred or assumed by Marconi Corporation plc and its material subsidiaries does notexceed 15% of Consolidated Shareholders’ Equity. The reference to Debt in the previous sentencedoes not include secured Debt that Marconi Corporation plc and its material subsidiaries wouldbe entitled to create, incur or assume without equally and ratably securing the bonds under theindenture referred to under ‘‘—Limitation on liens and guarantees’’ above.

This restriction will not apply to a given sale and leaseback transaction where:

1. Marconi Corporation plc or the material subsidiary, as the case may be, would beentitled to create, incur or assume Debt secured by an encumbrance on the propertysubject to the sale and leaseback transaction without equally and ratably securing thebonds;

2. within 180 days after the consummation of the sale and leaseback transaction, we willexpend for any property, including capital improvements on the property, an amountequal to:

(a) the ‘‘Net Proceeds’’ of the sale and leaseback transaction, which we define as thegreater of:

(x) the net proceeds we receive from the sale and leaseback transaction; and

(y) the fair market value of the property sold at the time of entering into thetransaction, as determined in good faith by the board of directors of MarconiCorporation plc; or

(b) a part of the Net Proceeds, so long as we elect to apply the balance of the NetProceeds in the manner described in the following clause (3); or

3. within 180 days after the consummation of any sale and leaseback transaction, we applyan amount equal to the Net Proceeds, less any amount elected under clause (2)(b) above,to the retirement or repayment of Funded Debt, as defined below, of MarconiCorporation plc ranking equally with the bonds or Funded Debt of a subsidiary. Noretirement referred to in this clause (3) may be effected by payment at maturity or underany mandatory sinking fund or prepayment provision, unless repayment is requiredbecause of the receipt of the Net Proceeds.

Certain definitions

For the purposes of these covenants, we define certain terms as follows:

‘‘Attributable Debt’’ means, for any lease as part of a sale and leaseback transaction, as of thedate of determination, the lesser of:

• the fair value of the property subject to the sale and leaseback transaction, as determinedin good faith by the board of directors of Marconi Corporation plc; and

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• the present value, discounted at the weighted average annual interest rate borne by allbonds outstanding at that time, compounded semi-annually, of the total amount of rentrequired to be paid under such lease during its remaining term, including any period forwhich such lease has been extended. Such rental payments do not include amountspayable by or on behalf of the lessee on for maintenance and repairs, insurance, taxes,assessments, water rates and similar charges.

‘‘Consolidated Shareholders’ Equity’’ means the aggregate from time to time of consolidatedequity shareholders’ interests of Marconi Corporation plc and its subsidiaries, as determined inaccordance with applicable accounting standards from time to time used in the preparation ofthe U.K. GAAP audited consolidated annual accounts of Marconi Corporation plc and itssubsidiaries. As of March 31, 2000, this amount equalled £4,419 million.

‘‘Debt’’ means any indebtedness, whether as principal, guarantor or surety, for or in respectof money borrowed, including amounts raised by acceptances under any acceptance credit, bills,bonds, debentures and similar securities and finance leases arranged primarily to raise finance,and the net amount of any liability under any treasury transaction with a bank or financialinstitution. ‘‘Debt’’ does not, however, include any indebtedness:

• arising for or in respect of assets or services acquired or sold in the ordinary course ofbusiness, except to the extent it is a treasury transaction or would be treated as a loan,overdraft or obligation under a finance lease in the audited consolidated annual accountsof Marconi Corporation plc and its subsidiaries; or

• owed by Marconi Corporation plc or a material subsidiary, as the case may be, toMarconi Corporation plc or to any subsidiary of Marconi Corporation plc.

‘‘Debt Securities’’ means any present or future indebtedness, whether principal, premium,interest or other amounts, for or in respect of any notes, bonds, debentures, debenture stock, loanstock or other securities which, with the consent of the issuer of such Debt Securities, are for thetime being quoted, listed or ordinarily dealt in on any stock exchange or other securities market,including any guarantee or indemnity in respect of such indebtedness or any arrangement havinga similar effect. In addition, Debt Securities must be either:

• denominated in a currency other than the pound sterling or, with effect from theParticipation Date, other than euro; or

• denominated in pounds sterling or, with effect from the Participation Date, euro, andinitially distributed primarily outside the United Kingdom.

‘‘Funded Debt’’ means any indebtedness which by its terms or by the terms of anyinstrument or agreement relating to such indebtedness matures, or which is otherwise payable orunpaid, more than one year from, or is directly or indirectly renewable or extendible to a datemore than one year from, the date of creation of such indebtedness. ‘‘Funded Debt’’ also includesany indebtedness which by its terms or by the terms of any instrument or agreement relating tothe indebtedness is repayable less than one year from the date of creation of that indebtedness,so long as the indebtedness is capable of being reborrowed, so that the final maturity of theindebtedness, as reborrowed from time to time, may fall one year or later from the date of itscreation.

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‘‘material subsidiary’’ means any subsidiary of Marconi Corporation plc:

(1) whose equity shareholders’ interests equal at least 15% of Consolidated Shareholders’Equity, all as calculated by reference to the most recent audited financial statements ofthe subsidiary and the most recent audited consolidated financial statements of MarconiCorporation plc; or

(2) to which is transferred all or substantially all of the business, undertakings and assets ofanother subsidiary which immediately prior to the transfer was itself a materialsubsidiary. When the transfer occurs, the transferring subsidiary ceases to be a materialsubsidiary, and the receiving subsidiary becomes and remains a material subsidiary untilthe next publication of its audited financial statements. At that time, the receivingsubsidiary remains a material subsidiary only if it meets the qualification described inclause (1) above.

‘‘Participation Date’’ means the date on which the United Kingdom participates in the thirdstage of European economic and monetary union under the Treaty establishing the EuropeanCommunity as amended by the Treaty on European Union or otherwise participates in Europeaneconomic and monetary union in a manner with similar effect to this third stage.

‘‘person’’ means any individual, corporation, partnership, limited liability company, jointventure, association, joint-stock company, trust, unincorporated organization, government or anyagency or political subdivision of a government or any other entity.

‘‘property’’ means any and all land, buildings, fixtures, machinery, equipment and othertangible assets owned by Marconi Corporation plc or a material subsidiary, and any and allleasehold interests of Marconi Corporation plc or a material subsidiary in any of the above to theextent any are leased by Marconi Corporation plc or that material subsidiary, and any and allleasehold improvements in respect of the above.

‘‘subsidiary’’ means a subsidiary within the meaning of Section 736 of the Companies Act1985, as amended by Section 144 of the Companies Act 1989.

Defeasance

Marconi Corporation plc may elect, at its option and at any time, to have the provisionsrelating to defeasance and discharge of indebtedness, or those relating to defeasance of certaincovenants in the indenture, applied to either tranche of the bonds, or to any specified part of thebonds.

Legal defeasance

The indenture will provide that if Marconi Corporation plc exercises its defeasance optionfor either tranche of the bonds, Marconi Corporation plc will be discharged from all itsobligations for those bonds. However, Marconi Corporation plc will retain certain obligations toexchange or register the transfer of bonds, to replace stolen, lost or mutilated bonds, to maintainpaying agencies and to hold moneys for payment in trust, upon the deposit in trust for thebenefit of the holders of the bonds, cash or U.S. government obligations, or both. The payment ofprincipal of and interest on the cash or obligations must provide funds in an amount sufficient topay the principal of and any premium, interest and other amounts on the bonds on theirrespective stated maturities in accordance with the terms of the indenture and the bonds.

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Defeasance or discharge may occur only if, among other things, Marconi Corporation plc hasdelivered to the trustee an opinion of counsel to the effect that:

• neither the trust nor the trustee will be required to register as an investment companyunder the U.S. Investment Company Act of 1940; and

• there has been a U.S. Internal Revenue Service ruling or a change in tax law to the effectthat holders of the bonds will not recognize gain or loss for U.S. federal income taxpurposes as a result of deposit, defeasance and discharge and will be subject to U.S.federal income tax on the same amount, in the same manner and at the same times aswould have been the case if the deposit, defeasance and discharge were not to occur.Marconi Corporation plc must also deliver a certified copy of the ruling to the trustee.

Covenant defeasance

The indenture will provide that, upon Marconi Corporation plc’s exercise of its option tohave the covenant defeasance section applied to either tranche of the bonds, MarconiCorporation plc can choose not to comply with the covenants described above under ‘‘—Certaincovenants.’’ This noncompliance will not be deemed to be, or result in, an event of default. Inorder to exercise this option, Marconi Corporation plc must deposit, in trust, for the benefit ofthe holders of the bonds, cash or U.S. government obligations, or both. The payment of principaland interest on the cash and U.S. government obligations must provide funds in an amountsufficient to pay the principal of and any premium, interest and other amounts on the bonds ontheir respective stated maturities.

Marconi Corporation plc will also be required, among other things, to deliver to the trusteean opinion of counsel to the effect that:

• neither the trust nor the trustee will be required to register as an investment companyunder the U.S. Investment Company Act of 1940; and

• holders of the bonds will not recognize gain or loss for U.S. federal income taxpurposes as a result of deposit and defeasance of certain obligations and will besubject to U.S. federal income tax on the same amount, in the same manner and atthe same times as would have been the case if the deposit and defeasance were notto occur.

In the event Marconi Corporation plc were to exercise this option and the bonds covered bythe option were declared due and payable because of the occurrence of any event of default, theamount of cash and U.S. government obligations deposited in trust would be sufficient to payamounts due on the bonds at the time of their stated maturities but might not be sufficient to payamounts due on the bonds upon any acceleration resulting from the event of default. In that case,Marconi Corporation plc would remain liable for such payments.

Events of default

The following will be events of default for either tranche of the bonds:

1. Marconi Corporation plc defaults in payment of all or any part of the principal of, or anypremium, interest or additional amounts on, the bonds when they become due andpayable, whether at the stated maturity of the principal or any installment of interest, byacceleration, by notice of redemption or otherwise. In the case of interest or additionalamounts, default in payment will be an event of default only when the default hascontinued for a period of 14 days or more;

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2. except as provided above in clause (1), Marconi Corporation plc or, for so long as theguarantee remains in force, Marconi plc, defaults for 30 days or more after notice hasbeen given to it in the performance or observance of any other covenant contained inany bonds or the indenture, other than a covenant included in the indenture expresslyfor the benefit solely of the other tranche of bonds;

3. either:

(a) any Debt of Marconi Corporation plc or, for so long as the guarantee of Marconi plcremains in force, any Debt of Marconi plc becomes due and payable prematurely byreason of any event of default relating to that Debt; or

(b) Marconi Corporation plc or, for so long as the guarantee remains in force, Marconiplc, fails to make any payment on any Debt within five business days of the duedate for payment or, if longer, within any applicable grace period.

Neither (a) nor (b) above will be an event of default, however, if:

(x) the aggregate amount of the Debt is less than the greater of (A) €50,000,000 or itsequivalent in any other currency or (B) 1.0% of Marconi Corporation plc’sConsolidated Shareholders’ Equity; or

(y) the payment in question is being contested in good faith by Marconi Corporation plcor Marconi plc, as the case may be.

4. Marconi Corporation plc or, for so long as the guarantee remains in force, Marconi plc,stops payment on, or is unable to pay, its debts as they fall due;

5. the guarantee, otherwise than following its release in accordance with its terms, ceasesto be, or is claimed by Marconi plc not to be, in full force and effect;

6. an order is made by a competent court or a resolution is passed for the winding up ordissolution of Marconi Corporation plc or, for so long as the guarantee remains in force,Marconi plc, other than for the purpose of a voluntary winding up, amalgamation,reconstruction or reorganization not involving a bankruptcy or insolvency on termsapproved by the trustee or by holders of 25% in aggregate principal amount of the bonds;

7. Marconi Corporation plc or, for so long as the guarantee remains in force, Marconi plcagrees to any kind of composition, rescheduling, scheme, compromise or other arrangementwith its creditors generally, or any class of its creditors, other than for the purposes of areorganization not involving a bankruptcy or insolvency on terms approved by the trusteeor by holders of 25% in aggregate principal amount of the bonds; or

8. an administrator or other receiver, manager, administrator or other similar official isappointed in relation to substantially all of the assets of Marconi Corporation plc or, for solong as the guarantee remains in force, Marconi plc, or an encumbrancer takes possessionof, or an execution or distress is levied against, substantially all of the assets of MarconiCorporation plc or, for so long as the guarantee remains in force, Marconi plc, in all cases(a) for Debt and (b) which is not discharged within 30 days after such appointment, takingof possession or levy.

If an event of default has occurred and is continuing, other than an event of default byMarconi Corporation plc specified in clauses (6), (7) and (8) above, the trustee, by written noticeto Marconi Corporation plc, or the holders of at least 25% in aggregate principal amount of theoutstanding bonds of the relevant tranche, by written notice to Marconi Corporation plc and thetrustee, may declare the principal of and all accrued interest and additional amounts on thebonds to be due and payable. These amounts will be due and payable on the date that writtennotice is received by or on behalf of Marconi Corporation plc, unless before that date all eventsof default relating to all bonds of the affected tranche have been cured.

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Upon a declaration of amounts due, as just described, the holders of a majority in theprincipal amount of the bonds of the relevant tranche may provide notice to Marconi Corporationplc and the trustee to rescind an acceleration and its consequences. Rescission will be effectiveonly if it would not conflict with any judgment or decree by a court of competent jurisdiction,and if all existing events of default have been cured or waived except non-payment of principalthat has become due solely because of the acceleration. If an event of default in respect ofMarconi Corporation plc specified in clauses (6), (7) or (8) above occurs, the principal of andaccrued interest and additional amounts on the applicable tranche of bonds will be immediatelydue and payable without any declaration or other act on the part of the trustee or any holder ofthe bonds.

Subject to the provisions of the indenture relating to the duties of the trustee in case anevent of default occurs and is continuing, the trustee will be under no obligation to exercise anyof its rights or powers under the indenture at the request or direction of any of the holders,unless the holders have offered the trustee reasonable indemnity. Subject to the provisions forthe indemnification of the trustee, the holders of a majority in aggregate principal amount of theoutstanding bonds of either tranche will have the right to direct the time, method and place ofconducting any proceeding for any remedy available to the trustee or exercising any trust orpower conferred on the trustee on the bonds of the relevant tranche.

No holder of any bonds will have any right to institute any proceeding under the indenture,for any remedy other than proceedings for payment of overdue principal, interest or otheramounts for a holder’s bonds, unless:

• a holder has previously given to the trustee written notice of a continuing event ofdefault on bonds of the same tranche;

• the holders of at least 25% in aggregate principal amount of the outstanding bonds ofthat tranche have made written request to the trustee to institute proceedings;

• the holders have offered to the trustee reasonable indemnity;

• the trustee has not received from the holders of a majority in aggregate principal amountof the applicable tranche of bonds outstanding a direction inconsistent with the request;and

• the trustee has failed to institute proceedings within 60 days.

The limitations above do not apply to a suit instituted by a holder of bonds for theenforcement of payment of the principal of or interest or additional amounts on bonds on or afterthe applicable due dates for such payments.

The indenture contains Marconi Corporation plc’s promise that it will file annually with thetrustee a certificate stating whether or not it is in default under the indenture. If MarconiCorporation plc is in default under the indenture it will include in the certificate a description ofthe nature and status of the default.

Modification, amendment and waiver of indenture terms; meetings of Holders

Modifications of and amendments to the indenture or to the terms and conditions of eithertranche of the bonds may be made, and future compliance with the indenture or the terms andconditions of the bonds or past default by Marconi Corporation plc or Marconi plc may bewaived, with the consent of the holders of at least a majority in aggregate principal amount at thetime outstanding of the bonds of the applicable tranche. However, without the consent of theholder of each bond affected, modification, amendment, waiver or consent may not:

• change the stated maturity of the principal or any installment of interest on the bonds orany additional amounts payable on the bonds;

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• reduce the principal amount of or interest on the bonds or additional amounts payableon the bonds or reduce the amount payable in the event of redemption or default;

• change the currency or place of payment of principal, interest or additional amounts onthe bonds;

• change the obligation of Marconi Corporation plc to pay additional amounts on thebonds, except as otherwise permitted by the indenture;

• impair the right to institute suit for the enforcement of any payment on the bonds;

• reduce any percentage of aggregate principal amount of bonds outstanding necessary tomodify or amend the indenture or the terms and conditions of the bonds or to waive anyfuture compliance or past default; or

• reduce the percentage of aggregate principal amount of bonds outstanding necessary torescind or annul any declaration of the principal of and accrued interest and additionalamounts on the bonds to be due and payable.

Any modifications, amendments or waivers to the indenture or to the terms and conditionsof the bonds will be conclusive and binding on all holders of the bonds of such tranche, whetheror not they have given consent, and on all future holders of the bonds, whether or not notation ofsuch modification, amendments or waivers is made upon the bonds. Any instrument given by oron behalf of any holder of bonds of a given tranche for a consent to any modification,amendment or waiver will be irrevocable once given and will be conclusive and binding on allfuture holders of the bonds.

The indenture contains provisions permitting Marconi Corporation plc and the trustee toenter into one or more supplemental indentures without the consent of the holders in order to:

• evidence the succession of another corporation to Marconi Corporation plc and theassumption by the successor corporation of the covenants, agreements and obligations ofMarconi Corporation plc, in accordance with to the provisions of the indenture and thebonds as described above under ‘‘—Certain covenants—Consolidation, merger, sale,lease, conveyance or other dispositions of assets’’;

• add to the covenants of Marconi Corporation plc for the benefit of the holders of thebonds or surrender any right or power of Marconi Corporation plc;

• add additional events of default;

• secure the bonds;

•▲on or after April 1, 2001, make any changes necessary to effect a change in the form ofthe global security from bearer form to registered form and amend any provisions of theindenture relating to the deposit agreement;

• evidence and provide for the acceptance of appointment under the indenture of asuccessor trustee; and

• cure any ambiguity, or to correct or supplement any provision of the indenture whichmay be inconsistent with any other provision of the indenture or make any otherprovision for matters or questions arising under the indenture as long as any such actionwill not adversely affect the interests of holders.

The indenture will provide that in determining whether the holders of the requisite principalamount of the outstanding bonds of a given tranche have given any direction, notice, consent,waiver or other action under the indenture as of any date, certain bonds, including those forwhose payment or redemption money has been deposited or set aside in trust for the holders andthose that have been fully defeased, will not be deemed to be outstanding.

The indenture contains provisions for convening meetings of the holders of bonds of eithertranche for any of the following purposes:

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• to give any notice to Marconi Corporation plc or to the trustee, or to give any directionsto the trustee, or to consent to the waiving of any default under the indenture and itsconsequences, in each case relating to the bonds held by such holders, or to take anyother action authorized to be taken by holders under the indenture;

• to remove the trustee and appoint a successor trustee;

• to consent to the execution of a supplemental indenture; or

• to waive any covenants, before the time for compliance with such covenants, added afterthe date of the indenture for the benefit of holders of all or either tranche of the bonds.

The quorum at any meeting will be the presence of persons holding or representing bonds ofthe relevant tranche in an aggregate principal amount sufficient under the appropriate provisionof the indenture to take action upon the business for the transaction of which the meeting wascalled. No action at a meeting of holders will be effective unless approved by persons holding orrepresenting bonds of the relevant tranche in the aggregate principal amount required by theprovision of the indenture. At any meeting of holders, each holder or proxy shall be entitled toone vote for each $1,000 principal amount of outstanding bonds of the relevant tranche held orrepresented.

Return of money unclaimed; discharge of trust

Money may be deposited with the trustee or any paying agent, or held by MarconiCorporation plc, in trust for the payment of principal, interest or other amounts due. If thismoney remains unclaimed for two years after such principal, interest or other amounts havebecome due and payable, the money will be paid to Marconi Corporation plc upon request, or, ifthen held by Marconi Corporation plc, will be discharged from such trust. The holder of theaffected bonds may afterwards, as an unsecured general creditor, look only to MarconiCorporation plc for payment. Furthermore, all liability of the trustee or paying agent for the trustmoney, and all liability of Marconi Corporation plc as trustee of this money, will at that timecease.

Notices and reports

In the event that definitive securities are issued, notices to holders of definitive securitieswill be mailed to them or the first named of joint holders by first class mail, or, if first class mailis unavailable, by airmail, at their respective addresses in the register. Notices will be deemed tohave been given on the fourth weekday after the date of mailing.

As long as the bonds are listed on the Luxembourg Stock Exchange and the rules of thatstock exchange so require, notices relating to the bonds will be published in a leading newspaperhaving general circulation in Luxembourg, which is expected to be the Luxembourg Wort. Thisnotice will be deemed to have been given on the date of publication or, if published more thanonce on different dates, on the first date on which publication is made.

As long as the bonds are listed on the Luxembourg Stock Exchange and the rules of thatstock exchange so require, reports filed by Marconi Corporation plc with the SEC or required tobe provided to the holders of the bonds under the indenture may be obtained at the office of thepaying agent in Luxembourg.

Governing law and consent to jurisdiction

The bonds and the indenture will be governed by and will be construed in accordance withthe laws of the State of New York. Marconi Corporation plc has agreed:

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• that any action arising out of or based upon the indenture, the deposit agreement or anyof the bonds may be instituted in any state or federal court in the Borough of Manhattan,New York City;

• that it will irrevocably submit to the non-exclusive jurisdiction of any such court in anysuch action; and

• that it will appoint an authorized agent upon which process may be served in any suchaction.

Concerning the trustee

The trustee for the bonds is The Bank of New York, which is also serving as the depositaryunder the deposit agreement.

Under the terms of the deposit agreement, the party serving as depositary will at all times bethe party serving as trustee under the indenture.

If the trustee is deemed to have a conflicting interest relating to the bonds for purposes of theTrust Indenture Act of 1939, then unless the trustee is able to eliminate the conflicting interest,the trustee may be required to resign as trustee under the indenture. In that event, MarconiCorporation plc would be required to appoint a successor trustee under the indenture.

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TAXATION

The statements below are based on the laws in force in the United Kingdom and the UnitedStates as of the date of this prospectus. They are subject to any subsequent changes in law.Changes could be made on a retroactive basis. The following summary does not purport to be acomprehensive description of all of the tax considerations that may be relevant to a decision toacquire, hold or dispose of bonds. It does not purport to deal with the tax consequencesapplicable to all categories of investors. Some investors may be subject to special rules. We arenot making any representations with respect to the tax consequences to any particular bondholder. You should consult your own tax advisors concerning the overall tax consequences ofyour ownership of bonds.

United Kingdom

Introduction

The following describes certain U.K. tax consequences of the ownership of bonds as of thedate of this prospectus, assuming that the interest paid on bonds will not exceed a reasonablecommercial return. Except where noted, it relates only to the position of persons who are theabsolute beneficial owners of their bonds and may not apply to special situations, such as thoseof dealers in securities.

Payments on the bonds

No withholding or deduction on account of U.K. income tax will be required from paymentsof principal. For so long as bonds are represented by the global bonds, remain in bearer form andare listed on the Luxembourg Stock Exchange or some other stock exchange recognized by theU.K. Inland Revenue, no withholding or other deduction on account of U.K. income tax will berequired from payments of interest where:

• the payment of interest is made through a paying agent who is not in the UnitedKingdom; or

• the payment of interest is made by or through a paying agent who is in the UnitedKingdom and either:

(1) the person beneficially entitled to the interest is not resident in the United Kingdomand beneficially owns the bonds from which the interest derives; or

(2) the bonds are held in a recognized clearing system,

and any other administrative conditions prescribed by regulations are satisfied.

In all other cases, and in particular where paid in respect of the definitive bonds inregistered form, interest will, subject to what we say below, be paid after deduction of incometax at the lower rate, currently 20%, subject to any direction to the contrary by the U.K. InlandRevenue under an applicable double taxation treaty.

Where any person in the United Kingdom, acting in the course of a trade or profession:

• acts as custodian of the bonds, in respect of which he receives any interest or interest ispaid at his direction or with his consent; or

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• collects or secures payments of or receives interest on the bonds for another person,except in any case by means only of clearing a check or arranging for the clearing of acheck; or

• otherwise acts for another person in arranging to collect or secure payment of interest onthe bonds;

the person will withhold on account of U.K. income tax at the lower rate, currently 20%, oninterest and is entitled to deduct an amount to pay the U.K. withholding tax from interest orother sums due from the person or to the holder unless:

• the relevant bonds are held in a recognized clearing system and the person either:

(1) pays or accounts for the interest directly or indirectly to the recognized clearingsystem; or

(2) is acting as depository for the recognized clearing system;

• the person beneficially entitled to the interest is not resident in the United Kingdom andbeneficially owns the bonds; or

• the interest arises to trustees not resident in the United Kingdom of certain discretionaryor accumulation trusts, for example, where none of the beneficiaries of the trust areresident in the United Kingdom; or

• the person beneficially entitled to the interest is eligible for relief from tax on theinterest; or

• the interest falls to be treated as the income of, or of the government of, a sovereignpower or of an international organization; or

• the bonds and the interest are beneficially owned by a person falling into a category,prescribed by regulations made under the Income and Corporation Taxes Act 1988 oranother circumstance prescribed by that Act applies.

