Edgar Filing: LUCENT TECHNOLOGIES INC

________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-K

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

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001

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

FOR THE TRANSITION PERIOD FROM _________ TO ____________
-------------------

COMMISSION FILE NO.: 001-11639
-------------------

LUCENT TECHNOLOGIES INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

DELAWARE 22-3408857
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

600 MOUNTAIN AVENUE, MURRAY HILL, NEW JERSEY 07974
-------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (908) 582-8500

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
See attached Schedule A.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]

At November 30, 2001, the aggregate market value of the voting and
non-voting common stock held by non-affiliates of the registrant was
approximately $25,400,000,000.

At November 30, 2001, 3,419,537,648 shares of the registrant's common stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the 2002 annual
meeting of shareowners are incorporated by reference into Part III of this
Form 10-K.

________________________________________________________________________________

SCHEDULE A
Securities registered pursuant to Section 12(b) of the Securities Exchange
Act of 1934:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------

Common Stock (par value $.01 per share) New York Stock Exchange
7.25% Notes due July 15, 2006 New York Stock Exchange
6.50% Debentures due January 15, 2028 New York Stock Exchange
5.50% Notes due November 15, 2008 New York Stock Exchange
6.45% Debentures due March 15, 2029 New York Stock Exchange

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

TABLE OF CONTENTS

ITEM PAGE
---- ----
DESCRIPTION
----------------------------------------------------------------------------

PART I

Item 1. Business.................................................... 1
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders......... 21

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 22
Item 6. Selected Financial Data..................................... 23
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 24
Item 8. Financial Statements and Supplementary Data................. 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 42

PART III

Item 10. Directors and Executive Officers of the Registrant.......... 43
Item 11. Executive Compensation...................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 43
Item 13. Certain Relationships and Related Transactions.............. 43

PART IV

Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.................................................. 44

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

This report contains trademarks, service marks and registered marks of us
and our subsidiaries, and other companies, as indicated.

PART I

ITEM 1. BUSINESS

GENERAL

Lucent Technologies Inc. was incorporated in Delaware in November 1995. Our
principal executive offices are located at 600 Mountain Avenue, Murray Hill,
New Jersey 07974 (telephone number 908-582-8500). We were formed from the
systems and technology units that were formerly a part of AT&T Corp. ('AT&T'),
including the research and development capabilities of Bell Laboratories ('Bell
Labs'). Prior to February 1, 1996, AT&T conducted our original business through
various divisions and subsidiaries. On February 1, 1996, AT&T began executing
its decision to separate these divisions and subsidiaries into a stand-alone
company by transferring to us the assets and liabilities related to our
business. In April 1996, we completed the initial public offering ('IPO') of our
common stock and on September 30, 1996, became independent of AT&T when AT&T
distributed to its shareowners all of its Lucent shares. Our fiscal year begins
October 1 and ends September 30.

We operate in the global communications networking industry and design and
deliver networks for the world's largest communications service providers.
Backed by Bell Labs, one of the world's foremost industrial and research
development organizations, we rely on our strengths in mobility, optical, data
and networking technologies as well as software and services to develop next
generation networks. Our systems, services and software are designed to help
customers quickly deploy and better manage their networks and create new
opportunities for revenue-generating services that help businesses and
consumers.

We changed our reporting segments in fiscal year 2001 to Products and
Services from Service Provider Networks and Microelectronics and Communications
Technologies in fiscal year 2000. The Products segment provided public
networking systems and software to telecommunications service providers and
public networks around the world for applications in communications and
computing industries. The product lines within this segment were: (1) switching
and access; (2) optical networking; (3) wireless; and (4) optical fiber. The
Services segment, Lucent Worldwide Services ('LWS'), included the full life
cycle of planning and design, consulting and integration support services as
well as network engineering, provisioning (i.e., allocating data transmission or
bandwidth capacity), installation and warranty support. In fiscal year 2001, our
research and development activities continued to be conducted through Bell Labs.
As discussed in 'Our Resulting Organization,' in July 2001, we announced our
decision to further reorganize our business and corresponding reporting
segments. Beginning in fiscal year 2002, our two reporting segments,
representing how we will manage our business, will be Integrated Network
Solutions ('INS'), targeting wireline customers, and Mobility Solutions
('Mobility'), targeting wireless customers. LWS will support our INS and
Mobility segments in fiscal year 2002.

MARKET ENVIRONMENT

The global communications networking industry experienced a very challenging
period in calendar 2001, during which business activity contracted. We believe
that approximately 50 large global service providers of telecommunications and
data services account for 70% of all amounts spent on equipment and services in
this industry during calendar 2001. We have relationships with all 50 service
providers and work closely through contracts and other arrangements with
approximately 30 of these providers.

Due to the recent global economic slowdown, our service provider customers
are facing slowing revenue growth, reduced access to capital and the need to
carefully manage their cash flow and profitability. In response to these
challenges, service providers are reducing capital expenditures and rethinking
their plans to expand their networks. They are refocusing their capital
investment on projects that can most directly contribute to their revenues.

Service providers are also responding to these challenges by refocusing
their businesses. For example, large established service providers such as
Verizon Communications Inc. ('Verizon') have realigned their businesses through
spin-offs and internal restructuring to focus on either the wireless

market (in Verizon's case, through Verizon Wireless Inc.) or the wireline market
(in Verizon's case, through Verizon Communications). These refocused service
providers are consolidating and globalizing within their chosen segment to gain
scale and geographic diversity. In this new environment, large, established and
global service providers appear to be in the best position to succeed.

OUR STRATEGY

In light of the changes in the market environment described above, we
reorganized our businesses to become more focused and better positioned to
capitalize on market opportunities. To match the realignment of our customers'
businesses, we are restructuring our reporting segments into distinct wireline
(INS) and wireless units (Mobility), and have begun to target the large service
providers in each segment, which we believe offers us the best opportunity for
future growth and stable revenue. We believe our business structure along
customer lines -- wireline and wireless -- will enable us to better serve
and anticipate the needs of our large service provider customers.

We strive to have our customers regard us as their partner of choice for
providing communications and data equipment and services. We seek to
differentiate ourselves along five key dimensions. First, we intend to promote
an architectural and design principle across our product portfolios, which we
call Service Intelligent'TM' network architecture, to address the key challenges
that service providers are facing -- managing network costs and complexity,
exploiting revenue opportunities and maintaining reliability. Second, within
this common architecture we expect to develop and maintain a broad portfolio of
products targeted at the world's largest service providers. Third, we intend to
offer one of the industry's most complete network management systems and most
extensive services capabilities to integrate and manage networks. Fourth, we
plan to use our global capability and experience to design our products,
software and services to address our customers' global business problems. Fifth,
we intend to maintain one of the largest and most productive in-house research
and development programs focused on the world's largest service providers.

We expect to prioritize sales and marketing, product development, services
and supply chain resources to meet the global needs of the world's largest
service providers. In fiscal year 2001, we initiated actions to follow the
geographic footprint of our large service provider customers around the world to
the approximately 20 core countries in which these customers do business. Our
sales force will also pursue business with other service providers in these 20
countries when opportunities arise. We expect to serve customers selectively in
countries that are adjacent to these countries drawing upon the infrastructure
from the core countries. For countries that do not fit those criteria,
we are planning to develop 'strategic relationships' with third party agents,
so that we can continue to service customers without utilizing our direct
resources. With this new model, our goals are to eliminate costs from our
business, speed-up our decision making by reducing the number and distance of
people involved in the decisions and shift to the most profitable, long-term
systems and development projects. We are also moving from a geographically
organized sales force that served the customers of our entire Products
segment to two smaller sales forces, one primarily dedicated to the needs
of INS (wireline) customers and the second primarily dedicated to the needs
of Mobility (wireless) customers, in order to better address our customers'
requirements.

We expect that revenues for fiscal year 2002 will be less than the revenues
for fiscal year 2001 as a result of the sale of a significant portion of our
optical fiber business on November 16, 2001, other dispositions we may undertake
in fiscal year 2002, our new strategic direction that focuses on large service
providers, and the continued uncertainty in the global telecommunications
market. However, if the global communications networking market does not improve
or improves at a slower pace than we anticipate or if we do not achieve the
benefits we seek from our restructuring program and change in strategic
direction, our revenues may be lower than we expect.

OUR RESTRUCTURING PROGRAM

Fiscal year 2001 was a transition year for us in which we eliminated many
duplications in marketing functions and programs and centralized our sales
support functions to utilize our resources for the opportunities that we
currently believe to be the most profitable for us -- the large service
provider

market. We evaluated our manufacturing operations and assessed our use of
contract manufacturers and decided to eliminate certain of our manufacturing
facilities and make greater use of contract manufacturers. We assessed virtually
every aspect of our product portfolio and associated research and development
('R&D'), made decisions based on the needs of our largest service provider
customers, deployed our resources to meet those needs and then streamlined the
rest of our operations to support those reassessments. We eliminated some
marginally profitable or non-strategic lines; merged certain technology
platforms; consolidated development activities; and eliminated management
positions, which resulted in reduced associated product development costs. We
sold the assets relating to a number of product lines whose products did not
support our large service provider customers or our strategy. In following our
customers, we initiated actions to close facilities and reduce the work forces
in approximately 40 of the approximately 60 countries in which we operated at
the end of fiscal year 2000.

PHASE I OF OUR RESTRUCTURING PROGRAM

On January 24, 2001, we announced Phase I of our restructuring program to
exit certain nonstrategic product lines and to streamline our cost structure in
various business and corporate operations. This program included plans to reduce
our work force by approximately 10,000 employees, reduce our expense run rate by
$2.0 billion on an annual basis by the end of fiscal 2001, reduce the accounts
receivable and inventory portion of our working capital from their 2001 first
fiscal quarter levels (determined by excluding the effect of non-cash charges
and asset securitizations, and normalized for the change in quarterly sales) by
approximately $2.0 billion by the end of fiscal year 2001 and reduce our actual
capital spending versus our initially forecasted capital spending by $400
million in fiscal year 2001.

We achieved or exceeded our Phase I restructuring goals. As targeted, we
reduced our annual operating expense rate in fiscal year 2001 by over
$2.0 billion through employee reductions, product rationalizations, and
decreased spending. We reduced working capital by approximately $3.0 billion,
exceeding our original target of $2.0 billion through more aggressive management
of inventory and accounts receivables across all product units. We reduced
capital spending to approximately $1.4 billion for fiscal year 2001,
representing a $500 million decline from the prior fiscal year. We eliminated
10,500 work force positions by the end of July 2001.

Phase I of our restructuring program resulted in business restructuring
charges of approximately $2.7 billion in the second fiscal quarter of 2001 and
$684 million in the third fiscal quarter of 2001.

In June 2001, we expanded our restructuring program by offering a voluntary
retirement program to approximately 13,000 eligible employees (not including the
employee reductions identified above). More than 8,500 employees accepted our
early retirement offer in July 2001.

PHASE II OF OUR RESTRUCTURING PROGRAM

In response to the decline of the telecommunications industry, on
July 24, 2001, we announced that we had developed a proposed Phase II to
our restructuring program. Because implementation of Phase II required
modification to the covenants contained in our credit facilities, we obtained
the approval of lenders under our credit facilities for the amendment of our
credit facilities in August 2001. See 'Liquidity and Capital Resources
-- Liquidity -- Credit facilities' under 'Management's Discussion and
Analysis,' filed as part of this report.

