AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 9, 2002
________________________________________________________________________________

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                              -------------------

                                   FORM 10-Q

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM             TO

                        COMMISSION FILE NUMBER 001-16397

                              -------------------

                               AGERE SYSTEMS INC.


                                              
                  A DELAWARE                                     I.R.S. EMPLOYER
                  CORPORATION                                    NO. 22-3746606


                 1110 AMERICAN PARKWAY NE, ALLENTOWN, PA 18109

                      Telephone -- Area Code 610-712-4323

       Former Address: 555 Union Boulevard, Allentown, Pennsylvania 18109

                              -------------------

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

    At July 31, 2002, 731,348,289 shares of Class A common stock and 907,995,677
shares of Class B common stock were outstanding.

________________________________________________________________________________






                               AGERE SYSTEMS INC.
                                   FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
                               TABLE OF CONTENTS



                                                              PAGE
                                                              ----
                                                           
Part I -- Financial Information
    Item 1. Financial Statements (Unaudited)
        Condensed Consolidated and Combined Statements of
        Operations for the three and nine months ended
        June 30, 2002 and 2001..............................    2
        Condensed Consolidated Balance Sheets as of
        June 30, 2002 and
          September 30, 2001................................    3
        Condensed Consolidated and Combined Statements of
        Changes in Stockholders' Equity and Total
        Comprehensive Loss for the three and nine months
        ended June 30, 2002 and 2001........................    4
        Condensed Consolidated and Combined Statements of
        Cash Flows for the nine months ended June 30, 2002
        and 2001............................................    5
        Notes to Condensed Consolidated and Combined
        Financial Statements................................    6
    Item 2. Management's Discussion and Analysis of
            Financial Condition and Results of Operations...   29
    Item 3. Quantitative and Qualitative Disclosures About
            Market Risk.....................................   53

Part II -- Other Information
    Item 1. Legal Proceedings...............................   54
    Item 6. Exhibits and Reports on Form 8-K................   54


                                       1






                        PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                      AGERE SYSTEMS INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



                                                                 THREE               NINE
                                                              MONTHS ENDED       MONTHS ENDED
                                                                JUNE 30,           JUNE 30,
                                                            ----------------   -----------------
                                                             2002     2001      2002      2001
                                                             ----     ----      ----      ----
                                                                             
Revenue...................................................  $  560   $   927   $ 1,648   $ 3,480
Costs.....................................................     497       962     1,516     2,494
                                                            ------   -------   -------   -------
Gross profit (loss).......................................      63       (35)      132       986
                                                            ------   -------   -------   -------
Operating expenses:
    Selling, general and administrative...................      73       145       272       481
    Research and development..............................     164       217       541       754
    Amortization of goodwill and other acquired
      intangibles.........................................      10       112        47       335
    Restructuring and separation -- net...................     127       462       223       509
    Impairment of goodwill and other acquired
      intangibles.........................................    --          27       176        27
                                                            ------   -------   -------   -------
        Total operating expenses..........................     374       963     1,259     2,106
                                                            ------   -------   -------   -------
Operating loss............................................    (311)     (998)   (1,127)   (1,120)
Other income (expense) -- net.............................      18        (5)      353        32
Interest expense..........................................      23        62        96        96
                                                            ------   -------   -------   -------
Loss before provision for income taxes....................    (316)   (1,065)     (870)   (1,184)
Provision for income taxes................................      16        45        56        74
                                                            ------   -------   -------   -------
Loss before cumulative effect of accounting change........    (332)   (1,110)     (926)   (1,258)
Cumulative effect of accounting change (net of benefit
  for income taxes of $2 for the nine months ended
  June 30, 2001)..........................................    --       --        --           (4)
                                                            ------   -------   -------   -------
Net loss..................................................  $ (332)  $(1,110)  $  (926)  $(1,262)
                                                            ------   -------   -------   -------
                                                            ------   -------   -------   -------
Basic and diluted loss per share:
    Loss before cumulative effect of accounting change....  $(0.20)  $ (0.68)  $ (0.57)  $ (1.02)
    Cumulative effect of accounting change................    --       --        --        --
                                                            ------   -------   -------   -------
Net loss..................................................  $(0.20)  $ (0.68)  $ (0.57)  $ (1.02)
                                                            ------   -------   -------   -------
                                                            ------   -------   -------   -------
Weighted average shares outstanding -- basic and diluted
  (in millions)...........................................   1,637     1,629     1,636     1,233
                                                            ------   -------   -------   -------
                                                            ------   -------   -------   -------


     See Notes to Condensed Consolidated and Combined Financial Statements.

                                       2






                      AGERE SYSTEMS INC. AND SUBSIDIARIES
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



                                                              JUNE 30,   SEPTEMBER 30,
                                                                2002         2001
                                                                ----         ----
                                                                   
ASSETS
Current Assets
    Cash and cash equivalents...............................   $1,167       $ 3,152
    Trade receivables, less allowances of $14 at June 30,
      2002 and $33 at September 30, 2001....................      298           389
    Inventories.............................................      243           304
    Prepaid expenses........................................       51            61
    Other current assets....................................       70           154
                                                               ------       -------
        Total current assets................................    1,829         4,060
Property, plant and equipment -- net of accumulated
  depreciation and amortization of $2,548 at June 30, 2002
  and $2,419 at September 30, 2001..........................    1,484         1,851
Goodwill and other acquired intangibles -- net of
  accumulated amortization of $88 at June 30, 2002 and $93
  at September 30, 2001.....................................      156           343
Prepaid pension costs.......................................      218        --
Deferred income taxes -- net................................        4             4
Other assets................................................      275           304
                                                               ------       -------
        Total assets........................................   $3,966       $ 6,562
                                                               ------       -------
                                                               ------       -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
    Accounts payable........................................   $  366       $   514
    Payroll and benefit-related liabilities.................      150           138
    Short-term debt.........................................      400         2,516
    Income taxes payable....................................      324           336
    Restructuring reserve...................................       81           171
    Other current liabilities...............................      163           229
                                                               ------       -------
        Total current liabilities...........................    1,484         3,904
Postemployment and postretirement benefit liabilities.......      186            92
Long-term debt..............................................      432            33
Deferred income taxes -- net................................        4        --
Other liabilities...........................................       49            72
                                                               ------       -------
        Total liabilities...................................    2,155         4,101
                                                               ------       -------
Commitments and contingencies

STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share, 250,000,000
  shares authorized and no shares issued and outstanding....    --           --
Class A common stock, par value $0.01 per share,
  5,000,000,000 shares authorized and 730,675,587 shares
  issued and 730,671,339 shares outstanding after deducting
  4,248 shares in treasury as of June 30, 2002 and
  727,000,107 shares issued and outstanding as of September
  30, 2001..................................................        7             7
Class B common stock, par value $0.01 per share,
  5,000,000,000 shares authorized and 908,100,000 shares
  issued and 907,995,677 shares outstanding after deducting
  104,323 shares in treasury as of June 30, 2002 and
  908,100,000 shares issued and outstanding as of
  September 30, 2001........................................        9             9
Additional paid-in capital..................................    7,267         6,996
Accumulated deficit.........................................   (5,468)       (4,542)
Accumulated other comprehensive loss........................       (4)           (9)
                                                               ------       -------
        Total stockholders' equity..........................    1,811         2,461
                                                               ------       -------
        Total liabilities and stockholders' equity..........   $3,966       $ 6,562
                                                               ------       -------
                                                               ------       -------


     See Notes to Condensed Consolidated and Combined Financial Statements.

                                      3






                      AGERE SYSTEMS INC. AND SUBSIDIARIES
           CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
              IN STOCKHOLDERS' EQUITY AND TOTAL COMPREHENSIVE LOSS
                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)



                                                                 THREE               NINE
                                                             MONTHS ENDED        MONTHS ENDED
                                                               JUNE 30,            JUNE 30,
                                                           -----------------   -----------------
                                                            2002      2001      2002      2001
                                                            ----      ----      ----      ----
                                                                             
Class A Common Stock beginning balance...................  $     7   $ --      $     7   $ --
Issuance of Class A Common Stock.........................    --            6     --            6
Conversion of Class B to Class A Common Stock............    --            1     --            1
                                                           -------   -------   -------   -------
Class A Common Stock ending balance......................        7         7         7         7
                                                           -------   -------   -------   -------
Class B Common Stock beginning balance...................        9        10         9        10
Conversion of Class B to Class A Common Stock............    --           (1)    --           (1)
                                                           -------   -------   -------   -------
Class B Common Stock ending balance......................        9         9         9         9
                                                           -------   -------   -------   -------
Owner's net investment
Beginning balance........................................    --        --        --        5,823
Net loss prior to February 1, 2001.......................    --        --        --          (74)
Transfers to Lucent Technologies Inc. ...................    --        --        --       (1,405)
Transfers from Lucent Technologies Inc. .................    --        --        --        1,501
Transfer to additional paid in capital...................    --        --        --       (5,845)
                                                           -------   -------   -------   -------
Ending balance...........................................    --        --        --        --
                                                           -------   -------   -------   -------
Additional paid in capital
Beginning balance........................................    7,032     5,889     6,996     --
Transfers from owner's net investment....................    --        --        --        5,845
Transfers to Lucent Technologies Inc. ...................      127      (262)      127    (1,580)
Transfers from Lucent Technologies Inc. .................       98       377       132     1,739
Debt transferred from Lucent Technologies Inc. ..........    --       (2,500)    --       (2,500)
Issuance of common stock -- net of expense...............        8     3,428         8     3,428
Equity-based compensation................................        2     --            4     --
                                                           -------   -------   -------   -------
Ending balance...........................................    7,267     6,932     7,267     6,932
                                                           -------   -------   -------   -------
Accumulated deficit
Beginning balance........................................   (5,136)      (78)   (4,542)    --
Net loss from February 1, 2001...........................     (332)   (1,110)     (926)   (1,188)
                                                           -------   -------   -------   -------
Ending balance...........................................   (5,468)   (1,188)   (5,468)   (1,188)
                                                           -------   -------   -------   -------
Accumulated other comprehensive loss
Beginning balance........................................       (2)      (44)       (9)      (52)
Foreign currency translations............................       (1)       (5)       (3)        3
Unrealized gain on investments...........................    --          141     --          141
Unrealized gain (loss) on cash flow hedges...............       (1)    --            3     --
Reclassification adjustments to net loss.................    --        --            5     --
                                                           -------   -------   -------   -------
Ending balance...........................................       (4)       92        (4)       92
                                                           -------   -------   -------   -------
    Total stockholders' equity...........................  $ 1,811   $ 5,852   $ 1,811   $ 5,852
                                                           -------   -------   -------   -------
                                                           -------   -------   -------   -------
Total comprehensive loss
Net loss.................................................  $  (332)  $(1,110)  $  (926)  $(1,262)
Other comprehensive income (loss)........................       (2)      136         5       144
                                                           -------   -------   -------   -------
Total comprehensive loss.................................  $  (334)  $  (974)  $  (921)  $(1,118)
                                                           -------   -------   -------   -------
                                                           -------   -------   -------   -------


     See Notes to Condensed Consolidated and Combined Financial Statements.

                                       4






                      AGERE SYSTEMS INC. AND SUBSIDIARIES
          CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)



                                                                     NINE
                                                                 MONTHS ENDED
                                                                   JUNE 30,
                                                              ------------------
                                                               2002       2001
                                                               ----       ----
                                                                   
OPERATING ACTIVITIES
    Net loss................................................  $  (926)   $(1,262)
    Adjustments to reconcile net loss to net cash (used)
      provided by operating activities:
        Cumulative effect of accounting change..............    --             4
        Restructuring expense -- net of cash payments.......       72        407
        Provision for inventory write-downs.................       68        353
        Depreciation and amortization.......................      396        681
        (Benefit) provision for uncollectibles..............       (3)        24
        Provision for deferred income taxes.................       18          7
        Impairment of investments...........................        9         34
        Impairment of goodwill and other acquired
          intangibles.......................................      176         27
        Equity earnings from investments....................      (40)       (38)
        Gain on disposition of business.....................     (243)     --
        Gain on sales of investments........................      (41)     --
        Amortization of debt issuance costs.................       37      --
        Decrease in receivables.............................       96        256
        Increase in inventories.............................      (14)      (288)
        (Decrease) increase in accounts payable.............      (89)       191
        Increase (decrease) in payroll and benefit
          liabilities.......................................       13       (115)
        Changes in other operating assets and liabilities...      (57)         8
        Other adjustments for non-cash items -- net.........        7         12
                                                              -------    -------
    Net cash (used) provided by operating activities........     (521)       301
                                                              -------    -------
INVESTING ACTIVITIES
    Capital expenditures....................................     (150)      (632)
    Proceeds from the sale or disposal of property, plant
      and equipment.........................................      124      --
    Proceeds from sales of investments......................       55      --
    Proceeds from disposition of business...................      250      --
    Other investing activities -- net.......................    --            (3)
                                                              -------    -------
    Net cash provided (used) by investing activities........      279       (635)
                                                              -------    -------
FINANCING ACTIVITIES
    Transfers from Lucent Technologies Inc. ................    --           170
    Payment of credit facility fees.........................      (21)     --
    Proceeds from the issuance of long-term debt -- net of
      expenses..............................................      396      --
    Proceeds from the issuance of short-term debt...........      163      --
    Principal repayments of credit facility.................   (2,278)     --
    Proceeds from the issuance of stock -- net of expense...        8      3,434
    Principal repayments on long-term debt..................      (12)        (8)
                                                              -------    -------
    Net cash (used) provided by financing activities........   (1,744)     3,596
                                                              -------    -------

    Effect of exchange rate changes on cash.................        1      --
                                                              -------    -------
    Net (decrease) increase in cash and cash equivalents....   (1,985)     3,262
    Cash and cash equivalents at beginning of period........    3,152      --
                                                              -------    -------
    Cash and cash equivalents at end of period..............  $ 1,167    $ 3,262
                                                              -------    -------
                                                              -------    -------


     See Notes to Condensed Consolidated and Combined Financial Statements.

                                       5






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                              FINANCIAL STATEMENTS
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

    Agere Systems Inc. (the 'Company' or 'Agere') was incorporated in Delaware
as a wholly owned subsidiary of Lucent Technologies Inc. ('Lucent') on
August 1, 2000. On this date, 1,000 shares of the Company's common stock, par
value $0.01 per share, were issued, authorized and outstanding. Agere had no
material assets or activities as a separate corporate entity until the
contribution by Lucent of its integrated circuits and optoelectronic components
businesses (collectively, the 'Company's Businesses'). Lucent had previously
conducted these businesses through various divisions and subsidiaries. On
February 1, 2001, Lucent transferred to Agere all the assets and liabilities
related to the Company's Businesses (the 'Separation'), other than the pension
and postretirement assets and liabilities which were transferred in June of
2002.

    On March 14, 2001, the Company amended its certificate of incorporation to
authorize shares of Class A and Class B common stock and changed and
reclassified its 1,000 outstanding shares of common stock into 1,035,100,000
shares of Class B common stock (the 'Recapitalization'). The ownership rights of
Class A and Class B common stockholders are the same except that each share of
Class B common stock has four votes for the election and removal of directors
while each share of Class A common stock has one vote for such matters. All
Company share and per share data has been retroactively adjusted to reflect the
Recapitalization as if it had occurred at the beginning of the earliest period
presented.

    On April 2, 2001, the Company issued 600,000,000 shares of Class A common
stock in an initial public offering (the 'IPO') for $6 per share less
underwriting discounts and commissions of $.23 per share. On April 4, 2001,
Lucent converted 90,000,000 shares of Class B common stock into Class A common
stock and exchanged those shares for outstanding Lucent debt with Morgan Stanley
pursuant to the overallotment option granted in connection with the IPO. After
completion of the IPO, inclusive of the overallotment option, Lucent owned
approximately 58% of the aggregate number of outstanding shares of Class A and
Class B common stock. Also, on April 2, 2001, the Company assumed from Lucent
$2,500 of short-term debt. On May 1, 2001, Lucent elected to convert 37,000,000
of its shares in the Company from Class B common stock to Class A common stock.

    On June 1, 2002, Lucent distributed all of the Agere common stock it then
owned to its stockholders (the 'Distribution'). Prior to June 1, 2002, Agere was
a majority-owned subsidiary of Lucent.

BASIS OF PRESENTATION

    The condensed consolidated and combined financial statements include amounts
prior to February 1, 2001 that have been derived from the consolidated financial
statements and accounting records of Lucent using the historical results of
operations and historical basis of the assets and liabilities of the Company's
Businesses. Management believes the assumptions underlying the consolidated and
combined financial statements are reasonable. However, the consolidated and
combined financial statements that were derived from Lucent's financial records
may not necessarily reflect the Company's results of operations, financial
position and cash flows in the future or what its results of operations,
financial position and cash flows would have been had the Company been a
stand-alone company. Because a direct ownership relationship did not exist among
all the various units comprising the Company, Lucent's net investment in the
Company is shown in lieu of stockholders' equity in the combined financial
statements prior to the Separation. The Company began accumulating retained
earnings (losses) on February 1, 2001, the date on which Lucent transferred
substantially all of the assets and liabilities of the Company's Business to

                                       6






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

the Company. The formation of the Company and the transfers of assets and
liabilities from Lucent have been accounted for as a reorganization of entities
under common control, in a manner similar to a pooling of interests.

    Beginning February 1, 2001, the Company's consolidated financial statements
include certain majority owned subsidiaries and assets and liabilities of the
Company. Investments in which the Company exercises significant influence, but
which it does not control are accounted for under the equity method of
accounting. Investments in which the Company does not exercise significant
influence are recorded at cost. All material intercompany transactions and
balances between and among the Company's Businesses, subsidiaries and investees
accounted for under the equity method have been eliminated. In addition, certain
prior year amounts have been reclassified to conform to the fiscal 2002
presentation.

  General Corporate Expenses

    Prior to February 1, 2001, general corporate expenses were allocated from
Lucent based on revenue. These allocations were reflected in the selling,
general and administrative, costs and research and development line items in the
condensed consolidated and combined statements of operations. The general
corporate expense allocations were primarily for cash management, legal,
accounting, tax, insurance, public relations, advertising, human resources and
data services. These allocations amounted to $60 for the nine months ended
June 30, 2001. Management believes the costs of these services charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed these functions as a stand-alone company.
Since the Separation, the Company has performed these functions using its own
resources or through purchased services. The Company and Lucent entered into
agreements for Lucent to provide certain general corporate services on a
transition basis. See Note 15 'Transactions with Lucent.'

  Basic Research

    Prior to February 1, 2001, research and development expenses included an
allocation from Lucent to fund a portion of the costs of basic research
conducted by Lucent's Bell Laboratories. This allocation was based on the number
of individuals conducting basic research who were transferred from Lucent's Bell
Laboratories to the Company as part of the Separation. The allocation amounted
to $23 for the nine months ended June 30, 2001. Management believes the costs of
this research charged to the Company are a reasonable representation of the
costs that would have been incurred if the Company had performed this research
as a stand-alone company. Since the Separation, expenses for basic research
conducted by the Company are included with all other research and development
expenses in the condensed consolidated statements of operations.

  Interest Expense

    Prior to February 1, 2001, interest expense was allocated from Lucent as
Lucent provided financing to the Company and incurred debt at the parent level.
This allocation was based on the ratio of the Company's net assets, excluding
debt, to Lucent's total net assets, excluding debt. The allocation amounted to
$32 for the nine months ended June 30, 2001. Interest expense for all periods
presented includes interest expense related to the Company's capitalized lease
obligations.

  Income Taxes

    The Company's income taxes were calculated on a separate tax return basis
prior to the IPO. This reflects Lucent's tax strategies and is not necessarily
reflective of the tax strategies that the

                                       7






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

Company would have followed or will follow as a stand-alone company. For the
three and nine months ended June 30, 2002, the Company's effective tax rates
were (4.8)% and (6.4)%, respectively, which primarily reflect the recording of a
full valuation allowance of approximately $117 and $313, respectively, against
U.S. net deferred tax assets. For the three and nine months ended June 30, 2001,
the Company's effective tax rates were (4.2)% and (6.3)%, respectively, which
primarily reflect the impact of recording of a full valuation allowance of
approximately $364 against U.S. net deferred tax assets, non-tax deductible
goodwill amortization and separation costs.