In the case of each of the above exceptions (except sub-paragraph (2) above), furtheradministrative conditions imposed by regulations, for instance, as to the making of a declarationin the required form, may have to be satisfied for the relevant exception to be available.

Interest on bonds constitutes U.K. source income for tax purposes and, as such, may besubject to income tax by direct assessment even where paid without withholding. However,except for any income tax deducted as described above, a holder who is not resident for taxpurposes in the United Kingdom will not be liable to U.K. tax on interest on bonds unless thatholder is chargeable to income tax or corporation tax on a branch or agency in the UnitedKingdom through which it carries on a trade, profession or vocation and in connection withwhich the interest is received or to which bonds are attributable. There are exemptions forinterest received by specified categories of agent (such as some brokers and investmentmanagers).

The Finance Act 2000 contains provisions that repeal Part IV, Chapter VIIA of the Incomeand Corporation Taxes Act (which contains the paying and collecting agency rules) and section124, dealing with interest on quoted Eurobonds with effect from April 1, 2001 and replaces theseobligations with the requirement to provide information to the U.K. Inland Revenue in relation tointerest payments in relation to amounts paid or received on or after April 6, 2001. In addition,

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with effect from April 1, 2001 these provisions allow quoted Eurobonds to be in registered formand remove the specific conditions that must currently be satisfied for interest on quotedEurobonds to be payable without withholding; instead, all interest on quoted Eurobonds will beexcluded from the withholding obligation contained in section 349 of the Income andCorporation Taxes Act.

U.K. corporation taxpayers

In general, bondholders which are within the charge to U.K. corporation tax will be chargedto tax as income on all returns on and fluctuations in value of bonds broadly in accordance withtheir statutory accounting treatment. Bondholders will also generally be charged to tax in eachaccounting period by reference to interest accrued in that period.

Other U.K. taxpayers—taxation of chargeable gains

Save as described below in relation to connected persons, the bonds will not constitutequalifying corporate bonds within the meaning of section 117 in the Taxation of ChargeableGains Act 1992. Therefore a disposal (including a redemption) of a bond by a bondholder who isnot subject to U.K. corporation tax in respect of the bond may give rise to a chargeable gain or anallowable loss for the purposes of U.K. taxation of chargeable gains.

The bonds will, however, be treated as relevant discounted securities where they areacquired by a person who is connected with Marconi Corporation plc or held by a person whobecomes connected with Marconi Corporation plc for so long as they are held by the person. Indetermining whether a person is connected with Marconi Corporation plc for these purposes thetest in section 839 in the Income and Corporation Taxes Act is to be used, except that no accountwill be taken of his rights under the bonds.

If the bonds are treated as relevant discounted securities, the bonds will represent qualifyingcorporate bonds. In this case, a disposal by a bondholder would not give rise to a chargeable gainor an allowable loss for the purposes of the U.K. taxation of chargeable gains.

Other U.K. taxpayers—accrued income scheme

On a disposal of bonds by a bondholder, any interest which has accrued since the lastinterest payment date may be chargeable to tax as income if that bondholder is resident orordinarily resident in the United Kingdom or carries on a trade in the United Kingdom through abranch or agency to which the bonds are attributable.

Stamp duty and stamp duty reserve tax

No U.K. stamp duty or stamp duty reserve tax is payable on the issue or the transfer of theglobal bond.

Proposed EU withholding tax directive

In June 1998, the European Commission presented to the Council of Ministers of the EU aproposal to oblige member states to adopt either a ‘‘withholding tax system’’ or an ‘‘informationreporting system’’ in relation to interest, discounts and premiums. It is unclear whether thisproposal will be adopted, and if it is adopted, whether it will be adopted in its current form. The‘‘withholding tax system’’ would require a paying agent established in a member state to

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withhold tax at a minimum rate of 20% from any interest, discount or premium paid to anindividual resident in another member state unless the individual presents a certificate obtainedfrom the tax authorities of the member state in which he or she is resident confirming that thoseauthorities are aware of the payment due to the individual. The ‘‘information reporting system’’would require a member state to supply, to other member states, details of any payment ofinterest, discount or premium made by paying agents within its jurisdiction to an individualresident in another member state. For these purposes, the term ‘‘paying agent’’ is broadly definedand includes an agent who collects interest, discounts or premiums on behalf of an individual. Ifthis proposal is adopted, it will not apply to payments of interest, discounts and premiums madebefore January 1, 2001. It appears, however, from a report by the ECOFIN Council to theEuropean Council dated June 20, 2000 that the proposals will not be adopted in their presentform. The ECOFIN Council has agreed that the ultimate objective of any EU directive is theexchange of information between member states. Member states would be permitted temporarilyto operate a withholding tax system if they so wish provided that an appropriate share of the taxcollected is transferred to the member state in which the relevant payee is resident. TheEuropean Council has endorsed the ECOFIN Council’s report and agreement concerning theultimate objective of any EU directive.

Payment by Marconi plc as guarantor

As a matter of U.K. tax law, it is possible that payments made by Marconi plc as guarantorwould be subject to withholding on account of U.K. tax. This withholding would be subject toany claim which would be made under any applicable double tax treaty.

United States

Introduction

The following summarizes the principal U.S. federal income tax consequences of acquiring,holding and disposing of bonds. The discussion is based on currently existing provisions of theU.S. Internal Revenue Code of 1986, as amended, existing and proposed U.S. Treasuryregulations, and current administrative rulings and court decisions, all of which are subject tochange, potentially with retroactive effect. The following does not consider:

• other U.S. federal taxes (such as the estate tax) or state, local or foreign tax aspects ofacquiring, holding, or disposing of bonds;

• specific facts and circumstances that may be relevant to particular holders in light oftheir personal investment circumstances or status;

• special tax rules that may apply to holders, including, without limitation, tax-exemptorganizations, financial institutions, insurance companies and dealers in securities orforeign currencies;

• special tax rules that may apply to holders that hold bonds as part of straddles, hedgingtransactions, constructive sales or conversion transactions; or

• holders that did not purchase bonds as part of the initial distribution or that hold bondsother than as capital assets within the meaning of Internal Revenue Code Section 1221.

United States federal income tax consequences to U.S. bondholders

The following applies to U.S. bondholders. A U.S. bondholder is a beneficial owner of bondswho for U.S. federal income tax purposes is:

• a citizen or resident of the United States;

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• a corporation or other entity taxable as a corporation created or organized in or underthe laws of the United States or any political subdivision of the United States;

• an estate whose income is subject to U.S. federal income tax regardless of its source; or

• a trust if a court within the United States is able to exercise primary supervision over itsadministration and one or more U.S. persons have the authority to control all substantialdecisions of the trust.

Payments of interest on bonds

Interest paid on bonds generally may be included in a U.S. bondholder’s gross income asordinary interest income at the time payments are accrued or are received (in accordance withthe U.S. bondholder’s usual method of tax accounting). Should any U.K. tax be withheld, thoseamounts (including additional amounts) will be included in the U.S. bondholder’s gross income.

Subject to certain limitations, you may credit against your U.S. federal tax liability or take asa deduction against your federal taxable income the amount of any U.K. tax withheld under U.K.law or the U.K. tax treaty. Interest paid on a bond will be treated as foreign source income,which may be relevant in calculating your foreign tax credit limitation. The limitation on foreigntaxes eligible for credit is calculated separately with respect to specific classes of income. For thispurpose, interest paid on a bond generally will constitute ‘‘passive income’’ or, in the case ofcertain holders, ‘‘financial services income.’’

Sale, exchange, redemption or retirement of bonds

Upon the sale, exchange, redemption or retirement of a bond, any gain or loss realized by aU.S. bondholder generally will be capital gain or loss and will be long-term capital gain or lossin the case of bonds held for more than one year. In the case of non-corporate U.S. bondholders,the maximum tax rate on capital gains arising on the disposition of assets held for more than oneyear is 20%. Gain on the sale, exchange, redemption or retirement of bonds by a U.S. bondholdergenerally will be U.S. source income. Your ability to deduct capital losses is subject tolimitations.

Information reporting and backup withholding requirements with respect to U.S. bondholders

U.S. information reporting requirements may apply with respect to the payment of intereston bonds. No backup withholding is required for interest payments by Marconi Corporation plcto corporate U.S. bondholders. Non-corporate U.S. bondholders may be subject to backupwithholding at the rate of 31% with respect to interest when a non-corporate U.S. bondholder:

• fails to furnish or certify a correct taxpayer identification number to the payor or itsagent in the manner required;

• is notified by the Internal Revenue Service that it has failed to report payments ofinterest or dividends properly; or

• fails, under certain circumstances, to certify that it has not been notified by the IRS thatit is subject to backup withholding for failure to report interest and dividend payments.

United States federal income tax consequences to non-U.S. bondholders

The following discussion summarizes the U.S. federal income tax consequences of acquiring,holding and disposing of bonds by a foreign bondholder, that is, a holder that is not a U.S.person.

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Payments of interest on and sale, exchange, redemption or retirement of bonds

Subject to the discussion below for U.S. backup withholding, a foreign bondholder generallywill not be subject to U.S. federal income tax on payments of interest on bonds, or gain from thesale, exchange, redemption or retirement of bonds unless:

• the income is effectively connected with the conduct by the foreign bondholder of a U.S.trade or business or, in the case of a resident of a country which has a treaty with theUnited States, the income is attributable to a permanent establishment (or in the case ofan individual, a fixed place of business) in the United States, in which case the foreignbondholder will be taxed on the income like a U.S. bondholder, or

• for any gain on the sale, exchange, redemption or retirement of bonds, the foreignbondholder is present in the United States for 183 days or more in the taxable year ofthe sale and meets certain other conditions, in which case the foreign bondholdergenerally will be taxed on the gain like a U.S. bondholder.

If you are a corporate foreign bondholder, effectively connected income may, under certaincircumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate ifyou are eligible for the benefits of an income tax treaty that provides for a lower rate.

Information reporting and backup withholding requirements with respect to foreign bondholders

For payments made on or before December 31, 2000.

U.S. information reporting requirements and backup withholding will not apply to intereston bonds paid to foreign bondholders at an address outside the United States (provided that thepayor does not have definite knowledge that the payee is a U.S. person). As a general matter,information reporting and backup withholding will not apply to a payment of proceeds from adisposition of bonds effected outside the United States by a foreign office of a foreign broker.However, information reporting requirements, but not backup withholding, will apply to apayment of the proceeds of a disposition effected outside the United States of bonds through aU.S. broker, unless the broker has documentary evidence in its records that the holder is not aU.S. person and has no actual knowledge that the evidence is false, or the foreign bondholderotherwise establishes an exemption. For purposes of the preceding sentence, a U.S. broker is abroker that is a U.S. person or has other connections to the United States. Payment by a broker ofthe proceeds of a disposition of bonds effected inside the United States is subject to both backupwithholding at a rate of 31% and information reporting unless the foreign bondholder certifiesunder penalties of perjury that he is not a U.S. person and provides his name and address or theforeign bondholder otherwise establishes an exemption. Any amounts withheld under the backupwithholding rules from a payment to a foreign bondholder will be allowed as a refund or a creditagainst the foreign bondholder’s U.S. federal income tax, provided that the required informationis furnished to the IRS.

For payments made after December 31, 2000.

On October 6, 1997, the IRS issued final regulations relating to withholding, backupwithholding and information reporting that unify current certification procedures and forms andclarify reliance standards. These regulations generally will be effective for payments made afterDecember 31, 2000.

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UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting agreement datedthe date of this prospectus (the ‘‘Underwriting Agreement’’), the underwriters named below, forwhom Morgan Stanley & Co. Incorporated is acting as representative, have severally agreed topurchase, and Marconi Corporation plc has agreed to sell to them, severally, the respectiveprincipal amounts of the bonds set forth opposite their respective names below:

Name

Principalamount of 2010

bonds

Principalamount of 2030

bonds

Morgan Stanley & Co. Incorporated . . . . . . . . . . . . . . . . . . . . . . . $495,000,000 $495,000,000Credit Suisse First Boston Corporation . . . . . . . . . . . . . . . . . . . 81,000,000 81,000,000J.P. Morgan Securities Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000,000 81,000,000Merrill Lynch, Pierce, Fenner & Smith Incorporated . . . . . . 81,000,000 81,000,000Salomon Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000,000 81,000,000UBS Warburg LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,000,000 81,000,000

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $900,000,000 $900,000,000

Morgan Stanley & Co. Incorporated is acting as the global coordinator and sole bookrunner ofthis offering.

Sales made in the United States will be made through affiliates of the underwriters listedabove who are broker-dealers registered under the Exchange Act.

The underwriting agreement provides that the obligations of the several underwriters topurchase and accept delivery of the bonds offered hereby are subject to the approval of certainlegal matters by their counsel and to certain other conditions. The underwriters are obligated totake and pay for all of the bonds if any are taken.

No action has been or will be taken in any jurisdiction by us or any underwriter that wouldpermit an offering to the general public of the bonds offered hereby in any jurisdiction other thanthe United States.

The underwriters initially propose to offer part of the bonds directly to the public at thepublic offering price set forth on the cover page of this prospectus and part to certain dealers atprices that represent a concession not to exceed

▲▲.400% of the principal amount of the 2010

bonds and .500% of the principal amount of the 2030 bonds. Any underwriter may allow, andany such dealers may reallow, a concession to other underwriters or certain other dealers not toexceed

▲▲.250% of the principal amount of the 2010 bonds and the 2030 bonds. After the initial

offering of the bonds, the offering price and other selling terms may from time to time be variedby the representative of the underwriters. The underwriters have agreed to reimburse Marconi forcertain expenses relating to the offering.

The bonds are a new issue of securities with no established trading market. We have appliedto list the bonds on the Luxembourg Stock Exchange. We do not intend to apply for the listing ofthe bonds on a U.S. national securities exchange. We have been advised by the underwriters thatthey intend to make a market in the bonds. However, the underwriters are not obligated to do soand may discontinue the market making at any time without notice. No assurance can be givenas to the liquidity of the trading market for the bonds.

We and Marconi plc have agreed with the underwriters that, without the prior writtenconsent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters, we will not, duringthe period ending 30 days after the date of this prospectus, offer, sell, contract to sell, orotherwise dispose of any debt securities of or guaranteed by Marconi plc or ourselves which aresubstantially similar to the bonds, other than any debt securities that are offered or sold outsidethe United States.

131



Each underwriter has represented that:

(1) it has not offered or sold and, prior to the date six months after the latest closing date,will not offer or sell any bonds to persons in the United Kingdom except to personswhose ordinary activities involve them in acquiring, holding, managing or disposing ofinvestments (as principal or agent) for the purposes of their businesses or otherwise incircumstances which have not resulted and will not result in an offer to the public inthe United Kingdom within the meaning of the Public Offers of Securities Regulations1995, as amended (the ‘‘Regulations’’);

(2) it has complied and will comply with all applicable provisions of the Financial ServicesAct 1986 and the Regulations with respect to anything done by it in relation to theBonds in, from or otherwise involving the United Kingdom; and

(3) it has only issued or passed on, and will only issue or pass on, in the United Kingdomany document received by it in connection with the sale of the bonds, to a person whois of a kind described in Article 11(3) of the Financial Services Act 1986 (InvestmentAdvertisements) (Exemptions) Order 1996, or is a person to whom the document mayotherwise be lawfully be issued or passed on.

In order to facilitate the offering of the bonds, the underwriters may engage in transactionsthat stabilize, maintain or otherwise affect the price of the bonds. Specifically, the underwritersmay over-allot in connection with the offering, creating a short position in the bonds for theirown account. In addition, to cover over-allotments or to stabilize the price of the bonds, theunderwriters may bid for, and purchase, bonds in the open market. Finally, the underwritingsyndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributingthe bonds in the offering if the syndicate repurchases previously distributed bonds intransactions to cover syndicate short positions, in stabilization transactions or otherwise. Any ofthese activities may stabilize or maintain the market price of the bonds above independentmarket levels. The underwriters are not required to engage in these activities and may end any ofthese activities at any time.

We have agreed to indemnify the several underwriters against certain liabilities, includingliabilities under the Securities Act.

Morgan Stanley Dean Witter will be facilitating internet distribution for this offering tocertain of its internet subscription customers. Morgan Stanley Dean Witter may make anelectronic prospectus available on its website for these customers. Other than the prospectus inelectronic format, the information on this website relating to this offering is not a part of thisprospectus.

Certain of the underwriters and their respective affiliates have, from time to time, performedvarious investment or commercial banking and financial advisory services for us. In particular,Credit Suisse First Boston, Morgan Guaranty Trust Company of New York, Citibank N.A. andUBS AG, each of which is an affiliate of one of our underwriters, are lenders under the 1998credit facility and will receive a portion of the amounts repaid under that credit facility with thenet proceeds of the offering. See ‘‘Use of Proceeds’’. Because over 10% of the net proceeds isintended to be paid to affiliates of members of the National Association of Securities Dealers, Inc.that are participating in the distribution of the bonds, the offering is being made pursuant to Rule2710(c)(8) of the Conduct Rules of the NASD.

132



NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of the bonds in Canada is being made only on a private placement basisexempt from the requirement that we prepare and file a prospectus with the securities regulatoryauthorities in each province where trades of bonds are effected. Accordingly, any resale of thebonds in Canada must be made in accordance with applicable securities laws which will varydepending on the relevant jurisdiction, and which may require resales to be made in accordancewith available statutory exemptions or pursuant to a discretionary exemption granted by theapplicable Canadian securities regulatory authority. Purchasers are advised to seek legal adviceprior to any resale of the bonds.

Representatives of Purchasers

Each purchaser of bonds in Canada who receives a purchase confirmation will be deemed torepresent to us and the dealer from whom that purchaser confirmation is received that (i) he isentitled under applicable provincial securities laws to purchase the bonds without the benefit ofa prospectus qualified under securities laws, (ii) where required by law, that he is purchasing asprincipal and not as agent, and (iii) he has reviewed the text above under ‘‘Resale Restrictions’’.

Rights of Action (Ontario Purchasers)

The securities being offered are those of a foreign issuer and Ontario purchasers will notreceive the contractual rights of action prescribed by Ontario securities law. As a result, Ontariopurchasers must rely on other remedies that may be available, including common law rights ofaction for damages or rescission or rights of action under the civil liability provisions of the U.S.federal securities laws. Following a decision of the U.S. Supreme Court, it is possible thatOntario purchasers will not be able to rely upon the remedies set out in Section 12(a)(2) of theU.S. Securities Act of 1933 where securities are being offered under a U.S. private placementmemorandum such as this document.

Enforcement of Legal Rights

All of our directors and officers as well as the experts named in this offering memorandummay be located outside of Canada and, as a result, it may not be possible for Canadian purchasersto effect service of process within Canada upon us or those persons. All or a substantial portionof our assets and those persons may be located outside of Canada and, as a result, it may not bepossible to satisfy a judgement against us or those persons in Canada or to enforce a judgementobtained in Canadian courts against us or persons outside of Canada.

Notice of British Columbia Residents

A purchaser of bonds to whom the Securities Act (British Columbia) applies is advised thathe is required to file with the British Columbian Securities Commission a report within ten daysof the sale of any bonds acquired by him pursuant to this offering. This report must be in theform attached to the British Columbia Securities Commission Blanket Order BOR #95/17, a copyof which may be obtained from us. Only one report must be filed in respect of bonds acquired onthe same date and under the same prospectus exemption.

Taxation and Eligibility for Investment

Canadian purchasers of bonds should consult their own legal and tax advisors with respectto the tax consequences of an investment in the Bonds in their particular circumstances and withrespect to eligibility of the notes for investment by the purchaser under relevant Canadianlegislation.

133


R. R. DONNELLEY LON(•• ) •• 53312/20000 011 44 20 7330 1600 CB 01 SEP 00 22:30

LEGAL MATTERS

Freshfields Bruckhaus Deringer, U.K. counsel for Marconi Corporation plc and Marconi plc,and Cleary, Gottlieb, Steen & Hamilton, counsel for the underwriters, will pass upon certainmatters under English law. Cravath, Swaine & Moore, U.S. counsel for Marconi Corporation plcand Marconi plc, and Cleary, Gottlieb, Steen & Hamilton, counsel for the underwriters, will passupon certain matters under U.S. law.

EXPERTS

The consolidated financial statements of Marconi plc as of March 31, 1999 and 2000 and forthe years then ended included in the prospectus have been audited by Deloitte & Touche,independent auditors, as stated in their report appearing in this prospectus, and are included inreliance upon the reports of such firm given upon their authority as experts in accounting andauditing.

The consolidated financial statements of Fore Systems as of March 31, 1999, and for the yearthen ended included in this prospectus have been so included in reliance on the reportPricewaterhouseCoopers LLP, independent accountants, have given on the authority of said firmas experts in accounting and auditing.

SERVICE OF PROCESS ANDENFORCEMENT OF CIVIL LIABILITIES

We are organized under the laws of England and Wales. Most of our directors, executiveofficers and certain of the experts named in this prospectus are residents outside the UnitedStates. A substantial portion of our assets and those of such directors, officers and experts arelocated outside the United States. As a result, it may be difficult for you:

• to effect service of process within the United States upon us or such persons;

• to enforce outside the U.S. judgments obtained against such persons in U.S. courts; or

• to enforce in U.S. courts judgments obtained against such persons in courts injurisdictions located outside the United States;

in each case in any action, including actions predicated upon the civil liability provisions of U.S.securities laws.

In addition, it may be difficult for you to enforce, in original actions brought in courts injurisdictions located outside the United States, rights predicated upon the U.S. securities laws.

We have designated Patricia A. Hoffman of Marconi Inc., 1500 Mittel Boulevard, Wood Dale,Illinois, U.S.A. 60191-1073 (telephone: 680-238-3995), as our agent for service of process in theUnited States with respect to the bonds.

134



WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form F-1 under the Securities Actand the related rules and regulations concerning the bonds we propose to sell in this offering.This prospectus, which forms a part of the registration statement, does not contain all theinformation set forth in the registration statement, certain parts of which have been omitted aspermitted by SEC rules and regulations. For further information about us and the bonds wepropose to sell in this offering, you should refer to the registration statement and the exhibits andschedules filed as a part of the registration statement.

Marconi plc is presently subject to the information and periodic reporting requirements ofthe Exchange Act. As a result of the offering of bonds under this prospectus,

▲Marconi

Corporation plc will become subject to the information and periodic reporting requirements ofthe Exchange Act. We are exempt from the rules under the Exchange Act prescribing thefurnishing and content of proxy statements to shareholders, and our officers, directors andprincipal shareholders are exempt from the reporting and ‘‘short swing’’ profit recoveryprovisions contained in Section 16 of the Exchange Act. As a foreign private issuer, we are notrequired by the Exchange Act to publish financial statements as frequently or promptly as U.S.companies. We will, however, fulfill our obligations with respect to such requirements by filingperiodic reports and other information with the SEC. We intend to furnish annual reportscontaining consolidated financial statements certified by an independent public accounting firm.

You may read and copy all or any portion of the registration statement and its exhibits at thepublic reference facilities maintained by the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Room1024, Washington, D.C. 20549, and at its regional offices at Seven World Trade Center, Suite1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,Chicago, Illinois 60661-2511. You may request copies of all or any portion of these documents,upon payment of a duplication fee, by writing to the public reference section of the SEC at 450Fifth Street, N.W., Washington, D.C. 20549. You may obtain more information about the publicreference room by calling the SEC at 1-800-SEC-0330. We do not file electronically with the SECand, consequently, the registration statement and other reports and information we file with theSEC are not available on the website maintained by it.

135

29025 FIN 1 Project Marlin Prospectus 3.8.7p15 psAOG 05 JUL 00 02:23


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Marconi plc and subsidiaries

Consolidated financial statements for the years ended March 31, 1999 and 2000

Page

Independent auditors’ report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3

Consolidated statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4

Consolidated statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated statements of comprehensive income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Consolidated statements of shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6

Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7

Fore Systems, Inc.