We anticipate that Phase II of our restructuring effort will further reduce
annual operating expenses by an additional $2.0 billion, generate an additional
$1.0 billion reduction in working capital, reduce our capital spending rate by
an additional $750 million and further reduce our work force by an additional
15,000 to 20,000 employees worldwide. If we determine that market and industry
conditions warrant it, we may further realign our resources and reduce our work
force prior to completion of Phase II of our restructuring program.

Our restructuring actions related to Phase II in fiscal year 2001 resulted
in a business restructuring charge of $8 billion, recorded in the fourth fiscal
quarter of 2001.

We currently expect to complete Phase II of our restructuring program by the
end of fiscal year 2002. If implemented in the manner and on the timeline we
intend, we also expect to realize its full benefits by the end of fiscal year
2002. However, we cannot assure you that our restructuring program will achieve
all of the expense reductions and other objectives we anticipate or on the
timetable contemplated because our ability to achieve our goals will depend upon
a number of conditions, some of which are outside our control. In addition, the
restructuring program may have other unanticipated adverse effects on our
business. Because our restructuring program involves realigning our businesses
and sales forces, it may be disruptive to our customer relationships.
Furthermore, since a small number of large service providers will account for an
even greater percentage of our revenues after these restructuring actions,
decreases in spending by these large service providers, if greater than we
expect, will have an adverse effect on our revenues.

As a result of Phase I and Phase II of our restructuring program, we
recorded charges during fiscal year 2001 associated with voluntary and
involuntary employee separations totaling approximately 39,000 employees,
including 8,500 related to the voluntary retirement offer. As of September 30,
2001, approximately 23,700 of these employees had been terminated. In addition,
5,300 of employee separations since December 31, 2000, not included in the above
amounts, were achieved through attrition and divestiture of businesses. The
majority of the remaining employee separations are expected to be completed by
the end of the second fiscal quarter of 2002.

DISCONTINUED OPERATIONS

On December 29, 2000, we completed the sale of our power systems business.
On April 2, 2001, Agere Systems Inc. ('Agere'), our microelectronics business,
completed an initial public offering ('IPO') of 600 million shares of common
stock, resulting in net proceeds of $3.44 billion to Agere. In addition, on
April 2, 2001, Morgan Stanley & Co. Incorporated exercised its overallotment
option to purchase an additional 90 million shares of Agere Class A common stock
from us. After the exercise of the overallotment option by Morgan Stanley, we
owned 57.8% of Agere common stock. If we satisfy certain conditions and terms
under our credit facilities, we intend to spin-off Agere through a tax-free
distribution to our shareowners. Accordingly, our financial statements, filed as
part of this report, for all periods presented reflect Agere and the power
systems business as discontinued operations. Agere is a separately traded public
company that files its own reports with the SEC.

Agere designs, develops and manufactures integrated circuits for use in a
broad range of communications and computer systems and optoelectronic components
for communications networks. Agere is the world leader in sales of
communications components, which include both integrated circuits and
optoelectronic components. Communications components are basic building blocks
of electronic and photonic products and systems for terrestrial and submarine,
or undersea, communication networks and for communications equipment.

In fiscal year 2001, Agere had two principal businesses: Integrated Circuits
and Optoeletronics. 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. Agere's Integrated
Circuits business also includes wireless local area networking products, which
facilitate the transmission of data and voice signals within a localized area
without cables or wires. Agere's Optoelectronics business includes its
optoelectronic components operations, including both active optoelectronic and
passive optical components. Optoelectronic components transmit, process, change,
amplify and receive light that carries data and voice traffic over optical
networks.

Our separation agreement with Agere provides that if the Agere distribution
were not completed on or before September 30, 2001, we would complete the Agere
spin-off as promptly as practicable following our satisfaction or waiver of all
conditions of such agreement. This agreement also provides that we may terminate
our obligation to complete the distribution if, after consultation with Agere
senior management, our board of directors determines, in its sole discretion,
that the distribution is not in the best interests of us or our shareowners.
Recent amendments to our credit facilities, completed on August 16, 2001, have
delayed our ability to complete the spin-off. We remain committed to completing
the process of separating Agere from our company, and we intend to move forward
with our

distribution of the shares of Agere stock in a tax-free spin-off to our
shareowners. However, we cannot assure you that the conditions to our obligation
to complete the distribution will be satisfied by a particular date or that the
terms and conditions of our indebtedness will permit the distribution by a
particular date or at all. See 'Agere Spin-Off Update' under 'Management's
Discussion and Analysis,' filed as part of this report.

In connection with the intended spin-off of Agere, we entered into a
Microelectronics Product Purchase Agreement that governs the purchase of goods
and services by us from Agere. Under this agreement, we committed to purchase at
least $2.8 billion of products from Agere over a three-year period beginning
February 1, 2001. In limited circumstances, our purchase commitment may be
reduced or the term may be extended. For the period February 1, 2001 through
September 30, 2001, our purchases under this agreement were $325 million. We are
currently discussing with Agere ways to restructure our obligations under the
agreement.

DISPOSITIONS AND OTHER MATTERS

As a result of our plan to expand our use of contract manufacturers, we sold
our manufacturing operations in Oklahoma City, Oklahoma and Columbus, Ohio to
Celestica Corporation on August 31, 2001. Upon closing of the sale, we entered
into a five-year supply agreement with Celestica to be the primary manufacturer
of our switching and access and wireless networking products. We are evaluating
our remaining manufacturing facilities to determine if their number and
capabilities support our new business model and may take action in the future
with respect to one or more of these facilities.

On November 16, 2001, we completed the sale of a significant portion of our
optical fiber business to The Furukawa Electric Co., Ltd. Excluded from the sale
completed on November 16, 2001, were our interests in two Chinese joint
ventures -- Lucent Technologies Shanghai Fiber Optic Co., Ltd. and Lucent
Technologies Beijing Fiber Optic Cable Co., Ltd. -- which we agreed in July
2001 to sell to Corning Incorporated. The sale to Corning, which is subject to
U.S. and foreign governmental approvals and other customary closing conditions
is expected to close by the end of the first calendar quarter in 2002. The
optical fiber business designed, developed and manufactured an extensive line of
fiber optic products, including singlemode and multimode fiber and fiber cables.
With 12 cable manufacturing facilities around the world, the optical fiber
business is one of the world's leading suppliers of optical fiber cables.

OUR RESULTING ORGANIZATION

In July 2001, we announced the realignment of our segments to focus on
distinct customer segments: an INS segment, focusing on wireline, and a Mobility
segment, focusing on wireless service providers. We are consolidating sales,
marketing, product development, services, product management and offer
management and general profit and loss responsibilities within each of these two
customer segments. In fiscal year 2002, the INS segment and the Mobility segment
will become separate reporting segments. Both our INS segment and our Mobility
segment will offer a broad array of our products to distinct types of customers.
Because of the differences in the businesses of customers that each of INS and
Mobility will target, we expect that INS will primarily sell and service
switching and access and optical networking products to our wireline customers
while Mobility will primarily sell wireless products to wireless service
providers.

We will support these two new segments through a number of central
organizations, including LWS. Manufacturing and supply chain functions have been
consolidated into a single global Supply Chain Networks organization that
manages the materials and activities necessary to produce and deliver products
and services to our customers. Our corporate headquarters support functions and
Bell Labs will also support both segments and work with our customer teams in
presenting our offerings to our customers.

We announced our Service Intelligent network architecture in January 2001.
Service Intelligent network architecture is a design and architectural principle
through which we intend to enhance our products and services in both our INS and
Mobility segments. The strategy arose from our belief that, in order to be
successful in the future, service providers will need to move beyond simply
delivering

Internet connections, broadband transmissions (the high speed delivery of
multiple voice, data and video signals) and Internet Protocol ('IP') services.
To enhance customer loyalty and command premium prices, service providers will
have to offer additional business-quality customized IP services to their
customers, such as the ability to manage traffic problems and address shortages
of space and prevent unauthorized access to a network caused by increased use of
the Internet.

Service Intelligent network architecture involves three key elements:

- Employing service intelligence in networks. This means designing products
with an underlying capability ('intelligence') that enables them to make
choices and learn or adapt through experience. We are designing products
that, among other things: (1) make decisions about the routes they direct
transmissions to take over a network by reference to factors such as
transmission speed and cost; (2) adjust the bandwidth available to a
particular network user at any one time in response to that user's network
usage patterns; and (3) diagnose their own faults and fix those faults or
alleviate the effect they have on their network.

- Using MultiProtocol Label Switching ('MPLS') within or between network
layers. MPLS is a standard protocol or procedure for regulating the
transmission of data that has traditionally provided for the designation,
routing, forwarding and switching of transmissions through a network. In
implementing our Service Intelligent network architecture, we are
designing products that use MPLS in a new way -- to signal within and
between network layers to enable different components of a network to
quickly communicate information to each other. Applications of our
enhanced use of MPLS include products which can store a large amount of
information concerning the preferences of a network user or a group of
network users (e.g., the employees of a company) so as to allow customized
services to be provided to them in an efficient manner.

- Delivering unified network management, which means allowing the operator
of a network to provision (allocate data transmission or bandwidth
capacity), monitor and isolate faults in a network and perform other
network management tasks from a single console.

For example, Service Intelligent network architecture could be deployed in a
virtual private network ('VPN'). A VPN is a network that has the appearance and
function of a private network (a network in which data is transmitted within the
network over dedicated private lines that are not shared with other unrelated
users). A Service Intelligent VPN would allow an employee to access his or her
employer's computer system over the Internet and enjoy individual user and
application recognition features and network security levels that are more
characteristic of networks that are accessed by dialing-up over dedicated
private lines. Because Service Intelligent VPNs would allow private networks to
be utilized within a public network, service providers' customers would be able
to achieve savings by outsourcing many computer network functions to their
service providers (e.g., firewall protection which is the filtering of
information transmitted into a network to ensure the data being transmitted does
not breach the network's security -- for example, by transmitting a computer
virus which could disrupt the network) and sharing public transmission lines
which, because they are shared, can be utilized more efficiently than dedicated
private lines.

We are working to harness Service Intelligent network architecture
capabilities within our existing products, software and services and to design
new products, software and services which will enable a service provider to
offer services, such as VPNs, to their customers that are customized to
individual customer needs and which can be differentiated from the services
offered by other service providers. At the same time, we recognize the needs of
service providers to manage network costs and complexity and improve network
reliability, so that part of our overall design strategy is to create products
and services that address these needs.

INTEGRATED NETWORK SOLUTIONS (INS) SEGMENT

INS focuses on global, wireline service providers, including long distance
carriers and both traditional local telephone companies and internet service
providers. By forming a single segment that concentrates on large wireline
service providers, we aim to fine tune our effectiveness with these wireline
service provider customers and better position ourselves to meet their product
and services

needs. INS plans to provide offerings comprised of a broad range of switching
and access and optical networking products. INS' offerings will include service
offerings provided by LWS and may include products, software and services
provided through original equipment manufacturers and our co-marketing and
strategic alliances with other businesses. In response to the needs of its
wireline customers, the INS segment will also offer wireless-oriented circuit
and packet switching and network management products.

SWITCHING AND ACCESS PRODUCTS

Primarily used for voice communications, switching is a networking
technology that uses switches to transmit or 'switch' communications and data
from one location to another within the network. Access products provide a means
of entry or an ability to connect to the Internet, within the networks, for
work-related applications and information, and to other networks.

Circuit switching has been used in telephone networks for decades. In a
traditional 'circuit-switched' telephone call, the telephone network creates
dedicated connections so that the person placing the call can communicate with
the person receiving the call. When the call is placed, the network determines a
path for the call and all communications during that call are transmitted over
that path. The telephone line and other network resources are then dedicated to
that particular call and cannot be used for any other purpose or any other call.