  Interim Financial Information

    These condensed financial statements have been prepared in accordance with
the rules of the Securities and Exchange Commission for interim financial
statements and do not include all annual disclosures required by accounting
principles generally accepted in the United States ('U.S.'). These financial
statements should be read in conjunction with the audited consolidated and
combined financial statements and notes thereto included in the Company's Form
10-K for the fiscal year ended September 30, 2001. The condensed financial
information as of June 30, 2002 and for the three and nine months ended
June 30, 2002 and 2001 is unaudited, but includes all adjustments that
management considers necessary for a fair presentation of the Company's
consolidated and combined results of operations, financial position and cash
flows. Results for the three and nine months ended June 30, 2002 are not
necessarily indicative of results to be expected for the full fiscal year 2002
or any other future periods.

2. RECENT PRONOUNCEMENTS

SFAS 142

    In July 2001, the Financial Accounting Standards Board ('FASB') issued
Statement of Financial Accounting Standards ('SFAS') No. 142, 'Goodwill and
Other Intangible Assets' ('SFAS 142'). SFAS 142 provides guidance on the
financial accounting and reporting for acquired goodwill and other intangible
assets. Under SFAS 142, goodwill and indefinite lived intangible assets will no
longer be amortized. Intangible assets with finite lives will continue to be
amortized over their useful lives, which will no longer be limited to a maximum
life of forty years. The criteria for recognizing an intangible asset have also
been revised. As a result, the Company will need to re-assess the classification
and useful lives of its previously acquired goodwill and other intangible
assets. SFAS 142 also requires that goodwill and indefinite lived intangible
assets be tested for impairment at least annually. The goodwill impairment test
is a two-step process that requires goodwill to be allocated to reporting units.
In the first step, the fair value of the reporting unit is compared to the
carrying value of the reporting unit. If the fair value of the reporting unit is
less than the carrying value of the reporting unit, a goodwill impairment may
exist, and the second step of the test is performed. In the second step, the
implied fair value of the goodwill is compared to the carrying value of the
goodwill and an impairment loss will be recognized to the extent that the
carrying value of the goodwill exceeds the implied fair value of the goodwill.
The Company will adopt SFAS 142 effective October 1, 2002 and does not expect
that it will have a significant impact on its financial condition or results of
operations.

SFAS 143

    Also in July 2001, the FASB issued SFAS No. 143, 'Accounting for Asset
Retirement Obligations' ('SFAS 143'). This standard provides the financial
accounting and reporting for the cost of legal obligations associated with the
retirement of tangible long-lived assets. In accordance with SFAS 143,
retirement obligations will be recorded at fair value in the period they are

                                       8






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

incurred. When the liability is initially recorded, the cost is capitalized as
part of the related long-lived asset and subsequently depreciated over its
remaining useful life. Changes in the liability resulting from the passage of
time will be recognized as operating expense. The Company plans to adopt
SFAS 143 effective October 1, 2002 and is currently evaluating the potential
effects of implementing this standard on its financial condition and results of
operations.

SFAS 144

    In October 2001, the FASB issued SFAS No. 144, 'Accounting for the
Impairment or Disposal of Long-Lived Assets' ('SFAS 144'). SFAS 144 supersedes
SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of' ('SFAS 121'), and the accounting and
reporting provisions for the disposal of a segment of business contained in APB
Opinion No. 30 'Reporting the Effects of a Disposal of a Segment of a Business,
and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions.'
SFAS 144 establishes a single accounting model for long-lived assets to be
disposed of by sale and broadens the presentation of discontinued operations.
The Company will adopt SFAS 144 effective October 1, 2002 and does not expect it
to have a material effect on its financial condition or results of operations.

SFAS 146

    In June 2002, the FASB issued SFAS No. 146, 'Accounting for Exit or Disposal
Activities' ('SFAS 146'). SFAS 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are accounted
for currently pursuant to the guidance that the Emerging Issues Task Force
('EITF') has set forth in EITF Issue No. 94-3, 'Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)' ('EITF 94-3'). The scope
of SFAS 146 also includes (1) costs related to terminating a contract that is
not a capital lease, (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract and (3) costs to consolidate facilities or
relocate employees. SFAS 146 is effective for Agere's exit or disposal
activities that are initiated after December 31, 2002, although earlier
application is encouraged. The Company is currently evaluating the timing of its
adoption of SFAS 146 and the potential effects of implementing this standard on
its financial condition and results of operations.

3. ACCOUNTING CHANGE

    Effective October 1, 2000, the Company adopted SFAS No. 133, 'Accounting for
Derivative Instruments and Hedging Activities' ('SFAS 133'), and its
corresponding amendments under SFAS No. 138, 'Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FAS 133.'
SFAS 133 requires the Company to measure all derivatives, including certain
derivatives embedded in other contracts, at fair value and to recognize them in
the balance sheet as an asset or liability, depending on the Company's rights or
obligations under the applicable derivative contract. For derivatives designated
as fair value hedges, the changes in the fair value of both the derivative
instrument and the hedged item are recorded in earnings. For derivatives
designated as cash flow hedges, the effective portions of changes in fair value
of the derivative are reported in other comprehensive income and are
subsequently reclassified into earnings when the hedged item affects earnings.
Changes in fair value of derivative instruments not designated as hedging
instruments and ineffective portions of hedges are recognized in earnings in the
current period. The adoption of SFAS 133 as of October 1, 2000, resulted in a
cumulative

                                       9






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

after-tax increase in net loss of $4 (net of a tax benefit of $2). The increase
in net loss is primarily due to derivatives not designated as hedging
instruments. For the three and nine month periods ended June 30, 2002 and 2001
the change in fair market value of derivative instruments was recorded in other
income (expense) -- net and was not material.

4. RESTRUCTURING AND SEPARATION -- NET

RESTRUCTURING AND RELATED EXPENSES

    As a result of a significant decline in market demand since early calendar
year 2001, the Company has announced a number of restructuring and consolidation
actions to improve gross profit, reduce expenses and streamline operations.
These actions include a worldwide workforce reduction, rationalization of
manufacturing capacity and other activities. The Company recorded net
restructuring and related charges of $125 and $216 for the three and nine months
ended June 30, 2002, respectively, classified within restructuring and
separation -- net. These amounts are comprised of charges of $136 and $313,
offset by reversals of $11 and $97, for the three and nine months ended June 30,
2002, respectively. The Company also recorded restructuring and related charges
of $414 and $426 in the three and nine months ended June 30, 2001, respectively.

    During the third quarter of fiscal 2001, the Company announced a workforce
reduction of 6,000 employees and asset impairment charges to resize the business
consistent with the market environment. The workforce reduction spanned various
business functions, operating units and geographic regions and included
management and occupational employees.

    On December 5, 2001, the Company announced a workforce reduction of 950
positions, affecting primarily management positions within the Company's product
groups, sales organizations and corporate support functions located in New
Jersey and Pennsylvania.

    On January 23, 2002, the Company announced plans to further improve its
operating efficiency by consolidating its facilities including manufacturing,
research and development, business management and administrative facilities in
Pennsylvania and New Jersey. Additionally, the Company announced it was seeking
a buyer for its wafer fabrication operation in Orlando, Florida, although the
Company currently intends to operate the facility at least through the end of
fiscal 2004 if it is unable to sell the facility on acceptable terms. This site
has approximately 1,100 employees.

    As part of its facilities consolidation, the Company also announced the move
of a majority of its integrated circuits and optoelectronics operations from the
Company's sites in Reading and Breinigsville, Pennsylvania, into its Allentown,
Pennsylvania campus. In addition, the majority of its assembly and test
operations located in these three sites are moving to the Company's assembly and
test facilities in Bangkok, Thailand; Matamoras, Mexico; and Singapore.
Subsequently, the Company will discontinue operations at the Reading and
Breinigsville facilities and will seek buyers for those properties.

    The Company is in the process of evaluating new restructuring initiatives to
help achieve positive cash flow at lower revenue breakeven levels than
anticipated in previously announced restructuring plans. Although no plans have
been approved, the additional actions could potentially impact staffing levels,
product lines, capital expenditures, and manufacturing facilities and may
require the use of cash to fully implement.

    In addition to the announced plans, the Company has initiated actions to
consolidate its California operations in Irwindale into its existing Alhambra
campus and expects this to be substantially completed by the third quarter of
fiscal year 2003.

                                       10






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

  Three and Nine Months Ended June 30, 2002

    The following tables set forth the Company's restructuring reserves as of
June 30, 2002 and reflect the activity related to the worldwide workforce
reductions and the rationalization of manufacturing capacity and other charges
affecting the reserve for the three and nine months ended June 30, 2002:



                             MARCH 31,                     THREE MONTHS ENDED                      JUNE 30,
                               2002                           JUNE 30, 2002                          2002
                           -------------   ---------------------------------------------------   -------------
                           RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                              RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                              -------         ------         --------       -----     --------      -------
                                                                               
Workforce reduction......      $ 25            $ 88            $ --         $ (79)     $  (9)         $25
Rationalization of
  manufacturing capacity
  and other charges......        51              48             (11)           (7)       (25)          56
                               ----            ----            ----         -----      -----          ---
    Total................      $ 76            $136            $(11)        $ (86)     $ (34)         $81
                               ----            ----            ----         -----      -----          ---
                               ----            ----            ----         -----      -----          ---




                          SEPTEMBER 30,                    NINE MONTHS ENDED                      JUNE 30,
                              2001                           JUNE 30, 2002                          2002
                          -------------   ---------------------------------------------------   -------------
                          RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                             RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                             -------         ------         --------       -----     --------      -------
                                                                              
Workforce reduction.....      $ 92            $144            $(20)        $(102)     $ (89)         $25
Rationalization of
  manufacturing capacity
  and other charges.....        79             169             (77)          (60)       (55)          56
                              ----            ----            ----         -----      -----          ---
    Total...............      $171            $313            $(97)        $(162)     $(144)         $81
                              ----            ----            ----         -----      -----          ---
                              ----            ----            ----         -----      -----          ---


    Worldwide Workforce Reduction

    During the three and nine months ended June 30, 2002, the Company recorded
restructuring charges of $88 and $144 related to workforce reductions of
approximately 790 and 1,990 employees, respectively. Of the total workforce
reduction charges for the three and nine months ended June 30, 2002, $79 and
$102, respectively, represent non-cash charges for termination benefits to
certain U. S. employees, including occupational employees covered under the
terms of a collective bargaining agreement who voluntarily and irrevocably
accepted an enhanced termination benefit package offered by the Company. Of
these non-cash charges for the nine months ended June 30, 2002, $15 represents
payments incurred as the result of actions of the Company prior to June 1, 2002
that will be paid from Lucent's pension assets while the remaining balance of
$87 represents payments subsequent to June 1, 2002 that will be paid from the
Company's pension assets.

    In the first nine months of fiscal 2002, the Company recorded a $20 reversal
of the restructuring reserve associated with workforce reductions, resulting
from severance and benefit cost estimates that exceeded amounts paid during the
second half of calendar year 2001. The original reserve included an estimate of
termination pay and benefits for occupational employees that was based on the
average rate of pay and years of service of the occupational employee pool at
risk. The Company's collective bargaining agreements allow for a period when
employees at risk can opt for positions filled by employees with less seniority.
When that period ended, a series of personnel moves followed that ultimately
resulted in lower severance and benefit payments than originally expected. This
was due principally to the termination of occupational employees with fewer
years of service and fewer weeks of severance entitlement. These personnel moves
were substantially finished at the end of calendar 2001. There were no reversals
associated with workforce reductions for the three months ended June 30, 2002.
Severance costs and other exit costs were determined in accordance with
EITF 94-3.

                                       11






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

    The Company has completed the workforce reductions announced in fiscal 2001
with approximately 6,000 employees taken off-roll as of March 31, 2002 and has
separated approximately 700 employees as of June 30, 2002 from initiatives
announced in the current fiscal year. Approximately 145 employees are scheduled
to go off-roll in the fourth quarter of fiscal 2002 and approximately 565
additional employees are expected to be off-roll by September 2003. However, due
to current market conditions the Company is currently evaluating additional cost
reduction initiatives that may result in increases to the number of employees to
be affected by workforce reductions as well as the timing of those reductions.

    Rationalization of Manufacturing Capacity and Other Charges

    The Company recorded restructuring and related charges of $48 and $169 for
the three and nine months ended June 30, 2002, respectively, relating to the
rationalization of under-utilized manufacturing facilities and other activities.
Of the charges recorded for the third quarter of fiscal 2002, $12 was for asset
impairments, $20 for facility closings, $2 for accelerated depreciation and $14
for other related costs. The charges recognized for the nine months ended
June 30, 2002 included $81 related to asset impairments, $60 for facility
closings, $9 for contract terminations, $3 for accelerated depreciation and $16
of other related costs. The accelerated depreciation charges were recognized due
to the shortening of estimated useful lives of certain assets in connection with
the planned closing of certain administrative facilities. The other related
costs are for the implementation and integration of the initiatives and include
costs for the relocation and training of employees and relocation of equipment.

    The asset impairment charges of $12 for the third quarter of fiscal 2002
resulted from the abandonment of certain research and development assets
associated with the initiative announced on January 23, 2002 to consolidate
research and development operations located in New Jersey. The asset impairment
charges of $81 for the nine months ended June 30, 2002 includes $33 for the
impairment of assets under construction that had not been placed into service
associated with the facilities consolidation initiative announced on
January 23, 2002 to move the majority of the Company's operations in Reading and
Breinigsville, Pa. to its Allentown, Pa. campus. The remaining asset impairment
charges of $36 for the nine months ended June 30, 2002 related to property,
plant and equipment associated with earlier restructuring initiatives for the
rationalization of underutilized manufacturing facilities and other activities.
All affected assets were classified as held for disposal in accordance with the
guidance on impairment of assets in SFAS 121, and depreciation was suspended.
These non-cash impairment charges represent the write-down to fair value, less
costs to sell, of property, plant and equipment that were removed from
operations.

    The facility closing charges of $20 for the third quarter of fiscal 2002
consist of $10 due to lease termination fees and facility restoration costs
primarily associated with the consolidation of the California operations and $10
for facility restoration costs associated with the consolidation of the
Pennsylvania and New Jersey facilities. In addition, the facility closing
charges for the nine months ended June 30, 2002 also include $40 consisting
principally of a non-cash charge of $35 for the realization of the cumulative
translation adjustment resulting from the Company's decision to substantially
liquidate its investment in the legal entity associated with its Madrid, Spain
manufacturing operations. This charge was recognized in accordance with EITF
Issue No. 01-5, Issue Summary No. 1, 'Application of SFAS No. 52, and Foreign
Currency Translation, to an Investment Being Evaluated for Impairment That Will
Be Disposed Of.' The $5 balance of the charges for the nine months ended
June 30, 2002 related to the facility closings is primarily for lease
terminations, non-cancelable leases and facility restoration costs.

    The Company recorded restructuring charge reversals of $11 and $77 for the
three and nine months ended June 30, 2002, respectively. The $11 reversal during
the third quarter of fiscal 2002 resulted from adjustments to estimates of $7
for asset impairments and $4 for facility lease

                                       12






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

terminations and facility restoration. The asset impairment adjustments were due
principally to realizing more proceeds than expected from asset dispositions.
The facility lease and restoration reversals resulted from favorable lease
termination negotiations and lower facility restoration costs than previously
reserved. In addition, the restructuring charge reversals for the nine months
ended June 30, 2002 also include adjustments to estimates of $52 for asset
impairments, of which $35 is due to receiving more proceeds than originally
anticipated from the sale of assets including $25 from the sale of assets
associated with the Madrid, Spain facility. This adjustment also includes $17
due to the redeployment of assets, of which $5 was associated with the Company's
Pennsylvania and New Jersey facilities consolidation initiative. The $14 balance
of the reversals consists of $6 for contract terminations, $6 for a reserve
deemed no longer necessary, and $2 for lease terminations associated with the
Pennsylvania and New Jersey facilities consolidation initiative.

    Restructuring Reserve Balances as of June 30, 2002

    The Company anticipates that the majority of the $25 restructuring reserve
as of June 30, 2002, relating to workforce reductions, will be paid by the end
of the second quarter of fiscal 2003. The Company also anticipates that the
restructuring reserve balance of $56 as of June 30, 2002, relating to the
rationalization of manufacturing capacity and other charges, will be paid as
follows: the majority of the contract terminations of $22 will be paid by the
end of the second quarter of fiscal 2003; facility termination fees and
non-cancelable lease obligations of $13, due to consolidation of facilities,
will be paid over the respective lease terms through fiscal 2005; and the
majority of facility restoration costs of $21 will be paid by the end of
calendar year 2002. These cash outlays will be funded through cash on hand.

  Three and Nine Months Ended June 30, 2001

    The following tables set forth the Company's restructuring reserves as of
June 30, 2001 and reflect the activity related to the worldwide workforce
reductions and the rationalization of manufacturing capacity and other charges
affecting the reserve for the three and nine months ended June 30, 2001:



                             MARCH 31,                     THREE MONTHS ENDED                      JUNE 30,
                               2001                           JUNE 30, 2001                          2001
                           -------------   ---------------------------------------------------   -------------
                           RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                              RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                              -------         ------         --------       -----     --------      -------
                                                                               
Workforce reduction......      $ --            $ 93             $--         $ (11)      $(18)        $ 64
Rationalization of
  manufacturing capacity
  and other charges......        12             321              --          (255)        (1)          77
                               ----            ----             ---         -----       ----         ----
    Total................      $ 12            $414             $--         $(266)      $(19)        $141
                               ----            ----             ---         -----       ----         ----
                               ----            ----             ---         -----       ----         ----




                          SEPTEMBER 30,                    NINE MONTHS ENDED                      JUNE 30,
                              2000                           JUNE 30, 2001                          2001
                          -------------   ---------------------------------------------------   -------------
                          RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                             RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                             -------         ------         --------       -----     --------      -------
                                                                              
Workforce reduction.....      $ --            $ 93             $--         $ (11)      $(18)        $ 64
Rationalization of
  manufacturing capacity
  and other charges.....        --             333              --          (255)        (1)          77
                              ----            ----             ---         -----       ----         ----
    Total...............      $ --            $426             $--         $(266)      $(19)        $141
                              ----            ----             ---         -----       ----         ----
                              ----            ----             ---         -----       ----         ----


                                       13






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

    Worldwide Workforce Reduction

    The Company recorded restructuring charges of $93 for the three and nine
months ended June 30, 2001, related to approximately 1,000 employees impacted by
the discontinuance of its chip fabrication operations in Madrid, Spain and
approximately 2,000 employees associated with the third quarter restructuring
initiative in fiscal 2001 that were taken off-roll as of June 30, 2001. Of this
charge, $11 represented termination benefits to certain US management employees
that were funded through Lucent's pension assets. Severance costs and other exit
costs noted above were determined in accordance with EITF 94-3.

    Rationalization of Manufacturing Capacity and Other Charges

    The Company recorded restructuring charges of $321 and $333 for the three
and nine months ended June 30, 2001, respectively, relating to the
rationalization of under-utilized manufacturing facilities and other activities.
As part of these efforts, the Company discontinued operations at its Madrid,
Spain chip fabrication plant and rationalized under-utilized manufacturing
capacity at its facilities in Orlando, Florida, and Allentown, Breinigsville and
Reading, Pennsylvania. In addition, the Company has been consolidating several
satellite-manufacturing sites as well as leased corporate offices. The
restructuring charges include $26 for the three and nine months ended June 30,
2001, related to facility closings, primarily for lease terminations and
non-cancelable lease costs. They also include an asset impairment charge of $249
for the three and nine months ended June 30, 2001, related to property, plant,
and equipment associated with the consolidation of manufacturing and other
corporate facilities. These charges were recognized in accordance with the
guidance on assets to be disposed of in SFAS 121. The remaining charges of $46
and $58 for the three and nine months ended June 30, 2001, respectively, are
related primarily to contract terminations.

SEPARATION EXPENSES

    The Company incurred costs, fees and expenses relating to the Separation.
These fees and expenses were primarily related to legal separation matters,
designing and constructing the Company's computer infrastructure, information
and data storage systems, marketing expenses relating to building a company
brand identity and implementing treasury, real estate, pension and records
retention management services. The Company incurred separation expenses of $2
and $48 for the three months ended June 30, 2002 and 2001, respectively, and $7
and $83 for the nine months ended June 30, 2002 and 2001, respectively.