Consolidated financial statements for the year ended March 31, 1999

Report of independent accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-43

Consolidated statement of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-44

Consolidated balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-45

Consolidated statement of changes in common stock and stockholders’ equity . . . . . . . . . . . . . F-46

Consolidated statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-47

Statement of comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-48

Notes to consolidated financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-49

F-1

29025 FIN 2 Project Marlin Prospectus 3.8.7p15 psAOG 07 AUG 00 21:02


INDEPENDENT AUDITORS’ REPORT

To the board of directors and shareholdersof Marconi plc

We have audited the accompanying consolidated balance sheets of Marconi plc andsubsidiaries (‘‘Marconi’’) as of March 31, 1999 and 2000 and the related consolidated statementsof income, cash flows, comprehensive income and shareholders’ equity for each of the two fiscalyears in the period ended March 31, 2000. These consolidated financial statements are theresponsibility of Marconi’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Marconi as of March 31, 1999 and 2000, and theconsolidated results of its operations and its cash flows for each of the two fiscal years in theperiod ended March 31, 2000 in conformity with accounting principles generally accepted in theUnited States of America.

DELOITTE & TOUCHE

London, EnglandAugust 7, 2000

F-2




CONSOLIDATED BALANCE SHEETS

March 31,

(In millions, except share data)1999 £ 2000 £ 2000 U.S.$

ASSETSCurrent assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,418 555 884Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 178 283Accounts receivable, net of allowance for doubtful accounts . . . . . . . 1,303 1,906 3,035Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616 946 1,506Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 65 91 145Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,508 — —

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,990 3,676 5,853

Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 758 1,207Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 14 22Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 574 914Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 31 49Goodwill and other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174 4,843 7,711Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 103 163

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,292 9,999 15,919

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilities

Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 1,821 2,899Current maturities of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 9 14Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 825 1,314Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . 1,086 1,652 2,630Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 537 855

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,602 4,844 7,712

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 939 1,495Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 139 221

Commitments and contingencies (Note 21)

Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16 25Shareholders’ equity

Ordinary shares, £0.05 par value; Authorized: 3,500,000,000 sharesin 1999 and 6,000,000,000 shares in 2000; Issued andoutstanding: 2,677,305,566 shares in 1999 and 2,723,996,450shares in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 136 217

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 486 774Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,416 3,577 5,695Accumulated other comprehensive income/(loss) . . . . . . . . . . . . . . . . . . (283) (138) (220)

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,547 4,061 6,466

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY . . . . . . . . . . . . . . . . 8,292 9,999 15,919

See notes to consolidated financial statements.

F-3




CONSOLIDATED STATEMENTS OF INCOME


1999 £ 2000 £ 2000 U.S.$

(In millions, except share data)

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789 5,437 8,657Direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,510 3,497 5,568

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,279 1,940 3,089Operating expenses

Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . 597 1,066 1,697Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 384 611Amortization of goodwill and other intangibles . . . . . . . . . . . . . . . . 92 495 788Purchased in-process research and development . . . . . . . . . . . . . . . — 277 441

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903 2,222 3,537

Operating income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 (282) (448)Other income/(expense)

Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 4 6Equity in net income of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 83 132Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 106 169Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55) (214) (341)

Income/(loss) from continuing operations before income taxes andminority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 (303) (482)

Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (458) (84) (134)Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (3) (5)

Income/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . 881 (390) (621)

Discontinued operationsIncome from discontinued operations, net of income tax . . . . . . . 248 — —Gain on discontinued operations, net of income tax . . . . . . . . . . . . — 675 1,075

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129 285 454

Earnings per share—basicIncome/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . £ 0.32 £ (0.14) $ (0.23)Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.09 £ 0.00 $ 0.00Gain on discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ — £ 0.25 $ 0.40

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.41 £ 0.11 $ 0.17

Earnings per share—dilutedIncome/(loss) from continuing operations . . . . . . . . . . . . . . . . . . . . . . £ 0.32 £ (0.14) $ (0.23)Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.09 £ 0.00 $ 0.00Gain on discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ — £ 0.24 $ 0.39

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £ 0.41 £ 0.10 $ 0.16


F-4




CONSOLIDATED STATEMENTS OF CASH FLOWSYear ended March 31,

(In millions)1999 £ 2000 £ 2000 U.S.$

Cash flows from operating activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129 285 454Adjustments to reconcile net income to net cash provided by/(used for) operating

activities:Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (248) — —Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 650 1,035Purchased in-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 277 441Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 32 51Change in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 (110) (175)Equity in net income of affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (87) (83) (132)Change in minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) 3 5Gain on sale of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (675) (1,075)Gain on sale of investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (850) — —

Changes in operating assets and liabilities, net of the effect of acquisitions:Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (169) (311) (495)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (105) (167)Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) 82 130Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (292) (465)Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240) 678 1,079

Net cash provided by/(used for) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (149) 431 686

Cash flows from investing activities:Maturities of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 147 234Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (5) (8)Dividends received from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 68 108Proceeds from the sale of investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,049 — —Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (299) (476)Proceeds from the sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 30 48Net proceeds from the separation of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,179 1,877Change in other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6 10Net cash paid for investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (132) (210)Net cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (958) (3,974) (6,328)

Net cash provided by/(used for) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 (2,980) (4,745)

Cash flow from financing activities:Short-term borrowings/(repayments), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 1,208 1,924Term loan borrowings/(repayments), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 657 1,046Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (218) (397) (632)Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 47 75Issuances of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 161 256Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (310) — —

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189 1,676 2,669

Cash provided by/(used in) discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135) 165 263Effects of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) (155) (247)

Net increase/(decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 (863) (1,374)Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,026 1,418 2,258

Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,418 555 884

Supplemental disclosure of cash flow activity:Cash payments for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 148 236

Cash payments for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301 114 182

Acquisitions:Tangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 543 865Intangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 991 4,364 6,948Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (796) (1,267)

Total cash paid for acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968 4,111 6,546


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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)


(In millions)1999 £ 2000 £ 2000 U.S.$

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129 285 454Other comprehensive income

Accumulated translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 44 70Unrealized holding gains arising during the year, net of incometax of £7 in 1999 and £27 in 2000, respectively . . . . . . . . . . . . . . . . . . . 32 101 161

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 430 685

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Ordinary sharesAdditional

paid-incapital

Retainedearnings

Accumulatedother

comprehensiveincome/(loss) Total

(In millions, except share data)Shares Amount

As of March 31, 1998 . . . . . . . . . 2,721,204,288 136 251 4,927 (339) 4,975Net income . . . . . . . . . . . . . . . . . . . 1,129 1,129Dividends paid (£0.12 per

share) . . . . . . . . . . . . . . . . . . . . . . (330) (330)Issuance of ordinary shares

under share option plans . . . 10,429,438 1 26 27Ordinary shares repurchased

and cancelled . . . . . . . . . . . . . . (54,328,160) (3) 3 (310) (310)Unrealized holding gains on

investments . . . . . . . . . . . . . . . . 32 32Translation adjustments . . . . . . 24 24

As of March 31, 1999 . . . . . . . . . 2,677,305,566 134 280 5,416 (283) 5,547Net income . . . . . . . . . . . . . . . . . . . 285 285Dividends paid (£0.11 per

share) . . . . . . . . . . . . . . . . . . . . . . (285) (285)Distribution of net assets of

discontinued operations . . . . (1,839) (1,839)Issuance of ordinary shares

under share option plans . . . 46,690,884 2 159 161Deferred compensation . . . . . . . 47 47Unrealized holding gains on

investments . . . . . . . . . . . . . . . . 101 101Translation adjustments . . . . . . 44 44

As of March 31, 2000 . . . . . . . . . 2,723,996,450 136 486 3,577 (138) 4,061


F-6



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Background and basis of presentation

Nature of operations

Marconi plc was incorporated on September 17, 1999 as the new holding company forcertain businesses of The General Electric Company, p.l.c. (‘‘GEC’’) group that remained after theseparation of GEC’s international aerospace, naval shipbuilding, defense electronics and defensesystems business from GEC and the merger of that business with British Aerospace. Thistransaction, and the accounting treatment, is set out in greater detail in footnote 18.

We have not presented separate financial statements or other financial disclosures regardingMarconi Corporation plc. Marconi Corporation plc is a wholly-owned subsidiary of Marconi plc.There is no difference between the consolidated assets, liabilities and results of operations ofMarconi plc and the consolidated assets, liabilities and results of operations of MarconiCorporation plc, except for non-interest bearing intercompany loans totalling £304 millionpayable by Marconi Corporation plc group companies to other companies in the Marconi plcgroup which are not subsidiaries of Marconi Corporation plc. These differences are not material.During the year ending March 31, 2001, Marconi Corporation plc plans to offer debt in the U.S.public debt market. Marconi will fully and unconditionally guarantee this issuance.

2. Summary of significant accounting policies

Basis of consolidation

The consolidated financial statements include the accounts of Marconi plc and itssubsidiaries. All intercompany balances and transactions have been eliminated.

Use of estimates

The preparation of the consolidated financial statements and related disclosures inconformity with generally accepted accounting principles in the U.S. requires management tomake estimates and assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statements and thereported amounts of revenues and expenses during the reporting period. Estimates are used for,but not limited to, the accounting for doubtful accounts, depreciation and amortization, salesreturns, warranty costs, taxes and contingencies. Actual results could differ from these estimates.

Cash and cash equivalents

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

Marketable securities

Marketable securities intended to be held to maturity are carried at amortized cost. All othermarketable securities are classified as available for sale and recorded at current market value. Netunrealized holding gains and losses are reported as a separate component of shareholders’ equity.Realized gains and losses on the sale of securities available for sale are determined using thespecific-identification method.

Inventories

Inventories are stated at the lower of cost, determined on a weighted-average basis, or marketvalue.

Property, plant and equipment

Property, plant and equipment is stated at cost. Depreciation expense is computed using thestraight-line method over the estimated useful lives of the depreciable assets. The estimated

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useful lives for buildings and improvements are between 25 and 50 years and the estimateduseful lives for machinery and equipment are between 3 and 10 years. Significant improvementswhich substantially extend the useful lives of assets are capitalized. Maintenance and repairs arecharged to expense as incurred. Upon disposal of an asset, its accumulated depreciation isdeducted from the original cost and any gain or loss is reflected in current earnings.

Long-lived assets

Marconi evaluates the carrying value of long-lived assets, whenever events or changes incircumstances indicate that the carrying value of the asset may be impaired. An impairment lossis recognized when estimated future cash flows, on an undiscounted basis, expected to resultfrom the use of the asset including disposition, is less than the carrying value of the asset. Basedon these evaluations, there were no adjustments to the carrying value of goodwill or other long-lived assets in 1999 or 2000.

Investments in affiliates

Investments in affiliates and joint ventures over which Marconi has the ability to exercisesignificant influence, but not a controlling interest (generally a 20%-50% ownership interest), areaccounted for using the equity method. Under this method, the investment is carried at cost ofacquisition plus Marconi’s equity in undistributed earnings or losses since the date ofacquisition.

Subsidiary stock issuances

Marconi recognizes in income, gains and losses on the issuance of stock by its subsidiariesand affiliates.

Income taxes

Marconi recognizes deferred tax assets and liabilities using enacted tax rates to calculatetemporary differences between the tax basis of assets and liabilities and the financial statementcarrying amounts.

Goodwill and other intangible assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, isamortized using the straight-line method over periods ranging from 10 to 20 years. Otherintangible assets are carried at cost and are amortized using the straight-line method over theestimated periods to be benefited, ranging from 5 to 15 years. Amortization expense for the fiscalyears ended March 31, 1999 and 2000, was £92 million and £495 million, respectively.

Marconi periodically evaluates the recoverability of goodwill and other intangible assets bycomparing the net book value of such assets to expected future cash flows, on an undiscountedbasis, over the remaining amortization period of the asset. Marconi measures impairment forenterprise level goodwill and identifiable intangible assets and goodwill associated with long-lived assets based on a discounted cashflow analysis. Based on these evaluations, there were noadjustments to the carrying value of goodwill and other intangible assets in 1999 or 2000.

Foreign currency translation

For operations outside the United Kingdom that prepare financial statements in currenciesother than pounds sterling, results of operations and cash flows are translated at the weightedaverage exchange rates during the period and assets and liabilities are translated at the end-of-

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period exchange rates. Translation adjustments are included as a separate component ofshareholder’s equity. Key exchange rates used are as follows:

Average rates Year-end rates

Fiscal YearEnded March

31, March 31,

1999 2000 1999 2000

U.S. Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.66 1.62 1.61 1.60French Franc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.71 10.21 9.81 10.94Italian Lira . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,861 3,015 2,895 3,228Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.47 1.56 1.50 1.67

Convenience translation

The consolidated financial statements are presented in millions of U.K. pounds sterling. Inaddition, the consolidated financial statements as of and for the fiscal year ended March 31, 2000are also presented in U.S. dollars. These U.S. dollar amounts are unaudited and are presentedsolely for the convenience of the reader at the rate of £1.00 = $1.5922, the noon buying rate ofthe U.S. Federal Reserve Bank as of March 31, 2000. No representation is made that the amountsshown could have been or could be converted into U.S. dollars at that or any other rate.

Concentrations of credit risk

Financial instruments that potentially subject Marconi to concentrations of credit risk consistprincipally of trade accounts receivable. Concentration of credit risk with respect to tradereceivables is limited due to the large number of customers and their geographic dispersion.

Derivative instruments

Marconi uses foreign currency exchange contracts and interest rate swaps agreements tomanage and reduce risk to Marconi by generating cash flows, which offset the foreign currency orinterest rate cash flows of certain transactions of underlying financial instruments in relation totheir amount and timing. Marconi’s derivative financial instruments are for purposes other thantrading and are not entered into for speculative purposes. Marconi’s non-derivative financialinstruments include letters of credit, commitments to extend credit and guarantees of debt.Marconi generally does not require collateral to support its financial instruments.

Derivative financial instruments are used by the Company to manage its interest rate andforeign currency exposures. The Company does not enter into financial instruments for trading orspeculative purposes. Instruments used for hedging purposes include interest rate swaps, taxequalization swaps and forward foreign exchange contracts. In the event that it is determined thata hedge is ineffective, including when the hedged transaction on longer exists, the Companyrecognizes in income the change in market value of the instrument from when it was no longeran effective hedge. Gains and losses on hedges realized before the settlement date of the relatedhedged transaction are deferred and recognized in income in the same period as the hedgedtransaction.

Payments and receipts under interest rate swap agreements specifically designated forhedging purposes are recorded under interest income and interest expense on an accrual basis.Tax equalization swaps, which qualify as hedges of foreign currency exposures, are recognizedthrough accumulated other comprehensive income (in accordance with the underlyingtransaction and the tax thereon) with any forward premium or discount recognized over the life

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of the contract in net interest income. Gains and losses on foreign currency denominated debt,which is designated and effective as an economic hedge of net investments in foreignsubsidiaries, are recognized through other comprehensive income.

Forward foreign exchange contracts generally exhibit a high correlation to the hedged itemsand are designated and considered effective as hedges of the underlying assets, liabilities andfirm commitments. Gains and losses on forward foreign exchange contracts which are designatedas hedges of assets, liabilities and firm commitments of the group, and which are denominated inforeign currencies relative to the functional currency of the transacting Marconi subsidiary, arerecognized in income or as adjustments to carrying amounts when the hedged transactions occur.

Fair values of exchange contracts are determined using published rates. Hedges which ceaseto be effective or are terminated prior to maturity are measured at fair value and any profit orloss is recognized through interest income or expense.

Revenue recognition

Revenue from product sales of hardware and software is recognized at time of delivery andacceptance. Terms of acceptance are dependent upon the specific contractual arrangement agreedwith the customer. These terms vary by contract and include delivery and acceptance as of:

• shipment date;

• delivery to a customer site of operations: or

• shipment to a customer site of operations and installation/testing.

In addition, revenue is recognized only when collectability is probable.

Revenue from multiple element contracts is allocated based on prices charged for eachindividual element when sold separately.

Revenue from services are recognized at time of performance.

Revenues and estimated profits on long-term contracts are recognized under the percentage-of-completion method of accounting using a cost-to-cost methodology. Profit estimates are revisedperiodically based on changes in facts. When estimates of total contract revenues and costsindicate a loss, a provision for the entire amount of the contract loss is recognized in the periodin which the loss becomes evident.

Research and development costs

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

Earnings per share

Basic earnings per share is computed by dividing net income by the weighted average numberof ordinary shares outstanding during the period. Diluted earnings per share further reflects allpotential dilution of ordinary shares, including the assumed exercise of dilutive share options.

Comprehensive income

Marconi has adopted the provisions of Statement of Financial Accounting Standards No.130, ‘‘Reporting Comprehensive Income’’. SFAS 130 establishes standards for reportingcomprehensive income and its components in the general-purpose financial statements. The

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primary difference between Marconi’s net income and its total comprehensive income for fiscalyears 1999 and 2000 include unrealized gains and losses on available-for-sale marketablesecurities and the accumulated translation adjustment.

Recently issued accounting pronouncements

During the fiscal year ended March 31, 2000, Marconi adopted Statement of Position (‘‘SOP’’)No. 98-1: ‘‘Accounting for the Costs of Computer Software Developed or Obtained for InternalUse’’. SOP No. 98-1 provides guidance on accounting for computer software costs that aredeveloped or obtained for internal use and requires that only certain costs of acquiring ordeveloping internal-use software be capitalized and amortized to expense over the expecteduseful life of the software. The adoption of SOP No. 98-1 did not have a material impact on theMarconi’s results of operations, financial position or cash flows.

During the fiscal year ended March 31, 2000, Marconi adopted SOP No. 98-5: ‘‘Reporting onthe Costs of Start-up Activities’’. SOP No. 98-5 provides guidance on the financial reporting ofstart-up costs and organization costs and requires such costs to be expensed as incurred. Theadoption of SOP No. 98-5 did not have a material impact on Marconi’s results of operations,financial position or cash flows.

In June 1999, the Financial Accounting Standards Board issued Statement of FinancialAccounting Standards No. 137: ‘‘Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB No. 133 an amendment of FASB Statement No. 133’’,which defers the effective date of SFAS No. 133: ‘‘Accounting for Derivative Instruments andHedging Activities’’ for fiscal years commencing after June 15, 2000. Marconi will adopt SFASNo. 133 for the fiscal year ending March 31, 2002. SFAS 133 requires that all derivativeinstruments be recorded on the balance sheet at their fair value. Changes in the fair value ofderivatives are recorded each period in current earnings or other comprehensive income,depending on whether a derivative is designated as a certain type of hedging instrument.Marconi is currently evaluating the impact of adopting SFAS 133, but does not expect suchadoption to have a material impact on its results of operations, financial position or cash flows.

In December 1999, the SEC issued Staff Accounting Bulletin (‘‘SAB’’) No. 101: ‘‘RevenueRecognition’’ which provides guidance on the recognition, presentation and disclosure ofrevenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that mustbe met to recognize revenue and provides guidance for disclosure impact with respect to revenuerecognition policies. The adoption of SAB 101 did not have a material impact on Marconi’sresults of operations, financial position or cash flows.

3. Business combinations

During the two years ended March 31, 2000, Marconi completed a number of acquisitions foran aggregate consideration of £5.1 billion. The acquisitions consisted of Reltec Corporation forapproximately £1.0 billion, Fore Systems for £2.9 billion, GPT for approximately £700 millionand others totalling approximately £500 million. The excess of consideration given over the fairvalue of net assets acquired with these acquisitions has been recorded as goodwill of £2.6 billionand intangible assets of £1.4 billion. The total purchased in-process research and developmentwas associated with two of these acquisitions and amounted to £277 million (see below).

Marconi’s acquisitions have all been accounted for under the purchase method ofaccounting. Accordingly, for financial reporting purposes, an allocation of the purchase price hasbeen made using estimated fair values of the assets acquired and liabilities assumed as of theacquisition dates in accordance with Accounting Principles Board Opinion No. 16, ‘‘BusinessCombinations’’. The results of operations from these acquisitions have been included in theaccompanying consolidated financial statements since their respective dates of acquisition.

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In connection with the acquisitions of Fore Systems and Reltec (as discussed below) duringthe fiscal year ended March 31, 2000 £174 million of the purchase price for Fore Systems and£103 million for Reltec have been identified as purchased in-process research and developmentcosts. Subsequent to the acquisition dates, these amounts were expensed immediately. Marconiused fair market appraisals to determine the amount of purchased in-process research anddevelopment and believes that the write-off of these amounts is appropriate, as these researchand development projects had not yet achieved technological feasibility and did not have anyalternative use as of the acquisition dates.

Fore Systems

In June 1999, Marconi acquired substantially all of the outstanding shares of Fore Systems forapproximately £2.9 billion. Fore Systems is a global supplier of upgradeable, resilient and high-capacity switching products and services for businesses in both the enterprise and carrier markets.

The fair market appraisal of acquired assets and liabilities resulted in £2,927 million beingassigned to goodwill and intangible assets, as set forth below (in millions):

Estimateduseful life

(Years)Valuation

£

Core developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 602In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . — 174Customer base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 121Assembled work force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 28Internal use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 23

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1,979

Reltec

In April 1999, Marconi acquired Reltec for a total purchase price of approximately£1.0 billion, excluding assumed debt of approximately £0.2 billion. Reltec is a supplier of abroad range of telecommunications systems, based on local loop access products.

The fair market appraisal of acquired assets and liabilities resulted in £1,344 million beingassigned to goodwill and other identified intangible assets, as set forth below (in millions);


(Years)Valuation

£

Core developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 312In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . — 103Customer base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 275Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 35Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3Assembled work force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 41

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 769Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 575

Other Acquisitions

In August 1998 the 40% minority stake in GPT held by Siemens was acquired for a cost of£700 million.

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The GPT business produces Synchronious Digital Hierarchy technology and is based inCoventry, England.

The fair market appraisal of acquired assets and liabilities resulted in £594 million beingassigned to goodwill, and other identified intangible assets, as set forth below:


(Years)Valuation

£

Customer base . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5Core developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 288

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 293Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 301

Purchased in-process research and development

Included in the purchase price allocation for the above acquisitions was purchasedin-process research and development. For each acquisition, a fair market appraisal wasperformed to assess and allocate a value to purchased in-process research and development. Thevalue allocated to purchased in-process research and development represents the estimated fairvalue based on risk-adjusted future cash flows generated from the products that would resultfrom each of the in-process projects. Estimated future after-tax cash flows of each project, on aproduct by product basis, were based on management’s estimates of revenue less operatingexpenses, cash flow adjustments, income taxes and charges for the use of contributory assets.Future cash flows were also adjusted for the value contributed by any core technology anddevelopment efforts that were completed post acquisition.

Revenues were estimated based on relevant market size and growth factors, expectedindustry trends, individual product sale cycles, the estimated life of each product’s underlyingtechnology and historical pricing. Estimated operating expenses include cost of goods sold,selling, general and administrative expenses and research and development expenses. Theestimated research and development expenses include costs to maintain the products once theyhave been introduced into the market and are generating revenues and costs to complete thepurchased in-process research and development. Operating expense estimates were consistentwith historical margins and expense levels for similar products.

The discount rates used to discount the projected net returns were based on a weighted-average cost of capital relative to Fore Systems and Reltec and the telecommunications industry,as well as the product-specific risk associated with the purchased in-process research anddevelopment products. Product-specific risk includes the stage of completion of each project, thecomplexity of the development work completed to date, the likelihood of achieving technologicalfeasibility and market acceptance.

Fore Systems

During the 12 months ended March 31, 2000, Fore Systems recorded a charge of £174million for purchased in-process research and development acquired in connection with the ForeSystems transaction.

A brief description of purchased in-process research and development projects is set forthbelow including an estimated percentage of completion of products within each project at theacquisition dates.

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As of the acquisition date, management’s estimations of the overall progress towardscompletion of projects is based on completion in terms of time, expenditure and workcomplexity. No acquirer specific synergies were explicitly employed in the analysis of thepurchased in-process research and development. The discount factors used in management’sestimation of the overall fair value for the projects ranged from 20% to 25%.

ASX 1000 and ASX 4000 (£77 million of purchased in-process research and development isattached to these closely related projects)

The ASX 1000 is a ten Gbps ATM switch providing access at the small enterprise core orlarger enterprise and service provider edge markets. Interfaces included a large number of ATMports as well as inter-working interfaces, as set forth below,

• Circuit emulation

• Frame relay

• Inverse multiplexing ATM.