Packet switching is a more recent technology that allows the resources of a
network to be utilized more efficiently. With a 'packet-switched' telephone
call, the originator's speech is chopped up into small segments (called packets)
of information. Packets are then sent independently of one another over
different paths through the network from the originating end of the call to the
destination. At each step along the way, the network can determine the 'next
step' that a particular packet should take. As all the packets arrive at the
destination, they are re-assembled into coherent speech and delivered to the
listener.

Packet switching has an advantage over circuit switching in that it allows
calls to share network resources because a 'path' is not dedicated to a call as
in circuit switching. However, packet switching can have lower transmission
quality than circuit switching -- some packets may get delayed in transit and
never get reassembled, creating gaps in the conversation. Also, the act of
chopping speech into small packets can degrade the quality of the speech.

We aim to assist our customers in the transition to the next generation of
networks. Our 'circuit-to-packet' offerings are based on delivering products
that can take advantage of the benefits of packet technology without sacrificing
the quality of circuit switching. Using our experience in ultra-high quality
circuit switching, coupled with the packet research and technologies available
through Bell Labs, our goal is to help service providers evolve their current
networks while maintaining customer satisfaction and quality.

For example, a product which continues to be key to our circuit-to-packet
strategy is the 5ESS'r' Switch. In addition to supporting the traditional
telephone services, the 5ESS Switch is a multi-service, software-based,
packet-ready switching system designed to meet the changing needs of wireline
and wireless communications service providers. The 5ESS Switch converges older
circuit switching technologies with new packet switching technology and can
deploy virtually all types and combinations of services from a single platform
including wireline, wireless, voice and data. For our existing customers, we
expect to continue to support the 5ESS-based switching center and provide a
transition to the new Softswitch-based solution for IP over voice services.

Our 7R/E'r' IP Business Services is another circuit-to-packet product. It is
an Internet protocol Centrex product that allows service providers to provide
business-quality voice communications as well as data and other services to
enterprise customers (i.e., small, medium and large business customers) within a
packet environment without these end users' having to invest in their own
telephone system.

Multiservice switches allow service providers to offer multiple services,
such as voice, data and video over one network. With multiservice switches,
service providers can offer asynchronous transfer mode (a mode which allows the
transportation of varying kinds of traffic whether voice, video or data) and
frame relay, which allows a network to use information packets of varying
lengths, depending on

the type of transmission. Our next generation core multiservice switch, planned
for release in calendar year 2002, is the TMX 880 Multiservice Xchange
Switch'TM'. The TMX 880 switch is anticipated to offer service providers an
economical solution for increasing network capabilities, efficiency, and speed.
Our IP service products give customers the ability to deliver new, high quality
IP, advanced security, managed bandwidth, merged voice and data and the delivery
of content.

We offer a variety of access products, including edge access products, which
are usually the first point of interface with the service provider's network
(the 'edge' refers to the entry, or access point, into a service provider's
network). An example of an edge access product is the MAX TNT'TM', a
multiprotocol wide area network access switch which enables telephone carriers,
service providers, corporations and major network providers to offer a variety
of access services such as analog, ISDN (Integrated Services Digital
Network -- which provides simultaneous voice and high-speed data through a
single phone line) and high-speed leased lines from a single product. An
example of another product that works in conjunction with our edge access
product offerings is the Lucent SoftSwitch. The Lucent SoftSwitch is our second
generation SoftSwitch product that is designed to help carriers address data
offload and voice transmission over packet connectivity in their long distance
networks. The SoftSwitch provides call control, signaling, routing, and billing
information by collecting information (e.g., duration, and telephone numbers)
for individual telephone calls and combines them for delivery to a billing
system. This aggregated information allows service providers to introduce
revenue-generating services at a centralized level.

Broadband access products enable service providers to offer voice and data
services to the farthest reaches of their voice and data networks. Broadband
refers to the increased speed and capacity of the transmission. The following
two products are examples of the broadband access products we offer:

AnyMedia'r' Access System -- a family of access products -- enables
service providers to connect customers to their networks over a wide range
of narrowband and broadband connections or interfaces. Narrowband
interfaces include traditional telephone services, coin telephone, voice
circuits, fax and data modems and a variety of special services. Broadband
interfaces operate at a higher speed than narrowband interfaces and include
IP and video services. This system delivers services through 'plug and
play' application packages that enable a service provider to match the
services offered to market demand, and change them at virtually anytime.

Stinger'r' DSL Access Concentrator -- a family of call aggregation
(collection) devices -- are designed for large dial-in applications such
as those operated by Internet service providers. These products combine
analog and digital calls over channelized lines. The Stinger'r' DSL Access
Concentrator offers features that the asynchronous transfer mode brings to
multi-service networks, including effective bandwidth management and high
availability.

OPTICAL NETWORKING PRODUCTS

Our optical networking products include laser-based transmission systems
that transport information between and among switches and other network
components by release of light particles. Optical networking is made possible by
photonics, a technology that uses light particles, or photons, to transport
information over hair-thin glass fibers. These systems include core backbone
(the central portion of network equipment) high capacity systems as well as
lower capacity metropolitan (local carrier) systems.

Core optical networking systems expand and speed optical signals over fiber
cable for the 'core' or central portion of the network of a service provider and
allow these customers to increase the amount of traffic transmitted over their
fiber optic networks. The core network equipment is responsible for moving voice
and data traffic from origin to destination and connecting radio base stations
to the public voice and data networks.

The portfolio of core optical networking products includes: (1) WaveStar'r'
Bandwidth Manager, a system used in central offices both to create and to move
traffic (it is, in effect, an electrical to optical cross-connect system);
(2) LambdaUnite'TM', our third generation ring system that is intended for the
smaller central office of service providers and can be used in both metro and
inter-office applications and 'unites' or integrates traffic from the edge of
the network into the core network; and

(3) WaveStar'r' Lambda Router'TM' Switches, a family of large-scale fully
optical switches in commercial deployment that uses small (diameter of a human
hair) mirrors to move light from one fiber to another.

Metro optical networking systems, another group of optical networking
products, are designed to aggregate and increase the use of fiber optic systems
for both voice and data traffic for local carriers or networks located in
metropolitan areas. This family of optical networking products provides service
providers with fast, efficient information transport over fiber optic lines.
Products include: Metropolis'TM' DMX/DMXpress, which aggregates both voice and
data traffic in the local portion of the network; and Metropolitan EON DWDM
Systems designed to solve the problem of optic fiber exhaust (overuse) in city
or regional applications.

MOBILITY SEGMENT

Focusing on the 30 largest global wireless service providers, Mobility will
become a separate reporting segment in fiscal year 2002. Mobility offers
products to support the needs of its customers for radio access, core networks,
network management and application and service delivery products. Mobility will
also tap strengths across product lines, including our optical networking and
switching and access product lines and services provided by LWS, and will draw
upon products, software and services provided by third parties.

Mobility's products and services for its wireless customers encompass all of
the major wireless mobile network standards, including Advanced Mobile Phone
Service ('AMPS'), an analog technology that uses FM radio channels, Time
Division Multiple Access ('TDMA'), Global Systems for Mobile Communications
('GSM') and Code Division Multiple Access ('CDMA'). We provide these mobile
systems throughout the world and in a variety of frequency bands assigned to
mobile communications. Mobility's offerings are scalable (i.e., can be made
larger or smaller without undue cost increases) and are therefore compatible
with the larger telecommunications environments of today, yet are able to evolve
into next generation networks.

Mobility's emphasis is providing the equipment and services necessary for
its customers to evolve from their current second generation ('2-G') technology
and implement third generation ('3-G') spread spectrum technologies which
include CDMA2000 and Universal Mobile Telecommunication Systems ('UMTS')*. We
believe spread spectrum technologies will allow service providers to: offer
enhanced voice capacity and improved internet access, facilitate the provision
of sophisticated high speed data, wireless applications and reach new users,
such as mobile professionals from Fortune 500 companies with data services. In
order for wireless service providers to succeed, we believe that they will have
to provide voice capacity at extremely low cost in a spectrum-efficient manner
and penetrate the high-speed wireless data market for enterprise customers, such
as the largest Fortune 500 customers.

The 2-G technologies utilized by service providers currently include GSM,
TDMA and cdmaOne. CdmaOne is a digital technology that allows multiple users to
share radio frequencies at the same time without interfering with one another. A
telephone or data call is assigned a unique code that distinguishes it from
others since signals move along different frequencies. GSM, most commonly used
in Europe and other countries, is a type of TDMA system, using a different
protocol. TDMA systems operate by dividing a single channel into a number of
timeslots. Each user gets to use only one of every few slots. First, a small
amount of the voice conversation of one user is transmitted, and then the
second, the third, and so forth until all users on one channel have transmitted
that initial portion of their voice conversation when the cycle repeats. Systems
based on these 2-G technologies provide digital, voice and data communications
but generally cannot offer the high speed services in a spectrum-efficient
manner that a 3-G spread spectrum technology is expected to provide.

The International Telecommunications Union, an international standards body
that operates as part of the United Nations, has been instrumental in
promulgating a vision of 3-G that embraces a wide variety of spread spectrum
technologies, a technology we have helped to develop. Based on variations of
CDMA, these spread spectrum technologies distribute radio signals over a wide
range of frequencies and then collect them onto their original frequencies at
the receiver. We have already brought to market

---------
* UMTS is a trademark of the European Telecommunications Standards Institute.

CDMA spread spectrum CDMA2000-networks in North America and expect to supply
UMTS networks in Europe and Korea in the near future. However, we cannot assure
you that the spread spectrum technologies on which we have chosen to focus will
become the dominant standards for 3-G wireless networks in the future. Some of
our competitors invest heavily in GSM, a technology in which we have decided not
to invest heavily in the future.

Leveraging our products and services across our portfolio, our Mobility
product offerings include:

BASE STATIONS PRODUCTS

Base stations provide the radio link that transmits and receives cellular
subscriber calls and manages handoffs as customers move from cell (the area in
which calls are handled by a particular base station) to cell. Each radio base
station covers a specific geographic area with a capacity to handle a certain
amount of subscriber traffic. Typically, base station equipment represents a
significant portion of the capital equipment cost of a mobile operator.

Our family of Flexent'TM' Base Station products supports virtually all major
radio access technologies (AMPS, TDMA, CDMA, GSM and UMTS). While we will
continue to sell AMPS, TDMA and GSM radio equipment to existing customers,
Mobility has made a strategic decision to focus on spread spectrum technologies,
such as CDMA and UMTS, in the future.

The Flexent OneBTS Base Station is the newest member of our base station
family, supporting CDMA and UMTS technologies, and will be the primary platform
that we offer for UMTS network deployments. The Flexent OneBTS base station
addresses the form, fit and function of future assemblies in a modular fashion
so that current investment is not likely to be lost as the cell evolves to
include expanded capacity in wireless voice and/or data transmissions.

CORE NETWORK EQUIPMENT

The core network equipment is responsible for connecting radio base stations
to the public voice and data networks. The primary element of the core network
for voice traffic is the mobile switching center ('MSC'). MSCs provide the
transfer of calls within the wireless network and interface to the public
switched telephone networks. The majority of these voice and packet data core
network products are provided by the INS segment. See 'Integrated Network
Solutions (INS) Segment' for more details on these products.