5. DEBT

CREDIT FACILITY

    On April 2, 2001, in connection with the IPO, the Company assumed $2,500 of
short-term borrowings from Lucent under a credit facility. The Company did not
receive any of the proceeds of this short-term debt.

    On October 4, 2001, the Company amended this credit facility. In connection
with the amendment, the Company repaid $1,000 of the $2,500 then outstanding,
reducing the facility to $1,500. The Company also paid $21 in fees in connection
with the amendment, which will be amortized over the life of the facility. The
facility is secured by the Company's principal domestic assets other than the
proceeds of the IPO and the receivables securing the Company's accounts
receivable securitization facility described below. The maturity date of the
facility was extended from February 22, 2002 to September 30, 2002. In addition,
if the Company raises at least $500 in equity or debt capital market
transactions before September 30, 2002, the maturity date of the

                                       14






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

facility will be extended to September 30, 2004, with the facility required to
be reduced to $500 on September 30, 2003. As of June 30, 2002, the Company has
raised $410 of the $500 in equity or debt capital market transactions through
the sale of convertible subordinated notes, as discussed below. The credit
facility debt is not convertible into any other securities of the Company. The
facility contains financial covenants, including restrictions on the Company's
ability to pay cash dividends.

    Under the agreement, Agere must use 100% (50% if the size of the facility is
$500 or less) of the net cash proceeds of liquidity raising transactions to
reduce the size of the facility. Liquidity raising transactions are dispositions
of assets (other than sales of inventory and disposals of excess or obsolete
property in the ordinary course of business) including, among other things,
receivables securitizations and sale-leaseback transactions, in each case
outside the ordinary course of business. The agreement also provides that 50% of
the net cash proceeds of the first $500 and 75% (50% if the size of the facility
is $500 or less) of the net cash proceeds greater than $500 from most sales of
debt or equity securities in public or private transactions be applied to reduce
the facility. Notwithstanding the foregoing, the Company must apply 100% of net
cash proceeds over $1,000 from the issuance of debt securities that are secured
equally with the facility to reduce the size of the facility. Subsequent to the
amendment, the Company has used the proceeds of various liquidity raising
transactions and a portion of the proceeds from the sale of convertible
subordinated notes, as well as a voluntary payment of $509 from cash on hand, to
repay borrowings under the facility. At June 30, 2002 the outstanding balance of
$222 under the facility is a term loan. The Company can borrow an additional
$500 under an undrawn revolving credit facility that is part of the credit
facility, which unless extended, will mature on September 30, 2002.

    The only periodic debt service obligation under the facility is to make
quarterly interest payments. The interest rate applicable to borrowings under
the facility is based on a scale indexed to the Company's credit rating. At
June 30, 2002, the interest rate on borrowings under the facility was the
applicable LIBOR rate plus 400 basis points, based upon the current ratings of
BB - with a negative outlook from Standard & Poor's and Ba3 with a negative
outlook from Moody's. Unless the Company's credit ratings change, this rate will
be in effect for the remaining life of the facility. Any further decline in the
Company's credit rating would increase the annual interest rate under the
facility by 25 basis points. In addition, based on the current credit ratings,
there is an annual charge of 75 basis points on the undrawn portion of the
revolving credit facility. The weighted average interest rate applicable to the
facility at June 30, 2002 was 6.6%.

CONVERTIBLE SUBORDINATED NOTES

    On June 19, 2002, the Company issued $410 of 6.5% Convertible Subordinated
Notes due December 15, 2009 (the 'Notes'). The Company received proceeds of $396
in connection with this offering, net of $14 in underwriting fees and other
expenses. The $14 of costs for the offering have been deferred and will be
amortized to interest expense over the term of the Notes. Of the net proceeds,
one half or $198 was used to repay borrowings under the credit facility. The
remainder of the net proceeds will be used for general corporate purposes.

    Interest on the Notes will accrue at the rate of 6.5% per annum and will be
payable semi-annually on June 15 and December 15 of each year, beginning on
December 15, 2002. The Notes can be converted into shares of Class A common
stock at an initial price of $3.3075 per share, subject to adjustment in certain
events, at any time prior to maturity, unless previously redeemed or repurchased
by the Company. The Company may redeem the Notes in whole or in part at any time
on or after June 20, 2007. In addition, upon a fundamental change in the
Company, the Company may be required to repurchase the Notes at a price equal to
100% of the principal amount of the Notes plus any accrued and unpaid interest
to date. The Notes are unsecured

                                       15






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

subordinated obligations and will be subordinated in right of payment to all the
Company's existing and future senior debt, including the credit facility.

ACCOUNTS RECEIVABLE SECURITIZATION

    On January 24, 2002, Agere Systems Inc. and certain of its subsidiaries
entered into a securitization transaction relating to certain accounts
receivable. As part of the transaction, Agere Systems Inc. and certain of its
subsidiaries irrevocably transfer accounts receivable on a daily basis to a
wholly-owned, fully consolidated, bankruptcy-remote subsidiary, Agere Systems
Receivables Funding LLC ('ASRF'). ASRF has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to ASRF secured by the accounts receivable. The financial
institutions have commitments under the loan agreement of up to $200; however
the amount the Company can actually borrow at any time depends on the amount and
nature of the accounts receivable that the Company has transferred to ASRF. The
loan agreement expires on January 21, 2003.

    As of June 30, 2002, ASRF had borrowed $163 under this agreement. The
proceeds were used by the Company to repay amounts outstanding under the credit
facility. Virtually all of the Company's accounts receivables are required to be
pledged as security for the outstanding loans even though some of those
receivables may not qualify for borrowings. As of June 30, 2002, $276 of gross
receivables are pledged as security for the outstanding loans. The Company pays
interest on amounts borrowed under the agreement based on one-month LIBOR. The
weighted average annual interest rate on amounts borrowed at June 30, 2002 was
1.9%. In addition, the Company pays an annual 1% commitment fee on the total
loan commitment of $200.

    ASRF is a separate legal entity with its own separate creditors. Upon
liquidation of ASRF, its assets will be applied to satisfy the claims of its
creditors prior to any value in ASRF becoming available to the Company. The
business of ASRF is limited to the acquisition of receivables from Agere Systems
Inc. and certain of its subsidiaries and related activities.

OTHER DEBT

    The remainder of the Company's debt relates to obligations under capitalized
leases.

6. IMPAIRMENT OF GOODWILL AND OTHER ACQUIRED INTANGIBLES

    The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances occur that indicate the carrying amount of the assets
may not be fully recoverable. Goodwill and other acquired intangibles associated
with acquisitions are evaluated for impairment in the period in which the
Company becomes aware of events and occurrences that indicate an impairment may
exist. These assessments were performed in accordance with SFAS 121, as a result
of weakening economic conditions and decreased current and expected future
demand for products in the markets in which the Company operates. Fair value of
the acquired entities was determined using a discounted cash flow model based on
growth rates and margins reflective of lower demand for the Company's products,
as well as anticipated future demand. Discount rates used were based upon the
Company's weighted average cost of capital adjusted for business risks. These
amounts are based on management's best estimate of future results.

    As a result of these assessments, the Company determined that an other than
temporary impairment existed related to certain of the Company's acquisitions.
During the three and nine months ended June 30, 2001, the Company recorded a
charge to reduce goodwill and other acquired intangibles of $27 related to
Enable Semiconductor, Inc., which was acquired in fiscal 1999. During the nine
months ended June 30, 2002, the Company recorded a charge to reduce

                                       16






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

goodwill and other acquired intangibles of $176, consisting of $113 and $63
related to Ortel Corporation and Herrmann Technology, Inc., respectively, both
of which were acquired in fiscal 2000. The Company recorded no charges to reduce
goodwill or other acquired intangibles during the three months ended June 30,
2002.

7. DIVESTITURES OF BUSINESSES

SALE OF FPGA BUSINESS

    On January 18, 2002, the Company completed the sale of certain assets and
liabilities related to the field-programmable gate array ('FPGA') business of
the Infrastructure Systems segment to Lattice Semiconductor Corporation
('Lattice') for $250 in cash. The transaction included the Company's
general-purpose ORCA'r' FPGA product portfolio, field-programmable system chip
product portfolio and related software design tools. As part of the transaction,
approximately 100 product development, marketing and technical sales employees
transferred to Lattice. The net cash proceeds of $250 from the sale were used to
permanently reduce the credit facility. The Company recognized a gain of $243
from the sale, which is included in other income (expense) -- net.

SALE OF WIRELESS LOCAL AREA NETWORK EQUIPMENT BUSINESS

    On June 17, 2002, the Company entered into an agreement to sell certain
assets and liabilities of its 802.11 wireless local area network ('LAN')
equipment business of the Client Systems segment, including its ORiNOCO'r'
product family, to Proxim Corporation ('Proxim') for $65 in cash. As part of the
sale, approximately 150 employees will transfer to Proxim. In addition, the
Company and Proxim have agreed to enter into a three-year strategic supply
agreement under which the Company will provide chips, modules and cards to
Proxim as needed, a license agreement for Agere technology used in the ORiNOCO
business and a patent cross-license agreement for their respective patent
portfolios including settlement of patent-related litigation between the two
companies. The sale is expected to close in the fourth quarter of fiscal 2002,
subject to customary closing conditions.

SALE OF ANALOG LINE CARD BUSINESS

    On June 24, 2002, the Company entered into an agreement to sell its analog
line card business of the Infrastructure Systems segment to Legerity, Inc.
('Legerity') for $70 in cash. The sale consists of certain products, technology
and intellectual property related to the analog line card business, which
provides integrated circuits used in telephone network equipment. As part of the
sale, approximately 50 employees will transfer to Legerity. In addition, through
a transitional supply agreement, the Company is obligated to supply chips for
Legerity through early 2003. The sale is expected to close in the fourth quarter
of fiscal 2002, subject to customary closing conditions.

                                       17






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

8. SUPPLEMENTARY FINANCIAL INFORMATION

BALANCE SHEET INFORMATION



                                                              JUNE 30,   SEPTEMBER 30,
                                                                2002         2001
                                                                ----         ----
                                                                   
Inventories
    Completed goods.........................................    $ 54         $ 87
    Work in process and raw materials.......................     189          217
                                                                ----         ----
        Inventories.........................................    $243         $304
                                                                ----         ----
                                                                ----         ----


INCOME STATEMENT INFORMATION

    The Company recorded inventory provisions classified within costs of $2 and
$279 for the three months ended June 30, 2002 and 2001, respectively, and $68
and $353 for the nine months ended June 30, 2002 and 2001, respectively. These
amounts are calculated in accordance with the Company's inventory valuation
policy, which is based on a review of forecasted demand compared with existing
inventory levels.

    The Company recorded $24 and $40 of accelerated depreciation for the three
and nine months ended June 30, 2002, respectively, due to a change in accounting
estimate. This change in accounting estimate is due to the shortening of the
estimated useful lives of certain assets in connection with the planned facility
closings announced on January 23, 2002. This accelerated depreciation is
reflected in net loss and resulted in a $.01 and $.02 per share loss for the
three and nine months ended June 30, 2002, respectively.

    The following table shows the components of other income (expense) -- net:



                                                                   THREE                    NINE
                                                               MONTHS ENDED             MONTHS ENDED
                                                                 JUNE 30,                 JUNE 30,
                                                             -----------------         --------------
                                                             2002         2001         2002      2001
                                                             ----         ----         ----      ----
                                                                                     
Other income (expense) -- net
    Gain on sale of FPGA business..........................  $--          $ --         $243      $ --
    Equity earnings (losses) from investments..............   14            (2)          40        38
    Interest income........................................    5            37           26        41
    Gain on sales of investments -- net....................   --            --           41        --
    Impairment of investments..............................   (4)          (29)          (9)      (34)
    Loss on foreign currency transactions..................   --            (4)          --        (6)
    Other -- net...........................................    3            (7)          12        (7)
                                                             ---          ----         ----      ----
        Total other income (expense) -- net................  $18          $ (5)        $353      $ 32
                                                             ---          ----         ----      ----
                                                             ---          ----         ----      ----


9. INVESTMENT IN SILICON MANUFACTURING PARTNERS PTE LTD

    The Company owns a 51% interest in Silicon Manufacturing Partners ('SMP'), a
joint venture with Chartered Semiconductor, which operates a 54,000 square foot
integrated circuit manufacturing facility in Singapore. The investment is
accounted for under the equity method due to Chartered Semiconductor's
participatory rights under the joint venture agreement. Under the joint venture
agreement, each partner is entitled to the margins from sales to customers
directed to SMP by that partner, after deducting their respective share of the
overhead costs of SMP. Accordingly, SMP's net income (loss) is not expected to
be shared in the same ratio as equity ownership. For the three and nine months
ended June 30, 2002 the Company recognized equity earnings of $14 and $40 from
SMP, respectively, compared to equity losses of $2 and equity earnings of $38,
respectively, in the corresponding prior year periods. SMP reported net income
of $1 and $27 for the three and nine months ended June 30, 2002, respectively,
versus a net loss of

                                       18






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

$9 and net income of $18, respectively, in the same periods in fiscal 2001. As
of June 30, 2002, SMP reported total assets of $646 and total liabilities of
$409 compared to total assets of $670 and total liabilities of $467 as of
September 30, 2001.

10. COMPREHENSIVE INCOME (LOSS)

    Total comprehensive loss represents net loss plus the results of certain
equity changes not reflected in the condensed consolidated and combined
statements of operations. The components of other comprehensive income (loss)
are shown below.



                                                                   THREE             NINE
                                                               MONTHS ENDED      MONTHS ENDED
                                                                 JUNE 30,          JUNE 30,
                                                              ---------------   ---------------
                                                              2002     2001     2002     2001
                                                              ----     ----     ----     ----
                                                                            
Net loss....................................................  $(332)  $(1,110)  $(926)  $(1,262)
Other comprehensive income (loss):
    Foreign currency translation adjustments................     (1)       (5)     (3)        3
    Unrealized gain on investments..........................     --       141      --       141
    Unrealized gain (loss) on cash flow hedges..............     (1)       --       3        --
    Reclassification adjustment to net loss.................     --        --       5        --
                                                              -----   -------   -----   -------
        Total comprehensive loss............................  $(334)  $  (974)  $(921)  $(1,118)
                                                              -----   -------   -----   -------
                                                              -----   -------   -----   -------


    The foreign currency translation adjustments are not currently adjusted for
income taxes because they relate to indefinite investments in non-U.S.
subsidiaries. The unrealized gain (loss) on cash flow hedges is related to
hedging activities by SMP and there are no income taxes provided for the
unrealized gain (loss). The reclassification adjustment is comprised of a
reversal of a $30 unrealized gain due to the realization of a gain from the sale
of an available-for-sale investment and a $35 unrealized foreign currency
translation loss due to the realization of the cumulative translation adjustment
resulting from the Company's decision to substantially liquidate its investment
in the legal entity associated with the Madrid, Spain manufacturing operations.

11. STOCK COMPENSATION PLANS

    Employees of the Company have been granted stock options and other
equity-based awards under Agere and Lucent stock-based compensation plans. On
June 1, 2002, at the time of the Distribution, all awards outstanding under
Lucent's stock-based compensation plans and held by Company employees were
converted to Company stock-based awards. The Company stock options and other
awards, as converted or adjusted, have the same vesting provisions, option
periods, and other terms and conditions as the Lucent options and awards they
replaced. The number of shares and exercise price of each stock option were
adjusted so that immediately following conversion, each option had the same
ratio of the exercise price per share to the market value per share, and the
same aggregate difference between market value and exercise price as the Lucent
stock options immediately prior to the conversion. No new measurement date has
occurred upon conversion of the stock options. In connection with the
Distribution on June 1, 2002, 46,675,960 shares of Class A common stock were
made subject to converted Lucent stock options.

    Presented below is a summary of the status of the Lucent stock options held
by Company employees prior to the Distribution, for which the Company assumed
responsibility, and the related transactions for the eight months ending
May 31, 2002. Also presented below is a summary of the status of Agere stock
options and related transactions for the nine months ended June 30, 2002. The
Lucent stock option activity is not necessarily indicative of what the activity
would have been had Agere been a separate stand-alone company during the period
presented, or what the activity may be in the future.

                                       19






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



                                                                        WEIGHTED
                                                                        AVERAGE
                                                              SHARES    EXERCISE
                                                              (000'S)    PRICE
                                                              -------    -----
                                                                  
Lucent options outstanding at September 30, 2001............   45,480   $ 32.59
    Granted.................................................      n/a       n/a
    Exercised...............................................   (1,890)     1.97
    Forfeited/expired.......................................   (5,368)     6.47
                                                              -------
Lucent options outstanding at May 31, 2002..................   38,222   $ 33.33
Agere spin-off adjustments..................................   18,916    (11.04)
                                                              -------
Agere options substituted for Lucent options, outstanding at
  June 1, 2002..............................................   57,138   $ 22.29
                                                              -------
                                                              -------
Agere options outstanding at September 30, 2001.............  142,750   $  5.81
    Granted.................................................    5,346      5.31
    Agere options substituted for Lucent options............   57,138     22.29
    Exercised...............................................      (13)     2.50
    Forfeited/expired.......................................  (18,020)     5.97
                                                              -------
Agere options outstanding at June 30, 2002..................  187,201   $ 10.79
                                                              -------
                                                              -------


    The weighted average fair value of Agere stock options granted during the
nine months ended June 30, 2002 was $2.24 per share, calculated using the
Black-Scholes option pricing model.

    Other stock unit awards are granted under certain award plans. The following
table presents the total number of shares of common stock represented by awards
granted to Company employees.



                                                                       NINE
                                                                   MONTHS ENDED
                                                                   JUNE 30, 2002
                                                                   -------------
                                                               
Other Agere stock unit awards granted (000's)...............              --
Weighted average market value of shares granted during the
  period....................................................              --
Other Lucent stock unit awards converted to Agere stock unit
  awards (000's)*...........................................             649
Weighted average market value at grant date of shares
  converted*................................................          $11.73


---------

* 434 Lucent stock unit awards were converted to Agere stock unit awards
  following the Distribution.

    Also on February 21, 2002, the Company's stockholders authorized an
additional 180 million shares for issuance under its 2001 Long Term Incentive
Plan.

12. LOSS PER COMMON SHARE

    Basic and diluted loss per common share is calculated by dividing net loss
by the weighted average number of common shares outstanding during the period.
As a result of the net loss reported for the three months ended June 30, 2002
and 2001, approximately 2,149,000 and 4,643,468 potential common shares,
respectively, and for the nine months ended June 30, 2002 and 2001,
approximately 3,834,222 and 1,559,129 potential common shares, respectively,
have been excluded from the calculation of diluted loss per share because their
effect would be anti-dilutive. The potential common shares have been
retroactively adjusted from the beginning of fiscal year 2002 for the conversion
of Lucent stock-based awards to Company stock-based awards in connection with
the Distribution.

                                       20






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

13. PENSION AND POSTRETIREMENT BENEFITS

    The Company has pension plans covering substantially all of it employees.
Retirement benefits are based on a career average or flat dollar formula. A cash
balance plan covers certain employees of companies acquired since 1996 and
management employees hired after January 1, 1999. Plans are funded on a current
basis to the extent deductible under existing Federal tax regulations.
Participants in the cash balance plan are not entitled to benefits under the
postretirement benefit plan.

    Prior to the Distribution, the Company's U.S. management and occupational
employees participated in Lucent's pension and postretirement plans. Effective
June 1, 2002, the Company assumed responsibility for all pension and
postretirement benefits covering active U.S. employees of the Company, as well
as U.S. employees who retired or terminated subsequent to the IPO. In June 2002,
Lucent transferred to the Company the pension and postretirement assets and
obligations related to these employees based on currently available census data.
This census data is subject to revisions that may result in additional transfers
to or from the Lucent plans. The Company anticipates finalizing the amounts to
be transferred by June 2003. Obligations related to retired and terminated
vested U.S. employees prior to the IPO are the responsibility of Lucent. The
Company is also responsible for the pension and postretirement benefits of its
non-U.S. employees. The liabilities of the various country-specific plans for
these employees are reflected in the condensed consolidated and combined
financial statements and were not material for the periods presented.