The ASX 1000 has been used as a platform for the development of the ASX 4000; a 40 GbpsSimplex or 20 Gbps fully redundant ATM switch targeted at the service provider market andenterprise core market. The ASX 4000 allows the incremental expansion of available bandwidth.As of acquisition the original ASX 4000 unit was being shipped to customers and available forpurchase; the management estimations below represent the likely expenditure on upgrading andenhancing functionality of inserts to match technological progress and market demands.Interfaces included OC-3, OC-12, OC-48, and OC-48*4 configured to drive OC-192 WDMinterfaces.

As of the acquisition date, management’s estimation of the overall progress is 40% related tothe development percentage completion of this project. The discount factor used inmanagement’s estimation of the overall fair value for this project was 20%. As of March 31, 2000management expect the OC-3, OC-12 and OC-48 interfaces to be generating revenues by August2000. revenues from the OC48*4 should commence by April 2001.

BFS (£85 million of purchased in-process research and development is allocated to this project)

BFS is the next generation ATM/packet switch aimed at the service provider core and edgemarket. It is intended that the BFS will switch at 240 Gbps scalable to 480 Gbps in simplex orredundant modes. It is intended that the BFS will operate at almost zero data loss on anycomponent failure. As at the acquisition date BFS was in the early design phase. Remainingdevelopment efforts include the development of hardware and software components togetherwith successful completion of field trials. As of March 31, 2000 management believe technicalfeasibility will be completed by the middle of 2001 and the project as a whole is expected to becomplete in late 2001.

As of the acquisition date, management’s estimation of the overall progress is 25% related tothe development percentage completion of this project. The discount factor used inmanagement’s estimation of the overall fair value for this project was 20%.

An aggregate total of £12 million of purchased in-process research and development isattributed to the following small projects.

Multi-protocol label switching.

Multi-protocol label switching (‘‘MPLS’’) is a hardware—software technology which bringsthe advantages of connection-based networks to legacy frame based networks. It allows for greaterutilization of network resources while reducing the dependency on large frame based routers.

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The MPLS hardware and software represent augmentations to the ASX 4000 which providesincreased productivity of existing networks when these are interfaced with the ASX 4000. TheMPLS software is due for deployment in December 2000.

As of the acquisition date, management’s estimation of the overall progress is 40% related tothe development percentage completion of this project. The discount factor used inmanagement’s estimation of the overall fair value for this project was 20%.

ESX 2400 and ESX 4800 (Berkeley Networks)

The ESX 2400 and ESX 4800 are frame switches designed for medium to large enterprisenetwork market. They represent the most significant of a portfolio of small projects in progresswithin Berkeley Networks. Development of the base units were complete as of the acquisition ofFore Systems by Marconi and the management estimations below represent the likely effort andexpenditure on upgrading and enhancing functionality of inserts to match technological progressand market demands.

The Berkeley Networks business was acquired by Fore Systems in Fall 1998. We do not haveaccess to project data prior to this date; the information below therefore only relates to the periodafter this point.

As of the acquisition date, management’s estimation of the overall progress is 85% related tothe development percentage completion of this project. The discount factor used in managementestimation of the overall fair value for this project was 25%. The development of these productsis now complete.

IAD

The K1.5 is an integrated access device that will be sold as either customer located equipmentor customer premises equipment that will provide connections between enterprises’ internalnetwork and the new public data network. At the point of acquisition the K1.5 design phase waswell advanced. The development of this product is now complete and ready for deployment.

As of the acquisition date, management’s estimation of the overall progress is 50% related tothe development percentage completion of this project. The discount factor used in managementestimation of the overall fair value for this project was 25%.

As of March 31, 2000 the remaining costs to develop the in-process research and developprojects into commercially viable products were £33 million in total. Although Fore Systemscurrently expects that the in-process research and development projects will be successfullydeveloped into commercially viable products, there can be no assurance that this will beachieved. Failure to complete the development of these projects in their entirety, or in a timelymanner, could have a material adverse impact on Fore Systems’ financial condition, results ofoperations and cash flows.

Reltec

During the 12 months ended 31 March, 2000, Reltec recorded a charge of £103 million forpurchased in-process research and development acquired in connection with the Reltec transaction.

A brief description of purchased in-process research and development projects is set forthbelow including an estimated percentage of completion of products within each project at theirrespective acquisition dates.

As of the acquisition date, management’s estimations of the overall progress towardscompletion of projects are based on completion in terms of time, expenditure and workcomplexity. No acquirer-specific synergies were explicitly employed in the analysis of the

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purchased in-process research and development. The discount factor used in management’sestimation of the overall fair value for the projects ranged from 20% to 35%.

MX platform (£63 million of purchased in-process research and development is attributed to thisproject)

The MX platform is a second-generation deep fiber broadband platform enabling servicesproviders to maximize the use of fiber optics in their network, and market integrated voice, videoand data services to subscribers.

At the time of the acquisition, this project was in the design, prototyping and testing stage.Marconi estimated that the project was 65% complete and required approximately £5.2 millionto successfully complete the project. This estimate is based on completion in terms of time,expenditure and work complexity. This project is a staged platform development withenhancements occurring over a multi-year timeframe. As of March 31, 2000 management believethat the project will be complete and benefits in the form of product revenues will commence bySeptember 2000.

Deep fiber HFC product (£14 million of purchased in-process research and development isattributed to this project)

The deep fiber hybrid fiber/coax (HFC)—fiber in the loop (FITL) capability enhances theDISC*S FITL platform to support advanced cable television services including cable modems.

At the time of the acquisition, this project was in the design stage. Remaining developmentefforts included design, prototyping and testing activities. Marconi estimated that the project was72% complete and required approximately £0.8 million to successfully complete the project.This estimate is based on completion in terms of time, expenditure and work complexity. As ofMarch 31, 2000 the project was complete.

An aggregate total of £26 million of purchased in-process research and development isattributed to the following small projects.

Next generation SONET interface on DISC*S NGDLC platform

This project adds a sophisticated Marconi multiplexor to the existing DISC*S systemproviding a SONET interface into the telecommunications network.

As of the acquisition date, project planning and specification activities were complete andthe project was in the design and implementation stage. Remaining development efforts includeddesign, prototyping and testing activities. Marconi estimated that the project was 25% completeand required approximately £1.3 million to successfully complete the project. As of March 31,2000 the project was complete and ready for deployment by September 2000.

DISC*S high density channel shelf

This project provides a high-density configuration for the DISC*S next generation NGDLCable to provide 2016 line interfaces per bay.

As of the acquisition date, project planning and specification activities were complete andthe project was in the design and implementation stage. Remaining development efforts includeddesign, prototyping and testing activities. Marconi estimated that the project was 38% completeand required approximately £1 million to successfully complete the project. As of March 31,2000 the project was complete and ready for deployment.

ADSL port card for DISC*S NGDLC

This program is designed to provide asymmetric digital subscriber line (ADSL) data serviceas an enhancement to the DISC*S NGDLC product.

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At the time of the acquisition, this project was in the planning and specification stage.Remaining development efforts included design, prototyping and testing activities. Marconiestimated that the project was 28% complete and required approximately £1.4 million tosuccessfully complete the project. This estimate is based on completion in terms of time,expenditure and work complexity. As of March 31, 2000 management anticipate that the projectwill be complete by September 2000 and that benefits in the form of product revenues will beginby the end of calendar year 2000.

Electrical network unit—ENU

The DISC*S MX ENU provides a curbside neighborhood distribution point for pair-gainrelief in saturated copper networks.

At the time of the acquisition, this project was in the design stage. Remaining developmentefforts included design, prototyping and testing activities. Marconi estimated that the project was53% complete and required approximately £0.8 million to successfully complete the project.This estimate is based on completion in terms of time, expenditure and work complexity. As ofMarch 31, 2000 the project was complete and ready for deployment.

Enhanced OSIRIS multiplexors

The enhanced OSIRIS multiplexors project includes a number of elements that enableOSIRIS access multiplexor technology to enter larger service provider accounts. This is done byoffering a feature set that allows OSIRIS multiplexors to inter-operate with larger networkbackbones, enables new data services and thus improves competitiveness.

The research and development effort is aimed toward achieving the following features:multi-vendor management level interoperability, cost effective IP and ATM data transport overSONET and SDH, and STM4 SDH capability for selected access network applications outsideNorth America.

As of the acquisition date, management’s estimation of the overall progress is 74% related tothe development percentage completion of this project and required approximately £1.2 millionto successfully complete the project. As of March 31, 2000 management believe that the project iscomplete and ready for deployment in June 2000.

OC48/packet path OSIRIS

The OC48/packet path OSIRIS project is intended to support higher 2.4Gbps speeds in theoptical access ring and to improve bandwidth utilization in the ring by using serviceconcentration, statistical multiplexing and over-subscription techniques for IP/ATM and dataservices.

As of the acquisition date, management’s estimation of the overall progress is 30% related tothe development percentage completion of this project and required approximately £1.9 millionto successfully complete the project. As of March 31, 2000 management believe that the projectwill be complete and benefits in the form of product revenues will commence November 2000.

OC48 ONX COT

OC48 ONX COT is a new product platform designed to attain higher speed applications thatare required for metropolitan area networks and high capacity access ring termination at thecentral office. This new multiplexor configuration will serve as the central office high densityOC48 ring gateway, and will possess the ability to terminate multiple rings of various speeds.

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As of the acquisition date, management’s estimation of the overall progress is 18% related tothe development percentage completion of this project and required approximately £5.6 millionto successfully complete the project. As of March 31, 2000 management believe that the projectwill be complete and benefits in the form of product revenues will commence from June 2000(first release) with further upgraded releases from October 2000 to March 2001.

The following unaudited pro forma summary presents information as if Reltec, Fore Systemsand the GPT minority had been acquired as of the beginning of Marconi’s fiscal year 1999. As thepurchase of Reltec and Fore Systems were near the beginning of fiscal year 2000 and the GPTminority was acquired in August 1998, no pro forma information will be provided for fiscal year2000. The fiscal year 1999 pro forma amounts include certain adjustments, primarily to recognizedepreciation, in process technology written off and amortization based on the allocated purchaseprice of Reltec, Fore Systems and GPT assets, and interest expense (net of tax), and do not reflectany benefits from economics which might be achieved from combining operations. The pro formainformation does not necessarily reflect the actual results that would have occurred nor is itnecessarily indicative of future results of operations of the combined companies:

(In millions, except share data)1999

£

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,812Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (498)Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.11Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.11

4. Marketable securities

A summary of marketable securities classified as available for sale and held to maturitysecurities as of March 31, 2000 and 1999 is set forth below:

March 31, 2000:

(In millions)

Amortizedcost

Grossunrealized

gains

Grossunrealized

losses

Estimatedfair

value

£ £ £ £

Available for sale:Lagadere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 99 — 115Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 — — 9

Total available for sale . . . . . . . . . . . . . . . . . . . . . . . . 25 99 — 124Held to maturity:

Eurobonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1 (1) 40Semiannual floating rate note . . . . . . . . . . . . . 25 1 — 26Annual tax bonds . . . . . . . . . . . . . . . . . . . . . . . . 3 — — 3

Total held to maturity . . . . . . . . . . . . . . . . . . . . . . . . 68 2 (1) 69

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 101 (1) 193

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R. R. DONNELLEY LON(•• ) LONLAN /20000 011 44 20 7330 1600 CB 01 SEP 00 22:30

March 31, 1999:

(In millions)

Amortizedcost

Grossunrealized

gains

Grossunrealized

losses

Estimatedfair

value

£ £ £ £

Available for sale:Lagadere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 32 — 49Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — — 3

Total available for sale . . . . . . . . . . . . . . . . . . . . . . . . 20 32 — 52Held to maturity:

Eurobonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 14 (11) 75Semiannual floating rate note . . . . . . . . . . . . . 33 2 (1) 34Annual tax bonds . . . . . . . . . . . . . . . . . . . . . . . . 1 — — 1

Total held to maturity . . . . . . . . . . . . . . . . . . . . . . . . 106 16 (12) 110

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 48 (12) 162

All available-for-sale marketable securities are classified as current assets. Scheduledmaturities of securities held to maturity at March 31, 2000 were as follows (in millions):

Amortizedcost

Fairvalue

£ £

Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 54Due in 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10Due in 2-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1Due after 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4

68 69

Differences between cost and market of £99 million (less deferred taxes of £27 million) and£32 million (less deferred taxes of £7 million) for available-for-sale securities have been recordedto a separate component of shareholders’ equity (net unrealized holding gains on investments) asof March 31, 2000 and 1999, respectively. There were no sales transactions of available-for-salesecurities in fiscal years 2000 and 1999.

5. Investments in affiliates

At March 31, 2000, Marconi has five investments, which it accounts for using the equitymethod: Alstom, Atlantic Telecom, GDA, Xcert, and Comstar. Marconi has a 24%, 27%, 50%,25% and 50% interest in the outstanding common stock of Alstom, Atlantic Telecom, GDA,Xcert and Comstar, respectively. At March 31, 2000, there were no differences between thecarrying amount and the underlying equity in net assets of Alstom, Atlantic Telecom, GDA, Xcertand Comstar. The aggregate market value of the Alstom investment as of March 31, 2000 is £892million. The aggregate market value of the Atlantic Telecom investment as of March 31, 2000 is£405 million. As GDA, Xcert and Comstar do not have quoted market price, no aggregate valuecan be provided. Dividends received from equity investments for fiscal year 1999 and 2000 were£426 million and £68 million, respectively.

Marconi owns approximately 24% of Alstom, a company which specializes in thecontracting of infrastructure construction projects for power generation, power transmission anddistribution and railway transportation. In June 1998, Alstom became the holding companyfollowing a legal reorganization resulting in the transfer of subsidiaries and investments

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previously held by GEC Alsthom, a joint venture between GEC and Alcatel. In June 1998 GECand Alcatel sold a proportion of their shares to reduce their shareholding, following anadditional issue of new shares by Alstom, from 50% to 24% each. As a result of this sharedisposal cash consideration of £952 million was received by Marconi. Taking into account theinvestment in Alstom represented by the 26% disposition, a gain of £841 million resulted. Ofthis gain £44 million was a gain arising from the additional issue of new shares by Alstom.

Summarized financial information for Alstom for March 31, 1999 and 2000 is as follows:March 31,

1999 £ 2000 £

(In millions)Balance sheet dataShort-term investments and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 704 1,450Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,477 4,627Inventories and contracts in progress, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,216 1,953Goodwill and fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,717 5,314

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,114 13,344

Provisions for risks and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,893 2,327Accrued pension and retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 417Financial debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 3,995Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,988 5,476

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,107 12,215

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 25Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 1,104

Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,114 13,344

Income statement dataRevenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,571 10,403Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 422Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 273

Alstom’s major infrastructure contracting activities are generally performed under fixed-pricecontracts. The length of such contracts varies, but is typically between 1 and 5 years. Under U.S.GAAP, a non-classified balance sheet would be shown because the contract-related items in thebalance sheet have realization and liquidation periods extending beyond 1 year.

Summarized financial information for our other investments in affiliates (in aggregate) forMarch 31, 1999 and 2000 is as follows:

March 31,

1999 £ 2000 £

(In millions)Balance sheet dataCurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484 772Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 504

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 765 1,276

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 332 603Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 38

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375 641

Income statement dataRevenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,139 1,031Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 53Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 15

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6. Inventories

Inventories consist of the following:

March 31,

(In millions)1999 £ 2000 £

Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 454Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 200Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 292

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 616 946

7. Property, plant and equipment

Property, plant and equipment consists of the following:

March 31,

(In millions)1999 £ 2000 £

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 203Building and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 56Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 1,127Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 91

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,163 1,477Less: accumulated depreciation 693 719

Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 758

Depreciation expense for the years ended March 31, 1999 and 2000 was £108 million and£155 million, respectively.

8. Goodwill and other intangible assets

Goodwill and other intangible assets consist of the following:

March 31,

(In millions)1999 £ 2000 £

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,383 4,107Less: accumulated amortization 474 767

Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 909 3,340

Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 1,804Less: accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 301

Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 1,503

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Intangible assets at March 31, 2000 include core developed technology of £1,273 million(1999 £359 million) with accumulated amortization of £248 million (1999 £98 million). Customerbase acquired in the acquisitions of Reltec and Fore Systems amounted to £396 million withaccumulated amortization of £35 million at March 31, 2000. The workforce acquired throughthese acquistions was valued at £69 million with accumulated amortization of £13 million atMarch 31, 2000. Trademarks and patents of £38 million were acquired in these transactions with£2 million of accumulated amortization at March 31, 2000. Other identified intangibles amountto £28 million (1999 £5 million) at March 31, 2000 with accumulated amortization of £3 million(1999 £1 million).

9. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following:

March 31,

(In millions)1999 £ 2000 £

Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 256Accrued expense and deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 663Dividend payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363 733

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086 1,652

10. Short-term borrowings and credit facilities

Under Marconi’s 1998 syndicated credit agreement:

(a) as of March 31, 1999, a group of banks committed a maximum of €1.5 billion(approximately £900 million) on an unsecured, revolving basis until March 23, 2000; as ofMarch 31, 2000, this facility had been extended until March 22, 2001, in a reduced amount of€1.3 billion (approximately £800 million).

(b) as of March 31, 1999 and 2000, a group of banks committed a maximum of €4.5 billion(approximately £2.7 million) on an unsecured, revolving basis until March 25, 2003.

Under the terms of this agreement, borrowings bear interest of 0.175% per annum over theLondon inter-bank offered rate. As of March 31, 1999 and 2000, the average interest rate onborrowings under the facility was 5.11% and 6.16% respectively. Additionally, Marconi payscommitment fees at a rate of 0.035% per annum with respect to the €1.3 billion (approximately£800 million) facility and 0.075% with respect to the €4.5 billion (approximately £2.7 billion)facility. The unused portion of this agreement at March 31, 1999 and 2000 was £3,049 millionand £1,995 million, respectively.

Under Marconi’s 1999 syndicated credit agreement, as of March 31, 2000, a group of bankscommitted a maximum of €2.5 billion (approximately £1.5 billion) on an unsecured, revolvingbasis until June 3, 2000; this facility has been extended until June 2, 2001, in a reduced amountof €2.4 billion (approximately £1.4 billion). Under the terms of this agreement, borrowings bearinterest of 0.25% over the London inter-bank offered rate. Marconi pays commitment fees at arate of 0.10% per annum on the undrawn amount of this facility. As of March 31, 2000, therewere no borrowings outstanding under this facility.

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R. R. DONNELLEY LON(•• ) LONLAN /20000 011 44 20 7330 1600 CB 01 SEP 00 22:30

11. Long-term debt

Year ended March31,

(In millions)1999 £ 2000 £

Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 939Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 9

Total obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 948Current maturities of long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . (15) (9)

Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 939

On March 30, 2000, Marconi issued two unsecured eurobonds having an aggregate principalamount of €1.5 billion (approximately £900 million). One eurobond is for €500 million(approximately £300 million) with a coupon rate of 5.625%, per annum, maturing on March 30,2005. The other eurobond is for €1 billion (approximately £600 million) with a coupon rate of6.375%, per annum, maturing on March 30, 2010. The eurobonds are not redeemable prior tomaturity (except, at Marconi’s option, in the event of certain tax changes) and are not subject toany sinking fund requirements.

As of March 31, 2000, Marconi had other obligations of £48 million related to finance leasesand secured debenture loans.

The following table sets forth the mandatory reductions in principal under the terms of alldebt agreements for each of the next five years based upon the amounts outstanding at March 31,2000:

(In millions) £

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 948

12. Valuation and qualifying accounts

DescriptionMarch 31, 1998

balance Additions DeductionsMarch 31, 1999

balance

£ £ £ £Allowance for doubtful accounts . . . . . . . . . . . . . . 24 14 (8) 30Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 78 (61) 133Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 63 (44) 65Restructuring reserve . . . . . . . . . . . . . . . . . . . . . . . . . . 60 37 (56) 41

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 192 (169) 269

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DescriptionMarch 31, 1999

balance Additions DeductionsMarch 31, 2000

balance

£ £ £ £Allowance for doubtful accounts . . . . . . . . . . . . . . 30 32 (28) 34Inventory reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 139 (77) 195Warranty reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 58 (61) 62Restructuring reserve . . . . . . . . . . . . . . . . . . . . . . . . . . 41 69 (48) 62

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 298 (214) 353

The restructuring reserve represents amounts charged with respect to businesses where exitannouncements have been made and exit plans have been established and approved. Suchcharges comprise involuntary redundancies and severance of £24 million (1999 £9 million), assetwrite-downs and other withdrawal costs of £37 million (1999 £32 million).

13. Pension plans and other postretirement plans

Pension plans

Marconi operates a number of defined benefit and defined contribution pension plans onbehalf of its employees. The most significant pension plan is the GEC 1972 Plan, a definedbenefit plan for employees in the United Kingdom, the assets of which are held separately fromthe assets of Marconi plc, are administered by trustees and are managed professionally.

The benefit offered to a specific employee varies based upon the location of and pastbusiness decisions made by a specific business unit, as well as local statutory requirements. Themajority of employees are eligible for defined benefit pension benefits, after minimum servicerequirements are met. Such benefits to an individual employee are calculated using a formulawhich is specific to the applicable pension plan, based upon years of credited service andaverage earnings of the employee.

Marconi funds its defined benefit pension obligations at a level which meets or exceeds locallegal requirements. Funded pension plan assets are primarily invested in equity and debtsecurities.

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Data with respect to benefit obligations are as follows:

Pension benefitsU.K. plans

Pension benefitsoverseas plans

(In millions)1999 £ 2000 £ 1999 £ 2000 £

Change in benefit obligation:Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,123 2,255 307 328Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 27 10 10Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 134 20 23Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 — —Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 3Actuarial loss/(gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 — (10) (11)Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 12 2Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125) (129) (11) (13)Business acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 52

Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,255 2,296 328 394

Change in plan assets:Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . 2,249 2,361 365 397Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 176 25 35Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 18 4 1Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 — —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125) (129) (11) (13)Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 14 3

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,361 2,435 397 423

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 139 69 29Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (96) (98) (43) (52)Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 12 13Unrecognized transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 12 (3) (2)

Net asset/(liability) recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 53 35 (12)

Amounts recognized in the balance sheet consist of:Prepaid benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 53Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (68)Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . 1 1

Net asset/(liability) recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 (12)

The actuarial assumptions used to develop the periodic benefit cost and funded status wereas follows:

Pensionbenefits

U.K. plans

Pensionbenefits

overseas plans

1999%

2000%

1999%

2000%

Weighted average assumptions:Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 6.0 7.25 7.0Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 7.5 9.5 9.5Rate of compensation increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 5.0 5.1 5.4Rate of pension increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.0 — —

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Data with respect to net periodic benefit cost are as follows:

Pensionbenefits

U.K. plans

Pensionbenefits

overseas plans

(In millions)1999 £ 2000 £ 1999 £ 2000 £

Components of net periodic benefit cost:Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 27 10 10Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 134 20 23Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (165) (173) (33) (36)Amortization of unrecognized transition (asset)/liability . . . . . . . . 3 3 (1) (1)Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1 1Amortization of actuarial (gains)/losses . . . . . . . . . . . . . . . . . . . . . . . . — — (1) (1)

Net periodic cost of deferred benefit plans . . . . . . . . . . . . . . . . . . . . . (9) (9) (4) (4)

The projected benefit obligation, accumulated benefit obligation, and fair value of plan assetsfor the overseas pension plans which have an accumulated benefit obligation in excess of planassets were £4 million, £4 million, and £4 million respectively at March 31, 2000, and £4million, £4 million, and £3 million at March 31, 1999.

Other postretirement benefits

At March 31, 2000, 9,352 employees and 2,361 retired employees (in 1999 4,860 employeesand 1,787 retired employees) of companies in the United States and Canada were entitled tohealth care benefits after retirement.

All but one of the plans are unfunded. The benefit cost charges and provisions for theliability are as follows:

Postretirementbenefits

(In millions)1999 £ 2000 £

Change in benefit obligations:Benefit obligations at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 45Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3Foreign currency exchange rate changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (3)Business acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 9

Benefit obligations at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 55


(In millions)1999 £ 2000 £

Change in plan assets:Fair value of assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1Group funding of benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (3)

Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1

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(In millions)1999 £ 2000 £

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (54)Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (13)

Net prepaid (accrued) benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (67)

Data with respect to net periodic benefit cost are as follows:


(In millions)1999 £ 2000 £

Components of net periodic benefit cost:Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3Amortization of net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1)

Net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3

In the year ended March 31, 2000, an annual rate of increase per capita in the cost of retireehealth care benefits of 7% for 2000 (decreasing to 6% for the year 2001 and 5% for the year2002) was assumed. In the year ended March 31, 1999, such rate was assumed to be 7% for 1999(decreasing to 6% for the year 2000 and 5% for the year 2001).