Our 5ESS-2000 Switch has advanced switching, signaling and administrative
capabilities to deliver cost-effectively the standard mobile switching center
functionality. It is a multipurpose, flexible modular platform capable of
supporting both wireline and wireless telecommunications applications. For our
existing wireless customers, we expect to continue to support the 5ESS-based
mobile switching center and provide a graceful transition to the new
Softswitch-based solution for IP over voice services.

Our Softswitch-based 3-G MSC provides integrated voice and data services
that use open application programming interfaces (applications for which the
code is published), enabling providers to create new innovative services for the
mobile Internet.

For new data oriented services, we are delivering Packet Data Gateways
(GGSN/PDSM) based on the Springtide 7000'r' IP Services Switch. This platform
enables wireless service provides to create secure connections for enterprise
data systems.

NETWORK MANAGEMENT PRODUCTS

Operations and maintenance centers (which are essentially software systems)
allow for the service provider's provisioning, diagnostics and administration of
its wireless networks. Our Mobility segment will be utilizing the Navis'TM'
network operations platforms from INS to provide these products.

APPLICATIONS AND SERVICE DELIVERY PRODUCTS

The MiLife'TM' Applications Platforms allow a wireless service provider to
easily introduce personalized mobile services. These platforms are used to
support mobile applications and services developed by us and by third parties.

COMPETITION

The global communications networking industry is highly competitive. Our
current principal competitors include Alcatel, Alsthom S.A., CIENA Corporation,
Cisco Systems, Inc., LM Ericsson Telephone Company, Fujitsu Limited, Motorola
Inc., Nokia Corporation, Nortel Networks Corporation, Siemens AG and NEC
Corporation. Some of our competitors, such as Alcatel, Cisco and Nortel, compete
across many of our product lines, while others do not offer as wide a breadth of
products and services as we do.

We expect that the level of competition on pricing and product offerings
will intensify as industry participants seek to strengthen their relationships
with large service providers and as our industry undergoes consolidation.
Additional factors that could impact on our ability to compete successfully in
our industry include:

- the quality, performance, reliability and market acceptance of our
products;

- market acceptance of our competitors' products;

- efficiency and quality of the production and implementation of our
products;

- our ability to develop appropriate technologies and introduce new products
and services and value added features on a timely basis;

- our ability to provide or secure customer financing in certain emerging
U.S. and non-U.S. markets; and

- our customer support and reputation.

We cannot assure you that we will be able to compete successfully against
current or future competitors. We believe we are currently among the top
suppliers of products and services to global wireline and wireless service
providers; however, a number of our existing competitors are very large
companies with substantial technical, engineering and financial resources and
brand recognition. In addition, we may from time to time face new competitors,
including entrants from the telecommunications, computer software, data
networking and semiconductor industries. These competitors may be able to offer
lower prices, additional products or services or other incentives that we cannot
match or do not offer. They may also be in a stronger position to respond
quickly to new or emerging technologies and to undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and make more
attractive offers to our potential customers, employees and third party agents.

LUCENT WORLDWIDE SERVICES (LWS)

During most of fiscal year 2001, LWS was reported as a separate segment,
integrating all of our service capabilities. In fiscal year 2002, those LWS
services and personnel dedicated to wireline customers will be reported as part
of the INS segment, and services and personnel supporting wireless customers
will be reported as part of the Mobility segment. Through these segments, we
will continue to provide a comprehensive array of professional services to
communications service providers worldwide. These services span the full life
cycle of planning, design, consulting and integration support services as well
as network engineering, provisioning, installation and warranty support,
operations and technical support and allow communications companies to plan,
build and manage their networks and transform their networks into Service
Intelligent networks.

NON-U.S. OPERATIONS

Despite the anticipated closing of many of our non-U.S. facilities and the
reduction of our non-U.S. work force, we will continue to have significant
operations in foreign countries, including manufacturing facilities, sales
personnel and customer support operations. See 'Lucent Restructuring Program.'
For

fiscal year 2001, we derived approximately 35% of our revenues from sales
outside the United States. We manufacture a significant portion of our products
outside the United States and are dependent on international suppliers for many
of our parts. However, because we intend to continue to pursue focused growth
opportunities in carefully delineated markets outside the United States, we will
continue to be subject to the risks inherent in doing business in foreign
countries. In many non-U.S. markets, long-standing relationships between our
potential customers and their local providers and protective regulations,
including local content requirements and type approvals, create barriers to our
entry; reversals or delays in the opening of non-U.S. markets to new competitors
could adversely affect our ability to capitalize on the opportunities in these
markets. Also, pursuit of non-U.S. opportunities may require us to make
significant investment for an extended period before returns on such investment,
if any, are realized. Such projects and investments could be adversely affected
by difficulties in protecting intellectual property, exchange controls, currency
fluctuations, investment policies, repatriation of cash, nationalization, social
and political risks, taxation, and other factors, depending on the country in
which such opportunity arises.

BELL LABS

Our INS and Mobility segments are supported by the technological expertise
provided by Bell Labs, one of the world's largest research and development
organizations focused on the needs of large service providers. Bell Labs
provides basic and applied research and development support for our business.
Most of its technical personnel are part of the segments they support. Bell
Labs' mission is to develop technically advanced products and services that will
keep us at the forefront of communications, to conduct fundamental research in
scientific fields important to communications and to create innovations that can
be put to use in our new communications products and services. Bell Labs
currently receives about four patents each day. Bell Labs' R&D activities
continue to focus on the technologies we view as central to our business
strategy: software, network design and engineering, network services, photonics,
data networking and wireless/cellular. Bell Labs also has led in the development
of software-based networking technologies that support our systems and products.

Bell Labs has made significant discoveries and advances in communications
science and technology, software design and engineering and networking. These
contributions include the invention of the transistor and the design and
development of integrated circuits, many types of lasers and recently,
molecular-scale transistors. In molecular-scale transistors, single molecules
are responsible for the transistor action -- switching and amplifying
electrical signals.

Bell Labs has become smaller as we reorganized or divested various
businesses, such as Agere, Avaya and our power systems business. Bell Labs'
researchers and developers associated with those businesses were relocated to
work with the new companies. At the same time, certain areas of R&D work grew.
For example, Bell Labs increased its work on technologies to further the
development of Service Intelligent network architecture.

SUPPLY CHAIN NETWORKS

Supply Chain Networks manages our end-to-end supply chain and supplier
activities needed to produce and deliver our products and services to our global
service provider customers. Supply Chain Networks' functions include: supporting
our go-to-market business model, managing our contract manufacturers and
partnering with our internal R&D and segment product management groups to
expedite delivery of our products and services.

CORPORATE HEADQUARTERS

Our reporting segments draw upon centrally managed but locally deployed
corporate support groups that include cash management, legal, accounting, tax,
insurance, public relations, insurance, advertising, human resources and data
services.

BACKLOG

Our backlog, calculated as the aggregate of the sales price of orders
received from customers less revenue recognized, was approximately $4.3 billion
and $8.7 billion on September 30, 2001 and 2000, respectively. Of these amounts,
approximately $600 million and $1.9 billion at September 30, 2001 and 2000,
respectively, was attributable to Agere, which has been reported as a
discontinued operation. Approximately $4.1 billion, of which $444 million
relates to Agere, of the orders included in the September 30, 2001 backlog are
scheduled for delivery during fiscal year 2002. However, all orders are subject
to possible rescheduling by customers. Although we believe that the orders
included in the backlog are firm, customers may be able to cancel some orders
without penalty, and we may elect to permit cancellation of orders without
penalty where management believes that it is in our best interest to do so. In
addition, some customers may become unable to pay for or finance their purchases
as a result of a deterioration in their financial positions.

SOURCES AND AVAILABILITY OF COMPONENTS AND MANUFACTURING

We make significant purchases of components and other materials from many
U.S. and non-U.S. sources. While there have been some shortages in components
and some other materials, we have generally been able to obtain sufficient
materials and components from sources around the world to meet our needs,
although there may be temporary delays. We also develop and maintain alternative
sources for essential materials and components. We do not have a concentration
of sources of supply of materials, labor or services that, if suddenly
eliminated, could severely impact our operations. The transition of
manufacturing operations to several contract manufacturers may cause a
concentration in fiscal year 2002.

SEASONALITY

Our revenues and earnings have not followed a consistent pattern and have
not been materially seasonal.

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY RIGHTS

In connection with our separation from AT&T in 1996, we were assigned
ownership of the majority of AT&T's patents, entered into a cross-licensing
agreement with AT&T and NCR Corporation ('NCR,' a subsidiary of AT&T which
conducted AT&T's transaction-intensive computer business and was spun off by
AT&T in December 1996) and were given rights, subject to specified limitations,
to pass through to our customers certain rights under approximately 400 patents
retained by AT&T. See 'Separation Agreements -- AT&T -- Technology licenses
and related matters.' From October 1, 1997 to September 30, 2001, we were issued
approximately 4,500 patents in the U.S. As a result of certain divestitures, as
indicated below in 'Separation Agreements,' we now own approximately 6,700
patents in the U.S. and 11,000 patents in foreign countries. The foreign patents
are, for the most part, counterparts of our U.S. patents. Many of the patents
owned by us are licensed to others, and we are licensed to use certain patents
owned by others.

Our intellectual property licensing division licenses, protects and
maintains our intellectual property and enforces our intellectual property
rights. This responsibility includes the licensing of our patents and technology
to third parties and negotiating agreements regarding our licensing of
intellectual property from others.

We market our products primarily under our own names and marks. We consider
our many trademarks to be valuable assets. Many of our trademarks are registered
throughout the world.

We rely on patent, trademark, trade secret and copyright laws both to
protect our proprietary technology and to protect us against claims from others.
We believe that we have direct intellectual property rights or rights under
cross-licensing arrangements covering substantially all of our material
technologies. However, there can be no assurance that claims of infringement
will not be asserted against us or against our customers in connection with
their use of our systems and products, nor can

there be any assurance as to the outcome of any such claims, given the
technological complexity of our systems and products.

In connection with our divestiture of Avaya in fiscal year 2000, we assigned
certain patents, technology, and trademarks to Avaya. We assigned to Avaya or
its subsidiaries approximately 800 issued U.S. patents and their corresponding
foreign counterparts relating principally to the businesses of Avaya. We
assigned to Avaya certain technology, including trade secrets, software and
copyrights, principally relating to the Avaya businesses. We also assigned to
Avaya several hundred trademarks principally relating to the Avaya businesses.
We and Avaya each granted to the other a non-exclusive license to make and sell
the products and services in which each was then or thereafter engaged. Each of
us and Avaya also granted limited licenses to the other under certain specified
technology existing as of October 1, 2000. There are no time restrictions
applicable to Avaya's use of patents assigned by or licensed to us.

In connection with the IPO of Agere, we and Agere executed and delivered
assignments and other agreements related to patents, technology and trademarks
owned by us. We assigned or exclusively licensed to Agere or its subsidiaries
approximately 6,000 U.S. patents and patent applications and their corresponding
foreign counterparts relating principally to the businesses of Agere. We
assigned to Agere certain technology, including trade secrets, software and
copyrights, principally relating to the Agere businesses. We also assigned to
Agere several hundred trademarks principally relating to the Agere businesses.
We and Agere each granted to the other, under the patents that each has, as well
as patents issued on patent applications with a filing date prior to February 1,
2003, a non-exclusive, personal nontransferable license to make and sell all
products and services in which each was then or thereafter engaged. The
cross-licenses also permit each of us and Agere, subject to limitations, to
engage third parties to make products for the licensee, and to pass through to
licensee's customers limited rights with respect to licensee's products and
services. Each of us and Agere also granted limited licenses to the other under
certain specified technology existing as of January 31, 2001. There are no time
restrictions applicable to Agere's use of patents assigned by or licensed to us.
See Agere's Registration Statement on Form S-1/A (No. 333-51594) filed with the
SEC on February 7, 2001.

