Marconi Gives Quarterly Report

Significant progress on cost reduction and cash generation despite continued tough market conditions

Direct cost savings more than offset lower Core sales volumes driving improvement in Core gross margin before exceptional items: 22.1 per cent of sales (Q3 FY02 19.3 per cent; Q2 FY03 21.6 per cent before impact of £25 million stock provisions) (see Core Gross Profit / Margin below)

Core operating cost annual run-rate (before goodwill amortisation and exceptional items) reduced to around £550 million by 31 December 2002 (approximately £1 billion at 31 December 2001); on track to achieve target run-rate of £520 million by the end of the financial year (see Core Operating Expenses below)

Substantial reduction in Core operating loss (before goodwill amortisation and exceptional items) to £41 million from £128 million in Q3 last year and from £90 million in the previous quarter this year; further progress towards EBITDA breakeven (£15 million adjusted Q3 EBITDA loss before exceptional items in the Core) (see Core Adjusted Operating Profit/(Loss) below)

Reduced operating loss (before goodwill amortisation and exceptional items) and significant progress in working capital drive £66 million positive operating cash flow (net of capital expenditure and before exceptional cash flows) in the Core during Q3 (Q3 2002 £25 million outflow; Q2 FY03 £43 million outflow); (see Operating Cash Flow below)

Group operating loss reduced to £130 million (Q3 2002: £256 million); Increased loss on ordinary activities before taxation of £198 million (Q3 2002: profit before tax £76 million) due to non-operating gains of £341 million in prior year

Outlook: seasonal Q4 sales uplift not expected; further sales declines likely during the year ending 31 March 2004; appropriate cost actions will be taken to further reduce breakeven level of Core sales to around £1.7 billion (see Outlook below)

Major milestone in financial restructuring achieved with filing of scheme documents with court on 17 March 2003 (see Financial Restructuring below and separate announcement dated 18 March 2003)

First European sale of BXR 48000 and first commercial sale of Marconi Softswitch to Jersey Telecom during Q3; recent major order wins include Access Hub and MSH2K optical backbone network for Telecom Italia; new 3-year frame contract with TATA India for SDH equipment;

Strong product pipeline; recent product launches include next generation SDH equipment (Series 4); new release of Access Hub platform incorporating voice over DSL, new Gigabit Ethernet and multicasting for video functionality; enhanced features to ServiceOn network management portfolio; integrated video application into next generation interactive kiosks; further enhancements to BXR-48000 to enable 10Gbps secure encrypted data transmissions; virtual presence desktop (Vipr) video conferencing platform launched.