    Lucent managed its U.S. employee benefit plans on a consolidated basis and
separate Company information is not available for the periods prior to June 1,
2002. The condensed consolidated and combined statements of operations include
an allocation of the costs (credits) of the U.S. employee pension and
postretirement plans. These costs (credits) were allocated based on the
Company's active employee population for each period presented prior to June 1,
2002. Net periodic benefit cost (credit), including the amounts allocated, for
the respective plans are as follows:



                                                                      THREE                     NINE
                                                                  MONTHS ENDED              MONTHS ENDED
                                                                    JUNE 30,                  JUNE 30,
                                                                -----------------         -----------------
                                                                2002         2001         2002         2001
                                                                ----         ----         ----         ----
                                                                                           
Net periodic benefit cost (credit)
    Pension benefits...................................         $(2)         $(5)         $(2)         $(2)
    Postretirement benefits............................           2            2            7            8


    Net periodic benefit cost (credit) for the month of June 2002 includes the
following components:



                                                              PENSION    POSTRETIREMENT
                                                              BENEFITS      BENEFITS
                                                              --------      --------
                                                                   
Service cost................................................    $  3          $--
Interest cost...............................................       6            1
Expected return on plan assets..............................     (11)          (1)
Amortization of prior service cost..........................       1           --
Recognized net actuarial gain...............................      (1)          --
                                                                ----          ---
    Net periodic benefit cost (credit)......................    $ (2)         $--
                                                                ----          ---
                                                                ----          ---


                                       21






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

    The following table sets forth the combined status of the plans as
recognized in the consolidated balance sheets at June 30, 2002:



                                                              PENSION    POSTRETIREMENT
                                                              BENEFITS      BENEFITS
                                                              --------      --------
                                                                   
Change in benefit obligation
    Obligation transferred from Lucent in June 2002.........   $  992        $ 217
    Service cost............................................        3           --
    Interest cost...........................................        6            1
    Actuarial loss..........................................       --           20
    Benefits paid...........................................      (14)          --
                                                               ------        -----
        Benefit obligation at June 30, 2002.................   $  987        $ 238
                                                               ------        -----
                                                               ------        -----
Change in plan assets
    Fair value of plan assets transferred from Lucent in
      June 2002.............................................   $1,243        $  97
    Actual loss on plan assets..............................      (95)          (7)
    Benefits paid...........................................      (14)          --
                                                               ------        -----
        Fair value of plan assets at June 30, 2002..........   $1,134        $  90
                                                               ------        -----
                                                               ------        -----

Funded status of the plan...................................   $  147        $(148)
Unrecognized net actuarial loss.............................       48           56
Unrecognized prior service cost.............................       24            3
Unrecognized initial asset..................................       (1)          --
                                                               ------        -----
        Net prepaid (obligation) at June 30, 2002...........   $  218        $ (89)
                                                               ------        -----
                                                               ------        -----
Weighted average assumptions:
    Discount rate...........................................      7.0%         7.0%
    Expected return on plan assets..........................      9.0%         9.0%
    Rate of compensation increase...........................      4.5%          --


    All separation benefit payments made as the result of actions of the Company
prior to June 1, 2002 were paid by the Lucent plans. All separation benefit
payments subsequent to June 1, 2002 are the responsibility of the Company and
will be paid by the Agere plans.

    For fiscal 2002, the assumed health care cost trend rates are 7.3% for
participants under age 65 and 8.9% for participants age 65 or older. The cost
trend rate for participants under age 65 is assumed to decrease gradually to 5%
in the year 2006. A one percent annual change in the assumed cost trend rate
would have a minimal effect on the total service and interest cost components
and on the postretirement benefit obligation.

14. OPERATING SEGMENTS

    Effective October 1, 2001, the Company realigned its business operations
into two market-focused groups, Infrastructure Systems and Client Systems, that
target the network equipment and consumer communications markets respectively.
These two groups comprise the Company's reportable operating segments. The
segments each include revenue from the licensing of intellectual property
related to that segment. There were no intersegment sales.

    The Infrastructure Systems segment is comprised of the former
Optoelectronics segment and portions of the former Integrated Circuits segment
and facilitates the convergence of products from both businesses as the Company
addresses markets in high-speed communications systems. The Company has
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows the more efficient

                                       22






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

design, development and delivery of complete, interoperable solutions to
equipment manufacturers for advanced enterprise, access, metropolitan, long-haul
and undersea applications.

    The Client Systems segment consists of the remainder of the former
Integrated Circuits segment and delivers integrated circuit solutions for a
variety of end-user applications such as modems, Internet-enabled cellular
terminals, hard-disk drives for computers as well as software, systems and
wireless local area networking solutions.

    Each segment is managed separately. Disclosure of segment information is on
the same basis used internally for evaluating segment performance and allocating
resources. Performance measurement and resource allocation for the segments are
based on many factors. The primary financial measure used is operating income
(loss), exclusive of amortization of goodwill and other acquired intangibles,
the impairment of goodwill and other acquired intangibles, and net restructuring
and separation expenses.

    The Company does not identify or allocate assets by operating segment. In
addition, the Company does not allocate interest income or expense, other income
or expense, or income taxes to the segments. Management does not evaluate
segments based on these criteria. The Company has centralized corporate
functions and uses shared service arrangements to realize economies of scale and
efficient use of resources. The costs of shared services, and other corporate
center operations managed on a common basis, are allocated to the segments based
on usage or other factors based on the nature of the activity.

REPORTABLE SEGMENTS



                                                                  THREE            NINE
                                                              MONTHS ENDED     MONTHS ENDED
                                                                JUNE 30,         JUNE 30,
                                                              -------------   ---------------
                                                              2002    2001     2002     2001
                                                              ----    ----     ----     ----
                                                                           
Revenue
    Infrastructure Systems..................................  $ 230   $ 592   $  719   $2,376
    Client Systems..........................................    330     335      929    1,104
                                                              -----   -----   ------   ------
        Total...............................................  $ 560   $ 927   $1,648   $3,480
                                                              -----   -----   ------   ------
                                                              -----   -----   ------   ------
Operating loss (excluding amortization of goodwill and other
  acquired intangibles, impairment of goodwill and other
  acquired intangibles, and net restructuring and separation
  expenses)
    Infrastructure Systems..................................  $(174)  $(337)  $ (563)  $ (124)
    Client Systems..........................................     --     (60)    (118)    (125)
                                                              -----   -----   ------   ------
        Total...............................................  $(174)  $(397)  $ (681)  $ (249)
                                                              -----   -----   ------   ------
                                                              -----   -----   ------   ------


RECONCILING ITEMS

    A reconciliation of the totals reported for the operating segments to the
significant line items in the condensed financial statements is shown below.

                                       23






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)



                                                                  THREE             NINE
                                                              MONTHS ENDED      MONTHS ENDED
                                                                JUNE 30,          JUNE 30,
                                                              -------------   -----------------
                                                              2002    2001     2002      2001
                                                              ----    ----     ----      ----
                                                                            
Reportable segment operating loss...........................  $(174)  $(397)  $  (681)  $  (249)
    Amortization of goodwill and other acquired
      intangibles...........................................    (10)   (112)      (47)     (335)
    Restructuring and separation expenses -- net............   (127)   (462)     (223)     (509)
    Impairment of goodwill and other acquired intangibles...     --     (27)     (176)      (27)
                                                              -----   -----   -------   -------
        Total operating loss................................  $(311)  $(998)  $(1,127)  $(1,120)
                                                              -----   -----   -------   -------
                                                              -----   -----   -------   -------


REVENUE BY PRODUCT

    The Company generates revenues from the sale of two products, integrated
circuits and optoelectronic components. These products are consistent with the
segments reported by the Company prior to October 1, 2001. Integrated circuits,
or chips, are made using semiconductor wafers imprinted with a network of
electronic components. They are designed to perform various functions such as
processing electronic signals, controlling electronic system functions and
processing and storing data. Optoelectronic components, including both active
and passive components, transmit, process, change, amplify and receive light
that carries data and voice traffic over optical networks.



                                                                     THREE                NINE
                                                                  MONTHS ENDED        MONTHS ENDED
                                                                    JUNE 30,            JUNE 30,
                                                                 --------------      ---------------
                                                                 2002      2001       2002     2001
                                                                 ----      ----       ----     ----
                                                                                  
Integrated circuits........................................      $496      $650      $1,426   $2,400
Optoelectronic devices.....................................        64       277         222    1,080
                                                                 ----      ----      ------   ------
    Total revenue..........................................      $560      $927      $1,648   $3,480
                                                                 ----      ----      ------   ------
                                                                 ----      ----      ------   ------


15. TRANSACTIONS WITH LUCENT

    Lucent was the majority stockholder and a related party of the Company until
the Distribution, which occurred on June 1, 2002. Revenue from products sold to
Lucent through June 1, 2002 were $19 and $162 for the three and nine months
ended June 30, 2002, respectively, and $113 and $518 for the three and nine
months ended June 30, 2001, respectively. Products purchased from Lucent were $6
and $21 for three and nine months ended June 30, 2001, respectively. There were
no material purchases of products from Lucent in fiscal 2002. As of
September 30, 2001, there were $42 of trade receivables due from Lucent.

    In connection with the Separation, the Company and Lucent entered into the
Microelectronics Product Purchase Agreement that governed the purchase by Lucent
of Agere products. In light of the dramatic decline in demand for
telecommunications products that has occurred since the parties entered into the
original agreement and the Company's desire to maintain its relationship with
Lucent the parties amended the agreement on July 17, 2002. See Note 17
'Subsequent Events'.

    In connection with the Separation, the Company and Lucent entered into an
Interim Service and Systems Replication Agreement to provide each other, on an
interim, transitional basis, with various data processing services,
telecommunications services and corporate support services, including:
accounting, financial management, information systems management, tax, payroll,
legal, human resources administration, procurement and other general support.
The costs associated with

                                       24






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

this agreement amounted to $3 and $6 for the three and nine months ended
June 30, 2002, respectively, and $36 and $68 for the three and nine months ended
June 30, 2001.

16. COMMITMENTS AND CONTINGENCIES

    In the normal course of business, the Company is involved in proceedings,
lawsuits and other claims, including proceedings under laws and government
regulations related to environmental, tax and other matters. The semiconductor
industry is characterized by substantial litigation concerning patents and other
intellectual property rights. From time to time, the Company may be party to
various inquiries or claims in connection with these rights. In addition, from
time to time the Company is involved in legal proceedings arising in the
ordinary course of business, including unfair labor charges filed by its unions
with the National Labor Relations Board, claims before the U.S. Equal Employment
Opportunity Commission and other employee grievances. These matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at June 30, 2002 cannot be ascertained.
While these matters could affect the operating results of any one quarter when
resolved in future periods and while there can be no assurance with respect
thereto, management believes that after final disposition, any monetary
liability or financial impact to the Company beyond that provided for at
June 30, 2002, would not be material to the annual consolidated financial
statements.

    In December 1997, the Company entered into a joint venture, called Silicon
Manufacturing Partners, or SMP, with Chartered Semiconductor, a leading
manufacturing foundry for integrated circuits, to operate a 54,000 square foot
integrated circuit manufacturing facility in Singapore. The Company owns a 51%
equity interest in this joint venture, and Chartered Semiconductor owns the
remaining 49% equity interest. The Company has an agreement with SMP under which
it has agreed to purchase 51% of the production output from this facility and
Chartered Semiconductor agreed to purchase the remaining 49% of the production
output. If the Company fails to purchase its required commitments, it will be
required to pay SMP for the fixed costs associated with the unpurchased wafers.
Chartered Semiconductor is similarly obligated with respect to the wafers
allotted to it. The agreement also provides that Chartered Semiconductor will
have the right of first refusal to purchase integrated circuits produced in
excess of the Company's requirements. The agreement may be terminated by either
party upon two years written notice, but may not be terminated prior to February
2008. The agreement may also be terminated for material breach, bankruptcy or
insolvency. Based on forecasted demand, the Company believes it is unlikely that
it would have to pay any significant amounts for underutilization in the near
future. However, if the Company's purchases under this agreement are less than
anticipated, the Company's cash obligation to SMP may be significant.

    In July 2000, the Company and Chartered Semiconductor entered into an
agreement committing the Company and Chartered Semiconductor to jointly develop
manufacturing technologies for future generations of integrated circuits
targeted at high-growth communications markets. The Company originally agreed to
invest up to $350 over a five-year period. In June 2002, the Company and
Chartered Semiconductor amended the agreement to provide that Chartered
Semiconductor will conduct all future development work. If requested by
Chartered Semiconductor, the Company will provide consulting services on
technical issues on mutually agreeable terms. The Company has no further funding
obligation under the agreement and does not believe any future commitments under
the amended agreement will have a material impact on its financial position,
results of operations or cash flows.

    The Company has also entered into an agreement with Chartered Semiconductor
whereby Chartered Semiconductor will provide integrated circuit wafer
manufacturing services. Under the

                                       25






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

agreement, the Company provides a demand forecast to Chartered Semiconductor for
future periods and Chartered Semiconductor commits to have manufacturing
capacity available for the Company's use. If the Company uses less than a
certain percent of the forecasted manufacturing capacity, the Company may be
obligated to pay penalties to Chartered Semiconductor. The Company is currently
in discussions with Chartered Semiconductor concerning shortfalls in purchase
commitments.

RISKS AND UNCERTAINTIES

    The Company's primary source of liquidity is its cash and cash equivalents.
The Company believes its cash and cash equivalents are sufficient to meet cash
requirements for at least the next 12 months, including repayment of borrowings
under the credit facility if its maturity is not extended, the cash requirements
of the facilities consolidation and the other announced restructuring
activities, and the increased working capital requirement to the extent the
accounts receivable securitization is not extended past its current expiration
date in January 2003. The liquidity discussion above does not contemplate the
cash requirements for new restructuring initiatives that the Company is
considering and it does not believe these actions will have an impact on its
ability to meet cash requirements for the next 12 months.

LEGAL PROCEEDINGS

    An investigation was commenced on April 4, 2001, by the U.S. International
Trade Commission based on a request of Proxim, alleging patent infringement by
14 companies, including some of the Company's customers, for wireless local area
networking products. Proxim alleges infringement of three patents related to
spread-spectrum coding techniques. Spread-spectrum coding techniques refers to a
way of transmitting a signal for wireless communications by spreading the signal
over a wide frequency band. One of the Company's subsidiaries, Agere Systems
Guardian Corp., filed a lawsuit on May 23, 2001, in the U.S. District Court in
Delaware against Proxim alleging infringement of three patents used in Proxim's
wireless local area networking products. In connection with the Company's sale
of its wireless LAN equipment business to Proxim, the Company and Proxim entered
into a cross license which will result in the dismissal of the International
Trade Commission proceeding against the Company's customers to the extent based
on the use of the Company's products as well as the Delaware proceeding against
Proxim.

ENVIRONMENTAL, HEALTH AND SAFETY

    The Company is subject to a wide range of U.S. and non-U.S. governmental
requirements relating to employee safety and health and to the handling and
emission into the environment of various substances used in its operations. The
Company also is subject to environmental laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund,
that require the cleanup of soil and groundwater contamination at sites
currently or formerly owned or operated by the Company, or at sites where the
Company may have sent waste for disposal. These laws often require parties to
fund remedial action at sites regardless of fault. Lucent is a potentially
responsible party at numerous Superfund sites and sites otherwise requiring
cleanup action. With some limited exceptions, under the Separation and
Distribution Agreement with Lucent, the Company has assumed all environmental
liabilities resulting from the Company's Businesses, which include liabilities
for the costs associated with eight of these sites -- five Superfund sites, two
of the Company's former facilities and one of the Company's current
manufacturing facilities.

                                       26






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

    It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. This practice is followed whether the claims are asserted
or unasserted. Management expects that the amounts reserved will be paid out
over the period of remediation for the applicable site, which typically ranges
from five to thirty years. Reserves for estimated losses from environmental
remediation are, depending upon the site, based primarily upon internal or third
party environmental studies, estimates as to the number, participation level and
financial viability of all potentially responsible parties, the extent of the
contamination and the nature of required remedial actions. Accruals will be
adjusted as further information develops or circumstances change. The amounts
provided for in the condensed consolidated and combined financial statements for
environmental reserves are the gross undiscounted amount of such reserves,
without deductions for insurance or third party indemnity claims. Although the
Company believes that its reserves are adequate, including those covering the
Company's potential liabilities at Superfund sites, there can be no assurance
that expenditures which will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in these reserves or will not have a material adverse impact on the
Company's financial condition, results of operations or cash flows. Any possible
loss or range of loss that may be incurred in excess of that provided for as of
June 30, 2002, cannot be estimated.

17. SUBSEQUENT EVENTS

AMENDMENT OF MICROELECTRONICS PURCHASE AGREEMENT

    On July 17, 2002, the Company and Lucent amended the Microelectronics
Purchase Agreement that governed the purchase by Lucent of Agere products. The
parties entered into the amendment in light of the dramatic decline in demand
for telecommunications products that has occurred since the parties entered into
the original agreement and the Company's desire to maintain its relationship
with Lucent. The amendment provides that:

     The term of the agreement is extended to September 30, 2006.

     For 'existing products,' Lucent has agreed that, as long as Agere's terms
     and products are competitive:

       --  During the current fiscal year, which ends on September 30, 2002, and
           each of the next four fiscal years, it will purchase from Agere 90%
           of its requirements for existing products.

       --  In the current fiscal year, it will purchase a minimum of $250 of
           existing products, if that amount is greater than 90% of its
           requirements for those products.

       --  Lucent will furnish to Agere all requests for quotations it
           distributes for existing products.

      'Existing products' are products of the kind currently being purchased by
      Lucent from Agere, as well as any next generation or successor products.

     For 'new products':

       --  Lucent will purchase from Agere at least 60% of the business covered
           by each request for quotation for new products, as long as Agere's
           terms and products are competitive.

       --  Lucent will pursue with Agere joint research and joint development
           projects that may lead to new products, as long as Agere is
           competitive on criteria established by Lucent.

                                       27






                  NOTES TO CONDENSED CONSOLIDATED AND COMBINED
                      FINANCIAL STATEMENTS -- (CONTINUED)
                 (DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

      'New products' are products within Agere's served available market that
      are not existing products.

     Lucent's actual purchases for the contract year ended January 31, 2002,
     satisfy Lucent's purchase commitment under the agreement for that year.

     Lucent will assign to Agere a number of patents and intellectual property
     license agreements.

     Lucent will forgive specified amounts owed by Agere to Lucent under
     existing intellectual property license agreements.

     Lucent will provide Agere with the ability to terminate leases at Lucent's
     New Jersey locations earlier than contemplated by the original agreements.

CLOSING OF WIRELESS LAN EQUIPMENT BUSINESS SALE

    On August 5, 2002, the Company completed the sale of the wireless LAN
equipment business to Proxim.

                                       28






ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

    The following discussion of our financial condition and results of
operations should be read in conjunction with our unaudited financial statements
for the three and nine months ended June 30, 2002 and 2001 and the notes
thereto. This discussion contains forward-looking statements. Please see
'Forward-Looking Statements' and 'Factors Affecting Our Future Performance' for
a discussion of the uncertainties, risks and assumptions associated with these
statements.

OVERVIEW

    We are the world's leading provider of communications components. We deliver
integrated circuits, optical components and subsystems that access, move and
store information. Agere's integrated solutions form the building blocks for
advanced wired, wireless and optical communications networks.

    Effective October 1, 2001, we realigned our business operations into two
market-focused groups, Infrastructure Systems and Client Systems, that target
the network equipment and consumer communications markets respectively. Each of
these two groups is a reportable operating segment. The segments each include
revenue from the licensing of intellectual property related to that segment.

    The Infrastructure Systems segment is comprised of our former
Optoelectronics segment and portions of our former Integrated Circuits segment
and facilitates the convergence of products from both businesses. This segment
delivers solutions to the high-speed communications systems market. We have
consolidated research and development, as well as marketing, for both
optoelectronic and integrated circuit devices aimed at communications systems.
This allows us to more efficiently design, develop and deliver complete,
interoperable solutions to equipment manufacturers for advanced enterprise,
access, metropolitan, long-haul and undersea applications.