RISK FACTORS

FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K and other documents we file with the SEC
contain forward-looking statements that are based on current expectations,
estimates, forecasts and projections about the industries in which we operate,
our beliefs and our management's assumptions. In addition, other written or oral
statements that constitute forward-looking statements may be made by or on
behalf of us. Words such as 'expects,' 'anticipates,' 'targets,' 'goals,'
'projects,' '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 certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual outcomes and results may differ materially from what
is expressed or forecast in such forward-looking statements. Except as required
under the federal securities laws and the rules and regulations of the SEC, we
do not have any intention or obligation to update publicly any forward-looking
statements after the distribution of this Form 10-K, whether as a result of new
information, future events, changes in assumptions, or otherwise.

See the prospectus and reports filed by Agere with the SEC for a further
list and description of risks and uncertainties related to Agere.

The following items are representative of the risks, uncertainties and
assumptions that could affect the outcome of the forward-looking statements. In
addition, such forward-looking statements could be affected by general industry
and market conditions and growth rates, general U.S. and non-U.S. economic and
political conditions, including the global economic slowdown and interest rate
and currency exchange rate fluctuations and other future events or otherwise.

- If the telecommunications market does not improve, or improves at a slower
pace than we anticipate, our results of operations will continue to suffer.

- We may require additional sources of funds if our sources of liquidity are
unavailable or insufficient to fund our operations. We cannot assure you
that the additional sources of funds would be available or available on
reasonable terms.

- We incurred a net loss in fiscal year 2001 and may continue to incur net
losses in the future; if we continue to incur net losses, we may be unable
to comply with our debt covenants and to complete our intended spin-off of
Agere.

- Our restructuring program may not yield the benefits we expect and could
even harm our financial condition, reputation and prospects.

- We operate in a highly competitive industry. Our failure to compete
effectively would harm our business.

- A limited number of our customers account for a substantial portion of our
revenues, and the loss of one or more key customers could significantly
reduce our revenues and profitability.

- We have developed outsourcing arrangements for the manufacture of some of
our products. If these third parties fail to deliver quality products and
components at reasonable prices on a timely and reliable basis, we may
alienate some of our customers and our revenues and profitability may
decline.

- As we expand our use of third parties for contract manufacturing and
distribution of our products, our inability to control or manage these
relationships properly and effectively could have unintended adverse
consequences to us, such as damage to our reputation, violation of local
laws and regulations and increased costs to our business.

- We have long-term sales agreements with a number of our large customers.
Some of these arrangements are fixed-price contracts that could result in
cost overruns, and some may require us to sell products and services that
we would otherwise discontinue, thereby diverting resources away from the
development of more profitable or strategically important products.

- We are vulnerable to downturns in our customers' businesses as a result of
our customer financing arrangements.

- If we are unable to provide customer financing to our customers when
appropriate, we may lose some of our customers. Our credit ratings can
affect our ability to offer such financing.

- If we fail to enhance our existing products and keep pace with
technological advances in our industries or if we pursue technologies that
do not become commercially accepted, customers may not buy our products and
our revenues and profitability may be adversely affected.

- Because many of our current and planned products are highly complex, they
may contain defects or errors that are detected only after deployment in
communications networks; if that occurs, our reputation may be harmed.

- Many of the products and services we offer are developed on reliance upon
existing technical standards and regulations, our interpretation of
unfinished standards or the lack of such standards and regulations. Rapid
changes to existing regulations and standards or the implementation of new
regulations upon products and services not previously regulated could
adversely affect development, demand, sale and warranty of our product and
services, thus increasing our costs and decreasing the demand for our
products.

- We are party to several lawsuits, which, if determined adversely to us,
could result in the imposition of damages against us and could harm our
business and financial condition.

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

- Our success depends on our ability to retain and recruit key personnel.

- We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and equity prices that could impact our results of
operations and financial condition.

- We are subject to environmental, health and safety laws which could
increase our costs and restrict our business operations.

- Our results of operations, working capital requirements and cash flow from
operating activities can vary greatly from fiscal quarter to fiscal
quarter.

- Our revenues and profitability may be negatively impacted if the mix of our
products and services become less attractive to our customers.

- We may be unable to realize an economic benefit from our deferred tax
assets which would have an adverse effect on our future results of
operations.

EMPLOYEE RELATIONS

On September 30, 2001, we had approximately 77,000 employees. Of these
77,000 employees, 69% were located in the United States. Of these domestic
employees, approximately 36% were represented by unions, primarily the
Communications Workers of America ('CWA') and the International Brotherhood of
Electrical Workers ('IBEW'). Our current five-year collective agreements with
the CWA and IBEW expire on May 31, 2003.

ENVIRONMENTAL MATTERS

Our current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. We have remedial and
investigatory activities under way at numerous current and former facilities. In
addition, we were named a successor to AT&T as a potentially responsible party
('PRP') at numerous 'Superfund' sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ('CERCLA') or
comparable state statutes. Under the Separation and Distribution Agreement with
AT&T, we are responsible for all liabilities primarily resulting from or
relating to the operation of our business as conducted at any time prior to or
after the Separation from AT&T including related businesses discontinued or
disposed of prior to the Separation, and our assets including, without
limitation, those associated with these sites. In addition, under such
Separation and Distribution Agreement, we are required to pay a portion of
contingent liabilities paid out in excess of certain amounts by AT&T and NCR,
including environmental liabilities.

It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. We record an environmental reserve
when it is probable that a liability has been incurred and the amount of the
liability is 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 periods of remediation for the applicable sites, which
typically range from five to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily upon
internal or third-party environmental studies and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or as circumstances change. The amounts provided
for in our consolidated financial statements for environmental reserves are the
gross undiscounted amounts of such reserves, without deductions for insurance or
third-party indemnity claims. In those cases where insurance carriers or
third-party indemnitors have agreed to pay any amounts, and management believes
that collectibility of such amounts is probable, the amounts are reflected as
receivables in the consolidated financial statements. Although we believe that
our reserves

are adequate, there can be no assurance that the amount of capital expenditures
and other expenses which will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in our reserves or will not have a material adverse effect on our
financial condition, results of operations or cash flows. Any possible loss or
range of possible loss that may be incurred in excess of that provided for at
September 30, 2001 cannot be determined.

SEPARATION AGREEMENTS

AT&T

For the purposes of governing certain of the relationships between us and
AT&T (including NCR) following the Separation, in 1996 we, AT&T and NCR entered
into a Separation and Distribution Agreement and related ancillary agreements
(collectively, the 'Separation Agreements'). The ancillary agreements include
the Employee Benefits Agreement, technology-related agreements, the Tax Sharing
Agreement and other tax-related agreements. The full text of the Separation and
Distribution Agreement and other ancillary agreements are exhibits to AT&T's
Annual Report on Form 10-K filed on February 28, 1996.

SEPARATION AND DISTRIBUTION AGREEMENT

Under the Separation and Distribution Agreement, we assumed or agreed to
assume, and agreed to perform and fulfill all the 'Lucent Liabilities' (as
defined in the Separation and Distribution Agreement) in accordance with their
respective terms. Without limitation, the Lucent Liabilities generally include
all liabilities and contingent liabilities relating to our present and former
business and operations, and contingent liabilities otherwise assigned to us;
contingent liabilities related to AT&T's discontinued computer operations (other
than those of NCR) were assigned to us. The Separation and Distribution
Agreement provides for the sharing of contingent liabilities not allocated to
one of the parties in specified proportions, and also provides that each party
will share specified portions of contingent liabilities related to the business
of any of the other parties that exceed specified levels.

EMPLOYEE BENEFITS AGREEMENT

AT&T and we entered into the Employee Benefits Agreement that governs our
employee benefit obligations, including compensation and benefits, with respect
to active employees and retirees assigned to us. Pursuant to the Employee
Benefits Agreement, we assumed and agreed to pay, perform, fulfill and
discharge, in accordance with their respective terms, certain liabilities to, or
relating to, former employees of AT&T or its affiliates employed by us and our
affiliates and certain former employees of AT&T or its affiliates (including
retirees) who either were employed in our business or who otherwise are assigned
to us for purposes of allocating employee benefit obligations (including all
retirees of Bell Labs).

PATENT LICENSES AND RELATED MATTERS

We, AT&T and NCR executed and delivered assignments and other agreements,
including a patent license agreement, related to patents then owned or
controlled by AT&T and its subsidiaries. The patent assignments divided
ownership of patents, patent applications and their foreign counterparts among
us, AT&T and NCR, with the substantial portion of those then owned or controlled
by AT&T and its subsidiaries (other than NCR) being assigned to us. A small
number of the patents assigned to us are jointly owned with either AT&T or NCR.
Certain of the patents that we jointly own with AT&T are subject to a joint
ownership agreement under which each of AT&T and us has full ownership rights in
the patents. The other patents that we jointly own with AT&T, and the patents
that we jointly own with NCR, are subject to defensive protection agreements
with AT&T and NCR, respectively, under which we hold most ownership rights in
the patents exclusively. Under these defensive protection agreements, AT&T or
NCR, as the case may be, has the ability, subject to specified restrictions, to
assert infringement claims under the patents against companies that assert
patent infringement claims against them, and has consent rights in the event we
wish to license the patents to certain third parties or for certain fields of
use under specified circumstances. The defensive protection agreements also
provide for one-time payments from AT&T and NCR to us.

The patent license agreement entered into by us, AT&T and NCR provides for
cross-licenses to us, AT&T and NCR, under each of the other parties' patents
that are covered by the licenses, to make, use, lease, sell and import any and
all products and services of the businesses in which the licensed company
(including specified related companies) is now or hereafter engaged. The
cross-licenses also permit each party, subject to specified limitations, to have
third parties make items under each of the other parties' patents, as well as to
pass through to customers certain rights under each of the other parties'
patents with respect to products and services furnished by the licensed company.
In addition, the rights granted to us and AT&T include the right to license
third parties under each of the other's patents to the extent necessary to meet
existing patent licensing obligations as of March 29, 1996, and AT&T has the
right, subject to specified restrictions and procedures, to ask us to license
third parties under a limited number of identified patents that were assigned to
us.

TECHNOLOGY LICENSES AND RELATED MATTERS

We, AT&T and NCR executed assignments and other agreements, including the
Technology License Agreement, related to technology then owned or controlled by
AT&T and its subsidiaries. Technology includes copyrights, mask works and other
intellectual property other than trademarks, trade names, trade dress, service
marks and patent rights. The technology assignments divide ownership of
technology among us, AT&T and NCR, with AT&T and us owning technology that was
developed by or for, or purchased by, our business or AT&T's services business,
respectively, and NCR owning technology that was developed by or for, or
purchased by, NCR. Technology that is not covered by any of these categories is
owned jointly by us and AT&T or, in the case of certain specified technology,
owned jointly by us, AT&T and NCR.

The Technology License Agreement entered into by us, AT&T and NCR provides
for royalty-free cross-licenses to each to use the other parties' technology
existing as of April 10, 1996, except for specified portions of each technology
as to which use by the other is restricted or prohibited.