An increase of one percentage point in such assumed rates would have increased the benefitobligation at March 31, 2000 by approximately £5 million and the service and interest costcomponents of the net periodic benefit cost for the year then ended by approximately £0.5million. A decrease of one percentage point in such assumed rates would have decreased thebenefit obligation at March 31, 2000 by approximately £4 million and the service and interestcost components of the net periodic benefit cost for the year then ended by approximately £0.5million.

Defined contribution plans

The U.S. subsidiaries of Marconi operate 401(k) plans for eligible employees who contributea percentage of their pre-tax compensation with the company matching these contributions up toprescribed limits. Marconi’s matching contributions were £5 million and £1 million for the yearsended March 31, 2000 and 1999, respectively.

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14. Fair values of financial instruments

The carrying amounts and fair values of material financial instruments at March 31, 1999and 2000 are as follows:

1999 2000

(In millions)

Carryingamounts

Fairvalues

Carryingamounts

Fairvalues

£ £ £ £

Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 162 192 193Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 62 939 920Obligations under finance leases . . . . . . . . . . . . . . . . . . . . . . . . 3 3 9 9Forward currency agreements . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 — 6Interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . — (10) — 124Tax swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (41) (27)Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — (33)

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

Cash and cash equivalents

The carrying values of cash and cash equivalents, receivables, lines of credit and payablesapproximate their fair values.

Marketable securities and long-term debt

Marketable securities are valued at quoted market price market prices.

Foreign exchange contracts and market derivatives

The fair values of the interest rate swaps and tax swaps have been determined by referencesavailable from the markets on which the instruments are traded. Forward foreign currencycontracts and other fair values have been calculated by discounting cash flows at prevailinginterest rates.

Interest rate swaps

Marconi has entered into pay-fixed agreements to effectively convert a portion of its variable-rate debt to fixed-rate debt to reduce the risk of incurring higher interest costs due to risinginterest rates. The following table summarizes the notional amounts outstanding and weightedaverage interest data, based on variable rates in effect at March 31, 1999 and 2000, for theseswaps that expire between 2008 and 2009:

Year ended March 31,

(In millions)1999 £ 2000 £

Pay fixed swaps:Notional amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 2,417Average receive rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.03% 5.49%Average pay rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.85% 5.58%

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15. Shareholders’ equity

Holders of ordinary shares in Marconi are entitled to one vote per share on matters to bevoted on by the shareholders, and to receive dividends when and as declared by the board.Shareholders are not entitled to preemptive rights and have no subscription, redemption orconversion 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 ofshares of any series of preferred shares issued or that may be issued in the future.

Under the terms of Marconi’s share option plans, officers and certain other employees havebeen granted options to purchase Marconi’s ordinary shares, phantom options or nil cost options.The terms of the grant vary and each of the main plans are described below.

As of March 31, 2000, Marconi has granted options under four share option plans: theMarconi 1999 share option plan, the Marconi U.K. sharesave plan, the Marconi launch share planand the Marconi phantom option plan.

Each plan has been approved by the board and the shareholders of Marconi. The employeeshare plans are designed to create incentives for employees and encourage them to become long-term shareholders.

The Marconi 1999 share option plan

All full-time employees and executive directors have been eligible to be granted optionsunder the option plan at the discretion of the remuneration committee. Options granted toparticipants will not normally be exercisable unless our earnings per share over a period of atleast three financial years has exceeded the growth in the U.K. Retail Price Index by at least anaverage of 3% per year. Options will entitle the option holder to acquire Marconi ordinary sharesat a price per share determined by the remuneration committee, which shall not be less than themarket value of a Marconi share shortly before the date of grant.

Marconi applies variable plan accounting for grants under this scheme and will recognizecompensation cost when achievement of the performance conditions becomes probable.

The Marconi U.K. sharesave plan

All U.K. resident employees and executive directors are eligible to participate in the U.K.sharesave plan. Under the U.K. sharesave plan, participants can purchase options with anexercise price not less than 80% of the market value of a Marconi ordinary share on the tradingday immediately before the invitation day (as defined in the rules of the plan). In order toparticipate, each employee must enter into a savings contract with a specified financialinstitution under which they agree to make monthly contributions, which must not exceed £250per month in aggregate. This plan is non-compensatory in nature.

The Marconi launch share plan

Under this plan, employees at November 30, 1999 were, at the discretion of the board,granted the right to receive up to 1,000 Marconi ordinary shares, which would be exercisableprovided that two conditions are met. The first condition is that the market price of a Marconiordinary share must have doubled from 801.5p to £16.03 during the period between November30, 1999 and November 30, 2004. The second condition is that a participant must normallyremain in employment until November 30, 2002 or, if later, at the time that the first condition ismet. Marconi applies variable plan accounting for grants under this plan and will account for thecompensation expense if the first condition is met.

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The Marconi phantom option plan

In June 1999, the GEC remuneration committee adopted the phantom option plan for thepurpose of granting incentives relating to any increase in our value primarily to executives andemployees of Reltec and Fore Systems following our acquisition of those businesses. FromNovember, 1999, Marconi operated the phantom option plan and awards were made by referenceto Marconi shares and previous awards (grants made between June 1999 and November 1999 inrelation to GEC Shares) were adjusted so that they related to Marconi shares on a value-for-valuebasis. Following the adjustment the holder of a phantom unit was kept in the same economicposition as before through an adjustment to the exercise price and an increase in the number ofunits. A phantom option is similar to a share option except that it is a cash-based award grantedin relation to a stated number of phantom units, each of which has the same economic value as aMarconi ordinary share. Upon exercise of a phantom option, the holder is entitled to receive acash payment equal to the difference between the base price of the phantom option (normallycorresponding to the market value of a Marconi ordinary share at the time the phantom option isgranted) and market value of a Marconi ordinary share on the date of exercise. Marconi may givenotice to participants that it elects to substitute options to acquire real Marconi ordinary sharesfor phantom options. If such an election is made, a participant will be required on exercise topay an amount equal to the base price of the phantom options to Marconi and will receiveMarconi ordinary shares. Options are normally exercisable between the third and tenthanniversaries of grant. Marconi recognizes compensation expense measured at the end of eachperiod as the amount by which the quoted market value of a Marconi share exceeds the unitprice payable by the unit holder. The expense is recognized over the service period. Changes,either increases or decreases, in the quoted market value of the shares between the date of grantand the date the phantom options are exercised result in a change in the compensation expenseto be recognized.

Where the phantom options were granted in exchange for Reltec and Fore Systems optionsas part of those business combinations, the fair value of those options was treated as part of therespective purchase prices.

Existing GEC share option plans

Options plans similar to the Marconi 1999 share option plan and the Marconi U.K. sharesaveplan had been in place over GEC shares. There was a non-compensatory plan known as the 1992Savings-Related Scheme. There was a fixed plan known as the Managers’ 1984 Scheme. Therewas a variable plan known as the 1997 Executive Scheme. During fiscal 2000, optionholders whowould remain Marconi employees, were able to exchange options over GEC shares for optionsover Marconi shares. Following the exchange the optionholder was kept in the same economicposition after the exchange as before the exchange through an adjustment to the exercise priceand an increase in the number of shares under option. The exchange resulted in no change inmeasurement date for either the 1992 Savings-Related Scheme or the Managers’ 1984 Scheme. Asperformance conditions in respect of the 1997 Executive Scheme ceased to apply, themeasurement date for this option plan occurred. These performance conditions were theachievement of earnings per share targets and a vesting period.

Optionholders in the three plans who would not remain Marconi employees were able toexercise their options.

As of March 31, 2000 Marconi had not granted any options under either of the Marconiassociated companies share option plan or the Marconi long term incentive plan.

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Option activity under the plans is as follows:

Number ofshares

Weighted averageexercise price

Outstanding, March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,676,217 £3.70Granted (weighted average fair value of £1.42) . . . . . . . . . . . . 12,228,081 4.85Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,163,908) 3.83Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,828,898) 3.10

Outstanding, March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,911,492 4.11Granted (weighted average fair value of £4.19) . . . . . . . . . . . . 150,237,840 3.33Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,817,336) 4.20Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,375,946) 4.13

Outstanding, March 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,956,050 4.40

All options were granted at fair market value as of date of grant. At March 31, 2000, optionsto purchase 14,843,191 shares were exercisable. Additional information regarding optionsoutstanding as of March 31, 2000 is as follows:

Options outstanding Options exercisable

Range ofexercise

pricesNumber

outstanding

Weightedaverage

remainingcontractuallife (years)

Weightedaverage

exerciseprice

Numberexercisable

Weightedaverage

exerciseprice

£ nil-2.66 46,225,951 9.05 £0.27 4,826,024 £1.493.01-4.72 19,801,655 7.58 3.50 10,017,167 3.294.76-6.76 33,298,828 9.23 5.06 — —

7.12-10.09 50,629,616 9.67 8.10 — —

£0.17-10.09 149,956,050 9.11 4.40 14,843,191 £2.70

Additional employee share plan information

Marconi accounts for the employee share plans under Accounting Principles Board OpinionNo. 25: ‘‘Accounting for Stock Issued to Employees,’’ under which no compensation cost hasbeen recognized for all ordinary shares and share options issued with a price equal to fair marketvalue. Marconi has recognized compensation cost for all ordinary shares and share optionsissued with a price below fair market value. For ordinary options, such expense is recognizedover the vesting period of the options. Marconi recognized compensation expense ofapproximately £118 million and £nil for the years ended March 31, 2000 and 1999, respectively,related to share options issued below fair market value. Unrecognized deferred compensationwas approximately £52 million and £nil at March 31, 2000 and 1999, respectively. Hadcompensation cost for the employee share plan been determined consistent with the fair valuemethodology of SFAS No. 123: ‘‘Accounting for Stock-Based Compensation’’, Marconi’s netincome would have been as follows:

(In millions, except per share data)1999 £ 2000 £

Net income:As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129 285Pro forma income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 332

Pro forma income per share:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.41 £0.12Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.41 £0.12

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

1999 2000

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.80% 6.10%Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 3.5Assumed volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.15% 44.46%Expected dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.13 £0.13

16. Earnings per shareThe following table reconciles net income available for ordinary shareholders and the

weighted average ordinary shares outstanding for basic and diluted earnings per ordinary sharefor the periods presented:

Year endedMarch 31,

(In millions, except for per share data)1999 £ 2000 £

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,129 285Basic earnings per ordinary share:

Weighted average ordinary shares outstanding . . . . . . . . . . . . . . . 2,711.6 2,696.9Basic earnings per ordinary share . . . . . . . . . . . . . . . . . . . . . . . . . . . £0.41 £0.11

Diluted earnings per ordinary share:Weighted average ordinary shares outstanding . . . . . . . . . . . . . . . 2,711.6 2,696.9Effect of dilutive options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.1 40.5

Adjusted ordinary shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . 2,738.7 2,737.4Diluted earnings per ordinary share . . . . . . . . . . . . . . . . . . . . . . . . . £0.41 £0.10

17. Income taxesThe components of income before income taxes and minority interests are as follows:

Income/(Loss)

Year endedMarch 31,

(In millions)1999 £ 2000 £

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,093 (194)Non-United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 (109)

Income/(loss) from ordinary activities before income taxes andminority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 (303)

Income tax provision/(benefit) includes:Year endedMarch 31,

(In millions)1999 £ 2000 £

Current income taxesUnited Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 54Non-United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 30

Total current taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 84Deferred income taxes

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 149Non-United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 (149)

Total deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 0

Total income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 84

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The differences between the group’s tax on profit on ordinary activities, and the statutoryincome tax rate in the United Kingdom are as follows:

Year endedMarch 31,

(In millions)1999 £ 2000 £

Taxes computed at the statutory rate: (30%-2000 and 31%-1999) . . . . . 419 (91)Non-deductible goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 148Non-UK tax rate differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 (6)Adjustment in respect of affiliates’ tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34) (14)Tax charge on reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 47Non-deductible items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18Changes in reinvestment position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (16)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (2)

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 84

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.9% (27.7%)

Deferred income tax assets/(liabilities) in the balance sheet are as follows:Year endedMarch 31,

(In millions)1999 £ 2000 £

Net current deferred tax assets:Net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 38Reversal of reinvestment position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 16Provisions and other expenses not currently deductible . . . . . . . . . . . . 97 58

Sub total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 112Net non-current deferred tax assets/(liabilities)

Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (2)Intangible assets (other than goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (85) (572)Pension and post-employment liabilities not currently deductible . . (37) (44)

Sub total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (618)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) (506)

As of March 31, 2000 £128 million of operating losses, net of a valuation allowance of£45 million, were available to be carried forward. As of March 31, 1999 there was £9 million ofoperating losses available to be carried forward, however a full valuation allowance was recordedagainst these operating losses because they are not expected to be realized.

The group does not provide deferred tax for potential taxes which could become payable onthe distribution of retained earnings from its non-UK subsidiaries or joint ventures or on thedisposition of such interests where there is no intention to dispose of such interests. A netdeferred tax asset in the amount of £16 million has been recognized as of March 31, 2000 toaccount for the net tax benefit relating to investments which are not considered permanentlyreinvested.

18. Discontinued operations

In January 1999, GEC reached a preliminary agreement with British Aerospace under whichGEC’s international aerospace, naval shipbuilding, defense electronics and defense systemsbusiness would be separated and subsequently merged with British Aerospace.

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The results of operations of this business have been restated as discontinued operations forall years presented. A summary of operating results of discontinued operations is presentedbelow:

Summary of operating results of discontinued operations:

Year endedMarch 31,

(In millions)1999 £ 2000 £

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,801 1,817Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 27Income before income taxes and minority interest . . . . . . . . . . . . . . . . . . . 334 44Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (42)Income applicable to minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (2)

Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . 248 —

In November 1999, following sanction by the High Court of a Scheme of Arrangementpursuant to Section 425 of the Companies Act 1985, GEC undertook an internal reorganizationand reconstruction under Section 110 of the Insolvency Act 1986 (the transaction). As a result ofthose steps, the former businesses of GEC became owned directly or indirectly by two newcompanies—MES Holdco (which held GEC’s defense business—MES) and Marconi plc (whichheld GEC’s remaining businesses). British Aerospace Plc (now named BAE Systems Plc) (BAe)acquired MES Holdco in consideration for the issue to former GEC shareholders of approximately0.428 new BAe ordinary shares plus 13.54 pence of BAe Capital Amortizing Loan Stock for eachGEC share held. GEC shareholders also received one share in Marconi plc for each GEC shareheld prior to the reorganization and reconstruction.

The transaction was completed on November 29, 1999; shares in the Company wereadmitted to the Official List of the London Stock Exchange on November 30, 1999 and dealingsin the Company’s shares commenced on that day.

The value of BAe ordinary shares and Capital Amortizing Loan Stock issued to GECshareholders on November 29, 1999 amounted to £4,932 million.

At the date of separation MES owed an amount of approximately £1.2 billion to GEC. Theseliabilities were repaid immediately after separation with funds made available by BAe.

The separation has been treated as a partial disposition of the MES business and a partialdistribution to shareholders. The net assets at separation (£2,278 million) have been apportionedon a pro-rata basis between the disposition to the extent of the cash received by Marconi (£439million) and the distribution to the extent of the value of BAE shares and loan stock receiveddirectly by GEC shareholders (£1,839 million). The resulting gain on disposition, net oftransaction costs of £65 million, is £675 million.

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Net assets of discontinued operations:

(In millions)March 31, 1999

Assets £Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (268)Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436Prepaid expense and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 635Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99Investment in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64Goodwill and intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,988Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,586Liabilities

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . 696

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 863Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Other long term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,078

Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . 2,508

19. Segment and related information disclosuresMarconi has adopted SFAS No. 131: ‘‘Disclosures about Segments of an Enterprise and

Related Information,’’ in this report. This standard requires disclosure of segment information onthe same basis used internally for evaluating segment performance and for deciding how toallocate resources to segments.

Description of the types of products and services from which each reportable segment derivesits revenues

Under SFAS No. 131 Marconi has six reportable segments: communications networks,communications services, mobile communications, medical systems, commerce systems and datasystems. Each segment operates in, and derives its revenues from, distinct business lines.Communications networks develops, manufactures, sells and supports optical networks,transmission systems and network management software for customers in the carrier networkmarket. It also provides to customers in the carrier network market a broad range of accessproducts. In addition, we supply to customers in both the carrier and the enterprise networkmarkets, a broad range of high-performance, high-capacity broadband switches which selectpaths for sending large amounts of voice of data traffic through a network. Communicationsservices provides a broad range of support services to the communications industry worldwide toenable operators to optimize business returns from their network investment including planning,building and operating communications networks tailored to suit customer’s needs, as well assupporting our own communications and information technology products. Mobilecommunications designs, develops and integrates communications and information technologiesinto wireless communications systems for professional and military uses. Medical systemsmanufactures and distributes medical imaging equipment for both diagnostic and therapeuticuses. Commerce systems provides point of sale and back office accounting systems for attended

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and unattended retail markets, fuel pumps and dispensers, and services for the retail petroleumindustry. Data systems provides a broad range of marking and imaging equipment used in theidentification, distribution and tracking of food products, goods and printed matter. Marconi hasother investments and businesses shown in the segmental information under ‘‘other.’’

Measurement of segment operating profit or loss, segment assets, and segment capitalemployed

Marconi evaluates performance and allocates resources based on strategic long-term growthplans for each reportable segment. We measure performance on revenues and operating profits ona segment basis using U.K. GAAP. The principal measurement differences between U.K. GAAPand U.S. GAAP as related to the information reported on a segmental basis are the result ofdifferences in the accounting for pensions and postretirement benefits, reorganization costs,employee share options and dividends. We also report capital employed on a U.K. GAAP basis tomonitor trends in capital employed as it is an indicator of how effectively the fixed assets andworking capital are being used by the segments.

Factors management used to identify Marconi’s reportable segments

Operating segments are defined as components of an enterprise for which separate financialinformation is available that is evaluated regularly by the chief operating decision maker indeciding how to allocate resources and in assessing performance. The six reportable segments arestrategic market units that offer distinct products and services. These segments were determinedbased upon the customers and markets that Marconi serves. Each segment is managed separatelyas each segment requires different technologies and marketing strategies. The following tablespresent certain financial data from Marconi’s reportable segments presented in accordance withU.K. GAAP and then reconciled to U.S. GAAP financial information consolidated totals:

Analysis of reportable segments (management information—U.K. GAAP reconciled to U.S.GAAP)

(In millions)As of and for the year ended March 31, 1999

Netrevenues Depreciation

Operatingprofit

Capitalemployed(*)

£ £ £ £Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,343 41 247 340Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 5 32 37Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 6 16 126Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 898 10 49 303Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 9 45 103Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218 5 57 43Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 731 32 62 301

Segment total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,090 108 508 1,253

(In millions)As of and for the year ended March 31, 2000

Netrevenues Depreciation

Operatingprofit

Capitalemployed(*)

£ £ £ £Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,535 80 416 807Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543 9 73 33Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 8 26 123Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010 12 76 289Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 9 49 107Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 5 59 46Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718 32 51 300

Segment total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,724 155 750 1,705

F-36



(*) Included in the capital employed category are the following: property, plant andequipment, inventory, accounts receivable, prepaid expense and other current assets, other non-current assets, accounts payable, accrued liabilities, non-current liabilities, and other liabilities.

Operating profit under U.K. GAAP is defined as profit from operations before goodwill andintangible amortization, in-process research and development, U.K. GAAP operating exceptionalitems, gains and losses on business disposals and the impact of less than 50% owned affiliates.

The following is a reconciliation from net revenue per segments to revenues per theconsolidated statement of income for the two fiscal years ended March 31, 2000:

(In millions)1999 £ 2000 £

Net revenues per segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,090 5,724Less: joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (301) (287)

Revenues (U.S. GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789 5,437

The segment information reviewed by the Chief Operating Decision Maker is prepared underU.K. GAAP. As required under U.K. GAAP the segment revenue total includes Marconi’s share ofrevenues earned by joint ventures. These revenues include revenues earned by joint venturesfrom sales to Marconi.

Accordingly Marconi’s share of joint ventures revenue is a deductive item in reconcilingfrom U.K. GAAP revenue to the revenue recorded in the U.S. GAAP consolidated financialstatements.

The following is a reconciliation from operating profit per segments to income fromcontinuing operations before income taxes and minority interests for the two fiscal years endedMarch 31, 2000:

(In millions)1999 £ 2000 £

Operating profit per segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 508 750U.S. GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 (129)

Adjusted operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 621Operating exceptional items* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (106)Joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (25)Goodwill and other intangibles amortization and purchased in-process research

and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (92) (772)Other income / (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975 (21)

Income from continued operations before income taxes and minority interest . . . . . 1,351 (303)

U.S. GAAP adjustments include the following:

(In millions)1999 £ 2000 £

Reorganization costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (48)Option schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (108)

36 (129)

U.K.—U.S GAAP adjustments are discussed on pages F-38 and F-39.

* These U.K. GAAP exceptional items relate to reorganization costs £63 million (1999 £29million) and year 2000 costs £43 million (1999 £22 million) which are disclosed on a separate

F-37



line under U.K. GAAP. For U.S. GAAP reporting these items have been reclassified to theappropriate expense line in the income statement. In all cases this was selling, general andadministrative expenses.

The following is a reconciliation from capital employed to total assets per the consolidatedbalance sheet at March 31, 1999 and 2000:

(In millions)1999 £ 1999 £ 2000 £ 2000 £

Segments capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,253 1,705Corporate capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (863) (1,016)Joint venture capital employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (73) (71)

317 618U.S. GAAP Adjustments

Pension and postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 146Proposed dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 93Option schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (325)Reorganization costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 6

435 570Add items excluded from capital employed:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,418 555Marketable securities, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 178Net assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . 2,508 —Marketable securities, long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 14Investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 574Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 31Goodwill and other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,174 4,843

5,814 6,195Add back credit balances included in capital employed:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 825Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,086 1,652Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 139

1,726 2,616

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,292 9,999

The following describes the significant U.K. GAAP to U.S. GAAP adjustments as they relateto segment information.

Pension and postretirement benefits

Under both U.K. GAAP and U.S. GAAP pension costs are provided so as to provide forfuture pension liabilities. However, there are differences in the prescribed methods of valuation,which give rise to GAAP adjustments to the pension cost and prepayment.

Proposed dividends

Under U.K. GAAP dividends are provided for in the year in respect of which they arerecommended by the board of directors. Under U.S. GAAP, dividends are not provided for untildeclared by the board of directors.

F-38



Option Schemes

Under both U.K. GAAP and U.S. GAAP option schemes give rise to compensation expensewhen specified criteria are met. The measurement date and calculation of expense can bedifferent, giving rise to GAAP adjustments to compensation expense, accrued liabilities andadditional paid-in capital.

Reorganization costs

Under U.S. GAAP the criteria for recording reorganization provisions are different to thoseunder U.K. GAAP.

Major customer information

Marconi had one customer which accounted for 13% and 11% of revenue for the year endedMarch 31, 1999 and March 31, 2000, respectively.

Geographic information

Revenue data is collected on a territory basis and thus the following disclosures areprovided.

Revenue to unaffiliated customers by geographic region are as follows:

Revenues by territory of destination:For the year ended

March 31,

(In millions)1999 £ 2000 £

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034 1,265The Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,278 2,357Rest of Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 918 1,192Africa, Asia, and Australasia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559 623

Total external revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789 5,437

Revenues by territory of origin:For the year ended

March 31,

(In millions)1999 £ 2000 £

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,454 1,726The Americas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,266 2,499Rest of Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 850Africa, Asia, and Australasia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 362

Total external revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789 5,437

Revenue by origin with the USA (included within The Americas above) totalled £2,448million (1999: £1,232 million) and with Italy (included in the Rest of Europe) £598 million(1999: £535 million). No other country contributed more than 10% of revenue by origin in 2000or 1999.

F-39



Long-lived assets

Within capital employed, the balance sheet measure reviewed by the Chief OperatingDecision Maker, the only long-lived assets are property, plant and equipment and other noncurrent assets.