    The Client Systems segment consists of the remainder of our former
Integrated Circuits segment and delivers integrated circuit solutions for a
variety of end-user applications such as modems, Internet-enabled cellular
terminals and hard-disk drives for computers as well as software, integrated
circuits and network interface cards for wireless local area networking
applications. Prior to the sale of our wireless local area network equipment
business on August 5, 2002, this segment also sold complete wireless local area
networking solutions.

    We reported a net loss of $332 million and $926 million for the three and
nine months ended June 30, 2002, respectively, compared to a net loss of $1,110
million and $1,262 million for the three and nine months ended June 30, 2001,
respectively.

SEPARATION FROM LUCENT

    We were incorporated under the laws of the State of Delaware on August 1,
2000, as a wholly owned subsidiary of Lucent Technologies Inc. We had no
material assets or activities as a separate corporate entity until the
contribution to us by Lucent of its integrated circuits and optoelectronic
components businesses. Lucent had previously conducted these businesses through
various divisions and subsidiaries. On February 1, 2001, Lucent began the
separation of our company by transferring to us all the assets and liabilities
related to these businesses, other than the pension and postretirement assets
and liabilities. In April 2001, we completed our initial public offering.
Subsequent to our initial public offering, Lucent was our majority shareholder
and owned 100% of our outstanding Class B common stock. On May 1, 2001, Lucent
elected to convert 37 million shares of its Agere Class B common stock to
Class A common stock. Following these transactions, Lucent owned approximately
58% of the total outstanding common stock and approximately 84% of the combined
voting power of both classes of our voting stock with respect to the election
and removal of directors. On June 1, 2002, Lucent distributed all of the Agere
common stock it then owned to its stockholders. Also in June 2002, Lucent
transferred to us the pension and postretirement assets and liabilities related
to our employees based on currently available census data. This census data is
subject to revisions that may result in additional transfers to or from the
Lucent plans. We anticipate finalizing the amounts to be transferred by June
2003.

                                       29






As a result of this transfer, we have prepaid pension costs of $218 million and
postretirement liabilities of $89 million at June 30, 2002.

    Our financial statements include amounts prior to February 1, 2001 that have
been derived from the financial statements and accounting records of Lucent
using the historical results of operations and historical basis of the assets
and liabilities of our businesses. We believe the assumptions underlying our
financial statements are reasonable. However, our financial statements that were
derived from Lucent's financial records may not necessarily reflect our results
of operations, financial position and cash flows in the future or what our
results of operations, financial position and cash flows would have been had we
been a stand-alone company. Because a direct ownership relationship did not
exist among all the various units comprising Agere, Lucent's net investment in
us is shown in lieu of stockholders' equity in our financial statements for
periods prior to February 1, 2001. We began accumulating retained earnings
(losses) on February 1, 2001, the date on which Lucent transferred to us
substantially all the assets and liabilities of our business. For periods prior
to February 1, 2001, our financial statements include allocations of Lucent's
expenses, including allocations for general corporate expenses, basic research,
interest expense, pension and postretirement costs and income taxes.

OPERATING TRENDS

    During the third quarter of fiscal 2002, both the Client and Infrastructure
segments experienced a 2% increase in revenues for the three months ended
June 30, 2002 compared to the three months ended March 31, 2002. We expect
revenues to decrease moderately in our fourth fiscal quarter. However, our
ability to forecast future results is limited due to continued demand
uncertainty by our customers.

    Our costs consist primarily of manufacturing overhead, materials and labor.
Similar to many other semiconductor manufacturers, we have relatively high fixed
costs associated with our wafer manufacturing. As a result, our ability to
reduce costs quickly in times of decreased demand is limited, which has an
adverse effect on margins. Because we anticipated higher revenues as we entered
both fiscal 2001 and 2002 than we actually experienced, our cost structure
reflected manufacturing capacity and resources greater than those actually
required for both fiscal years. In light of the lower revenues we have
experienced in recent quarters, we have taken a number of steps to reduce our
cost structure, including restructuring and consolidation activities and
reductions in capital spending. We are in the process of evaluating new
restructuring initiatives to help us achieve positive cash flow at lower revenue
breakeven levels than planned for in previously announced restructuring plans.
Although no plans have been approved, the additional actions could potentially
impact staffing levels, product lines, capital expenditures, and manufacturing
facilities and may require the use of cash to fully implement. Pending
finalization of these further restructuring initiatives, we suspended
construction related to our facilities consolidation in the manufacturing area
of the Allentown facility in the beginning of August 2002.

RESTRUCTURING ACTIVITIES

    As a result of a significant decline in market demand since early calendar
year 2001, we have announced a number of restructuring and consolidation actions
to improve gross profit, reduce expenses and streamline operations. These
actions include a worldwide workforce reduction, rationalization of
manufacturing capacity and other activities. We recorded net restructuring and
related charges of $125 million and $216 million for the three and nine months
ended June 30, 2002, respectively, classified within restructuring and
separation -- net. These amounts are comprised of charges of $136 million and
$313 million, offset by reversals of $11 million and $97 million, for the three
and nine months ended June 30, 2002, respectively. We also recorded
restructuring and related charges of $414 million and $426 million in the three
and nine months ended June 30, 2001, respectively.

    During the third quarter of fiscal 2001, we announced a workforce reduction
of 6,000 employees and asset impairment charges to resize the business
consistent with the market

                                       30






environment. The workforce reduction spanned various business functions,
operating units and geographic regions and included management and occupational
employees.

    On December 5, 2001, we announced a workforce reduction of 950 positions,
affecting primarily management positions within our product groups, sales
organizations and corporate support functions located in New Jersey and
Pennsylvania.

    On January 23, 2002, we announced plans to further improve our operating
efficiency by consolidating our facilities including manufacturing, research and
development, business management and administrative facilities in Pennsylvania
and New Jersey. Additionally, we announced we were seeking a buyer for our wafer
fabrication operation in Orlando, Florida, although we currently intend to
operate the facility at least through the end of fiscal 2004 if we are unable to
sell the facility on acceptable terms. This site has approximately 1,100
employees.

    As part of our facilities consolidation, we also announced the move of a
majority of our integrated circuits and optoelectronics operations from our
sites in Reading and Breinigsville, Pennsylvania into our Allentown,
Pennsylvania campus. In addition, the majority of our assembly and test
operations located in these three sites are moving to our assembly and test
facilities in Bangkok, Thailand; Matamoras, Mexico; and Singapore. Subsequently,
we will discontinue operations at the Reading and Breinigsville facilities and
will seek buyers for those properties.

    In addition to the announced plans, we have initiated actions to consolidate
our California operations in Irwindale into our existing Alhambra campus and
expect this to be substantially completed in the third quarter of fiscal year
2003.

THREE AND NINE MONTHS ENDED JUNE 30, 2002

    The following tables set forth our restructuring reserves as of June 30,
2002 and reflect the activity related to the worldwide workforce reductions and
the rationalization of manufacturing capacity and other charges affecting the
reserve for the three and nine months ended June 30, 2002:



                             MARCH 31,                     THREE MONTHS ENDED                      JUNE 30,
                               2002                           JUNE 30, 2002                          2002
                           -------------   ---------------------------------------------------   -------------
                           RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                              RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                              -------         ------         --------       -----     --------      -------
                                                          (DOLLARS IN MILLIONS)
                                                                               
Workforce reduction......      $ 25            $ 88            $ --         $ (79)     $  (9)         $25
Rationalization of
  manufacturing capacity
  and other charges......        51              48             (11)           (7)       (25)          56
                               ----            ----            ----         -----      -----          ---
    Total................      $ 76            $136            $(11)        $ (86)     $ (34)         $81
                               ----            ----            ----         -----      -----          ---
                               ----            ----            ----         -----      -----          ---




                          SEPTEMBER 30,                     NINE MONTHS ENDED                      JUNE 30,
                               2001                           JUNE 30, 2002                          2002
                          --------------   ---------------------------------------------------   -------------
                          RESTRUCTURING    RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                             RESERVE          CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                             -------          ------         --------       -----     --------      -------
                                                         (DOLLARS IN MILLIONS)
                                                                               
Workforce reduction.....       $ 92            $144            $(20)        $(102)     $ (89)         $25
Rationalization of
  manufacturing capacity
  and other charges.....         79             169             (77)          (60)       (55)          56
                               ----            ----            ----         -----      -----          ---
    Total...............       $171            $313            $(97)        $(162)     $(144)         $81
                               ----            ----            ----         -----      -----          ---
                               ----            ----            ----         -----      -----          ---


  Worldwide Workforce Reduction

    During the three and nine months ended June 30, 2002, we recorded
restructuring charges of $88 million and $144 million relating to workforce
reductions of approximately 790 and 1990 employees, respectively. Of the total
workforce reduction charges for the three and nine months

                                       31






ended June 30, 2002, $79 million and $102 million, respectively, represent
non-cash charges for termination benefits to certain U. S. employees, including
occupational employees covered under the terms of a collective bargaining
agreement who voluntarily and irrevocably accepted an enhanced termination
benefit package that we offered. Of these non-cash charges for the nine months
ended June 30, 2002, $15 represents payments that will be paid from Lucent's
pension assets while the remaining balance of $87 represents payments subsequent
to June 1, 2002 that will be paid from our pension assets.

    In the first nine months of fiscal 2002, we recorded a $20 million reversal
of the restructuring reserve associated with workforce reductions, resulting
from severance and benefit cost estimates that exceeded amounts paid during the
second half of calendar year 2001. The original reserve included an estimate of
termination pay and benefits for occupational employees that was based on the
average rate of pay and years of service of the occupational employee pool at
risk. Our collective bargaining agreements allow for a period when employees at
risk can opt for positions filled by employees with less seniority. When that
period ended, a series of personnel moves followed that ultimately resulted in
lower severance and benefit payments than originally expected. This was due
principally to the termination of occupational employees with fewer years of
service and fewer weeks of severance entitlement. These personnel moves were
substantially finished at the end of calendar 2001. There were no reversals
associated with workforce reductions for the three months ended June 30, 2002.

    We completed the workforce reductions announced in fiscal 2001 with
approximately 6,000 employees taken off-roll as of March 31, 2002 and have
separated approximately 700 employees as of June 30, 2002 from initiatives
announced in the current fiscal year. Approximately 145 employees are scheduled
to go off-roll in the fourth quarter of fiscal 2002 and approximately 565
additional employees are expected to be off-roll by September 2003. However, due
to current market conditions we are currently evaluating additional cost
reduction initiatives that may result in increases to the number of employees to
be affected by workforce reductions as well as the timing of those reductions.

  Rationalization of Manufacturing Capacity and Other Charges

    We recorded restructuring and related charges of $48 million and $169
million for the three and nine months ended June 30, 2002, respectively,
relating to the rationalization of under-utilized manufacturing facilities and
other activities. Of the charges recorded for the third quarter of fiscal 2002,
$12 million was for asset impairments, $20 million for facility closings, $2
million for accelerated depreciation and $14 million for other related costs.
The charges recognized for the nine months ended June 30, 2002 included $81
million related to asset impairments, $60 million for facility closings, $9
million for contract terminations, $3 million for accelerated depreciation and
$16 million of other related costs. The accelerated depreciation charges were
recognized due to the shortening of estimated useful lives of certain assets in
connection with the planned closing of certain administrative facilities. The
other related costs are for the implementation and integration of the
initiatives and include costs for the relocation and training of employees and
relocation of equipment.

    The asset impairment charges of $12 million for the third quarter of fiscal
2002 resulted from the abandonment of certain research and development assets
associated with the initiative announced on January 23, 2002 to consolidate
research and development operations located in New Jersey. The asset impairment
charges of $81 million for the nine months ended June 30, 2002 includes $33
million for the impairment of assets under construction that had not been placed
into service associated with the facilities consolidation initiative announced
on January 23, 2002 to move the majority of the our operations in Reading and
Breinigsville, Pa. to our Allentown, Pa. campus. The remaining asset impairment
charges of $36 million for the nine months ended June 30, 2002 related to
property, plant and equipment associated with earlier restructuring initiatives
for the rationalization of underutilized manufacturing facilities and other
activities. All affected assets were classified as held for disposal and
depreciation was suspended. These non-cash impairment charges

                                       32






represent the write-down to fair value, less costs to sell, of property, plant
and equipment that were removed from operations.

    The facility closing charges of $20 million for the third quarter of fiscal
2002 consist of $10 million due to lease termination fees and facility
restoration costs primarily associated with the consolidation of the California
operations and $10 million for facility restoration costs associated with the
consolidation of the Pennsylvania and New Jersey facilities. In addition, the
facility closing charges for the nine months ended June 30, 2002 also include
$40 million consisting principally of a non-cash charge of $35 million for the
realization of the cumulative translation adjustment resulting from our decision
to substantially liquidate our investment in the legal entity associated with
our Madrid, Spain manufacturing operations. The $5 million balance of the
charges for the nine months ended June 30, 2002 related to the facility closings
is primarily for lease terminations, non-cancelable leases and facility
restoration costs.

    We recorded restructuring charge reversals of $11 million and $77 million
for the three and nine months ended June 30, 2002, respectively. The $11 million
reversal during the third quarter of fiscal 2002 resulted from adjustments to
estimates of $7 million for asset impairments and $4 million for facility lease
terminations and facility restoration. The asset impairment adjustments were due
principally to realizing more proceeds than expected from asset dispositions.
The facility lease and restoration reversals resulted from favorable lease
termination negotiations and lower facility restoration costs than previously
reserved. In addition, the restructuring charge reversals for the nine months
ended June 30, 2002 also include adjustments to estimates of $52 million for
asset impairments, of which $35 million is due to receiving more proceeds than
originally anticipated from the sale of assets including $25 million from the
sale of assets associated with our Madrid, Spain facility. This adjustment also
includes $17 million due to the redeployment of assets, of which $5 million was
associated with our Pennsylvania and New Jersey facilities consolidation
initiative. The $14 million balance of the reversals consists of $6 million for
contract terminations, $6 million for a reserve deemed no longer necessary, and
$2 million for lease terminations associated with the Pennsylvania and New
Jersey facilities consolidation initiative.

  Restructuring Reserve Balances as of June 30, 2002

    We anticipate that the majority of the $25 million restructuring reserve as
of June 30, 2002, relating to workforce reductions, will be paid by the end of
the second quarter of fiscal 2003. We also anticipate that the restructuring
reserve balance of $56 million as of June 30, 2002, relating to the
rationalization of manufacturing capacity and other charges, will be paid as
follows: the majority of the contract terminations of $22 million will be paid
by the end of the second quarter of fiscal 2003; facility termination fees and
non-cancelable lease obligations of $13 million, due to consolidation of
facilities, will be paid over the respective lease terms through fiscal 2005;
and the majority of facility restoration costs of $21 million will be paid by
the end of calendar year 2002. These cash outlays will be funded through cash on
hand.

    Excluding the facilities consolidation initiative announced on January 23,
2002 which is discussed in greater detail below, future annualized pre-tax
savings are estimated to be approximately $600 million, of which approximately
$120 million is associated with reduced depreciation and $480 million is cash
savings resulting from lower employee costs and reduced costs associated with
contract and facility lease obligations. The full impact of these savings were
reflected in the third quarter of fiscal 2002 and were approximately $150
million. We estimate that approximately 75% of these savings were reflected in
gross margin with the remaining 25% reflected in operating expenses.

THREE AND NINE MONTHS ENDED JUNE 30, 2001

    The following tables set forth our restructuring reserves as of June 30,
2001 and reflect the activity related to the worldwide workforce reductions and
the rationalization of manufacturing capacity and other charges affecting the
reserve for the three and nine months ended June 30, 2001:

                                       33









                             MARCH 31,                     THREE MONTHS ENDED                      JUNE 30,
                               2001                           JUNE 30, 2001                          2001
                           -------------   ---------------------------------------------------   -------------
                           RESTRUCTURING   RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                              RESERVE         CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                              -------         ------         --------       -----     --------      -------
                                                          (DOLLARS IN MILLIONS)
                                                                               
Workforce reduction......     $--              $ 93           $--           $ (11)      $(18)        $ 64
Rationalization of
  manufacturing capacity
  and other charges......        12             321            --            (255)        (1)          77
                               ----            ----            ----         -----       ----         ----
    Total................      $ 12            $414            $--           $(266)      $(19)        $141
                               ----            ----            ----         -----       ----         ----
                               ----            ----            ----         -----       ----         ----




                          SEPTEMBER 30,                     NINE MONTHS ENDED                      JUNE 30,
                               2000                           JUNE 30, 2001                          2001
                          --------------   ---------------------------------------------------   -------------
                          RESTRUCTURING    RESTRUCTURING   RESTRUCTURING   NON-CASH     CASH     RESTRUCTURING
                             RESERVE          CHARGE         REVERSAL       ITEMS     PAYMENTS      RESERVE
                             -------          ------         --------       -----     --------      -------
                                                         (DOLLARS IN MILLIONS)
                                                                               
Workforce reduction.....     $--               $ 93           $--           $ (11)      $(18)        $ 64
Rationalization of
  manufacturing capacity
  and other charges.....      --                333            --            (255)        (1)          77
                              ----             ----           ----          -----       ----         ----
    Total...............     $--               $426           $--           $(266)      $(19)        $141
                              ----             ----           ----          -----       ----         ----
                              ----             ----           ----          -----       ----         ----


  Worldwide Workforce Reduction

    We recorded restructuring charges of $93 million for the three and nine
months ended June 30, 2001, related to approximately 1,000 employees impacted by
the discontinuance of our chip fabrication operations in Madrid, Spain and
approximately 2,000 employees associated with the third quarter restructuring
initiative in fiscal 2001 that were taken off-roll as of June 30, 2001. Of this
charge, $11 million represented termination benefits to certain US management
employees that were funded through Lucent's pension assets.

  Rationalization of Manufacturing Capacity and Other Charges

    We recorded restructuring charges of $321 million and $333 million for the
three and nine months ended June 30, 2001, respectively, relating to the
rationalization of under-utilized manufacturing facilities and other activities.
As part of these efforts we discontinued operations at our Madrid, Spain chip
fabrication plant and rationalized under-utilized manufacturing capacity at our
facilities in Orlando, Florida, and Allentown, Breinigsville and Reading,
Pennsylvania. In addition, we have been consolidating several
satellite-manufacturing sites as well as leased corporate offices. The
restructuring charges include $26 million for the three and nine months ended
June 30, 2001, related to facility closings, primarily for lease terminations
and non-cancelable lease costs. They also include an asset impairment charge of
$249 million for the three and nine months ended June 30, 2001, related to
property, plant, and equipment associated with the consolidation of
manufacturing and other corporate facilities The remaining charges of $46
million and $58 million for the three and nine months ended June 30, 2001,
respectively, are related primarily to contract terminations.

FACILITIES CONSOLIDATION

    In addition to the charges we recorded as restructuring expenses related to
our January 23, 2002 announcement concerning our facilities consolidation, we
also recorded approximately $56 million and $73 million of charges within gross
margin for the three and nine months ended June 30, 2002, respectively, of which
$22 million and $37 million, respectively, resulted from accelerated
depreciation. This accelerated depreciation charge is due to the shortening of
estimated useful lives of certain assets in connection with the planned
manufacturing facility closings.

                                       34






    At that time of the announcement, we expected to incur total cash
expenditures of approximately $250 million to $350 million associated with the
moving of operations and the consolidating of manufacturing, research and
development, business management and administrative facilities in Pennsylvania
and New Jersey. Also anticipated were additional non-cash impacts associated
with accelerated depreciation and asset impairments related to the property,
plant and equipment located at Breinigsville and Reading, which had a combined
net book value of approximately $400 million as of June 30, 2002. We are
determining which of these assets will be transferred to other locations,
temporarily remain in service until the completion of the facilities
consolidation, or be removed from service and disposed of by sale or
abandonment. We are in the process of evaluating new restructuring initiatives
to reduce our revenue breakeven levels further than anticipated in the
previously announced restructuring initiatives. Although no plans have been
approved, the additional actions could potentially impact staffing levels,
product lines, capital expenditures, and manufacturing facilities. Pending
finalization of these further restructuring initiatives, we suspended
construction related to our facilities consolidation in the manufacturing area
of the Allentown facility in the beginning of August 2002, which may impact the
timing and amount of the cash and non-cash expenses related to the facilities
consolidation.