AVAYA

For the purpose of governing certain of the relationships between us and
Avaya following its spin-off, we and Avaya entered into a Contribution and
Distribution Agreement, as well as other ancillary agreements, including the
Employee Benefits Agreement, the Patent and Technology License Agreement, the
Tax Sharing Agreement and the Trademark Licensing Agreement. The Contribution
and Distribution Agreement provides for each of us and Avaya to indemnify the
other with respect to contingent liabilities primarily relating to their
respective businesses or otherwise assigned to each of us, subject to certain
sharing provisions. In the event the aggregate value of all amounts paid by
each, in respect of any single contingent liability or any set or group of
related contingent liabilities, is in excess of $50 million, each will share
portions in excess of the threshold amount based on agreed-upon percentages. The
Contribution and Distribution Agreement also provides for the sharing of certain
contingent liabilities, specifically: (1) any contingent liabilities that are
not primarily our contingent liabilities or contingent liabilities associated
with the businesses attributed to Avaya; (2) certain specifically identified
liabilities, including liabilities relating to terminated, divested or
discontinued businesses or operations; and (3) shared contingent liabilities
within the meaning of the Separation and Distribution Agreement with AT&T Corp.
The full text of the Contribution and Distribution Agreement and other ancillary
agreements are exhibits to the Registration Statement on Form 10-12B/A
(No. 001-15951) of Avaya filed with the SEC on August 9, 2000.

AGERE

For the purpose of accomplishing the contribution and distribution to Agere
of certain businesses as well the governance of certain relationships between us
and Agere, in February 2001, we and Agere entered into a Separation and
Distribution Agreement, as well as other ancillary agreements, including the
Employee Benefits Agreement, the Patent and Technology License Agreement, the
Tax Sharing Agreement and the Trademark Licensing Agreement. The Separation and
Distribution Agreement provides for each of us and Agere to indemnify the other
with respect to contingent liabilities primarily relating to each of our
respective businesses or otherwise assigned to each of us, subject to certain
sharing provisions. The Separation and Distribution Agreement also provides for
the sharing of certain

contingent liabilities, specifically: (1) any contingent liabilities that are
not primarily our contingent liabilities or contingent liabilities associated
with the businesses attributed to Agere; (2) certain specifically identified
liabilities, including liabilities relating to terminated, divested or
discontinued businesses or operations; and (3) shared contingent liabilities
within the meaning of the Separation and Distribution Agreement with AT&T or the
Contribution and Distribution Agreement with Avaya. The full text of the
Separation and Distribution Agreement and other ancillary agreements are
exhibits to the Registration Statement on Form S-1/A (No. 333-51594) of Agere
filed with the SEC on February 7, 2001.

We and Agere executed and delivered assignments and other agreements related
to patents, technology and trademarks owned by us. We assigned or exclusively
licensed approximately 6,000 U.S. patents and patent applications and their
corresponding foreign counterparts relating principally to the Agere business.
We also assigned to Agere certain technology, including trade secrets, software
and copyrights and several hundred trademarks principally relating to the Agere
businesses. We and Agere each granted to the other, under the patents that each
of us has, a nonexclusive, personal, nontransferable license to make and sell
any and all products and services of the businesses in which the licensed
company, including related companies, is now or hereafter engaged. Under certain
circumstances, the cross-licenses provide for additional rights and
restrictions. The cross-licenses between us and Agere cover all patents of each
of us, including patents issued on patent applications filed before February 1,
2003. We and Agere each granted to the other, a nonexclusive, personal,
nontransferable license to designated technology existing as of January 31,
2001. Subject to a limited number of exceptions, no right was granted to
sublicense any of the technology other than in connection with the sale or
licensing of products.

ITEM 2. PROPERTIES.

At September 30, 2001, we operated 31 manufacturing sites, occupying in
excess of 9.7 million square feet. Nine locations were in the United States,
substantially all of which were owned. The remaining 22 sites were located in 14
other countries.

At September 30, 2001, we operated 87 warehouse sites, occupying in excess
of 3.8 million square feet. Seventy-one locations were in the United States,
substantially all of which were leased. The remaining 16 sites were located in
13 other countries.

At September 30, 2001, we operated 546 office sites (administration, sales,
field service), occupying in excess of 20.8 million square feet of which 15.9
million square feet were leased. Three hundred thirty of these office sites were
located in the United States. The remaining 216 sites were located in 56 other
countries.

At September 30, 2001, we operated additional sites with significant
research and development activities in nine countries, including the U.S.,
occupying in excess of 10.4 million square feet of which approximately 2.3
million square feet were leased.

All of our owned properties in the United States are subject to a mortgage
held by The Chase Manhattan Bank as security for our obligations under our
revolving credit facilities, with the exception of three core New Jersey
properties located in Whippany, Murray Hill and Holmdel that are pledged to
secure financing from GMAC Commercial Mortgage Corporation.

None of our properties listed above is used only by one reporting segment.
We believe our plants and facilities are suitable and adequate to meet our
current needs.

ITEM 3. LEGAL PROCEEDINGS.

In the normal course of business, we are subject to proceedings, lawsuits,
and other claims, including proceedings under the laws and governmental
regulations related to environmental, labor, product and other matters. (Also
see Item 1, 'Business -- Separation Agreements' regarding the assumption by us
of certain liabilities and contingent liabilities.) All such matters are subject
to many uncertainties, and outcomes are not predictable with assurance.
Consequently, we are unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact with respect to these matters at
September 30, 2001. 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, it is management's opinion that after final disposition, any
monetary liability or financial impact to us beyond that provided in the
consolidated balance sheet at September 30, 2001 would not be material to our
annual consolidated financial statements filed as part of this report, except
for the several purported class action lawsuits for alleged violations of
federal securities laws and the two purported class action complaints filed
under ERISA, described below.

We and certain of our former officers are defendants in several purported
shareholder class action lawsuits for alleged violations of federal securities
laws. Those cases were filed between January 2000 and February 2001 and have
been consolidated into a single action pending in the United States District
Court for the District of New Jersey. The Fifth Consolidated and Amended Class
Action Complaint filed in July 2001, alleges, among other things, that beginning
in late October 1999, we and certain of our officers misrepresented our
financial condition and failed to disclose material facts that had an adverse
impact on our future earnings and prospects for growth. The action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. The action is in its early stages and we are unable to determine its
potential impact on our consolidated financial statements. We have filed a
motion to dismiss the complaint and intend to defend the action vigorously.

We have been served with at least six derivative complaints filed by
individual shareowners in Delaware Chancery Court against the current members of
our Board of Directors, certain former directors and a former officer. Five of
those complaints were filed in January 2001 and have been consolidated in a
single action. The sixth complaint was filed in July 2001. The consolidated
actions assert that the current and former directors and officer allegedly
breached their fiduciary duties to us by acquiescing in or approving allegedly
fraudulent conduct and seek damages against the defendants and in favor of us,
as well as costs and expenses associated with litigation. The non-consolidated
action alleges that our current and former directors breached fiduciary duties
to supervise our company and seeks an accounting of the damages sustained as a
result of these alleged acts, as well as costs and expenses associated with
litigation. A motion has been filed to consolidate the non-consolidated action
with the actions that have already been consolidated. The actions are in the
early stages and we are unable to determine their potential impact on the
consolidated financial statements. We intend to defend the actions vigorously.

An additional derivative complaint was filed in September 2001 by an
individual shareholder in the Delaware Court of Chancery against our current
Board of Directors, three former directors and a former officer asserting claims
of corporate waste and breach of fiduciary duties arising out of the award of
performance-based compensation to our directors and an officer and seeks the
return of all such performance-based compensation, compensation to us for
resulting losses, the imposition of a constructive trust upon the proceeds of
any sale of our shares by the defendants, as well as costs and expenses
associated with litigation. This action is in the early stages and we are unable
to determine its potential impact on the consolidated financial statements. We
intend to defend the action vigorously.

One of our former sales executives filed a lawsuit against us in New Jersey
Superior Court in December 2000 relating to her separation agreement and
departure from us. The complaint asserts claims for violation of New Jersey's
Conscientious Employee Protection Act and breach of contract. The complaint
seeks unspecified compensatory and punitive damages, as well as attorneys' fees.
This action is in the early stages and we are unable to determine its potential
impact on the consolidated financial statements. We are defending the action
vigorously.

We and our former subsidiary, Lucent Technologies Consumer Products L.P.,
have been named as defendants in an action instituted by VTech Holdings Limited
and VTech Electronics Netherlands B.V. filed in January 2001 in the United
States District Court for the Southern District of New York. The lawsuit arises
from VTech's acquisition of wired telephone assets from us. The complaint
alleges fraud and breach of various warranties and covenants in the Purchase
Agreement as well as claims for rescission and attorneys' fees. VTech seeks
approximately $300 million in damages, in addition to costs and expenses
associated with the litigation. In the alternative, VTech seeks rescission of
the Purchase Agreement and disgorgement by us of the purchase price of the wired
telephone assets. Discovery in the action is ongoing. We believe VTech's claims
are without merit. We have filed a motion to dismiss the fraud claim and one
count of breach of contract and are defending the action vigorously.

An adversary proceeding was initiated by Winstar Communications, Inc. and
Winstar Wireless, Inc., against us in April 2001 in connection with the Chapter
11 bankruptcy petition filed by Winstar

Communications, Inc. and various related entities. The plaintiffs filed their
First Amended Complaint in the United States Bankruptcy Court for the District
of Delaware in October 2001. The complaint asserts various claims against us for
breach of contract and breach of the duty of good faith and fair dealing and
seeks compensatory damages in excess of $10 billion, specific performance of
certain provisions of the contracts, as well as costs and expenses associated
with litigation. We believe the action is without merit and are defending
it vigorously.

In April 2001, various shareowners filed a complaint against us, the current
members of our Board of Directors, certain current and former employees and
others in Texas District Court, Rockwall County. The complaint alleges
violations of federal securities laws and Texas and Delaware securities laws,
common law fraud and negligent misrepresentation in connection with statements
made in a Registration Statement and Prospectus filed by us with the SEC
relating to our purchase of Agere, Inc. in fiscal year 2000. Many of the
factual allegations in the complaint are substantially similar to certain of
the allegations in the consolidated shareholder class action described above.
The complaint seeks compensatory and exemplary damages, rescission of the
plaintiffs' tender of our stock, interest and costs and expenses associated
with litigation. The action is in its early stages and we are unable to
determine its potential impact on our consolidated financial statements. We
intend to defend the action vigorously.

In July 2001, a purported class action complaint was filed in the United
States District Court for the District of New Jersey under ERISA alleging, among
other things, that we and certain unnamed officers breached our fiduciary duties
with respect to our employee savings plans claiming that the defendants were
aware that our stock was inappropriate for retirement investment and continued
to offer such stock as a plan investment option. The complaint seeks damages,
injunctive and equitable relief, interest and fees and expenses associated with
litigation. The action is in the early stages and we are unable to determine its
potential impact on our consolidated financial statements. We intend to defend
the action vigorously.

In August 2001, a separate purported class action complaint was filed in the
United States District Court for the District of New Jersey under ERISA
alleging, among other things, that we breached our fiduciary duties with respect
to our employee benefit and compensation plans by offering our stock as an
investment to employees participating in the plans despite the fact that we
allegedly knew we were experiencing significant business problems. The complaint
seeks a declaration that we breached our fiduciary duties to plan participants,
an order compelling us to return all losses to the plans, injunctive relief to
prevent future breaches of fiduciary duties, as well as costs and expenses
associated with litigation. The action is in the early stages and we are unable
to determine its potential impact on our consolidated financial statements. We
intend to defend the action vigorously.

In November 2001, a purported class action complaint was filed in the United
States District Court for the District of New Jersey against us and current
and former officers, alleging that we and these officers concealed adverse
material information about Agere's financial condition prior to Agere's IPO and
material problems with our vendor financing portfolio. Plaintiff claims that
these alleged 'frauds' resulted in the decline of the market price of all Lucent
debt securities. This action is in the early stages and we are unable to
determine its potential impact on our consolidated financial statements. We
intend to defend this action vigorously.