Expenditure by sector on property, plant and equipment is as follows:

For the year endedMarch 31,

(In millions)1999 £ 2000 £

Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 174Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 16Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 14Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 17Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 62

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 299

Other sector non-current assets included within capital employed are as follows:


(In millions)1999 £ 2000 £

Communications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2Communications services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Mobile communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Medical systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 49Commerce systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3Data systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 49

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 103

The geographical split of long-lived assets included within capital employed is as follows:


(In millions)1999 £ 2000 £

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239 267United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 386Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 71Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 137

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494 861

Long-lived assets within other countries are not individually material for either fiscal yearpresented.

F-40



20. Related party transactions

Marconi and its consolidated subsidiaries have sales and purchases during the year withequity investments, joint ventures and associates, which are not consolidated, during the fiscalyears ended March 31, 1999 and 2000. All transactions are in the ordinary course of business.The primary transactions between Marconi and related parties are summarized as follows:

Year endedMarch 31, 1999

(In millions)Alstom Picker Other

£ £ £

Income statement:Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 48 51Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 — 2

Balance sheet:Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 13 16Trade payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 —

Year endedMarch 31, 2000

(In millions)Alstom Picker Other

£ £ £

Income statement:Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 54 12Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 — —

Balance sheet:Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 14 3Trade payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 — —

No significant transactions with directors or other executive officers of Marconi haveoccurred during the period.

21. Commitments and contingencies

Marconi is subject to legal proceedings and other claims arising in the ordinary course ofbusiness. Various lawsuits, claims and proceedings have been or may be instituted or assertedagainst Marconi relating to the conduct of its business, including those pertaining toenvironmental, safety and health, employment and contract matters. Although the outcome oflitigation cannot be predicted with certainty and some lawsuits, claims or proceedings may bedisposed of unfavorably to Marconi, management believes that the ultimate outcome of thesematters will not have a material adverse effect on the results of operations or financial position orcash-flows of Marconi.

Contingentliabilities

(In millions)1999 £ 2000 £

At March 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 25

Contingent liabilities relate mainly to the cost of legal proceedings which, in the opinion ofthe Directors, are not expected to have a materially adverse effect on the group.

F-41



Under the terms of the Marconi launch share plan, subject to the performance conditionsbeing met (see footnote 15) Marconi may issue up to 37,189,925 Marconi ordinary shares toemployees. The compensation expense, which would be recorded if the first performancecondition is met, is estimated to be approximately £596 million.

In the ordinary course of business Marconi enters into contracts for capital expenditures asset out below:

Capitalexpenditure

commitments

(In millions)1999 £ 2000 £

At March 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 59

Marconi leases certain facilities and equipment under operating leases, many of whichcontain renewal options and escalation clauses. Total rental expense was £45 million and £23million for the years ended March 31, 2000 and 1999, respectively.

At March 31, 2000, minimum future rental commitments under operating leases having non-cancelable lease terms in excess of one year are as follows:

(In millions)

Landand

buildingsOtheritems Total

£ £ £

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 26 572002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 8 302003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3 202004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2 172005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1 14Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 1 124

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 41 262

22. Subsequent event

On April 20, 2000, Marconi announced an agreement to acquire MSI, a global provider ofconsulting and planning services and operational support software used by the wirelesstelecommunications industry for an initial consideration of £391 million in cash and stock (risingto a maximum of £570 million in the future if certain performance criteria, including synergytargets, are met).

Sir Alan Rudge, a non-executive director of Marconi and non-executive Chairman of MSI,holds a substantial number of options from MSI. At the date of completion, he will receiveapproximately $5.3 million from MSI in respect of the cancellation of his options, whichrepresents the difference between the offer price in the MSI transaction ($17.50) and the exerciseprice of such options. Sir Alan Rudge did not participate in that part of any board meeting whichconsidered the proposed acquisition of MSI, nor did he receive any board papers related thereto.

F-42

29025 FIN 43 Project Marlin Prospectus 3.8.7p15 psAOG 14 SEP 00 20:50


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors ofFore Systems, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidatedstatements of operations, of cash flows, of comprehensive income (loss) and of changes incommon stock and stockholders’ equity present fairly, in all material respects, the financialposition of Fore Systems, Inc., and its subsidiaries at March 31, 1999, and the results of theiroperations and their cash flows for the year then ended in conformity with accounting principlesgenerally accepted in the United States. These financial statements are the responsibility of theCompany’s management; our responsibility is to express an opinion on these financial statementsbased on our audits. We conducted our audits of these statements in accordance with auditingstandards generally accepted in the United States, which require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. Webelieve that our audits provide a reasonable basis for the opinion expressed above.

As described in Note 17 to the consolidated financial statements, the Company was acquiredby

▲The General Electric Company, p.l.c. (‘‘GEC’’) on June 17, 1999.

PricewaterhouseCoopers LLPPittsburgh, PennsylvaniaApril 23, 1999 except Note 17, which is as of May 18, 2000.

F-43



Fore Systems, Inc.

CONSOLIDATED STATEMENT OF OPERATIONS

Year EndedMarch 31,

1999

(Inthousands,except per-share data)

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 632,353Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,971

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316,382Operating expenses:

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,293Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,430General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,668Purchased research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,355Merger related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,159

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,905

Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137,523)Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,899Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121)Litigation settlement charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Income (loss) before provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122,745)Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,827

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(132,572)

Net income per common share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.20)

Net income per common share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.20)

The accompanying notes are an integral part of these financial statements.

F-44



Fore Systems, Inc.

CONSOLIDATED BALANCE SHEET

March 31,1999

(Inthousands,

exceptshare data)

ASSETS:Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $187,277Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173,885Accounts receivable, net of allowance for doubtful accounts of $5,784 . . . . . . . . . . . . . . . . . 144,962Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,640Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,722Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,751

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 664,237Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,494Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,077Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,806

TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $822,614

LIABILITIES AND STOCKHOLDERS’ EQUITY:Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,248Accrued payroll and related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,927Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,570Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,113Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,115

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $189,973

Commitments and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Stockholders’ Equity:Common stock, par value $.01 per share; 300,000,000 shares authorized; 116,355,894

shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $680,069Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41,917)Treasury stock, at cost: 165,734 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,253)Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,258)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632,641

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $822,614


F-45



Fore Systems, Inc

CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK ANDSTOCKHOLDERS’ EQUITY

Common Stock

UnrealizedHolding

Gains(Losses) on

Investments

RetainedEarnings

Deficit

CumulativeTranslationAdjustment

TreasuryStock

(In thousands,exceptshare data)

Shares Amount Total

Balance, March 31, 1998 . . . 104,989,838 $424,186 $(1,696) $ 90,842 $(471) $(3,252) $ 509,609Issuance of common stock

under stock option andemployee purchaseplans . . . . . . . . . . . . . . . . . . . . 2,717,792 30,531 — — — — 30,531

Issuance of common stockfor purchase of business . 8,648,264 186,198 186,198

Income tax benefit fromstock option planactivity . . . . . . . . . . . . . . . . . . — 6,297 — — — — 6,297

Unrealized holding gainson available-for-saleinvestments . . . . . . . . . . . . . — — 349 — — — 349

Purchase of treasury stock . — — — — — (1) (1)Issuance of common stock

under employeeincentive plan . . . . . . . . . . . 32,857 (187) 32,670

Cumulative translationadjustment . . . . . . . . . . . . . . — — — — (440) — (440)

Net loss . . . . . . . . . . . . . . . . . . . — — — (132,572) — — (132,572)

Balance, March 31, 1999 . . . 116,355,894 $680,069 $(1,347) $ (41,917) $(911) $(3,253) $ 632,641


F-46



Fore Systems, Inc.

CONSOLIDATED STATEMENT OF CASH FLOWS

YearEnded

March 31,1999

(In thousands)Cash flows from operating activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(132,572)Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,299Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,991Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,747)Income tax benefit related to stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,297Purchased research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,355

Change in operating assets and liabilities:Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,257)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,873)Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,133)Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,905Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,141Prepaid income taxes and income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,948Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,818

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,172

Cash flows from investing activities:Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (158,343)Redemption and sale of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,806Investment in other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (402)Capitalization of software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,557)Payment of contingent consideration from Acquisition (Berkeley) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,959)Cash from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844Purchases of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29,344)

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,955)

Cash flows from financing activities:Principal payments on notes payable and capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64)Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1)Proceeds from issuance of Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,531

Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,466

Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,683

Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,594

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187,277

Cash paid (refunded) during the year for:Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 73Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,614


F-47



Fore Systems, Inc.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

Year EndedMarch 31,

1999

(In thousands)

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(132,572)Change in cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (440)Change in unrealized gain (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349

Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(132,663)


F-48



Fore Systems, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAll data in thousands except for share and per-share data

1. Summary of Significant Accounting Policies

Nature of Business

Fore Systems, Inc. (‘‘Fore Systems’’ or the ‘‘Company’’) is a leading global supplier ofnetworking solutions based on an Intelligent Infrastructure� designed to handle the networkedapplications of today and tomorrow. The Company’s Networks of Steel� deliver the increasedcapacity, reduced complexity and unparalleled flexibility and scalability required to buildnetworks that last.

Principles of Consolidation and Basis of Presentation

The financial statements include the accounts of the Company and its wholly-ownedsubsidiaries. All intercompany transactions have been eliminated. The Company’s fiscal yearends March 31. Any reference to years stated hereafter represents the fiscal year unless otherwiseindicated.

Revenue Recognition

Revenue is recognized when the product is shipped provided that all significant obligationsare fulfilled. Revenue from support contracts is recognized ratably over the term of the relatedagreements. Revenue from initial license fees, including limited warranty services, is recognizedupon the delivery of the software and the costs associated with providing such services, whichare immaterial, are accrued.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expenses during the reportedperiod. Actual results could differ from those estimates.

Cash and Cash Equivalents and Short-term Investments

The Company’s policy is to invest its excess cash in U.S. government securities, interest-bearing deposits with major banks, municipal notes and bonds and commercial paper ofcompanies with strong credit ratings that are subject to minimal credit and market risk. Cashequivalents consist of money market funds, commercial paper, U.S. government securities andmunicipal notes and bonds that have original maturities of 90 days or less. Short-terminvestments include securities purchased with an original maturity of greater than 90 days.

Inventories

Inventories are stated at the lower of cost or market, cost being determined using the first-in,first-out method.

Capitalized Software Development Costs

Software development costs for new software and enhancements to existing software areexpensed as incurred until the establishment of technological feasibility. Subsequent to establishmentof technological feasibility, the Company capitalizes software development costs incurred until the

F-49



product is available for general release to customers. Amortization of capitalized softwaredevelopment costs is computed on a product-by-product basis using the greater of (a) the ratiothat current gross revenues for a product bear to the total of current and anticipated future grossrevenues for that product, or (b) the straight-line method over the remaining estimated economiclife of the product. Unamortized capitalized software development costs amounted to $813 atMarch 31, 1999.

Fixed Assets

Equipment and furniture are recorded at cost and depreciated using the straight-line methodover the estimated useful lives of the assets which range up to 10 years. Leasehold improvementsare recorded at cost and amortized over the shorter of the estimated lives of the related assets orthe term of the lease.

Warranty Reserve

The Company generally provides a warranty for up to fifteen months on its products.Estimated warranty costs are accrued at the time revenue is recognized and are charged to cost ofsales.

Foreign Currency

The functional currency for the Company’s foreign manufacturing operations is the U.S.dollar. The functional currency for the other foreign operations is the local currency in therespective geographic territory. The assets and liabilities of the other foreign operations aretranslated into U.S. dollars at exchange rates in effect as of the balance sheet date. Results ofoperations are translated at the average exchange transaction rates for the period. Differencesarising on the translation of non-U.S. dollar functional currency entities are charged or creditedto the cumulative translation account as a component of other comprehensive income. Foreignexchange gains and losses, which are immaterial, are included in the results of operations.

Financial Instruments

The Company uses forward currency exchange contracts to manage foreign currencyexchange rate risk and does not use them for trading purposes. The exposure to credit risk forthese contracts is minimal since they are with major financial institutions. These contracts’ termsrange from one week to one year and are entered to hedge certain firm commitmentsdenominated in currencies other than the functional currency of the entity holding the foreigncurrency commitment. All foreign exchange forward contracts are designated as, and are effectiveas hedges of the underlying firm commitments. Gains and losses on the contracts are deferredand included in the measurement of the related foreign currency transaction and accordinglyclassified in the statement of operations with the related transaction. At March 31, 1999, theCompany had 390 outstanding forward currency contracts to buy $46,950 worth of variousforeign currencies as outlined below.

Contracts to buy foreign currencies:

ContractValue

UnrealizedGain/(Loss)

MarketValue

Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,195 $(1,692) $21,503British pounds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,630 (289) 15,341Japanese yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,865 (82) 2,783Other currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,260 (142) 5,118

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $46,950 $ (2,205) $ 44,745

F-50



At March 31, 1999, the Company had two outstanding interest rate swap contracts. TheCompany entered into these contracts—effective October 31, 1997 and December 15, 1999,respectively—to reduce the impact of changes in interest rates on future lease expense for theCompany’s headquarters, manufacturing and operating facilities (see Note 14). Under the terms ofthe contracts, the Company will receive a floating interest rate based upon 6-month LIBOR inexchange for payment of a fixed interest rate.

Over the life of the first contract, the notational amount upon which the interest paymentswill be calculated will range between approximately $21.8 million and $18.0 million. Theinterest rate fluctuations will result in a receipt or disbursement of funds by the Company oneach April 30th and October 30th until the termination of the agreement on October 30, 2007.Over the life of the second contract, the notational amount upon which the interest paymentswill be calculated will range between approximately $20.5 million and $18.7 million. Theinterest rate fluctuations will result in a receipt or disbursement of funds by the Company oneach April 30th and October 30th until the termination of the agreement on October 31, 2007.Rental expense is recognized on a straight-line basis. Differences between the floating rate rentalpayments and the amounts received or paid under the swap are matched and recognized asrental expense.

Gains and losses on these interest rate swaps will generally be offset by corresponding lossesand gains on the related lease agreements, resulting in negligible net exposure to the Company.

Net Income Per Share

Basic earnings per share is calculated based upon the weighted average number of commonshares actually outstanding. Diluted earnings per share is calculated based upon the weightedaverage number of common shares and shares of other potential common stock outstanding ifthey are dilutive. Since the Company had a net loss for the year ended March 31, 1999, thedilutive effect of other potential common stock has been excluded from the diluted calculation.Shares of potential common stock arising from the exercise of outstanding options are computedusing the treasury stock method.

Year EndedMarch 31,

1999

Net income available to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(132,572)Shares used for basic per share computation weighted average shares

outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,788Effect of Dilutive Securities: Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0

Shares used for diluted per share computation (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,788

Net Income Per Share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.20)

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1.20)

(1) 4,098,074 shares of potential common stock relating to outstanding employee stock optionshave been excluded from the diluted computation in 1999 since their effect was antidilutive.

Accounting for Stock Options

As permitted under Statement of Financial Accounting Standards No. 123 (‘‘SFAS 123’’),‘‘Accounting for Stock-Based Compensation,’’ the Company has elected to follow AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), and

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related interpretations, in accounting for stock based awards to employees. Under APB 25,because the exercise price of the Company’s employee stock options equals the market price ofthe underlying stock on the date of grant, no compensation expense is recognized in theCompany’s financial statements for all periods presented.

Advertising

Advertising costs are charged to operations when incurred. The Company did not incur anycosts associated with direct response advertising in 1999 and there were no capitalizedadvertising costs at March 31, 1999. Advertising expense for 1999 was $19,147.

New Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133‘‘Accounting For Derivative Instruments and Hedging Activities’’ (‘‘SFAS 133’’). SFAS No. 133requires the Company to carry derivatives and hedging instruments on the balance sheet at fairmarket value. In June of 1999, the FASB issued SFAS No. 137, ‘‘Accounting for DerivativeInstruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133.’’As a result, the provisions of SFAS No.133 are not required to be adopted until the Company’sfiscal year ending March 31, 2001. The Company has not completed its evaluation of the impactof this standard on financial position or results of operations.

2. Business Combinations

In February 1999, the Company acquired Euristix Limited, based in Dublin, Ireland,(‘‘Euristix’’) an industry-leading developer of advanced telecommunications software technologyand solutions. The Company issued 4.7 million shares of its Common Stock, par value $.01 pershare (‘‘Common Stock’’) in exchange for all of the outstanding ordinary shares of Euristix. Thetransaction was accounted for as a pooling of interests. In addition, the Company reserved177,000 shares of Common Stock for issuance upon the exercise of options granted insubstitution of options to purchase ordinary shares of Euristix. As a result of the transaction,Euristix was required to record a nonrecurring compensation charge of $32 million related tocertain Euristix variable compensation plans. The charge is reflected in the Company’sconsolidated statement of operations for the period ended March 31, 1999 in the respectiveexpense categories. The consolidated financial statements reflect the combination of the Companyand Euristix from April 1, 1998.

On September 11, 1998, the Company acquired Berkeley Networks, Inc., a Californiacorporation (‘‘Berkeley’’), by means of a merger (the ‘‘Merger’’) of a wholly-owned subsidiary ofthe Company, Fastwire Acquisition Corporation, a Delaware corporation (‘‘Fastwire’’), with andinto Berkeley. Berkeley, which designs and develops multi-gigabit routing switch platforms basedon Windows NT and advanced stateful inspection switching ASICs, was a development stageenterprise that had generated no significant revenues and had not shipped a completed productat the time the acquisition was completed.

The Company issued a total of approximately 8.6 million shares of Common stock to theformer shareholders of Berkeley and granted to former holders of options to purchase BerkeleyCommon stock a total of approximately 0.6 million substitute stock options to purchase theCompany’s Common stock. Pursuant to the terms of the Merger, additional consideration of up toa total of $30 million in cash (the ‘‘Earn-Out Payments’’) was to be paid by the Company basedon Berkeley achieving certain technological advances and/or attaining certain revenue goals inthe period commencing on September 11, 1998 and ending on the second anniversary thereof. Asof March 31, 1999, the Company accrued the first and second Earn-Out Payments totaling

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$20 million of which approximately $9.0 million was paid based on the payment scheduleestablished by the terms of the Merger, to the former equity holders of Berkeley.

The transaction was accounted for under the purchase method of accounting and,accordingly, the acquired assets and liabilities were recorded based upon their fair values at thedate of the acquisition. The results of operations of Berkeley are included in the financialstatements of the Company from the date of the acquisition.

The purchase price paid in Company stock and options and including the first cash Earn-Outpayments made through March 31, 1999 of $9.0 million totaled $196.7 million. Additional costsincurred in connection with the closing of the transaction ($6.5 million) and restructuringcharges of the acquired Company for certain assets, closing of facilities and employee terminationcosts ($1.4 million) along with the accrual of the second $10 million Earn-Out payment whichwas based on the achievement of certain technological advances, resulted in a total purchaseprice recorded as of March 31, 1999 of $214.6 million. The final Earn-Out payment of$10 million is dependent upon the attainment of certain revenue goals prior to September 11,2000. Depending on the amount and nature of any additional contingent consideration paid, theamount of intangible assets and corresponding periodic amortization may be increased.

The table below summarizes the purchase price allocation as of March 31, 1999, excludingthe final $10 million that may be recorded based on certain revenue goals being achieved overthe next 2 years:

Value

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,311Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,168Assembled work force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700Purchased research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,355Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,359Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,690)Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,355

Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $214,558

The recorded other intangible assets of $93.4 million are being amortized over 60 months.

Using the stage-of-completion methodology the Company estimated the value of thepurchased in-process research and development and recorded a $115.4 million charge.

The Company incurred restructuring charges of $2.5 million related primarily to the closingof the Company’s facilities and certain employee termination costs. The decision to close suchfacilities and to terminate such employees was made in connection with the acquisition ofBerkeley in order to rationalize and better align the Company’s resources following theacquisition. Cost savings are expected to result from the changes related to the restructuringactivities.

The value assigned to purchased research and development was determined by identifyingthree research projects in areas for which technological feasibility had not been established as ofthe date of the acquisition. These projects were the E4, the E8 and the EZ Switch (collectivelythe ‘‘projects’’). The E4 is a stackable Ethernet/Fast Ethernet/Gigabit Ethernet switch offering‘‘pay-as-you-go’’ bandwidth scalability and designed for medium size LAN backbones. The E8 is

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a modular platform expected to deliver high network performance to enterprise LAN backbones,and designed to meet the demands of the corporate data center and to operate at a processingrate of more than 38 million packets per second. The EZ Switch is a workgroup edge switchwhich will be targeted toward the low-cost stackable market and will allow for low-costforwarding devices to employ higher-end processing and memory architectures toward the routecalculation and distribution functions.

The value assigned to purchased research and development was determined by estimatingthe costs to develop the purchased research and development into commercially viable products;estimating the resulting net cash flows from such projects; discounting the net cash flows back totheir present value and multiplying the discounted net cash flows by the stage-of-completionpercentage of each research project. The blended discount rate includes a factor that takes intoaccount the uncertainty surrounding the successful development of the purchased research anddevelopment. At the acquisition date, the efforts remaining to develop the purchased researchand development to reach technical feasibility related to the completion of all planning,designing, prototyping, high-volume manufacturing, verification and testing activities that arenecessary to establish that the products can be produced to meet their design specificationsincluding functions, features and technical performance requirements.

The projects identified made up 100% of the total charge for purchased research anddevelopment. Commercial versions of the E4 and the E8 were first shipped to customers in lateNovember and mid-December 1998, respectively. Development of the EZ Switch was notcomplete as of March 31, 1999. Management expects that development of the EZ Switch will becompleted prior to March 31, 2000. Management expects that sales of the EZ Switch willcommence immediately following completion of development. Research and development costsrelated to the E4, the E8 and the EZ Switch projects incurred through the acquisition date were$6.0 million, $6.5 million and $.1 million, respectively. Total estimated costs at completion forthe E4, the E8 and EZ Switch projects, as of the acquisition date, are $7.9 million, $8.8 millionand $1.0 million, respectively.

Revenue assumptions for the purchased in-process products commence in fiscal year 1999and increase through fiscal year 2002, at which time they are assumed to decrease through fiscalyear 2004, as newer products are released. These assumptions are based on management’sestimates of market size and growth (which are supported by independent market data), expectedtrends in technology and the nature and expected timing of new product introductions by theCompany and its competitors. The estimated gross margins as a percentage of revenues areexpected to be higher on a stand alone basis as compared to historical gross margin percentagesdue to the product features and selling into a less price sensitive market. The estimated selling,general and administration costs were assumed to be lower as a percentage of revenue on a standalone basis as compared to historical percentages due to the type of markets and purchasingpatterns of the customers. Research and development costs were based on costs estimated tocomplete the projects and maintenance costs after the products are completed. The assumedincome tax rate was 28%. The blended discount rate used in discounting the net cash flows frompurchased research and development averaged 30%. The stage-of-completion percentages foreach project were determined by dividing the costs incurred to date by the total cost to complete.

Significant assumptions used to determine the value of the purchased research anddevelopment included financial projections for revenues, gross margin, selling and administrativecosts and research and development costs and an applicable income tax rate. The Companybelieves that the assumptions used in the forecasts were reasonable at the time of the businesscombination. No assurance can be given, however, that the underlying assumptions used toestimate expected project revenues, development costs or profitability, or the events associatedwith such projects, will transpire as estimated. For these reasons, actual results may varymaterially from the projected results.

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The following unaudited pro forma information has been prepared assuming that theacquisition of Berkeley had taken place at the beginning of the respective periods presented. Theamount of the aggregate purchase price allocated to purchased research and development and therestructuring charges has been excluded from the pro forma information as they are non-recurring items. Adjustments to arrive at the pro forma amounts include, among others, thoserelated to amortization of intangible assets and related tax effects and the write-off of purchasedin-process research and development. The pro forma financial information is not necessarilyindicative of the combined results that would have occurred had the acquisition taken place atthe beginning of the period, nor is it necessarily indicative of the results that may occur in thefuture.

Pro Forma forthe Twelve

Months EndedMarch 31, 1999

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $632,458Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,428)Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,420)Earnings per share—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.12)Earnings per share—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.12)

3. Cash Equivalents and Short-term Investments

Cash equivalents and short-term investments, classified as available for sale, consist of thefollowing:

AmortizedCost

UnrealizedGain/(Loss)

MarketValue

March 31, 1999Municipal notes and bonds . . . . . . . . . . . . . . . . . $122,088 $(1,402) $120,686Commercial paper and other . . . . . . . . . . . . . . . . 81,704 145 81,849U.S. Government securities . . . . . . . . . . . . . . . . . 52,918 (90) 52,828

$256,710 $(1,347) $255,363

The market value of available-for-sale securities maturing within one year at March 31, 1999was $235,170. The market value of available-for-sale securities with contractual maturities overone year and less than three years at March 31, 1999 was $20,193. Gross realized gains andlosses on sales of securities in 1999 were immaterial.