    Through the consolidation of operations in Pennsylvania and New Jersey, we
are reducing our square footage in the two states by about two million square
feet, or approximately 50 percent, significantly lowering costs. We expect to
realize approximately $100 million annually in cash savings from these actions,
commencing in the first quarter of fiscal 2003, driven primarily by a reduction
in rent and building infrastructure costs.

SEPARATION EXPENSES

    We incurred costs, fees and expenses relating to the separation. These fees
and expenses were primarily related to legal separation matters, designing and
constructing our computer infrastructure, information and data storage systems,
marketing expenses relating to building a company brand identity and
implementing treasury, real estate, pension and records retention management
services. For the three and nine months ended June 30, 2002 we incurred
separation expenses of $2 million and $7 million, respectively, compared to $48
million and $83 million, respectively, in the corresponding prior year period.
As we incurred the majority of the necessary expenses related to our separation
from Lucent in fiscal 2001 we would expect these expenses to be substantially
lower in fiscal 2002.

INVENTORY PROVISION

    We recorded inventory provisions, classified within costs, of $2 million and
$279 million for the three months ended June 30, 2002 and 2001, respectively,
and $68 million and $353 million for the nine months ended June 30, 2002 and
2001, respectively. The inventory provisions were calculated in accordance with
our inventory valuation policy, which is based on a review of forecasted demand
compared with existing inventory levels. Inventory that is determined to be
excessive or obsolete is generally disposed of for little or no recoverable
value. There are generally no alternative uses for such inventory.

    We experienced significant revenue growth over the five years ending
September 30, 2000, and this pattern of growth continued through the first
quarter of fiscal 2001. In the second quarter of fiscal 2001, we noted softness
in customers' demand. However, we did not believe this to be other than
temporary, given the recent history of growth. Our belief that the weakness in
demand was temporary was supported by the observation that customers were
delaying orders to later periods rather than canceling them, and third-party
market projections indicating that there could be a rebound in demand in the
following months. During the third quarter of fiscal 2001, the decline in the
market accelerated. Our customers provided evidence of a longer lasting market
decline, both through canceled orders and through direct communications with us.
Given our forecast of continuing reductions for future demand, the majority of
the fiscal 2001 inventory charge was recorded in the third quarter.

                                       35






IMPAIRMENT OF GOODWILL AND OTHER ACQUIRED INTANGIBLES

    We review our long-lived assets for impairment whenever events or changes in
circumstances occur that indicate the carrying amount of the assets may not be
fully recoverable. Goodwill and other acquired intangibles associated with
acquisitions are evaluated for impairment in the period in which we become aware
of events or occurrences that indicate an impairment may exist. These
assessments were performed as a result of weakening economic conditions and
decreased current and expected future demand for products in the markets in
which we operate. Fair value of the acquired entities was determined using a
discounted cash flow model based on growth rates and margins reflective of lower
demand for our products, as well as anticipated future demand. Discount rates
used were based upon our weighted average cost of capital adjusted for business
risks. These amounts are based on management's best estimate of future results.
As a result of these assessments, we determined that an other than temporary
impairment existed related to certain of our acquisitions. During the three and
nine months ended June 30, 2001, we recorded a charge to reduce goodwill and
other acquired intangibles of $27 million related to Enable Semiconductor, Inc.,
which was acquired in fiscal 1999. During the nine months ended June 30, 2002,
we recorded a charge to reduce goodwill and other acquired intangibles of $176
million, consisting of $113 million and $63 million related to Ortel Corporation
and Herrmann Technology, Inc., respectively, both of which we acquired in fiscal
2000. We recorded no charges to reduce goodwill or other acquired intangibles
during the three months ended June 30, 2002.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

    The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the period reported. The following accounting policies involve a
'critical accounting estimate' because they are particularly dependent on
estimates and assumptions made by management about matters that are highly
uncertain at the time the accounting estimates are made. In addition, while we
have used our best estimates based on facts and circumstances available to us at
the time, different estimates reasonably could have been used in the current
period, or changes in the accounting estimates we used are reasonably likely to
occur from period to period which may have a material impact on the presentation
of our financial condition and results of operations. These estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary.

    Goodwill and other acquired intangibles are reviewed for impairment whenever
events such as a significant industry downturn, product discontinuance, product
disposition, technological obsolescence or other changes in circumstances
indicate that the carrying amount may not be recoverable. When such events
occur, we compare the carrying amount of these assets to their undiscounted
expected future cash flows. If this comparison indicates that there is an
impairment, the amount of the impairment is typically calculated using
discounted expected future cash flows. We believe our estimates of undiscounted
and discounted future cash flows are critical accounting estimates because
future cash flows are dependent upon many factors that are highly uncertain,
including general economic trends, industry trends, and technological
developments. It is reasonably likely that future cash flows associated with
these assets may exceed or fall short of our current estimates, in which case a
different amount for our goodwill and intangible assets and the related
impairment charge would have resulted. If our actual cash flows exceed our
estimates of future cash flows, there would be no change to our previously
recognized impairment charge although it may indicate that the amount of the
impairment was greater than needed for goodwill and other acquired intangible
assets. If our actual cash flows are less than our estimates of future cash
flows, we may need to recognize additional impairment in future periods, which
would be limited to the carrying value of our goodwill and other acquired
intangible assets which was $156 million at June 30, 2002.

                                       36






    Property, plant and equipment are reviewed for impairment whenever events or
circumstances indicate that their carrying amount may not be recoverable. We
have impaired property, plant and equipment in connection with our restructuring
initiatives for the rationalization of underutilized manufacturing facilities
and other activities. These assets are classified as held for disposal and are
written-down to fair value less costs to sell. We believe our estimate of fair
value less costs to sell is a critical accounting estimate because the fair
value or proceeds that we may ultimately receive in connection with the
disposition of these assets is dependent upon many factors that are highly
uncertain, including general economic and industry trends. It is reasonably
likely that proceeds upon ultimate disposition of these assets may differ from
our current estimate, in which case we may under- or over-value our property,
plant and equipment and under- or over-value the related impairment charge.

    A valuation allowance is established, as needed, to reduce net deferred tax
assets to the amount for which recovery is probable. Commencing with the quarter
ended June 30, 2001, we established a full valuation allowance against our U.S.
net deferred tax assets because recent significant losses incurred, combined
with the uncertainty of the timing of the recovery of the semiconductor
industry, cause our long term financial forecast to have enough uncertainty that
we do not meet the standard of 'more likely than not' that is required for
measuring the likelihood of realization of net deferred tax assets. We believe
our estimate of the value of our net deferred tax assets is a critical
accounting estimate because it is dependent upon factors that are highly
uncertain, including our ability to generate future taxable income. Given our
lack of history as an independent company, recent losses, and other factors as
discussed in 'Factors Affecting Our Future Performance', our estimate of the
amount of taxable income we may generate in the future, as well as when we would
generate that income, is highly uncertain and is reasonably likely to vary from
our current estimate. In the event it becomes more likely than not that some or
all of the deferred tax assets will be realized, the valuation allowance will be
adjusted to reduce only the amount of deferred tax assets that are more likely
than not to be realized. Depending on the amount and timing of taxable income we
ultimately generate in the future, as well as other factors, we could recognize
no benefit from our deferred tax assets, in accordance with our current
estimate, or we could recognize the maximum benefit.

    Tax contingencies are recorded to address potential exposures involving tax
positions we have taken that could be challenged by taxing authorities. These
potential exposures result from the varying application of statutes, rules,
regulations and interpretations. We believe our estimate of the value of our tax
contingencies is a critical accounting estimate as it contains assumptions based
on past experiences and judgments about potential actions by taxing
jurisdictions. It is reasonably likely that the ultimate resolution of these
matters may be greater or less than the amount that we have currently accrued.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2001

    The following table shows the change in revenue, both in dollars and in
percentage terms by segment:



                                                     THREE
                                                 MONTHS ENDED
                                                   JUNE 30,                 CHANGE
                                             ---------------------   ---------------------
                                               2002        2001          $           %
                                               ----        ----          -           -
                                                         (DOLLARS IN MILLIONS)
                                                                     
Operating Segment:
    Infrastructure Systems.................    $230        $592        $(362)      (61)%
    Client Systems.........................     330         335           (5)       (1)
                                               ----        ----        -----
        Total..............................    $560        $927        $(367)      (40)%
                                               ----        ----        -----
                                               ----        ----        -----


    Revenue. Revenue decreased 40% or $367 million, for the three months ended
June 30, 2002, as compared to the same period in 2001, due primarily to volume
decreases. The decrease of $362

                                       37






million within the Infrastructure segment was due to depressed market conditions
and reduced expenditures by communication service providers, which drove volume
decreases across the entire segment. These volume decreases were especially
severe in optoelectronic products as revenues decreased 77% or $213 million,
from $277 million in the prior year quarter to $64 million in the current
quarter. The decrease of $5 million within the Client segment was driven
primarily by price erosion across the entire segment, particularly in the
wireless local area networking market, and volume decreases across the majority
of the segment, except for the personal computer market which experienced volume
growth primarily in hard-disk drive applications.

    Costs and Gross Margin. Costs decreased 48% or $465 million, from $962
million for the three months ended June 30, 2001 to $497 million for the three
months ended June 30, 2002. Gross margin increased from (3.8)% in the prior year
quarter to 11.3% in the current quarter, an increase of 15.1 percentage points.
Gross margin for the Infrastructure segment increased slightly to (13.5)% in the
current quarter from (14.0)% in the prior year quarter. This increase was due to
$272 million of inventory provisions that were recorded in the prior year
quarter compared with no provisions recorded in the current quarter. Excluding
the effects of the inventory provision, the Infrastructure segment gross margin
was significantly lower in the current quarter primarily due to excess
manufacturing capacity and, to a much lesser extent, due to $57 million of
facility consolidation and other restructuring related costs included in costs
in the current quarter. The effects of the excess manufacturing capacity were
lessened by the actions taken under our restructuring and cost saving
initiatives. Gross margin for the Client segment increased to 28.5% in the
current quarter from 14.3% in the prior year quarter primarily due to improved
manufacturing capacity utilization and better expense management related to the
actions taken under our restructuring and cost saving initiatives.

    Selling, General and Administrative. Selling, general and administrative
expenses decreased 50% or $72 million, from $145 million in the three months
ended June 30, 2001 to $73 million in the three months ended June 30, 2002. The
decrease was primarily due to savings realized from our restructuring and cost
saving initiatives.

    Research and Development. Research and development expenses decreased 24% or
$53 million, from $217 million in the prior year quarter to $164 million in the
current quarter. The decrease was primarily due to savings realized from our
restructuring and cost saving initiatives.

    Amortization of Goodwill and Other Acquired Intangibles. Amortization
expense decreased 91% or $102 million from $112 million for the three months
ended June 30, 2001 to $10 million for the three months ended June 30, 2002. The
decrease is due to the impairment of goodwill and other acquired intangibles of
$2,762 million that was recognized in the second half of fiscal 2001 and $176
million that was recognized in the second quarter of fiscal 2002. These
impairments significantly reduced our goodwill and other acquired intangibles
and therefore, our current period amortization.

    Restructuring and Separation -- Net. Net restructuring and separation
expenses decreased 73% or $335 million to $127 million for the three months
ended June 30, 2002 from $462 million for the three months ended June 30, 2001.
Net restructuring and related expenses decreased 70% or $289 million to $125
million for the three months ended June 30, 2002 from $414 million for the three
months ended June 30, 2001. Separation expenses decreased 96% or $46 million to
$2 million in the current quarter from $48 million in the prior year quarter, as
the separation was mostly completed in fiscal 2001.

    Impairment of Goodwill and Other Acquired Intangibles. During the three
months ended June 30, 2001, we determined that an other than temporary
impairment of goodwill and other acquired intangibles existed and recorded a
charge of $27 million to reduce goodwill and other acquired intangibles related
to our acquisition of Enable. No impairment charge was recorded during the three
months ended June 30, 2002.

    Operating Loss. We reported an operating loss of $311 million for the three
months ended June 30, 2002, an improvement of $687 million from an operating
loss of $998 million reported for the three months ended June 30, 2001. This
improvement reflects primarily an increase in gross

                                       38






profit, lower net restructuring and separation charges, expense reductions and
lower amortization of goodwill and other acquired intangibles. Although
performance measurement and resource allocation for the reportable segments are
based on many factors, the primary financial measure used is operating income
(loss) by segment, exclusive of amortization of goodwill and other acquired
intangibles, the impairment of goodwill and other acquired intangibles, and net
restructuring and separation expenses, which is shown in the following table.



                                                     THREE
                                                 MONTHS ENDED
                                                   JUNE 30,                 CHANGE
                                             ---------------------   ---------------------
                                               2002        2001          $           %
                                               ----        ----          -           -
                                                         (DOLLARS IN MILLIONS)
                                                                     
Operating Segment:
    Infrastructure Systems.................    $(174)      $(337)      $163          48%
    Client Systems.........................    --            (60)        60         100
                                               -----       -----       ----
        Total..............................    $(174)      $(397)      $223          56%
                                               -----       -----       ----
                                               -----       -----       ----


    Other Income (Expense) -- Net. Other income (expense) -- net was $5 million
of expense for the three months ended June 30, 2001 compared to income of $18
million for the same period in 2002. The change is primarily due to a $25
million decrease in impairments of non-consolidated investments, a $16 million
increase in income from our equity investment in Silicon Manufacturing Partners
Pte, Ltd and the absence of foreign currency transaction losses in the current
period, which amounted to $4 million in the prior year quarter, partially offset
by a $32 million decrease in interest income as a result of lower cash balances.

    Interest Expense. Interest expense decreased $39 million to $23 million for
the three months ended June 30, 2002 from $62 million in prior year period. This
decrease is due to the repayments of amounts outstanding under our credit
facility throughout fiscal 2002.

    Provision for Income Taxes. For the third quarter of fiscal 2002, we
recorded a provision for income taxes of $16 million on a pre-tax loss of $316
million, yielding an effective tax rate of (4.8)%. This rate is higher than the
U.S. statutory rate primarily due to the recording of a full valuation allowance
of approximately $117 million against U.S. net deferred tax assets. For the
third quarter of fiscal 2001, we recorded a provision for income taxes of $45
million on a pre-tax loss of $1,065 million, yielding an effective tax rate of
(4.2)%. This rate is higher than the U.S. statutory rate primarily due to the
impact of recording a full valuation allowance of approximately $364 million
against U.S. net deferred tax assets and non-tax deductible goodwill
amortization.

NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2001

    The following table shows the change in revenue, both in dollars and in
percentage terms by segment:



                                                     NINE
                                                 MONTHS ENDED
                                                   JUNE 30,                 CHANGE
                                             ---------------------   ---------------------
                                               2002        2001          $           %
                                               ----        ----          -           -
                                                         (DOLLARS IN MILLIONS)
                                                                     
Operating Segment:
    Infrastructure Systems.................   $  719      $2,376      $(1,657)     (70)%
    Client Systems.........................      929       1,104         (175)     (16)
                                              ------      ------      -------
        Total..............................   $1,648      $3,480      $(1,832)     (53)%
                                              ------      ------      -------
                                              ------      ------      -------


    Revenue. Revenue decreased 53% or $1,832 million, for the nine months ended
June 30, 2002 as compared to the same period in 2001, due primarily to volume
decreases. The decrease of $1,657 million within the Infrastructure segment was
due to depressed market conditions and reduced expenditures by communication
service providers, which drove volume decreases across the entire segment. These
volume decreases were especially severe in optoelectronic products as revenues
decreased 79% or $858 million from $1,080 million in the prior year period to
$222

                                       39






million in the current period. The decrease of $175 million within the Client
segment was driven by price erosion across the entire segment, particularly in
the wireless local area networking market, and volume decreases across the
majority of the segment, except for the personal computer market which
experienced volume growth primarily in hard-disk drive applications.

    Costs and Gross Margin. Costs decreased 39% or $978 million, from $2,494
million for the nine months ended June 30, 2001 to $1,516 million for the nine
months ended June 30, 2002. Gross margin decreased from 28.3% for the nine
months ended June 30, 2001 to 8.0% for the nine months ended June 30, 2002, a
decrease of 20.3 percentage points. Gross margin for the Infrastructure segment
decreased to (10.8)% in the current period from 30.2% in the prior year period.
The decrease was principally due to excess manufacturing capacity as a result of
the decline in sales volume, which was partially offset by lower inventory
provisions of $261 million. Gross margin for the Client segment declined to
22.6% in the current period from 24.4% in the prior year period. This decline
was primarily due to lower manufacturing capacity utilization as a result of the
decline in sales volume. The magnitude of the excess manufacturing capacity in
each segment was lessened by the actions taken under our restructuring and cost
saving initiatives.

    Selling, General and Administrative. Selling, general and administrative
expenses decreased 43% or $209 million, from $481 million in the nine months
ended June 30, 2001, to $272 million in the same period in 2002. The decrease
was primarily due to savings realized from our restructuring and cost saving
initiatives.

    Research and Development. Research and development expenses decreased 28% or
$213 million, from $754 million in the nine months ended June 30, 2001 to $541
million in the same period in 2002. The decrease was primarily due to savings
realized from our restructuring and cost saving initiatives.

    Amortization of Goodwill and Other Acquired Intangibles. Amortization
expense decreased 86% or $288 million from $335 million for the nine months
ended June 30, 2001 to $47 million for the nine months ended June 30, 2002. The
decrease is due to the impairment of goodwill and other acquired intangibles of
$2,762 million that was recognized in the second half of fiscal 2001 and $176
million that was recognized in the second quarter of fiscal 2002. These
impairments significantly reduced our goodwill and other acquired intangibles
and therefore, our current period amortization.

    Restructuring and Separation -- Net. Net restructuring and separation
expenses decreased 56% or $286 million to $223 million for the nine months ended
June 30, 2002 from $509 million for the nine months ended June 30, 2001. Net
restructuring and related expenses decreased 49% or $210 million to $216 million
for the nine months ended June 30, 2002 from $426 million for the nine months
ended June 30, 2001. Separation expenses decreased 92% or $76 million to $7
million in the current period from $83 million in the prior year period, as the
separation was mostly completed in fiscal 2001.

    Impairment of Goodwill and Other Acquired Intangibles. During the nine
months ended June 30, 2002, we determined that an other than temporary
impairment of goodwill and other acquired intangibles existed and recorded a
charge of $176 million to reduce goodwill and other acquired intangibles,
consisting of $113 million and $63 million related to the acquisitions of Ortel
and Herrmann, respectively. During the nine months ended June 30, 2001, we
determined that an other than temporary impairment of goodwill and other
acquired intangibles existed and recorded a charge of $27 million to reduce
goodwill and other acquired intangibles related to our acquisition of Enable.

    Operating Loss. We reported an operating loss of $1,127 million for the nine
months ended June 30, 2002 compared to an operating loss of $1,120 million
reported for the nine months ended June 30, 2001. This slightly wider loss was
caused by a decrease in gross profit and an increase in impairment of goodwill
and other acquired intangibles, which were partially offset by lower net
restructuring and separation charges, expense reductions and lower amortization
of goodwill and other acquired intangibles. Although performance measurement and
resource allocation for the reportable segments are based on many factors, the
primary financial measure used is operating

                                       40






income (loss) by segment, exclusive of amortization of goodwill and other
acquired intangibles, the impairment of goodwill and other acquired intangibles,
and net restructuring and separation expenses, which is shown in the following
table.



                                                      NINE
                                                  MONTHS ENDED
                                                    JUNE 30,                CHANGE
                                              --------------------   ---------------------
                                                2002        2001         $           %
                                                ----        ----         -           -
                                                         (DOLLARS IN MILLIONS)
                                                                     
Operating Segment:
    Infrastructure Systems..................    $(563)     $(124)      $(439)       N/M
    Client Systems..........................     (118)      (125)          7         6%
                                                -----      -----       -----
        Total...............................    $(681)     $(249)      $(432)       N/M
                                                -----      -----       -----
                                                -----      -----       -----


---------

N/M = Not meaningful

    Other Income (Expense) -- Net. Other income (expense) -- net increased $321
million, from $32 million of income for the nine months ended June 30, 2001 to
$353 million of income for the same period in 2002. The increase was primarily
due to the $243 million gain recognized on the sale of our FPGA business to
Lattice Semiconductor, gains of $41 million from sales of investments in the
current period and a $25 million decrease in losses related to the impairment of
non-consolidated investments.