On November 21, 2000, we announced that we had identified an issue impacting
revenue in the fourth fiscal quarter of 2000. We informed the SEC and initiated
a review by our outside counsel and outside auditors. In late December 2000, we
announced the results of the review, which resulted in certain adjustments to
our fourth fiscal quarter of 2000 results. We are cooperating fully with the
SEC's investigation of these matters.

See also, 'Environmental Matters' in Item 1 for additional information on
environmental matters and proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of the fiscal year covered by this report on
Form 10-K, no matter was submitted to a vote of our security holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

(A) MARKET PRICE AND DIVIDEND INFORMATION

Our common stock is traded on the New York Stock Exchange ('NYSE') under the
symbol LU. The following table presents the reported high and low sales prices
of our common stock as reported on the NYSE:

DIVIDEND
HIGH LOW PER SHARE
---- --- ---------

YEAR ENDED SEPTEMBER 30, 2001
Quarter ended December 31, 2000....................... $34.63 $12.19 $0.02
Quarter ended March 31, 2001.......................... 21.13 9.15 0.02
Quarter ended June 30, 2001........................... 11.50 5.04 0.02
Quarter ended September 30, 2001...................... 7.90 5.25 0.00

YEAR ENDED SEPTEMBER 30, 2000
Quarter ended December 31, 1999....................... $84.19 $55.06 $0.04
Quarter ended March 31, 2000.......................... 77.50 49.81 0.00
Quarter ended June 30, 2000........................... 65.94 51.06 0.02
Quarter ended September 30, 2000...................... 67.19 28.06 0.02

(B) APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

At November 30, 2001, there were approximately 1,556,233 shareowners of
record of our common stock.

On July 24, 2001, we announced that our Board of Directors had discontinued
payments of cash dividends on our common stock. Our credit facilities do not
currently allow us to declare cash dividends on our common stock unless we meet
specified operating and performance benchmarks. Assuming such benchmarks are
met, and there is not an event of default under the credit facilities, our
credit facilities would allow us to declare cash dividends on our common stock
of up to $.02 per share of common stock per fiscal quarter.

We currently have no plans to reinstate a dividend for our common stock.
However, in February and August of each year until 2031, we are required to pay
a dividend on our 8% redeemable convertible preferred stock in cash or common
stock based upon its liquidation preference value unless we lack legally
available funds or the preferred stock has been converted or redeemed. Our
credit facilities currently allow us to pay preferred stock dividends in cash.

ITEM 6. SELECTED FINANCIAL DATA.

FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED SEPTEMBER 30,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----

RESULTS OF OPERATIONS
Revenues.......................... $ 21,294 $ 28,904 $ 26,993 $ 21,307 $ 18,734
Gross margin (a).................. 2,058 11,714 12,969 9,817 7,795
Operating income (loss) (a)....... (19,029) 2,366 3,786 1,384 597
Income (loss) from continuing
operations...................... (14,170) 1,433 2,369 360 73
Earnings (loss) per common share
from continuing operations (b):
Basic......................... (4.18) 0.44 0.76 0.12 0.03
Diluted....................... (4.18) 0.43 0.74 0.12 0.03

Dividends per common share (b).... 0.06 0.08 0.08 0.0775 0.0563

FINANCIAL POSITION
Total assets...................... $ 33,664 $ 47,512 $ 34,246 $ 24,289 $ 20,176
Working capital................... 5,934 10,380 10,197 5,108 2,708
Total debt........................ 4,409 6,498 5,788 2,861 4,180
8.00% redeemable convertible
preferred stock................. 1,834 -- -- -- --
Shareowners' equity............... 11,023 26,172 13,936 7,960 4,573

---------

(a) Includes business restructuring charges and asset impairments of $11,416,
including $1,259 of inventory write-downs, which affected gross margin, in
the year ended September 30, 2001.

(b) All per share data have been restated to reflect the two-for-one splits of
our common stock that became effective on April 1, 1998 and April 1, 1999.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.

OVERVIEW

Lucent Technologies designs and delivers networks for the world's largest
communications service providers. Backed by Bell Labs research and development,
we rely on our strengths in mobility, optical, data and voice networking
technologies, as well as software and services, to develop next-generation
networks. Our systems, services and software are designed to help customers
quickly deploy and better manage their networks and create new,
revenue-generating services that help businesses and consumers.

During fiscal year 2001, we reorganized the company to become more focused
and better positioned to capitalize on market opportunities. This reorganization
included:

- on August 31, 2001, we sold our Oklahoma and Ohio manufacturing operations
to Celestica Corporation (see 'Liquidity and Capital
Resources -- Liquidity -- Sale of manufacturing operations');

- on July 24, 2001, we announced that we had entered into agreements to sell
our optical fiber business, and the sale was completed on November 16,
2001 (see 'Liquidity and Capital Resources -- Liquidity -- Sale of
optical fiber business');

- on April 2, 2001, Agere Systems Inc. (our microelectronics business)
completed an initial public offering ('IPO') of 600 million shares of
Class A common stock. We intend to spin-off our 57.8% remaining interest
in Agere through a tax-free distribution to our shareowners (see Note 3 to
the consolidated financial statements filed as part of this report and
'Liquidity and Capital Resources -- Agere Spin-Off Update');

- on January 24, 2001 and on July 24, 2001, we announced phase I and
phase II of our restructuring program. In connection with this program, we
recorded pretax charges of $11.4 billion during the year ended
September 30, 2001 (see 'Results of Operations -- Gross Margin and
Operating Expenses -- Restructuring charges and asset impairments' and
'Liquidity and Capital Resources -- Liquidity -- Restructuring
program'); and

- on December 29, 2000, we completed the sale of our power systems business
to Tyco International Ltd. for $2.5 billion in cash.

STRATEGIC DIRECTION

We are realigning our business around two customer-focused units: the
Integrated Network Solutions unit, targeting wireline service providers, and the
Mobility Solutions unit, targeting wireless service providers. As part of this
realignment, we expect to orient our product lines, research and development
efforts, sales and marketing, and supply chain and services to meet the needs of
the world's largest service providers.

While market demand continues to be uncertain, we believe our strategy to
target the world's largest service providers offers the most stable and
attractive opportunity for us. We have substantial experience in building and
supporting the complex networks that large service providers use to meet the
needs of their customers. We have strong relationships with most of the large
service providers in the United States, as well as many large service providers
outside the United States.

The successful implementation of our restructuring efforts is essential to
implementing our new strategy in the manner and on the timeline we intend (see
'Liquidity and Capital Resources -- Liquidity -- Restructuring program').

RESULTS OF OPERATIONS

REVENUES

The following table presents our U.S. and non-U.S. revenues and the
approximate percentage of total revenues (dollars in millions):

YEARS ENDED SEPTEMBER 30,
-----------------------------------
2001 2000 1999
---- ---- ----

U.S............................................... $13,776 $19,829 $18,407
Non-U.S........................................... 7,518 9,075 8,586
------- ------- -------
Total revenues.................................... $21,294 $28,904 $26,993
------- ------- -------
------- ------- -------

AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------

U.S............................................ 64.7% 68.6% 68.2%
Non-U.S........................................ 35.3% 31.4% 31.8%
------- ------- -------
Total revenues................................. 100.0% 100.0% 100.0%
------- ------- -------
------- ------- -------

The decrease in revenues globally for the year ended September 30, 2001
compared to the prior fiscal year was primarily due to a deterioration in global
telecommunications market conditions, a significant decrease in the competitive
local exchange carrier ('CLEC') market and a significant reduction in capital
spending by established service providers. In addition, we implemented a more
selective customer financing program, which also had an impact on revenues.
Approximately 50% of the decline in the U.S. was related to lower spending by
our largest customers. A limited number of our large customers provide a
substantial portion of our revenues. These customers include, among others,
Verizon, AT&T, Verizon Wireless, AT&T Wireless, SBC, BellSouth, Sprint and
Qwest. The remainder of the revenue decrease was primarily due to the
deteriorating CLEC market. The decrease in non-U.S. revenues for the year ended
September 30, 2001 compared with the prior year reflects the wind-down of a
project with Saudi Telecommunications Company ('STC') in Saudi Arabia and lower
revenues from two other projects, including One.Tel Corp., which went into
receivership in fiscal year 2001.

The increase in U.S. revenues for the year ended September 30, 2000 compared
with fiscal year 1999 included higher revenue from sales to incumbent local
exchange carriers (wireline and wireless) and CLECs. Revenues in fiscal year
2000 increased despite a decline in revenues from AT&T, which has historically
been a significant customer. The higher non-U.S. revenues reflected increases in
all regions except the Europe/Middle East/Africa region, which was negatively
affected by the substantial reduction of revenues from the STC project.

As a result of the sale of our optical fiber business and other dispositions
we may undertake, our new strategic direction that focuses on large service
providers and the continued uncertainty in the telecommunications market, we
expect that revenues for the year ended September 30, 2002 will be less than the
year ended September 30, 2001.

SEGMENT REVENUES

The following table presents our U.S. and non-U.S. revenues by segment and
the approximate percentage of total revenues (dollars in millions):

YEARS ENDED SEPTEMBER 30,
-------------------------
2001 2000 1999
---- ---- ----

U.S.:
Products...................................... $ 10,622 $ 15,888 $ 14,640
Services...................................... 2,870 3,272 2,828
Non-U.S.:
Products...................................... $ 6,225 $ 7,473 $ 7,182
Services...................................... 1,292 1,654 1,383
Total:
Products...................................... $ 16,847 $ 23,361 $ 21,822
Services...................................... 4,162 4,926 4,211

AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------
2001 2000 1999
---- ---- ----

Products...................................... 79.1% 80.8% 80.8%
Services...................................... 19.5% 17.0% 15.6%

Decreases in Products' and Services' revenues for the year ended
September 30, 2001, compared with the year ended September 30, 2000, were
primarily attributable to the factors noted above. Products' revenues decreased
in all product lines, except optical fiber. Sales of Products are a primary
driver of Services' revenues, therefore Services' revenues tend to follow the
trend of Products' revenues.

Of our major customers in the U.S., AT&T was the largest contributor to the
revenue decline. Compared with the prior year, revenues from AT&T declined by
$1.7 billion, of which $1.6 billion was in the Products' segment. This decrease
negatively affected our wireless, switching and access, and optical networking
products. Non-U.S. revenues were affected by the STC project noted above.
Revenues from the STC project were approximately $1 billion less than in the
prior year, of which $646 million of the decrease was in the Products' segment.
In addition, the STC project represented over 40% of the volume decline in the
Services' segment.

Increases in Products' revenues for the year ended September 30, 2000,
compared with the year ended September 30, 1999, were driven by sales of service
provider Internet infrastructure and wireless systems, offset in part by a
decline in switching and optical networking products. Lower than expected
revenues in optical networking were largely due to delayed market entry with the
OC-192 product. In addition, lower revenues from switching products were
primarily due to the shift in customer spending away from circuit switching,
competitive pricing and the impact of a substantial reduction in the STC
project.