4. Inventories

Inventories are summarized as follows:

March 31,1999

Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,778Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,439Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,423

Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $84,640

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During the quarter ended March 31, 1999, the Company announced the phase-out of thePowerHub product line which resulted in an aggregate charge of $31.5 million, which isincluded in cost of sales. This charge included $17.2 million related to firm commitments whichwill result in losses under a contract with a customer on PowerHub products, $11.7 million forinventory write-downs and $2.6 million for fixed asset write-downs and other charges.

5. Fixed Assets

Fixed assets are summarized as follows:

March 31, 1999

Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,444Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,260Equipment and furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,831

Total fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,535Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 90,041

Fixed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,494

6. Line of Credit

The Company has a line of credit available from a bank under which it can borrow up to$20 million. Borrowings under the agreement bear interest at either the prime rate or the LIBORrate plus 1%, at the option of the Company. Borrowings under this arrangement are secured bythe Company’s fixed assets, inventories and accounts receivable. There were no borrowingsunder this line at March 31, 1999. The bank agreement contains certain covenants, the mostrestrictive of which require the maintenance of a certain level of net worth, and expires onSeptember 30, 1999.

7. Notes Payable and Capital Lease Obligations

At March 31, 1999, the Company had notes payable and capital lease obligations aggregating$565 which are included in other current liabilities. Interest expense for the year ended March31, 1999 was not material.

8. Income Taxes

The provision for income taxes consists of the following:

Year EndedMarch 31, 1999

Current income tax expense:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,826State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,313

Total current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,562

Deferred income tax benefit:Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,753)State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (982)

Total deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,735)

Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,827

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Deferred income taxes result from differences in the timing of recognition of income andexpense items for tax and financial reporting purposes. The principle sources of such differencesand the tax effect of each are as follows at March 31, 1999:

March 31, 1999

Deferred tax assets (liabilities)Reserves not currently deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,747Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,978Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,772Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,266Depreciation and amoritization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 934Capitalized software development costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (302)Merger-related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,552Acquired assets basis differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,964Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,811

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,722

The Company has $31.4 million in net operating loss carryforwards expiring in 2005 through2019. The Company’s research and development tax credit carryforwards of 5.7 million expirebetween 2008 and 2014. In connection with the acquisition of Berkeley Networks (see Note 2),the Company acquired net deferred tax assets relating to temporary differences existing at theacquisition date of $5.5 million. This amount is included in net deferred tax assets disclosedabove but is not included in current period results of operations.

The effective tax rate differs from the applicable U.S. statutory federal income tax rate as aresult of the following differences:


Statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.00%State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.09%Foreign Sales Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.49%Research and development credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.84%Foreign income taxed at different rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.48%Merger and acquisitions costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.49%)Purchased research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32.89%)Non-deductible stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9.31%)Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.65%)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.57%)

Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8.01%)

9. Stockholders’ Equity

Authorized Capital

On May 6, 1996, the Company’s stockholders approved an increase in the authorized sharesof the Company’s Common stock, par value $.01 per share, to 300,000,000 shares. The Companyhas 5,000,000 authorized shares of preferred stock. Preferred stock may be issued at thediscretion of the Board of Directors of the Company (without stockholder approval), with suchdesignations, rights and preferences as the Board of Directors may determine from time to time.

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Stock Option Repricing

On October 13, 1998, the Compensation Committee of the Board of Directors determinedthat, as a result of a decline in the market price of the Common Stock since August 1998, thepurpose of the Existing Plans were not being adequately achieved with respect to thoseemployees holding options that had exercise prices significantly above the then current marketvalue. In light of these events, including the fact that two of the Company’s competitors hadrecently repriced their options, the Compensation Committee was concerned that it would not bepossible to retain key employees unless options were repriced. As a result, the Companymodified options to purchase 7,447,038 shares of Common Stock held by employees notparticipating in the Company’s Change in Control Severance Plan (‘‘Management Employees’’).The average exercise price of such options was changed from $15.38 to $10.00. In addition, withregard to the Management Employees, the Compensation Committee modified the exercise priceof options to purchase 3,650,520 shares of Common Stock. The average exercise price of suchoptions was changed from $16.77 to $12.50.

10. Stock Option Plans

The Company’s stock option plans provide for the issuance of an aggregate of 39,923,200shares of Common stock, of which 3,251,689 shares are available for future grants at March 31,1999.

The Compensation Committee of the Board of Directors determines the term of each option,option exercise price within limits set forth in the plans, number of shares for which each optionis granted and the rate at which each option is exercisable. However, under certain plans, theexercise price of any stock option may not be less than the fair market value of the shares on thedate granted (or, with respect to incentive stock options, less than 110% of the fair market valuein the case of an optionee holding more than 10% of the voting stock of the Company), and theterm cannot exceed ten years (five years for incentive stock options granted to holders of morethan 10% of the Company’s voting stock); under certain other plans, the exercise price for stockoptions, which do not qualify as incentive stock options under the Internal Revenue Code, aredetermined by the Compensation Committee of the Board of Directors in its discretion and theterm of such options cannot exceed ten years. Transactions under the stock option plans aresummarized as follows:

Shares

WeightedAverage

Exercise Price

Outstanding at March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,446,829 $16.17Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,696,323 12.66Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,131,764) 10.69Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,217,657) 15.40

Outstanding at March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,793,731 $13.31

Exercisable at March 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,795,349 15.09

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Options outstanding as of March 31, 1999:

Range of Exercise PricesNumber

Outstanding

WeightedAverage

RemainingContractual

Life (in years)

WeightedAverageExercise

Prices

$ 0.02—$10.00 8,875,953 8.11 $ 7.99$10.44—$12.50 3,638,985 8.53 12.47$12.63—$14.31 2,154,763 9.21 13.83$14.38—$15.19 2,308,858 7.38 15.14$15.19—$18.88 2,456,428 9.30 16.84$18.91—$33.63 2,358,744 7.58 30.01

$ 0.02—$33.63 21,793,731 8.29 $13.31

Options exercisable as of March 31, 1999:

Range of Exercise PricesNumber

Exercisable

WeightedAverage

Exercise Price

$ 0.02—$10.00 2,431,320 $ 5.39$10.44—$12.50 713,479 12.39$12.63—$14.31 649,737 13.61$14.38—$15.19 2,011,469 15.15$15.19—$18.88 433,888 16.15$18.91—$33.63 1,555,456 31.73

$ 0.02—$33.63 7,795,349 $15.09

The employee stock purchase plans (the ‘‘Stock Purchase Plans’’) allow eligible employeesthe opportunity to purchase up to an aggregate of 2,109,530 shares of Common stock throughpayroll deductions at a purchase price per share not less than 85% of the fair market value onthe first or last day of the quarterly offering periods (as defined in the Stock Purchase Plans),whichever is lower. The shares issued under the Stock Purchase Plans as of March 31, 1999 were586,028.

As permitted under Statement of Financial Accounting Standards No. 123 (‘‘SFAS 123’’),‘‘Accounting for Stock-Based Compensation,’’ the Company has elected to follow AccountingPrinciples Board Opinion No. 25, ‘‘Accounting for Stock Issued to Employees’’ (‘‘APB 25’’), andrelated interpretations, in accounting for stock-based awards to employees. Under APB 25,because the exercise price of the Company’s employee stock options equals the market price ofthe underlying stock on the date of grant, no compensation expense is recognized in theCompany’s financial statements for all periods presented. Pro forma information regarding netincome and earnings per share is required by SFAS 123. This information is required to bedetermined as if the Company had accounted for its employee stock options (including sharesissued under the Stock Purchase Plan, collectively called ‘‘options’’) granted subsequent toMarch 31, 1995 under the fair value method of that statement. The fair value of options grantedin fiscal 1999 reported below has been estimated at the date of grant using a Black-Scholesoption pricing model with the following weighted average assumptions:

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StockOption

Plan

StockPurchase

Plan

1999 1999

Risk-free rate (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.86 5.33Volatility (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.00 40.00Expected Life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.59 0.25Dividend Yield (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00 0.00

The Black-Scholes option valuation model was developed for use in estimating the fair valueof traded options that have no vesting restrictions and are fully transferable. In addition, optionvaluation models require the input of highly subjective assumptions, including the expectedstock price volatility. Because the Company’s options have characteristics significantly differentfrom those of traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in the opinion of management, the existing models donot necessarily provide a reliable single measure of the fair value of its options. The weightedaverage estimated fair value of employee stock options granted during fiscal 1999 was $4.69 pershare. The weighted average estimated fair value of shares granted under the Stock PurchasePlans during the year ended March 31, 1999 was $4.08.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized toexpense over the options’ vesting period. The Company’s pro forma information follows:

1999

Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(158,317)Pro forma net income per common share

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.43)Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.43)

Because the Company anticipates making additional grants and options vest over severalyears, the effects on pro forma disclosures of applying SFAS 123 are not likely to berepresentative of the effects on pro forma disclosures of future years. SFAS 123 is applicable onlyto options granted subsequent to March 31, 1995.

11. Defined Contribution Plan

In November 1993, the Company adopted a 401(k) plan (the ‘‘Plan’’) that covers substantiallyall employees who meet minimum age and service requirements. Company contributions aredetermined at the discretion of the Board of Directors. The Plan also permits tax-deferred salarydeductions for eligible employees in accordance with the Internal Revenue Code.

The expenses of this plan for the year ended March 31, 1999 were $4,398.

12. Major Customers and Concentration of Credit Risk Information

Revenue from government agencies, as a percentage of total revenue, for the year endedMarch 31, 1999 was 14%.

There were no customers with revenue in excess of 10% of the Company’s total revenue forthe year ended March 31, 1999.

Financial instruments which potentially expose the Company to concentrations of credit riskinclude accounts receivable. The Company performs an initial credit review and ongoing

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evaluations of customers’ financial conditions and, generally, does not require collateral. Inaddition, the Company maintains reserves for potential credit losses.

Accounts receivable were concentrated as follows:

March 31, 1999

Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49%Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36U.S. Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

100%

13. Segment Information

The Company adopted SFAS No. 131, ‘‘Disclosures about Segments of an Enterprise andRelated Information’’, The Company operates in one segment-networking equipment.

Revenues from sales to customers for the year ended March 31, 1999 were distributed asfollows:


United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $453,672Europe (includes Middle East and Africa) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121,109Pacific Rim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,399Other International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,173

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $632,353

Summarized financial information by geographic area is as follows:


RevenueLong

Lived Assets

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $445,786 $645,933International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,567 176,681Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632,353 822,614

14. Lease Commitments

In December 1998, the Company entered into agreements to construct and leasemanufacturing and operating facilities on land adjacent to the Company’s headquarters that waspurchased by the Company. The lessor has committed to fund a maximum of $20.5 million forthe construction of the building. Upon completion of construction, the Company will lease thefacilities under an eight-year operating lease and has options to renew the lease for twoadditional five-year terms (subject to certain conditions). Future annual minimum rentalpayments under the lease are approximately $1.5 million and are expected to commence in fiscalyear 2000. During the construction period, the Company guaranties the repayment of 90% ofcertain project costs expended or financed by the lessor, which amount is estimated not toexceed $18 million, and under certain circumstances guaranties the repayment of 100% of allproject costs expended or financed by the lessor. During the lease period, the Companyguaranties all of its obligations under the lease.

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The Company may, at its option, purchase the facilities during or at the expiration of theterm of the lease at an amount equal to the remaining balance of any debt of the lessor related tothe construction of the facilities plus any applicable prepayment penalties. The Company has theright to obtain a purchaser for the facility upon the termination of the lease. If the Companyexercises this remarketing option and obtains a buyer for the facility, the Company guaranties tothe lessor a residual value for the facility of approximately $14 million, an amount that wasdetermined at the lease inception date. Should the Company not exercise the remarketing option,the Company will be required to purchase the facility at the termination of the lease forapproximately $19 million.

As part of the above lease transaction, the Company will pledge approximately $19.5 millionof marketable securities as collateral for specified obligations of the lessor (approximately$1.2 million pledged as of March 31, 1999). The Company will manage these securities under itsinvestment policy. In addition, under the terms of the lease, the Company is required to complywith certain financial covenants including the maintenance of a minimum tangible net worth.Other restrictive covenants limit indebtedness and the payment of dividends.

The lease transaction entered into in December 1998 is tied to the lease for the Company’sexisting headquarters facilities. As such, the lease contains cross default provisions with theprevious lease, and if the Company elects to exercise the purchase, renewal or remarketingoptions with respect to any of the buildings under these leases, it must do so for all of them.Should the Company elect to purchase, or be required to purchase, all of these buildings, thetotal purchase price would approximate $43 million. In addition, under the terms of these leases,the Company is required to comply with certain financial covenants including the maintenanceof a minimum tangible net worth. Other restrictive covenants limit indebtedness and thepayment of dividends.

The Company also has operating lease agreements relating to certain other facilities andequipment which expire at various dates. Rent expense on operating leases for the year endedMarch 31, 1999 was $15,300.

Future minimum payments under all non-cancelable operating leases as of March 31, 1999are summarized as follows:

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,5072001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,2202002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,0742003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,6182004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,675Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,484

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,578

15. Litigation

(a) In July and August 1997, Fore Systems, together with six of its current or formerdirectors and officers, were named as defendants in seven nearly identical class action lawsuits,filed in the United States District Court for the Western District of Pennsylvania. Each of theselawsuits was filed on behalf of a putative class of persons (other than defendants and theirrespective affiliates) who purchased Fore Systems securities during the period from October 17,1996 through April 1, 1997, inclusive (the ‘‘Class Period’’). Each complaint asserted claimsagainst all defendants under Section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act)and, as to the individual defendants, under Section 20 of the 1934 Act. The complaints alleged

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generally that, during the Class Period, Fore Systems misrepresented material facts relating to itsresults of operations, competitive position and future prospects and concealed Fore Systems’alleged deterioration, declining growth and inability to compete successfully, until itspreliminary release on April 1, 1997 of Fore Systems’ projected results of operations for its fiscalyear ended March 31, 1997. The complaints sought certification of the alleged class of plaintiffs,unspecified compensatory damages, counsel and expert fees and other costs of suit andunspecified relief.

Pursuant to a court order, these lawsuits were consolidated, and the lead plaintiffs filed aConsolidated Amended Complaint on December 31, 1997. The Consolidated Amended Complaintcontained generalized allegations that paralleled those of the original complaints and addedallegations that Fore Systems’ financial statements for its fiscal quarters ended September 30 andDecember 31, 1996 had improperly recognized revenues on sales to certain customers. ForeSystems and the other defendants moved to dismiss the Consolidated Amended Complaint, onthe basis that the plaintiffs had failed to state a claim upon which relief might be granted. TheCourt denied the motion to dismiss in June 1998, and all defendants thereafter answered theConsolidated Amended Complaint denying all allegations of wrongdoing. The Court then entereda case management order providing for Phase 1 discovery and contemplating that defendantswould file an early motion for summary judgment. In addition, the Court granted plaintiffs’motion to certify the class of purchasers alleged in the Consolidated Amended Complaint.

Shortly before defendants’ motion for summary judgment was to be filed, plaintiffs filed aSecond Amended Consolidated Complaint (Second Amended Complaint). The Second AmendedComplaint repeated the generalized allegations of misrepresentations and omissions contained inplaintiffs’ original complaints, substantially changed the alleged factual basis for the allegationsof improper revenue recognition that were contained in plaintiffs’ Consolidated AmendedComplaint and alleged that Fore Systems’ purported deterioration and declining prospects andgrowth had begun in the quarter ended June 30, 1996. Accordingly, the Second AmendedComplaint sought to expand the alleged class to include all persons who purchased ForeSystems’ securities during the period July 19, 1996 through April 1, 1997, inclusive.

Defendants filed a motion to dismiss the Second Amended Complaint and, in the alternative,for summary judgment. On July 14, 1999, the Court denied defendants’ motion to dismiss and forsummary judgment and all defendants thereafter answered the Second Amended Complaintdenying all allegations of wrongdoing. By Order dated June 30, 1999, the Court had provided thatdiscovery would conclude nine months after the Court’s disposition of defendants’ dispositivemotion (i.e. on April 14, 2000). The parties have pursued discovery since July 1999. OnFebruary 23, 2000 plaintiffs requested an extension of the discovery period. That request wasdenied by the Magistrate Judge. Upon appeal of the Magistrate Judge’s order by plaintiffs, theDistrict Court, by order dated March 27, 2000, extended the discovery period through August 14,2000.

Fore Systems believes the allegations in the Second Amended Complaint are completelywithout merit and intends to defend this action vigorously. As such, the Company believes that amaterial loss contingency is neither probable nor reasonably estimable.

(b) On October 14, 1998, Fore Systems was sued by Bell Communications Research Inc.(now named Telcordia Technologies, Inc. (Telcordia) in the United States District Court for theDistrict of Delaware. Telcordia’s complaint against Fore Systems alleges that Fore Systems hasinfringed and continues to infringe four patents owned by Telcordia. The complaint identifiesFore Systems’ ‘‘Core Products, Edge Products and Multimedia Application Products’’ as allegedlyinfringing products and seeks unspecified damages for past infringement and an injunctionagainst future infringement.

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Fore Systems has answered Telcordia’s complaint by denying infringement and asserting theaffirmative defenses of invalidity, unenforceability, laches, equitable estoppel, implied license,misuse and unclean hands. In addition, Fore Systems has counterclaimed for a declaratoryjudgment on the same issues (non-infringement, invalidity, unenforceability, laches, equitableestoppel, implied license, misuse and unclean hands) and asserted affirmative claims (seekingdamages) for reformation of contract based on fraud, breach of the covenant of good faith and fairdealing, fraud, negligent misrepresentation and common law unfair business practices andcompetition. Discovery in this case has closed and both parties have filed summary judgmentmotions which are pending before the court. The case has been scheduled for trial in early May,2000.

Fore Systems believes the allegations in the complaint are completely without merit andintends to defend this action vigorously. As such, the Company believes that a material losscontingency is neither probable nor reasonably estimable.

From time to time, Fore Systems receives notifications alleging that it is or may be infringingthe intellectual property rights of third parties. At the present time, Fore Systems is in separatediscussions with several such third parties regarding the alleged infringement by the Company ofcertain patents owned by such third parties. Management believes that the ultimate outcome ofthese matters is not likely to have a material adverse effect on the results of operations orfinancial position of Fore Systems.

Although management believes that the ultimate outcome of pending legal proceedings willnot have a material adverse effect on the Company’s financial position or results of operations,litigation is subject to inherent uncertainties, and an unfavorable outcome may have a materialadverse effect on the results of operations in a particular future period or periods.

16. Litigation—Subsequent event (unaudited)

(a) Telcordia commenced a second suit against Fore Systems on June 8, 1999 in the UnitedStates District Court for the District of Delaware. This suit is related to the currently pending suit,identified in (b) above, and alleges infringement by Fore Systems of two additional patents.

Fore Systems has answered Telcordia’s complaint by denying infringement and asserting theaffirmative defenses of invalidity, unenforceability, laches, equitable estoppel, implied license,misuse and unclean hands. In addition, Fore Systems has counterclaimed: (i) for a declaratoryjudgment on the issues of non-infringement, invalidity and unenforceability; and (ii) alleginginfringement by Telcordia of one of Fore Systems’ patents. Discovery in this case has closed. Thedeadlines for filing summary judgment motions are in early April, 2000. The case has beenscheduled for trial in early July, 2000.

Fore Systems believes the allegations in the complaint are completely without merit andintends to defend this action vigorously. As such, the Company believes that a material losscontingency is neither probable nor reasonably estimable.

(b) In the week commencing May 17, 1999, three actions were filed in the Court of Chanceryof the State of Delaware against Fore Systems. The complaints also name as defendants fivepersons who were then directors of Fore Systems and one former director, who is erroneouslydesignated in such complaint as having been a member of the board of directors of Fore Systemsat that time. The complaints purport to assert claims on behalf of various stockholders of ForeSystems, other than the defendants and their respective affiliates. The complaints allege that theindividual defendants breached their fiduciary duties to Fore Systems’ public stockholders andviolated Delaware law as a result of the board of directors’ grant of certain options to senior

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executives of Fore Systems which allegedly took place after Fore Systems’ initial discussionswith GEC relating to the proposed acquisition by GEC of Fore Systems. The complaints seek classcertification and various other forms of relief, including a declaration that the grant of suchoptions was improper, an award to class members of their proportionate interest in the paymentto the holders of such options, a direction that the holders of such options hold the paymentswith respect thereto in a constructive trust for the benefit of the class, an award of costs anddisbursements of the action, including attorneys’ fees, and other unspecified relief. The partiesagreed to the consolidation of these actions and the Court ordered such consolidation for allpurposes. On July 15, 1999, defendants filed a motion to dismiss plaintiffs’ complaint for failureto state a claim on which relief can be granted, failure to comply with Chancery Court Rule 23.1,and lack of standing. While that motion was pending, plaintiffs filed a February 22, 2000 noticeseeking voluntary dismissal of their consolidated action without prejudice. The Court approvedthe plaintiffs’ proffered Order of Dismissal on March 1, 2000.

(c) On May 19, 1999, a complaint was filed in the United States District Court for theWestern District of Pennsylvania against GEC p.l.c., Fore Systems and seven persons who werethen directors and/or senior executives of Fore Systems (the Management Defendants). Threefurther, substantially identical complaints were filed in the same court on May 25, 1999, June 4,1999 and July 19, 1999.

After an order providing for consolidation of the three first filed complaints was entered andthe fourth complaint was also consolidated, plaintiffs filed their Consolidated Amended ClassAction Complaint on 20th September 1999 (‘‘Amended Complaint’’). The Amended Complaintadds as named plaintiffs those persons and entities previously designated by the court as leadplaintiffs, and it names six additional directors and/or officers of Fore Systems as additionalindividual defendants.

The Amended Complaint purports to assert claims on behalf of the public stockholders ofFore Systems (other than the defendants and their respective affiliates) for alleged violations ofsections 14 (d) and 10(b) of the 1934 Act and Rules 14d-10 and 10b-13 promulgated andthereunder relating to the GEC tender offer and the treatment afforded the individual defendants’options in that tender offer and the related merger transaction. In addition, the AmendedComplaint asserts claims against Fore Systems and the individual defendants alleged to ariseunder section 14(e) of the 1934 Act (for allegedly inadequate disclosures of the options in ForeSystems’ Schedule 14D-9 and the fairness of the merger consideration); under section 10(b) of the1934 Act (again, for allegedly inadequate disclosures concerning the options and terms of themerger in Fore Systems’ Schedule 14D-9); under section 20(a) of the 1934 Act against theindividual defendants only (for their alleged role as control persons with respect to the allegedviolations of sections 14(e) and 10(b), and for breach of fiduciary duty against the individualdefendants for their alleged actions relating to the grant of the options and the negotiation anddisclosure of the terms of the GEC/Fore Systems merger. The Amended Complaint seeks classcertification, an award of damages resulting from the alleged violations of the 1934 Act andbreaches of fiduciary duty, plaintiffs’ costs of suit, including attorney’s fees and experts’ fees andother disbursements and other unspecified relief.

On October 20, 1999, GEC and, separately, Fore Systems and the seven original individualdefendants moved to dismiss the Amended Complaint. On November 15, 1999, the six additionaldefendants moved to dismiss the Amended Complaint. The motions were considered by theMagistrate Judge, who filed a Report and Recommendation on, February 8, 2000, that alldefendants’ motions be denied. All defendants have objected to the Report andRecommendations on February 28, 2000. The district court, by Order dated March 21, 2000,accepted the Magistrate’s Report and Recommendation, and denied all defendants’ motions to

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29025 FIN 66 Project Marlin Prospectus 3.8.7p15 psAOG 14 SEP 00 20:51


dismiss. Fore Systems believes the allegations in the complaints are completely without meritand intends to defend this action vigorously. As such, the Company believes that a material losscontingency is neither probable nor reasonably estimable.

From time to time, Fore Systems receives notifications alleging that it is or may be infringingthe intellectual property rights of third parties. At the present time, Fore Systems is in separatediscussions with several such third parties regarding the alleged infringement by the Company ofcertain patents owned by such third parties. Management believes that the ultimate outcome ofthese matters is not likely to have a material adverse effect on the results of operations orfinancial position of Fore Systems.