    Interest Expense. Interest expense remained flat at $96 million for both the
nine months ended June 30, 2002 and 2001. During the nine months ended June 30,
2002, our interest expense is principally related to the credit facility, which
we have significantly reduced during the current period. During the nine months
ended June 30, 2001, our interest expense primarily reflects four months of
allocations from Lucent and one quarter of interest on the $2,500 million credit
facility we assumed from Lucent on April 2, 2001.

    Provision for Income Taxes. For the first nine months of fiscal 2002, we
recorded a provision for income taxes of $56 million on a pre-tax loss of $870
million, yielding an effective tax rate of (6.4)%. This rate is higher than the
U.S. statutory rate primarily due to the recording of a full valuation allowance
of approximately $313 million against U.S. net deferred tax assets. For the
first nine months of fiscal 2001, we recorded a provision for income taxes of
$74 million on a pre-tax loss of $1,184 million, yielding an effective tax rate
of (6.3)%. This rate is higher than the U.S. statutory rate primarily due to the
impact of recording a full valuation allowance of approximately $364 million for
U.S. net deferred tax assets, non-tax deductible goodwill amortization and
separation costs.

LIQUIDITY AND CAPITAL RESOURCES

    As of June 30, 2002, our cash in excess of short-term debt was $767 million,
which reflects $1,167 million in cash and cash equivalents less $222 million of
short-term debt under our credit facility, $163 million of borrowings under our
accounts receivable securitization facility and $15 million from the current
portion of our capitalized lease obligations.

    Net cash used in operating activities was $521 million for the nine months
ended June 30, 2002, compared with $301 million of net cash provided by
operating activities for the nine months ended June 30, 2001. Although cash used
for costs and operating expenses decreased compared to the same period last
year, an industry downturn led to a much greater drop in sales resulting in a
decrease of cash inflows. This caused the $822 million deterioration in cash
from operations.

    Net cash provided by investing activities was $279 million for the nine
months ended June 30, 2002 compared with cash used in investing activities of
$635 million for the nine months ended June 30, 2001. The increase in cash flow
from investing activities is primarily due to proceeds of $250 million from the
sale of the FPGA business, proceeds of $124 million from the sale of property,
plant and equipment, proceeds of $55 million from the sale of investments and a
reduced level of capital expenditures in the current period. Capital
expenditures decreased $482 million to

                                       41






$150 million for the nine months ended June 30, 2002, from $632 million for the
nine months ended June 30, 2001. We are seeking to limit our capital
expenditures principally to projects critical to winning new business, keeping
customer commitments and the completion of a new office facility adjacent to our
existing Allentown facility.

    Net cash used in financing activities was $1,744 million for the nine months
ended June 30, 2002, compared with cash provided by financing activities of
$3,596 million for the nine months ended June 30, 2001. The current period
reflects the repayment of $2,278 million under our credit facility, offset in
part by net proceeds of $396 million from the issuance of convertible notes and
$163 million in borrowings under our accounts receivable securitization
facility. The prior year period includes $3,434 million of proceeds from the
sale of common stock in our initial public offering.

    The $2,500 million credit facility that we assumed from Lucent at the time
of our initial public offering was a 364-day facility that was to mature on
February 21, 2002. On October 4, 2001, this credit facility was amended. In
connection with the amendment, we repaid $1,000 million, thereby reducing the
facility to $1,500 million. We also paid $21 million in fees in connection with
the amendment, which we are amortizing over the life of the facility. The
facility is secured by our principal domestic assets other than the proceeds of
our initial public offering and the receivables securing our accounts receivable
securitization facility, which is described below. The maturity date of the
facility was extended from February 22, 2002 to September 30, 2002. In addition,
if we raise at least $500 million in equity or debt capital markets transactions
before September 30, 2002, the maturity date of the facility will be extended to
September 30, 2004, with the facility required to be reduced $500 million on
September 30, 2003. As of June 30, 2002, we have raised $410 million of the $500
million through the sale of convertible subordinated notes, as discussed below.
The credit facility debt is not convertible into any other securities of the
Company.

    The interest rate applicable to borrowings under the facility is based on a
scale indexed to our credit rating. Our credit ratings have declined from BBB -
from Standard & Poor's and Baa3 from Moody's at the time of our initial public
offering to BB - with a negative outlook from Standard & Poor's and Ba3 with a
negative outlook from Moody's as of June 30, 2002. Based on these ratings, the
interest rate for borrowings under the facility is the applicable LIBOR rate
plus 400 basis points. Unless our credit ratings change, this rate will remain
in effect for the life of the facility. Any further decline in our credit rating
would increase the annual interest rate under the facility by 25 basis points,
which would increase our annual interest expense by approximately $0.6 million,
assuming $222 million was outstanding. As of June 30, 2002, the outstanding
balance of $222 million is a term loan. We also have access to an additional
$500 million under an undrawn revolving credit facility that is part of the
credit facility, which if not extended will expire on September 30, 2002. Based
on our current credit ratings, there is an annual charge of 75 basis points on
the undrawn portion of the revolving credit facility. The only periodic debt
service obligation under the amended credit facility is to make quarterly
interest payments.

    Under the agreement, we must use 100% (50% if the size of the facility is
$500 million or less) of the net cash proceeds of liquidity raising transactions
to reduce the size of the facility. Liquidity raising transactions are
dispositions of assets (other than sales of inventory and disposals of excess or
obsolete property in the ordinary course of business) including, among other
things, receivables securitizations and sale-leaseback transactions, in each
case outside the ordinary course of business. The agreement also provides that
50% of the net cash proceeds of the first $500 million and 75% (50% if the size
of the facility is $500 million or less) of the net cash proceeds greater than
$500 million from most sales of debt or equity securities in public or private
transactions be applied to reduce the credit facility. Notwithstanding the
foregoing, we must apply 100% of net cash proceeds over $1,000 million from the
issuance of debt securities that are secured equally with the credit facility to
reduce the size of the credit facility.

    On January 18, 2002, we completed the sale of certain assets and liabilities
related to our FPGA business to Lattice Semiconductor Corporation for $250
million in cash. The net cash proceeds from the sale were used to repay amounts
outstanding under our credit facility. We

                                       42






believe that the sale of the FPGA business will not have a material impact on
our future results of operations.

    On January 24, 2002, Agere Systems Inc. and certain of its subsidiaries
entered into a securitization transaction relating to certain accounts
receivable. As part of the transaction, Agere Systems Inc. and certain of its
subsidiaries irrevocably transfer accounts receivable on a daily basis to a
wholly-owned, fully consolidated subsidiary. The subsidiary has entered into a
loan agreement with certain financial institutions, pursuant to which the
financial institutions agreed to make loans to the subsidiary secured by the
accounts receivable. The financial institutions have commitments under the loan
agreement of up to $200 million; however, the amount that we can actually borrow
at any time depends on the amount and nature of the accounts receivable that we
have transferred to the subsidiary. The loan agreement expires on January 21,
2003. As of June 30, 2002, $163 million was outstanding under this agreement.
This amount of proceeds from borrowings under the agreement was used to repay
amounts outstanding under our credit facility.

    On June 19, 2002, we issued $410 million of 6.5% Convertible Subordinated
Notes due December 15, 2009. We received net proceeds of $396 million in
connection with this offering. Of the net proceeds, $198 million was used to pay
outstanding amounts under the credit facility. The remainder of the net proceeds
were used for general corporate purposes. Interest on the Notes will accrue at
the rate of 6.5% per annum and will be payable semi-annually on June 15 and
December 15 of each year, beginning on December 15, 2002. The Notes can be
converted into shares of Class A common stock at an initial price of $3.3075 per
share, subject to adjustment in certain events, at any time prior to maturity,
unless previously redeemed or repurchased by us. We may redeem the Notes in
whole or in part at any time on or after June 20, 2007. In addition, upon a
fundamental change in the Company, we may be required to repurchase the Notes at
a price equal to 100% of the principal amount of the Notes plus any accrued and
unpaid interest to date.

    During the nine months ended June 30, 2002, we reduced the amount
outstanding under our facility by $1,278 million to $222 million at June 30,
2002. The amounts used to make these repayments come from the following
transactions: $509 million from existing cash on hand, $198 million from our
convertible subordinated notes offering, $250 million from the sale of our FPGA
business, $163 million from our accounts receivable securitization, $67 million
from the sale of our manufacturing facility and related equipment located in
Spain, $55 million from the sale of investments, and $36 million from
sale-leaseback and various other transactions.

    On August 5, 2002, we sold certain assets and liabilities of our 802.11
wireless local area network equipment business, including our ORiNOCO'r' product
family, to Proxim Corporation for $65 million in cash. The net cash proceeds of
$65 million were subsequently used to repay amounts outstanding under our credit
facility.

    In addition, on June 24, 2002, we entered into an agreement to sell our
analog line card business to Legerity, Inc. for $70 million in cash. We expect
this transaction to close in the fourth quarter of fiscal 2002, subject to
customary closing conditions, and will use the net cash proceeds to repay
amounts outstanding under our credit facility.

    The credit facility contains financial covenants that require us to:
(i) maintain a minimum level of liquidity, (ii) achieve a minimum level of
earnings before interest, taxes, depreciation and amortization computed in
accordance with the agreement each quarter, (iii) maintain a minimum level of
net worth, computed in accordance with the agreement and (iv) limit capital
expenditures. Other covenants restrict our ability to pay cash dividends, incur
indebtedness and invest cash in our subsidiaries and other businesses. The
accounts receivable securitization has the same four financial covenants and
covenant levels as the credit facility; however, a violation of these covenants
will not accelerate payment or require an immediate cash outlay to cover amounts
previously loaned under the accounts receivable securitization, but will end our
ability to obtain further loans under the agreement.

    As a result of a significant decline in market demand for telecommunications
infrastructure products, we have been experiencing losses and have been using
cash in our operations for several

                                       43






quarters. In response to market conditions, we have announced a number of
restructuring and consolidation actions to reduce our losses.

    On January 23, 2002, we announced plans to consolidate manufacturing,
research and development, business management and administrative facilities in
Pennsylvania and New Jersey. We also planned to discontinue operations and seek
buyers for our Reading and Breinigsville facilities. At the time of the
announcement, the consolidation was expected to be substantially complete within
eighteen months. We also anticipated the cash required for this consolidation to
be between $250 million and $350 million. However, in the beginning of August
2002, we suspended construction related to our facilities consolidation in the
manufacturing area of our Allentown facility while we are considering new
actions that may impact the timing and amount of the cash requirements related
to the facilities consolidation. We are also in the process of evaluating new
restructuring initiatives that may require the use of cash, although no plans
have been approved.

    Our primary source of liquidity is our cash and cash equivalents. We believe
our cash and cash equivalents are sufficient to meet cash requirements for at
least the next 12 months, including repayment of borrowings under the credit
facility if its maturity is not extended, the cash requirements of the
facilities consolidation and the other announced restructuring activities, and
the increased working capital requirement to the extent the accounts receivable
securitization is not extended past its current expiration date in January 2003.
In addition, we continue to seek other sources of financing to provide
additional cash for use in the event that market conditions are worse than those
contemplated in our plans. An extension of the credit facility, an extension of
the accounts receivable securitization, any funds that we may receive as a
result of the disposal of assets related to our facilities consolidation or any
other financing transactions would further improve our liquidity. The liquidity
discussion above does not contemplate the cash requirements for new
restructuring initiatives that we are considering and we do not believe these
actions will have an impact on our ability to meet our cash requirements for the
next 12 months.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

    Our material contractual obligations and commitments include the Convertible
Subordinated Notes, the credit facility and the accounts receivable
securitization described above and leases, as well as the following commitments.

    In December 1997, we entered into a joint venture, called Silicon
Manufacturing Partners Pte Ltd, or SMP, with Chartered Semiconductor, a leading
manufacturing foundry for integrated circuits, to operate a 54,000 square foot
integrated circuit manufacturing facility in Singapore. We own a 51% equity
interest in this joint venture, and Chartered Semiconductor owns the remaining
49% equity interest. We have an agreement with SMP under which we have agreed to
purchase 51% of the production output from this facility and Chartered
Semiconductor has agreed to purchase the remaining 49% of the production output.
If we fail to purchase the required commitments, we will be required to pay SMP
for the fixed costs associated with the unpurchased wafers. Chartered
Semiconductor is similarly obligated with respect to the wafers allotted to it.
The agreement also provides that Chartered Semiconductor will have the right to
first refusal to purchase integrated circuits produced in excess of our
requirements. The agreement may be terminated by either party upon two years'
written notice, but may not be terminated prior to February 2008. The agreement
may also be terminated for material breach, bankruptcy or insolvency. Based on
forecasted demand, we believe it is unlikely that we would have to pay any
significant amounts for underutilization in the near future. However, if our
purchases under this agreement are less than anticipated, our cash obligation to
SMP may be significant.

    In July 2000, we and Chartered Semiconductor entered into an agreement
committing both parties to jointly develop manufacturing technologies for future
generations of integrated circuits targeted at high-growth communications
markets. We originally agreed to invest up to $350 million over a five-year
period. In June 2002, both parties amended the agreement to provide that
Chartered Semiconductor will conduct all future development work. If requested
by Chartered Semiconductor, we will provide consulting services on technical
issues on mutually agreeable terms.

                                       44






We have no further funding obligation under the agreement and do not believe any
future commitments under the amended agreement will have a material impact on
our financial position, results of operations or cash flows.

    We have also entered into an agreement with Chartered Semiconductor whereby
Chartered Semiconductor will provide integrated circuit wafer manufacturing
services to us. Under the agreement, we provide a demand forecast to Chartered
Semiconductor for future periods and Chartered Semiconductor commits to have
manufacturing capacity available for our use. If we use less than a certain
percent of the forecasted manufacturing capacity, we may be obligated to pay
penalties to Chartered Semiconductor. We are currently in discussions with
Chartered Semiconductor concerning shortfalls in purchase commitments.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

    In connection with the acquisitions of Agere, Inc., Herrmann and Ortel, a
portion of each purchase price was allocated to purchased in-process research
and development. In analyzing these acquisitions, we made decisions to buy
technology that had not yet been commercialized rather than develop the
technology internally. We relied on factors such as the amount of time it would
take to bring the technology to market in making these decisions. We also
considered Lucent's Bell Laboratories' resource allocation and its progress on
comparable technology, if any. Our management expects to use a similar decision
process in the future.

    We estimated the fair value of in-process research and development for the
above acquisitions using an income approach. This involved estimating the fair
value of the in-process research and development using the present value of the
estimated after-tax cash flows expected to be generated by the purchased
in-process research and development, using risk-adjusted discount rates and
revenue forecasts as appropriate. The selection of the discount rate was based
on consideration of Lucent's weighted average cost of capital, as well as other
factors known at the time, including the projected useful life of each
technology, profitability levels of each technology, the uncertainty of
technology advances and the stage of completion of each technology. We believe
that the estimated in-process research and development amounts so determined
represented fair value and did not exceed the amount a third party would have
paid for the projects.

    Core technology is a product, service or process that exists at the date of
the acquisition and may contribute to the value of any product resulting from
in-process research and development. We deducted an amount representing the
estimated value of any core technology's contribution from the estimated cash
flows used to value in-process research and development. At the date of
acquisition, the in-process research and development projects had not yet
reached technological feasibility and had no alternative future uses.
Accordingly, the value allocated to these projects was capitalized and
immediately expensed at acquisition. If the projects are not successful or
completed in a timely manner, management's product pricing and growth rates may
not be achieved and we may not realize the financial benefits expected from the
projects.

    Set forth below are descriptions of the major acquired in-process research
and development projects and our original assumptions in connection with these
acquisitions, followed by a current status of the projects. Due to significant
changes in economic, industry and market conditions, particularly beginning in
the latter half of fiscal 2001, the original assumptions at the time of
acquisition for these acquisitions, vary materially from our current estimates
as noted below.

AGERE, INC.

    On April 20, 2000, we completed the acquisition of Agere, Inc., which was a
developer and supplier of integrated circuits solutions used in network
processors, which control how data is sent over networks. At the acquisition
date, Agere, Inc. was conducting development and qualification activities
related to the development of a programmable network processor for various
protocols for 2.5 gigabits per second transmission speeds. A protocol is a set
of procedures for the formatting and timing of data transmission between two
pieces of equipment. A gigabit is a unit of measurement of data and is equal to
roughly one billion bits. The allocation to purchased

                                       45






in-process research and development of $94 million represented its estimated
fair value using the methodology described above.

    Agere, Inc.'s in-process research and development projects were
approximately 65% complete at the time of acquisition. The projects were
expected to be completed in November 2000 after approximately two years of
research and development effort. Following completion, the projects were
expected to begin generating economic benefits. Revenue attributable to the
resulting products was estimated to be $21 million in fiscal 2001 and $65
million in fiscal 2002. Revenue was expected to peak in fiscal 2007 and decline
thereafter through the end of the product's life, which was expected to be in
fiscal 2009, as new product technologies were expected to be introduced by us.
Revenue growth was expected to decrease from 205% in fiscal 2002 to 5% in fiscal
2007 and be negative for the remainder of the projection period. At the
acquisition date, costs to complete Agere's in-process research and development
efforts were expected to total approximately $3.4 million. Projected future net
cash flows attributable to Agere's in-process research and development, assuming
successful development, were discounted to net present value using a discount
rate of 30%.

    Agere, Inc.'s in-process research and development projects related to first
generation network processors were completed in the fourth quarter of fiscal
2000. The second generation processors were completed in the first quarter of
fiscal 2001. Actual costs related to completing these projects were $13 million.
Actual revenues for fiscal 2001 were $4 million, consisting primarily of sales
of development systems and models, which are used by customers for system
evaluations and qualifications. Changing conditions in the targeted market areas
for these network processors have led to a revised revenue forecast for these
parts, which is lower than originally anticipated. Fiscal 2002 revenues are
currently projected to be about $6.5 million, with long-term annual growth of
8%.

ORTEL CORPORATION

    On April 27, 2000, we completed the acquisition of Ortel, which was a
developer and manufacturer of semiconductor-based optoelectronic components used
in fiber optic systems for data communications and cable television networks. At
the acquisition date, Ortel was conducting development, engineering and testing
activities associated with high-speed optical transmitters, receivers and
transceivers. Ortel's in-process research and development projects ranged from
50% to 75% complete at the time of acquisition.

    Ortel's in-process research and development projects were expected to be
completed during the period from June 2000 to April 2001 after approximately two
to three and a half years of research and development effort. Following
completion, the projects were expected to begin generating economic benefits.
The allocation to purchased in-process research and development of $307 million
represented its estimated fair value using the methodology described above. The
$307 million was allocated to the following projects, which are explained below.

     10G New Products -- $61 million;

     10G OC-192 Receiver/Daytona Products -- $105 million;

     980 Products -- $95 million;

     1550 Products -- $27 million; and

     CATV Products -- $19 million.

    Projected net cash flows attributable to Ortel's in-process research and
development, assuming successful development, were discounted to net present
value using a discount rate of 25%. Revenue attributable to the 10G New Products
was estimated to be $5 million in fiscal 2001 and $30 million in fiscal 2002.
10G New Products are receivers that incorporate new packaging technologies for
high-speed transport and metropolitan network applications at speeds of 10
gigabits per second. Revenue was expected to peak in fiscal 2009 and decline
thereafter through the end of the products' life as new product technologies
were expected to be introduced by us. Revenue growth was expected to decrease
from 447% in fiscal 2002 to 8% in fiscal 2009, and be

                                       46






negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the products
were expected to be $3 million.

    Most of the 10G New Products were completed in fiscal 2001 as anticipated at
a cost of $2 million. One product remains in development and is expected to be
completed in the fourth quarter of fiscal 2002 at an estimated cost of $1
million. There were no revenues attributable to the 10G New Products in fiscal
2001. Management has revised its estimated revenue for fiscal 2002 to be less
than $1 million with a long-term growth rate of 10%.

    Revenue attributable to the 10G OC-192 Receiver/Daytona Products was
estimated to be $16 million in fiscal 2001 and $33 million in fiscal 2002. 10G
OC-192 Receiver/Daytona Products are directly modulated lasers and receivers
used for high-speed transport and metropolitan network applications at speeds of
10 gigabits per second. Revenue was expected to peak in fiscal 2009 and decline
thereafter through the end of the products' life as new product technologies
were expected to be introduced by us. Revenue growth was expected to decrease
from 166% in fiscal 2003 to 8% in fiscal 2009, and be negative for the remainder
of the projection period. At the acquisition date, costs to complete the
research and development efforts related to the product were expected to be $1
million.

    The 10G OC-192 Receiver/Daytona Products were completed in fiscal 2001.
Actual revenues in fiscal 2001 were $40 million and are currently projected to
decrease to $6 million for fiscal 2002 with little to no growth thereafter.
Actual project costs were materially consistent with management's original
estimates.

    Revenue attributable to the 980 Products was estimated to be $44 million in
fiscal 2001 and $108 million in fiscal 2002. 980 Products are pump lasers
operating at 980 nanometers wavelength. A nanometer is a unit of measurement of
distance and equals one billionth of a meter. Revenue was expected to peak in
fiscal 2008 and decline thereafter through the end of the products' life as new
product technologies were expected to be introduced by us. Revenue growth was
expected to decrease from 143% in fiscal 2002 to 17% in fiscal 2008, and be
negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the 980
Products were expected to be $1 million.

    The 980 Products were in development and therefore did not yield any
revenues in fiscal 2001. Currently, all design efforts on the 980 products have
been discontinued and there are no expected revenues in fiscal 2002 or any
future period.

    Revenue attributable to the 1550 Products was estimated to be $2 million in
fiscal 2001 and $63 million in fiscal 2002. 1550 Products are transmitters and
lasers operating at 1550 nanometers wavelength. Revenue was expected to peak in
fiscal 2008 and decline thereafter through the end of the products' life as new
product technologies were expected to be introduced by us. Revenue growth was
expected to decrease from 33% in fiscal 2003 to 17% in fiscal 2008, and be
negative for the remainder of the projection period. At the acquisition date,
costs to complete the research and development efforts related to the 1550
Products were expected to be $2 million.

    The 1550 Products had four distinct product lines. Of these product lines,
one has been completed, one has been cancelled and two are still in-process. It
is anticipated that the in-process research and development for the uncompleted
projects will be finalized in the fourth quarter of fiscal 2002. Product
development costs for the 1550 products since acquisition have been $1.5 million
and it is anticipated that an additional $0.5 million will be incurred to
complete the products. There were no revenues attributable to these products in
fiscal 2001. We have lowered our estimate of revenues to be $2 million in fiscal
2002 with negative growth thereafter.

    Revenue attributable to the CATV Products was estimated to be $28 million in
fiscal 2001 and $58 million in fiscal 2002. CATV Products are receivers and
return path products for cable television network applications. The return path
allows cable system operators to offer Internet and telephone services, in
direct competition with network services providers. Revenue was expected to peak
in fiscal 2004 and decline thereafter through the end of the products' life as
new product technologies were expected to be introduced by us. Revenue growth
was expected to decrease from 107% in fiscal 2002 to 4% in fiscal 2004 and be
negative for the remainder of the

                                       47






projection period. At the acquisition date, costs to complete the research and
development efforts related to the CATV Products were expected to be $1 million.

    The CATV Products were completed in fiscal 2001 at a cost of $2 million.
Actual revenues in fiscal 2001 were $44 million. Revenue attributable to these
projects is currently estimated to be $35 million in fiscal 2002 with minimal to
no growth anticipated in future years.

HERRMANN TECHNOLOGY, INC.

    On June 16, 2000, we completed the acquisition of Herrmann, which was a
developer and supplier of passive optical filters that can be used in
conjunction with active optoelectronic components in products such as
amplifiers. The allocation to in-process research and development of $34 million
represented its estimated fair value using the methodology described above. The
$34 million was allocated primarily to the development of manufacturing
processes.

    Revenue attributable to the products using these manufacturing processes was
estimated to be $59 million in fiscal 2001 and $91 million in fiscal 2002.
Revenue was expected to peak in fiscal 2005 and decline thereafter through the
end of the products' life as new technologies were expected to be introduced by
us. Revenue growth was expected to decrease from 54.7% in 2002 to 0.7% in fiscal
2005, and be negative for the remainder of the projection period. At the
acquisition date, costs to complete the research and development efforts related
to the processes were expected to be $0.5 million.

    Herrmann's in-process research and development projects ranged from 20% to
60% complete at the time of acquisition. Herrmann's in-process research and
development projects were expected to be completed during the period from August
2000 to June 2001 after approximately two to six years of research and
development effort. Following completion, the projects were expected to begin
generating economic benefits. In total, costs to complete Herrmann's in-process
research and development were expected to equal approximately $1.8 million.
Projected future net cash flows attributable to Herrmann's in-process research
and development, assuming successful development, were discounted to net present
value using a discount rate of 27.5%.

    Hermann's in-process research and development projects were either completed
by July of 2001 or discontinued due to market conditions. Actual costs to
complete the projects were $1.3 million. Actual revenue in fiscal 2001
attributable to these products was significantly lower than anticipated at $3
million. Management has revised the estimated revenue attributable to these
projects to be $6 million in fiscal 2002 with minimal to no growth anticipated
in future years.

RECENT ACCOUNTING PRONOUNCEMENTS

    In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, 'Goodwill and Other Intangible Assets.'
Statement 142 provides guidance on the financial accounting and reporting for
acquired goodwill and other intangible assets. Under Statement 142, goodwill and
indefinite lived intangible assets will no longer be amortized. Intangible
assets with finite lives will continue to be amortized over their useful lives,
which will no longer be limited to a maximum life of forty years. The criteria
for recognizing an intangible asset have also been revised. As a result, we will
need to re-assess the classification and useful lives of our previously acquired
goodwill and other intangible assets. Statement 142 also requires that goodwill
and indefinite lived intangible assets be tested for impairment at least
annually. The goodwill impairment test is a two-step process that requires
goodwill to be allocated to reporting units. In the first step, the fair value
of the reporting unit is compared to the carrying value of the reporting unit.
If the fair value of the reporting unit is less than the carrying value of the
reporting unit, a goodwill impairment may exist, and the second step of the test
is performed. In the second step, the implied fair value of the goodwill is
compared to the carrying value of the goodwill and an impairment loss will be
recognized to the extent that the carrying value of the goodwill exceeds the
implied fair value of the goodwill. We will adopt Statement 142 effective
October 1, 2002 and do not expect that it will have a significant impact on our
financial condition or results of operations.

                                       48






    Also in July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No 143, 'Accounting for Asset Retirement
Obligations.' Statement 143 provides the financial accounting and reporting for
the cost of legal obligations associated with the retirement of tangible
long-lived assets. In accordance with Statement 143, retirement obligations will
be recorded at fair value in the period they are incurred. When the liability is
initially recorded, the cost is capitalized as part of the related long-lived
asset and subsequently depreciated over its remaining useful life. Changes in
the liability resulting from the passage of time will be recognized as operating
expense. We plan to adopt Statement 143 effective October 1, 2002 and are
currently evaluating the potential effects of implementing this standard on our
financial condition and results of operations.

    In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, 'Accounting for the Impairment or
Disposal of Long-Lived Assets.' Statement 144 supersedes Statement 121 and the
accounting and reporting provisions for the disposal of a segment of business
contained in Accounting Principles Board Opinion No. 30 'Reporting the Effects
of a Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions.' Statement 144 establishes a
single accounting model for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations. We will adopt Statement
144 effective October 1, 2002 and do not expect it to have a material effect on
our financial condition or results of operations.

    In July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, 'Accounting for Exit or Disposal
Activities.' Statement 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are accounted
for currently pursuant to the guidance that the Emerging Issues Task Force has
set forth in Issue No. 94-3. The scope of Statement 146 also includes (1) costs
related to terminating a contract that is not a capital lease, (2) termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract and (3) costs to consolidate
facilities or relocate employees. Statement 146 is effective for our exit or
disposal activities that are initiated after December 31, 2002, with earlier
application encouraged. We are currently evaluating the timing of our adoption
of this standard and the potential effects of its implementation on our
financial condition and results of operations.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

    We are subject to a wide range of laws and regulations relating to
protection of the environment and employee safety and health. We are currently
involved in investigations and/or cleanup of known contamination at eight sites
either voluntarily or pursuant to government directives. There are established
reserves for environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental remediation are,
depending on the site, based primarily upon internal or third party
environmental studies, estimates as to the number, participation level and
financial viability of all potential responsible parties, the extent of
contamination and the nature of required remedial actions. Although we believe
that the reserves are adequate to cover known environmental liabilities, it is
often difficult to estimate with certainty the future cost of such matters.
Therefore, there is no assurance that expenditures that will be required
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amount reflected in the reserves for such matters or will
not have a material adverse effect on our consolidated financial condition,
results of operations or cash flows. Any possible loss or range of loss that may
be incurred in excess of that provided for as of June 30, 2002, cannot be
estimated.

LEGAL PROCEEDINGS

    An investigation was commenced on April 4, 2001, by the U.S. International
Trade Commission based on a request of Proxim, Inc., alleging patent
infringement by 14 companies,

                                       49






including some of our customers, for wireless local area networking products.
Proxim alleges infringement of three patents related to spread-spectrum coding
techniques. Spread-spectrum coding techniques refers to a way of transmitting a
signal for wireless communications by spreading the signal over a wide frequency
band. One of our subsidiaries, Agere Systems Guardian Corp., filed a lawsuit on
May 23, 2001, in the U.S. District Court in Delaware against Proxim alleging
infringement of three patents used in Proxim's wireless local area networking
products. In connection with the sale of our wireless local area network
equipment business to Proxim, both parties have entered into a cross license
which will result in the dismissal of the International Trade Commission
proceeding against our customers to the extent based on the use of our products
as well as the Delaware proceeding against Proxim.

RISK MANAGEMENT

    We are exposed to market risk from changes in foreign currency exchange
rates and interest rates that could impact our results of operations and
financial position. We manage our exposure to these market risks through our
regular operating and financing activities and, when deemed appropriate, through
the use of derivative financial instruments. We use derivative financial
instruments as risk management tools and not for speculative purposes. In
addition, we enter into derivative financial instruments with a diversified
group of major financial institutions in order to manage our exposure to
nonperformance on such instruments. Our risk management objective is to minimize
the effects of volatility on our cash flows by identifying the recognized assets
and liabilities or forecasted transactions exposed to these risks and
appropriately hedging the risks.

    We use foreign currency forward contracts, and may from time to time use
foreign currency options, to manage the volatility of non-functional currency
cash flows resulting from changes in exchange rates. Foreign currency exchange
contracts are entered into for recorded, firmly committed or anticipated
purchases and sales. The use of these derivative financial instruments allows us
to reduce our overall exposure to exchange rate movements, since the gains and
losses on these contracts substantially offset losses and gains on the assets,
liabilities and transactions being hedged.

    Effective October 1, 2000, we adopted Statement 133, 'Accounting for
Derivative Instruments and Hedging Activities,' and its corresponding amendments
under Statement 138. The adoption of Statement 133 resulted in a cumulative
effect of an increase in our net loss of $4 million, net of a tax benefit of $2
million for the three and nine months ended June 30, 2001. The increase in our
net loss is primarily due to derivatives not designated as hedging instruments.
The change in fair market value of derivative instruments was recorded in other
income (expense) -- net and was not material for all periods presented.

    While we hedge certain foreign currency transactions, a decline in value of
non-U.S. dollar currencies may adversely affect our ability to contract for
product sales in U.S. dollars because our products may become more expensive to
purchase in U.S. dollars for local customers doing business in the countries of
the affected currencies.

    As of June 30, 2002, we had $385 million of short-term variable rate debt
outstanding. To manage the cash flow risk associated with this debt, we may,
from time to time, enter into interest rate swap agreements. There were no
interest rate swap agreements in effect for the periods presented. As of
June 30, 2002, a variation of 1% in the interest rate charged on our short-term
debt would result in a change of approximately $4 million in annual interest
expense.

EUROPEAN MONETARY UNION -- EURO

    Several member countries of the European Union have established fixed
conversion rates between their sovereign currencies and the Euro, and have
adopted the Euro as their new single legal currency. The legacy currencies
remained legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During the transition period, cash-
less payments were permitted to be made in the Euro. Beginning on January 1,
2002, the participating countries introduced Euro notes and coins. The
participating countries withdrew all

                                       50






legacy currencies by February 28, 2002 and they are no longer available. The
Euro conversion may affect cross-border competition by creating cross-border
price transparency. We continue to evaluate issues involving the introduction of
the Euro as further accounting, tax and governmental legal and regulatory
guidance is available. We have not experienced and do not expect to experience a
material adverse effect on our business or financial condition related to the
Euro conversion.

FORWARD-LOOKING STATEMENTS

    This Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this report contain forward-looking
statements that are based on current expectations, estimates, forecasts and
projections about the industry in which we operate, management's beliefs and
assumptions made by management. Words such as 'expects', 'anticipates',
'intends', 'plans', 'believes', 'seeks', 'estimates', variations of such words
and similar expressions are intended to identify such forward looking
statements. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions which are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements. Except as required
under the federal securities laws and the rules and regulations of the
Securities and Exchange Commission, we do not have any intention or obligation
to update publicly any forward-looking statements whether as a result of new
information, future events or otherwise.

FACTORS AFFECTING OUR FUTURE PERFORMANCE

    The following factors, many of which are discussed in greater detail in our
Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (File
no. 001-16397), could affect our future performance and the price of our stock.

RISKS RELATED TO OUR RECENT SEPARATION FROM LUCENT

     Our historical financial information prior to the February 1, 2001
     contribution to us of our business from Lucent may not be representative of
     our results as a stand-alone company and, therefore, may not be reliable as
     an indicator of our historical or future results.

     Because Lucent's Bell Laboratories' central research organization
     historically performed important research for us, we must continue to
     develop our own core research capability. We may not be successful, which
     could materially harm our prospects and adversely affect our results of
     operations.

     We could incur significant tax liability if Lucent fails to pay the tax
     liabilities attributable to Lucent under our tax sharing agreement, which
     could require us to pay a substantial amount of money.

     Because the Division of Enforcement of the Securities and Exchange
     Commission is investigating matters brought to its attention by Lucent, our
     business may be affected in a manner we cannot foresee at this time.

     We are significantly limited in the amount of stock that we can issue to
     raise capital because of potential adverse tax consequences.

RISKS RELATED TO OUR BUSINESS

     The demand for products in our industry has recently declined, and we
     cannot predict the duration or extent of this trend. Sales of our
     integrated circuits and optoelectronic components are dependent on the
     growth of communications networks.

     If we do not complete our announced restructuring and facility
     consolidation activities as expected or even if we do so, we may not
     achieve all of the expense reductions we anticipate.

                                       51






     Because we expect to continue to derive a majority of our revenue from
     semiconductor devices and the integrated circuits industry is highly
     cyclical, our revenue may fluctuate.

     Our quarterly revenue and operating results may vary significantly in
     future periods due to the nature of our business.

     If we fail to keep pace with technological advances in our industry or if
     we pursue technologies that do not become commercially accepted, customers
     may not buy our products and our revenue may decline.

     Because many of our current and planned products are highly complex, they
     may contain defects or errors that are detected only after deployment in
     commercial communications networks and if this occurs, it could harm our
     reputation and result in increased expense.

     Our products and technologies typically have lengthy design and development
     cycles. A customer may decide to cancel or change its product plans, which
     could cause us to generate no revenue from a product and adversely affect
     our results of operations.

     Because our sales are concentrated on a few customers, our revenue may
     materially decline if one or more of our key customers do not continue to
     purchase our existing and new products in significant quantities.

     If we fail to attract, hire and retain qualified personnel, we may not be
     able to develop, market or sell our products or successfully manage our
     business.

     Because we are subject to order and shipment uncertainties, any significant
     cancellations or deferrals could cause our revenue to decline or fluctuate.

     If we do not achieve adequate manufacturing utilization, yields, volumes or
     sufficient product reliability, our gross margins will be reduced.

     We have relatively high gross margin on the revenue we derive from the
     licensing of our intellectual property, and a decline in this revenue would
     have a greater impact on our net income than a decline in revenue from our
     integrated circuits and optoelectronic products.

     We depend on joint ventures or other third-party strategic relationships
     for the manufacture of some of our products, especially integrated
     circuits. If these manufacturers are unable to fill our orders on a timely
     and reliable basis, our revenue may decline.

     If our customers do not qualify our manufacturing lines or the
     manufacturing lines of our third-party suppliers for volume shipments, our
     revenue may be delayed or reduced.

     Because our integrated circuit and optoelectronic component average selling
     prices in particular product areas are declining and some of our older
     products are moving toward the end of their product life cycles, our
     results of operations may be adversely affected.

     We conduct a significant amount of our sales activity and manufacturing
     efforts outside the United States, which subjects us to additional business
     risks and may adversely affect our results of operations due to increased
     costs.

     We are subject to environmental, health and safety laws, which could
     increase our costs and restrict our operations in the future.

     The communications component industry is intensely competitive, and our
     failure to compete effectively could hurt our revenue.

     We may be subject to intellectual property litigation and infringement
     claims, which could cause us to incur significant expenses or prevent us
     from selling our products. If we are unable to protect our intellectual
     property rights, our businesses and prospects may be harmed.

     If we cannot maintain our strategic relationships or if our strategic
     relationships fail to meet their goals of developing technologies or
     processes, we will lose our investment and may fail to keep pace with the
     rapid technological developments in our industry.

                                       52






     We may not have financing for future strategic initiatives, which may
     prevent us from addressing gaps in our product offerings that may arise in
     the future, improving our technology or increasing our manufacturing
     capacity.

RISKS RELATED TO OUR STOCK

     Because our common stock may be considered a technology stock, the market
     price and trading volume of our common stock may be volatile.

     Because our quarterly revenue and operating results are likely to vary
     significantly in future periods, our stock price may decline.

     Because of differences in voting power and liquidity between the Class A
     common stock and the Class B common stock, the market price of the Class A
     common stock may be less than the market price of the Class B common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    We have exposure to foreign exchange and interest rate risk. There have been
no material changes in market risk exposures from those disclosed in our Annual
Report on Form 10-K for the fiscal year ended September 30, 2001 (File no.
001-16397). See Item 2 -- 'Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Management' for additional details.

                                       53






                          PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    See Part I -- 'Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Legal Proceedings'.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits


       
    10.1  Indenture for $410,000,000 Convertible Subordinated Note
          (Filed herewith)
    10.2  Amendment to the Microelectronics Purchase Agreement
          (Incorporated by reference to exhibit 99.1 to our
          Form 8-K/A No. 1 filed July 19, 2002)
    10.3  Amended and Restated Employee Benefits Agreement
          (Incorporated by reference to exhibit 99.2 to our Form 8-K
          filed July 18, 2002)
    99.1  Certification of Chief Executive Officer pursuant to 18
          U.S.C. 1350 (Filed herewith)
    99.2  Certification of Chief Financial Officer pursuant to 18
          U.S.C. 1350 (Filed herewith)


(b) Reports on Form 8-K

    None

                                       54






                                   SIGNATURES

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

                                          AGERE SYSTEMS INC.


                                               
Date August 9, 2002                                             /s/ MARK T. GREENQUIST
                                                  ...................................................
                                                                  MARK T. GREENQUIST
                                                             EXECUTIVE VICE PRESIDENT AND
                                                                CHIEF FINANCIAL OFFICER


                                       55






                                 EXHIBIT INDEX



EXHIBITS NO.                          DESCRIPTION
------------                          -----------
           
    10.1      Indenture for $410,000,000 Convertible Subordinated Note
              (Filed herewith)
    10.2      Amendment to the Microelectronics Purchase Agreement
              (Incorporated by reference to exhibit 99.1 to our
              Form 8-K/A No. 1 filed July 19, 2002)
    10.3      Amended and Restated Employee Benefits Agreement
              (Incorporated by reference to exhibit 99.2 to our Form 8-K
              filed July 18, 2002)
    99.1      Certification of Chief Executive Officer pursuant to 18
              U.S.C. 1350 (Filed herewith)
    99.2      Certification of Chief Financial Officer pursuant to 18
              U.S.C. 1350 (Filed herewith)