Although management believes that the ultimate outcome of pending legal proceedings willnot have a material adverse effect on the Company’s financial position or results of operations,litigation is subject to inherent uncertainties, and an unfavorable outcome may have a materialadverse effect on the results of operations in a particular future period or periods.

17. Subsequent Event

On April 26, 1999,▲The General Electric Company, p.l.c. (‘‘GEC’’) and the Company entered

into a definitive merger agreement under which a U.S. Subsidiary of GEC (GEC AcquisitionCorp.) commenced a cash tender offer of $35 per share for all of the Company’s shares. The cashtender offer was completed in June 1999, which resulted in the merger between GEC AcquisitionCorp. and the Company, following which the Company became a wholly owned subsidiary ofGEC.

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29025 II 1 Project Marlin Prospectus 3.8.7p15 psAOG 14 SEP 00 17:45


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the costs and expenses, other than underwriting discounts andcommissions, expected to be payable by the Registrants in connection with the sale of thesecurities being registered with this registration statement. All amounts are estimates except theSEC registration fee.

SEC registration fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 475,200Luxembourg Stock Exchange listing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000Printing and engraving expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,000Accountants’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200,000Trustee’s and Depositary’s fees and expenses . . . . . . . . . . . . . . . . . . . . . . 10,000Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,800

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000

Item 14. Indemnification of Directors and Officers.

As permitted by Section 310 of the U.K. Companies Act 1985, each of the Registrant’sArticles of Association provides that every director or other officer of a Registrant will beindemnified out of the assets of that Registrant against any liability incurred by him in defendingany proceedings, whether civil or criminal, in which judgment is given in his favor (or theproceedings are otherwise disposed of without any finding or admission of any material breachof duty on his part) or in which he is acquitted or in connection with any application in whichrelief is granted to him by the court from liability for negligence, default, breach of duty orbreach of trust in relation to the affairs of that Registrant.

As permitted by Section 310 of the U.K. Companies Act 1985, each Registrant maintainsliability insurance for its directors and officers, including insurance against liabilities under theSecurities Act.

The underwriting agreement filed as Exhibit 1.1 to this registration statement provides forindemnification by the underwriters to the Registrants and their officers and directors for certainliabilities which arise under the Securities Act, or otherwise.

Item 15. Recent Sales of Unregistered Securities.

During the period from April 1, 1997 to March 31, 1998, Marconi Corporation plc (thencalled The General Electric Company p.l.c. or GEC) issued 2,789,751,357 ordinary shares of 5peach in respect of the exercise of options and 7,852,931 ordinary shares of 5p each as scripdividends. The ordinary shares were issued outside the United States pursuant to Regulation Sand did not require registration under the Securities Act.

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29025 II 2 Project Marlin Prospectus 3.8.7p15 psAOG 23 AUG 00 19:42


During the period from April 1, 1998 to March 31, 1999, Marconi Corporation plc issued10,429,438 ordinary shares of 5p each in respect of the exercise of options. During the periodApril 1, 1999 to March 31, 2000, Marconi Corporation plc issued 148,189,402 ordinary shares of5p each in respect of the exercise of options and in connection with the acquisition of MarconiFinanziaria. The ordinary shares were issued outside the United States pursuant to Regulation Sand did not require registration under the Securities Act.

On March 30, 2000, Marconi Corporation plc issued €1,000,000,000 6.375% bonds due 2010and €500,000,000 5.625% bonds due 2005. Marconi plc guarantees the bonds. The bonds and theguarantees were issued outside the United States pursuant to Regulation S, and did not requireregistration under the Securities Act.

During the period from April 1, 2000 to the date of this prospectus, Marconi Corporation plcissued 10,012,227 ordinary shares of 5p each in respect of the exercise of options. The ordinaryshares were issued outside the United States pursuant to Regulation S and did not requireregistration under the Securities Act.

On September 17, 1999, the date of Marconi plc’s incorporation, Marconi plc issued twoordinary shares of 5p each for the purposes of incorporation. On November 26, 1999, Marconiplc issued 2,723,486,794 ordinary shares of 5p each to the former shareholders of GEC inconnection with the reconstruction of GEC in November 1999 whereby such shareholders of GECbecame shareholders of Marconi plc and GEC became an indirect wholly-owned subsidiary ofMarconi plc and was subsequently renamed Marconi Corporation plc. The ordinary shares wereissued in reliance on the exemption from registration in Section 3(a)(10) of the Securities Act.

During the period from November 26, 1999 to March 31, 2000, Marconi plc issued 509,654ordinary shares of 5p each in respect of the exercise of options. The ordinary shares were issuedoutside the United States pursuant to Regulation S and did not require registration under theSecurities Act.

During the period from April 1, 2000 to the date of the prospectus, Marconi plc issued thefollowing securities:

• 21,960,808 ordinary shares of 5p each on June 15, 2000 in connection with theacquisition of Metapath Software International (MSI) on June 15, 2000. The ordinaryshares were issued to accredited investors pursuant to Section 4(2) of the Securities Act.

• 6,975,136 ordinary shares of 5p each to Miguel Garcia Winder on June 30, 2000 inconnection with the acquisition of Systems Management Specialists (SMS) on June 30,2000. The ordinary shares were issued to Mr. Winder, an accredited investor, pursuantto Section 4(2) of the Securities Act.

• 285,715 ordinary shares of 5p each on July 13, 2000 in connection with the acquisitionof Davies Industrial Communications on July 4, 2000. The ordinary shares were issuedoutside the United States pursuant to Regulation S and did not require registrationunder the Securities Act.

• 1,697,031 ordinary shares of 5p each on July 28, 2000 in connection with the acquisitionof Albany Partnership on July 28, 2000. The ordinary shares were issued outside theUnited States pursuant to Regulation S and did not require registration under theSecurities Act.

• 6,607,639 ordinary shares of 5p each in respect of the exercise of options during thisperiod. The ordinary shares were issued outside the United States pursuant toRegulation S and did not require registration under the Securities Act.

II-2



Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

Exhibit No. Description of Document

1.1* Form of Underwriting Agreement

3.1* Memorandum and Articles of Association of Marconi Corporation plc

3.2* Memorandum and Articles of Association of Marconi plc

4.1* Form of Indenture

4.2* Form of Deposit Agreement

5.1* Opinion of Freshfields, English counsel to Marconi Corporation plc and Marconiplc, as to certain matters under U.K. law

5.2* Cravath, Swaine & Moore, U.S. counsel to Marconi Corporation plc and Marconi plcas to the legality of the bonds and the guarantee

10.1* The Transactions Agreement dated April 27, 1999 between The General ElectricCompany, p.l.c. (now Marconi Corporation plc) and British Aerospace PublicLimited Company (now BAE Systems plc), as amended by a letter agreement sentby The General Electric Company, p.l.c. to British Aerospace Public LimitedCompany on September 6, 1999 and by a supplemental agreement dated October 7,1999. The agreements set forth below as exhibit numbers 10.2 to 10.8 were enteredinto pursuant to the Transactions Agreement

10.2* Tax Deed dated November 29, 1999 between British Aerospace Public LimitedCompany and Marconi plc

10.3* The EASAMS Agreement dated November 29, 1999 between British AerospacePublic Limited Company and Marconi plc

10.4* Machined Component Supply Agreement dated November 29, 1999 between EEVLimited (subsequently renamed Marconi Applied Technologies Limited) and BritishAerospace Public Limited Company

10.5* General Deed of Covenant dated November 29, 1999 between Marconi plc andBritish Aerospace Public Limited Company

10.6* Services Agreement dated November 29, 1999 between Marconi plc and BritishAerospace Public Limited Company

10.7* Technology Access Agreement dated November 29, 1999 between British AerospacePublic Limited Company and Marconi plc

10.8* Payment Deed dated April 27, 1999 between British Aerospace Public LimitedCompany and The General Electric Company, p.l.c.

10.9* 1999 Credit Facility Agreement dated June 4, 1999 between Marconi Corporationplc and certain financial institutions as Banks which have participated in the creditfacility, Barclays Capital and Warburg Dillon Read as the Joint Lead Arrangers andHSBC Investment Bank plc as the Agent, including a Guarantor AccessionAgreement dated January 27, 2000 by Marconi plc, and as extended to June 2, 2001by a letter dated May 26, 2000 by HSBC Investment Bank plc

10.10* An Agreement and Plan of Merger dated March 1, 1999 between GEC Incorporated,GEC Acquisition Corp. and Reltec Corporation

10.11* An Agreement and Plan of Merger dated April 26, 1999 between GEC Incorporated,GEC Acquisition Corp. and Fore Systems, Inc.

II-3



Exhibit No. Description of Document

10.12* Asset Purchase Agreement dated November 13, 1998 between Elscint Limited andPicker International Inc.

10.13* Acquisition Agreement dated June 24, 1998 between The General Electric Company,p.l.c. and Siemens Aktiengesellschaft for the acquisition of shares in GPT HoldingsLimited and the disposal of shares in Siemens GEC Communications SystemsLimited

10.14* Shareholders Agreement dated May 29, 1998 between Alcatel Alsthom CompagnieGenerale D’Electricite and The General Electric Company, p.l.c. relating to theirrelationship as shareholders in Alstom S.A.

10.15* 1998 Credit Facility Agreement dated March 25, 1998 between The General ElectricCompany, p.l.c., HSBC Investment Bank plc, as the Agent, Marine Midland Bank, asthe U.S. Swingline Agent, and certain financial institutions which have participatedin providing the credit facility and certain other financial institutions as the JointLead Arrangers, as amended by a Supplemental Agreement dated January 27, 2000among The General Electric Company, p.l.c., Marconi plc and HSBC InvestmentBank plc, as Agent, and as further amended by a Second Supplemental Agreementdated April 18, 2000 among Marconi Corporation plc, Marconi plc and HSBCInvestment Bank plc, as Agent, and as extended to March 22, 2001 by a letter datedMarch 17, 2000 by HSBC Investment Bank plc

10.16* Investment Agreement dated August 30, 1999 between Xcert International, Inc. andGEC Incorporated

10.17* Trust Deed dated March 30, 2000 relating to €500,000,000 5.625 per cent. Bondsdue 2005 between Marconi Corporation plc, Marconi plc and The Law DebentureTrust Corporation p.l.c.

10.18* Trust Deed dated March 30, 2000 relating to €1,000,000,000 6.375 per cent. Bondsdue 2010 between Marconi Corporation plc, Marconi plc and The Law DebentureTrust Corporation p.l.c.

10.19* Exchange Agreement dated April 17, 2000 between Marconi plc and certainshareholders in Metapath Software International, Inc.

10.20* An Agreement and Plan of Merger dated April 17, 2000 between Marconi plc andMetapath Software International, Inc.

11.1 Computation of Earnings Per Share (incorporated by reference to Note 16 of Notesto the Consolidated Financial Statements included in the Prospectus)

12.1* Calculation of Ratio of Earnings to Fixed Charges21.1+ List of principal subsidiaries and other associated companies of Marconi

Corporation plc23.1 Consent of Freshfields (included in Exhibit 5.1)23.2 Consent of Cravath, Swaine & Moore (included in Exhibit 5.2)23.3+ Consent of Deloitte & Touche23.4+ Consent of PricewaterhouseCoopers LLP24.1 Power of Attorney for Marconi Corporation plc (included on signature pages of

Registration Statement)24.2 Power of Attorney for Marconi plc (included on signature pages of Registration

Statement)25.1* Statement of Eligibility of the Trustee

* Previously filed.+ Filed with this registration statement.

(b) Financial Statement SchedulesNot required.

II-4



Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted todirectors, officers and controlling persons of the Registrants pursuant to the foregoing provisions,or otherwise, each Registrant has been advised that in the opinion of the SEC suchindemnification is against public policy as expressed in the Securities Act and is, therefore,unenforceable. In the event that a claim for indemnification against such liabilities (other thanthe payment by the registrant of expenses incurred or paid by a director, officer or controllingperson of any Registrant in the successful defense of any action, suit or proceeding) is asserted bysuch director, officer or controlling person in connection with the securities being registered, theregistrant will, unless in the opinion of its counsel the matter has been settled by controllingprecedent, submit to a court of appropriate jurisdiction the question whether suchindemnification by it is against public policy as expressed in the Securities Act and will begoverned by the final adjudication of such issue.

Each of the undersigned Registrants hereby undertakes:

(a) To provide to the underwriter at the closing specified in the underwriting agreementcertificates in such denominations and registered in such names as required by theunderwriter to permit prompt delivery to each purchaser.

(b) For purposes of determining any liability under the Securities Act, the informationomitted from the form of prospectus filed as part of this registration statement in relianceupon Rule 430A and contained in a form of prospectus filed by the Registrant pursuantto Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act shall be deemed to bepart of this registration statement as of the time it was declared effective.

(c) For the purpose of determining any liability under the Securities Act, each post-effectiveamendment that contains a form of prospectus shall be deemed to be a new registrationstatement relating to the securities offered therein, and the offering of such securities atthat time shall be deemed to be the initial bona fide offering thereof.

II-5



SIGNATURES

Pursuant to the requirements of the U.S. Securities Act of 1933, the Registrant certifies that ithas reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 andhas duly caused this registration statement to be signed on its behalf by the undersigned,thereunto duly authorized, in London, England on September 15, 2000.

MARCONI CORPORATION PLC

/S/ NORMAN CHARLES PORTERbyName: Norman Charles PorterTitle: Secretary

II-6



POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned directors andofficers and the authorized representative in the United States of the Registrant hereby severallyconstitutes and appoints Jeffrey Isaac Gordon and Norman Charles Porter and each of them, asattorneys-in-fact for the undersigned, in any and all capacities, with full power of substitutionand resubstitution, to sign any or all amendments to this registration statement (including post-effective amendments), and any subsequent registration statement filed by the Registrantpursuant to Rule 462(b) of the U.S. Securities Act of 1933, and to file the same with exhibitsthereto and other documents in connection therewith, with the U.S. Securities and ExchangeCommission, granting unto said attorneys-in-fact, and each of them, full power and authority todo and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person, hereby ratifyingand confirming all that each said attorney-in-fact, or any of them, or his or their substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the U.S. Securities Act of 1933, this registration statementhas been signed by the following persons in the capacities and on the dates indicated, either inperson or by power of attorney, on the 15th

▲day of September, 2000.

Signature Title Date

/S/ LORD SIMPSON OF DUNKELD

Lord Simpson of Dunkeld

Director(principal executive officer)

September 15, 2000

/S/ JOHN CHARLES MAYO, CBE

John Charles Mayo, CBE

Director(principal financial officer)

September 15, 2000

/S/ STEPHEN HARE

Stephen Hare (principal accounting officer)September 15, 2000

/S/ ROBERT IAN MEAKIN

Robert Ian Meakin

Director September 15, 2000

II-7



AUTHORIZED REPRESENTATIVE

Pursuant to the requirements of the U.S. Securities Act of 1933, this registration statementhas been signed by the undersigned in the capacity indicated on the 1

▲5th day of September,

2000.

Name

/S/ PATRICIA A. HOFFMAN

Patricia A. Hoffman

Capacity


Authorized Representative

II-8



SIGNATURES

Pursuant to the requirements of the U.S. Securities Act of 1933, the Registrant certifies that ithas reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 andhas duly caused this registration statement to be signed on its behalf by the undersigned,thereunto duly authorized, in London, England on September 15, 2000.

MARCONI PLC

/S/ NORMAN CHARLES PORTERbyName: Norman Charles PorterTitle: Secretary

II-9



POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned directors andofficers and the authorized representative in the United States of the Registrant hereby severallyconstitutes and appoints Jeffrey Isaac Gordon and Norman Charles Porter and each of them, asattorneys-in-fact for the undersigned, in any and all capacities, with full power of substitutionand resubstitution, to sign any or all amendments to this registration statement (including post-effective amendments), and any subsequent registration statement filed by the Registrantpursuant to Rule 462(b) of the U.S. Securities Act of 1933, and to file the same with exhibitsthereto and other documents in connection therewith, with the U.S. Securities and ExchangeCommission, granting unto said attorneys-in-fact, and each of them, full power and authority todo and perform each and every act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he might or could do in person, hereby ratifyingand confirming all that each said attorney-in-fact, or any of them, or his or their substitute orsubstitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the U.S. Securities Act of 1933, this registration statementhas been signed by the following persons in the capacities and on the dates indicated, either inperson or by power of attorney, on the 15th

▲day of September

▲, 2000.


/S/ SIR FRANCIS ROGER HURN

Sir Francis Roger Hurn

Chairman September 15, 2000

/S/ LORD SIMPSON OF DUNKELD

Lord Simpson of Dunkeld

Chief Executive(principal executive officer)

September 15, 2000

/S/ JOHN CHARLES MAYO, CBE

John Charles Mayo, CBE

Finance Director(principal financial officer)

September 15, 2000

/S/ STEPHEN HARE

Stephen Hare

Senior Vice President, Finance(principal accounting officer)

September 15, 2000

/S/ MICHAEL JOHN DONOVAN

Michael John Donovan

Chief Executive Officer,Marconi Systems

September 15, 2000

/S/ ROBERT IAN MEAKIN

Robert Ian Meakin

Personnel Director September 15, 2000

/S/ MICHAEL WILLIAM JOHN PARTON

Michael William John Parton

Chief Executive Officer,Marconi CommunicationsNetworks

September 15, 2000

/S/ SIR WILLIAM MARTIN CASTELL

Sir William Martin Castell

Non-Executive Director September 15, 2000

/S/ THE RT. HON.THE BARONESS LYDIA SELINA DUNN, DBE

The Rt. Hon.

The Baroness Lydia Selina Dunn, DBE


II-10




/S/ SIR ALAN WALTER RUDGE, CBE

Sir Alan Walter Rudge, CBE


/S/ HON. RAYMOND GEORGE

HARDENBERGH SEITZ

Hon. Raymond George Hardenbergh Seitz


/S/ NIGEL JOHN STAPLETON

Nigel John Stapleton


II-11




Pursuant to the requirements of the U.S. Securities Act of 1933, this registration statementhas been signed by the undersigned in the capacity indicated on the

▲15th day of September,

2000.

Name

/S/ PATRICIA A. HOFFMAN

Patricia A. Hoffman

Capacity


Authorized Representative

II-12

29025 EXIND 1 Project Marlin Prospectus 3.8.7p15 psAOG 30 AUG 00 22:11


MARCONI CORPORATION plcMARCONI plc

Exhibits to Form F-1 for Bonds

Exhibit No. Description of DocumentSequentialPage No.

1.1* Form of Underwriting Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.1* Memorandum and Articles of Association of Marconi Corporation plc . . . . . .3.2* Memorandum and Articles of Association of Marconi plc . . . . . . . . . . . . . . . . . .4.1* Form of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.2* Form of Deposit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.1* Opinion of Freshfields, English counsel to Marconi Corporation plc and

Marconi plc, as to certain matters under U.K. law . . . . . . . . . . . . . . . . . . . . . . . . . .5.2* Cravath, Swaine & Moore, U.S. counsel to Marconi Corporation plc and

Marconi plc as to the legality of the bonds and the guarantee . . . . . . . . . . . . . . .10.1* The Transactions Agreement dated April 27, 1999 between The General

Electric Company, p.l.c. (now Marconi Corporation plc) and BritishAerospace Public Limited Company (now BAE Systems plc), as amendedby a letter agreement sent by The General Electric Company, p.l.c. to BritishAerospace Public Limited Company on September 6, 1999 and by asupplemental agreement dated October 7, 1999. The agreements set forthbelow as exhibit numbers 10.2 to 10.8 were entered into pursuant to theTransactions Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.2* Tax Deed dated November 29, 1999 between British Aerospace PublicLimited Company and Marconi plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.3* The EASAMS Agreement dated November 29, 1999 between BritishAerospace Public Limited Company and Marconi plc . . . . . . . . . . . . . . . . . . . . . .

10.4* Machined Component Supply Agreement dated November 29, 1999between EEV Limited (subsequently renamed Marconi AppliedTechnologies Limited) and British Aerospace Public Limited Company . . . . .

10.5* General Deed of Covenant dated November 29, 1999 between Marconi plcand British Aerospace Public Limited Company . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.6* Services Agreement dated November 29, 1999 between Marconi plc andBritish Aerospace Public Limited Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.7* Technology Access Agreement dated November 29, 1999 between BritishAerospace Public Limited Company and Marconi plc . . . . . . . . . . . . . . . . . . . . . .

10.8* Payment Deed dated April 27, 1999 between British Aerospace PublicLimited Company and The General Electric Company, p.l.c. . . . . . . . . . . . . . . . .

10.9* 1999 Credit Facility Agreement dated June 4, 1999 between MarconiCorporation plc and certain financial institutions as Banks which haveparticipated in the credit facility, Barclays Capital and Warburg Dillon Readas the Joint Lead Arrangers and HSBC Investment Bank plc as the Agent,including a Guarantor Accession Agreement dated January 27, 2000 byMarconi plc, and as extended to June 2, 2001 by a letter dated May 26,2000 by HSBC Investment Bank plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.10* An Agreement and Plan of Merger dated March 1, 1999 between GECIncorporated, GEC Acquisition Corp. and Reltec Corporation . . . . . . . . . . . . . . .

10.11* An Agreement and Plan of Merger dated April 26, 1999 between GECIncorporated, GEC Acquisition Corp. and Fore Systems, Inc. . . . . . . . . . . . . . . .

*Previously filed.

1

29025 EXIND 2 Project Marlin Prospectus 3.8.7p15 psAOG 15 SEP 00 00:06


Exhibit No. Description of DocumentSequentialPage No.

10.12* Asset Purchase Agreement dated November 13, 1998 between ElscintLimited and Picker International Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.13* Acquisition Agreement dated June 24, 1998 between The General ElectricCompany, p.l.c. and Siemens Aktiengesellschaft for the acquisition ofshares in GPT Holdings Limited and the disposal of shares in Siemens GECCommunications Systems Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.14* Shareholders Agreement dated May 29, 1998 between Alcatel AlsthomCompagnie Generale D’Electricite and The General Electric Company, p.l.c.relating to their relationship as shareholders in Alstom S.A. . . . . . . . . . . . . . . . .

10.15* 1998 Credit Facility Agreement dated March 25, 1998 between The GeneralElectric Company, p.l.c., HSBC Investment Bank plc, as the Agent, MarineMidland Bank, as the U.S. Swingline Agent, and certain financialinstitutions which have participated in providing the credit facility andcertain other financial institutions as the Joint Lead Arrangers, as amendedby a Supplemental Agreement dated January 27, 2000 among The GeneralElectric Company, p.l.c., Marconi plc and HSBC Investment Bank plc, asAgent, and as further amended by a Second Supplemental Agreement datedApril 18, 2000 among Marconi Corporation plc, Marconi plc and HSBCInvestment Bank plc, as Agent, and as extended to March 22, 2001 by aletter dated March 17, 2000 by HSBC Investment Bank plc . . . . . . . . . . . . . . . . .

10.16* Investment Agreement dated August 30, 1999 between Xcert International,Inc. and GEC Incorporated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.17* Trust Deed dated March 30, 2000 relating to €500,000,000 5.625 per cent.Bonds due 2005 between Marconi Corporation plc, Marconi plc and TheLaw Debenture Trust Corporation p.l.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.18* Trust Deed dated March 30, 2000 relating to €1,000,000,000 6.375 per cent.Bonds due 2010 between Marconi Corporation plc, Marconi plc and TheLaw Debenture Trust Corporation p.l.c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.19* Exchange Agreement dated April 17, 2000 between Marconi plc and certainshareholders in Metapath Software International, Inc. . . . . . . . . . . . . . . . . . . . . . .

10.20* An Agreement and Plan of Merger dated April 17, 2000 between Marconiplc and Metapath Software International, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11.1 Computation of Earnings Per Share (incorporated by reference to Note 16 ofNotes to the Consolidated Financial Statements included in the Prospectus)

12.1* Calculation of Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . . . .21.1† List of principal subsidiaries and other associated companies of Marconi

Corporation plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23.1 Consent of Freshfields (included in Exhibit 5.1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .23.2 Consent of Cravath, Swaine & Moore (included in Exhibit 5.2) . . . . . . . . . . . . .23.3† Consent of Deloitte & Touche . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23.4† Consent of PricewaterhouseCoopers LLP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24.1 Power of Attorney for Marconi Corporation plc (included on signature

pages of Registration Statement) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24.2 Power of Attorney for Marconi plc (included on signature pages of

Registration Statement) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25.1* Statement of Eligibility of the Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

*Previously filed.†Filed herewith.

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