Increases in Services' revenues in the U.S. for the year ended
September 30, 2000, compared with the year ended September 30, 1999, were driven
by factors noted in the Products' revenues discussion along with increased
installation revenues driven by improved sales to large service providers.
Non-U.S. Services' revenues increased in fiscal year 2000 as compared with the
prior fiscal year, primarily due to increased system support business in the
Europe/Middle East/Africa and Asia/Pacific regions.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, 'Revenue Recognition in Financial Statements'
('SAB 101'). SAB 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements. The adoption of SAB 101 in
fiscal year 2001 did not have a significant impact on segment revenues or the
comparability of results of operations for the periods presented (see Note 5 to
the consolidated financial statements filed as part of this report).

GROSS MARGIN

The telecommunications market conditions noted in the Revenues section
significantly reduced our gross margin and gross margin as a percentage of
revenues in the year ended September 30, 2001. The gross margin percentage for
the year ended September 30, 2001 decreased to 9.7% from 40.5% in the prior
fiscal year. The fiscal year 2001 gross margin percentage includes inventory
charges of approximately $1.2 billion associated with product rationalizations
and discontinuance of products under our business restructuring program.
Excluding this amount, the gross margin percentage would have been 15.6%. Other
factors contributing to the gross margin percentage decline were:

- reduced spending by service providers that caused lower sales volumes
across most product lines and services, and consequently resulted in less
absorption of fixed costs;

- one-time charges associated with customers experiencing financial
difficulties;

- lower software revenues compared with the prior year;

- costs associated with supplier and customer contract settlements;

- the impact of several international contracts with lower margins;

- higher provisions for slow-moving and obsolete inventory; and

- a shift of approximately 4% in the geographic revenue mix from the U.S.
region, which typically yields higher gross margins, to non-U.S. regions.

We expect our gross margin percentage to increase from its year ended
September 30, 2001 level. Based upon our estimated view of the
telecommunications market in the future, improved product mix, reduction of
one-time charges, successful implementation of cost reductions initiated in
fiscal year 2001, market and product rationalization work and the introduction
of new products, our gross margin percentage will improve in the future.
However, future market conditions and economic conditions could affect the
achievement of this objective.

As a percentage of revenue, gross margin decreased to 40.5% for the year
ended September 30, 2000 from 48.0% in fiscal year 1999. This decrease was
primarily due to decreased volumes and margins in optical networking and
switching products, including lower software revenues, an increase in
competitive pricing in other product lines and continued expansion into overseas
markets, which generally yield lower margins. This decrease in gross margin
percentage was partially offset by $350 million of lower personnel costs,
including lower incentive compensation awards and a higher net pension credit,
and the impact of adopting Statement of Position 98-1, 'Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use' ('SOP 98-1').

OPERATING EXPENSES

The following table presents our operating expenses (dollars in millions):

YEARS ENDED SEPTEMBER 30,
------------------------
2001 2000 1999
---- ---- ----

Selling, general and administrative ('SG&A') expenses,
excluding the following two items. 4,240 4,743 5,009
Provision for uncollectibles and customer financings....... 2,249 505 66
Amortization of goodwill and other acquired intangibles.... 921 362 296
------- ------ ------
Total SG&A............................................. 7,410 5,610 5,371
Research and development ('R&D')........................... 3,520 3,179 3,536
Purchased in-process research and development ('IPRD')..... -- 559 276
Business restructuring charges and asset impairments....... 10,157 -- --
------- ------ ------
Operating expenses..................................... $21,087 $9,348 $9,183
------- ------ ------
------- ------ ------

SG&A EXPENSES

Excluding the amortization of goodwill and other acquired intangibles and
the provision for uncollectibles and customer financings, SG&A expenses were
lower for the year ended September 30, 2001 as compared with fiscal year 2000
resulting primarily from headcount reductions under our restructuring program
and other company directed savings initiatives that limited discretionary
spending. We expect SG&A expenses to continue to decline in fiscal year 2002 for
these reasons (see 'Liquidity and Capital
Resources -- Liquidity -- Restructuring program').

SG&A expenses, excluding the amortization of goodwill and other acquired
intangibles and provision for uncollectibles and customer financings, decreased
for the year ended September 30, 2000 as compared with the year ended
September 30, 1999 due to lower personnel costs of $475 million, including lower
incentive compensation awards, a higher net pension credit and the impact of
adopting SOP 98-1 partially offset by $61 million of expenses primarily
associated with the mergers with International Network Services, Excel Switching
Corporation and Xedia. Included in SG&A expenses for the year ended
September 30, 1999 was a reversal of 1995 business restructuring charges of $85
million and expenses associated with the mergers with Ascend, Nexabit, RAScom
and VitalSigns in the aggregate of approximately $110 million.

PROVISION FOR UNCOLLECTIBLES AND CUSTOMER FINANCINGS

The deterioration of certain customers' credit worthiness resulted in higher
provisions for uncollectibles and customer financings in fiscal year 2001 as
compared with the prior year. Three customer financings, including provisions
for amounts due from One.Tel and Winstar, accounted for approximately 60% of the
fiscal year 2001 expense (see 'Liquidity and Capital Resources -- Customer
Financing').

The increase in the provision for uncollectibles and customer financings for
the year ended September 30, 2000 as compared with fiscal year 1999 was due to
increased reserves for bad debt on trade receivables due to specific credit
concerns with certain customers for which financing was provided.

AMORTIZATION OF GOODWILL AND OTHER ACQUIRED INTANGIBLES

The full-year effect of the acquisitions of Chromatis Networks, Inc. in June
2000 and Spring Tide Networks in September 2000 was the primary reason for the
increase in the amortization of goodwill and acquired intangibles in fiscal year
2001 as compared to the prior fiscal year. Under our restructuring program, we
discontinued and rationalized certain product lines and product development
efforts, including discontinuing the Chromatis product portfolio. As a result of
these actions, certain goodwill impairment charges were recorded. These actions
will result in lower amortization of goodwill and acquired intangibles in future
years (see ' -- Restructuring charges and asset impairments').

The increase in the amortization of goodwill and acquired intangibles for
the year ended September 30, 2000 as compared to fiscal year 1999 was associated
with the acquisitions noted above.

R&D

The increase in R&D expenses for the year ended September 30, 2001 as
compared with the prior fiscal year was primarily due to acquisitions made late
in fiscal year 2000 and new product development, particularly in next-generation
wireless products, optical networking products and switching and access
products, partially offset by program reductions included in our restructuring
program. As a result of our restructuring program, we expect R&D expenses to
decline in fiscal year 2002 (see 'Liquidity and Capital
Resources -- Liquidity -- Restructuring program'). The decrease in R&D
expenses for the year ended September 30, 2000 as compared with fiscal year 1999
was largely the result of $325 million of lower personnel costs, including lower
incentive compensation awards and a higher net pension credit, and the impact of
adopting SOP 98-1.

IPRD

The IPRD of $559 million for the year ended September 30, 2000, reflected
$131 million and $428 million from the Spring Tide and Chromatis acquisitions,
respectively. The IPRD of $276 million for the year ended September 30, 1999
related primarily to the acquisition of Stratus for $243 million and to a lesser
extent, the acquisitions of XNT, Quantum, InterCall, Quadritek and WaveAccess.
See further discussion under 'In-Process Research and Development.'

RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

On January 24, 2001 and on July 24, 2001, we announced phase I and phase II
of our restructuring program. Under the restructuring program, we exited certain
non-strategic wireless, optical networking and switching and access product
lines and streamlined our cost structure in various businesses and corporate
operations. These actions are expected to significantly enhance our ability to
achieve the goals associated with our new strategic direction. The total charge
for business restructuring and asset impairments was $11.4 billion, of which
$10.2 billion is included in Operating expenses. The operating expense charge
includes restructuring costs of $4.8 billion and asset write-downs of $5.4
billion. The remaining $1.2 billion of the business restructuring charge relates
to inventory and was charged to Costs.

Restructuring costs included:

- employee separation costs of $3.4 billion associated with approximately
39,000 voluntary and involuntary employee separations;

- contract settlements of $944 million, including settlements of purchase
commitments with suppliers of $508 million and contract renegotiations or
cancellations of contracts with customers of $436 million; and

- facility closings and other costs of $383 million.

Asset write-downs included:

- impairment charges for goodwill and other acquired intangibles of $4.1
billion, primarily related to the write-off of $3.7 billion of goodwill
and other acquired intangibles as a result of the discontinuance of the
Chromatis product portfolio;

- property, plant and equipment, net write-downs of $425 million;

- capitalized software write-downs of $362 million; and

- other asset write-downs of $522 million.

For additional information, see 'Liquidity and Capital
Resources -- Liquidity -- Restructuring program' and Note 2 to the
consolidated financial statements filed as part of this report.

OTHER INCOME (EXPENSE) -- NET

Other income (expense) -- net consisted of the following items (dollars in
millions):

YEARS ENDED
SEPTEMBER 30,
-------------------
2001 2000 1999
---- ---- ----

Interest income............................................. $ 255 $ 118 $ 129
Minority interests in earnings of consolidated
subsidiaries.............................................. (81) (50) (27)
Net losses from equity method investments................... (60) (31) (3)
Other-than-temporary write-downs of investments............. (266) (14) --
Loss on foreign currency transactions....................... (58) (18) (8)
Net gains on sales and settlements of financial
instruments............................................... 34 347 270
Write-off of embedded derivative assets..................... (42) -- --
Miscellaneous -- net...................................... (139) (19) (4)
------ ----- -----
Other income (expense) -- net............................. $ (357) $ 333 $ 357
------ ----- -----
------ ----- -----

The decrease in other income (expense) -- net was primarily related to
other-than-temporary write-downs of investments and lower net gains on sales and
settlements of financial instruments, partially offset by higher interest income
in fiscal year 2001 compared with the prior year. Due to adverse market
conditions in fiscal year 2001, we recorded impairment charges on several of our
investments. Conversely, in fiscal year 2000 we had gains on sales of
investments, which were primarily attributable to a gain of $189 million from
the sale of a certain equity investment. The write-off of the embedded
derivative assets was primarily related to One.Tel.

INTEREST EXPENSE

Interest expense for the year ended September 30, 2001 increased to $518
million as compared with $342 million for fiscal year 2000. The increase in
interest expense is due to higher weighted average short-term debt levels,
primarily related to borrowings under our credit facilities. In addition,
interest expense included the amortization of fees associated with entering into
our credit facility arrangements in fiscal year 2001. As of September 30, 2001,
we had reduced our total debt level by approximately $2.1 billion from the prior
year. If current debt levels are maintained or further reduced, we expect
interest expense to be lower in fiscal year 2002.

Interest expense for the year ended September 30, 2000 increased $24 million
to $342 million as compared with $318 million in fiscal year 1999 primarily due
to higher weighted average interest rates on commercial paper.

PROVISION (BENEFIT) FOR INCOME TAXES

The following table presents our provision (benefit) for income taxes and
the related effective tax (benefit) rates (dollars in millions):

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Provision (benefit) for income taxes..................... $(5,734) $924 $1,456
Effective tax (benefit) rate............................. (28.8)% 39.2% 38.1%

The effective tax benefit rate for the year ended September 30, 2001, was
lower than the U.S. statutory rate primarily from the impact of non-tax
deductible goodwill amortization and certain

non-tax deductible business restructuring charges and asset impairments, both of
which decreased the effective tax benefit rate, offset in part by research and
development tax credits, which increased the effective tax benefit rate on the
pretax loss from continuing operations.

We recorded a tax benefit resulting in related net deferred tax assets of
$5.2 billion as of September 30, 2001, reflecting net operating loss and credit
carryforwards and deductible temporary differences. Although realization is not
assured, we have concluded that it is more likely than not that the net deferred
tax assets will be realized based on the scheduling of deferred tax liabilities
and projected taxable income. The amount of the net deferred tax assets actually
realized, however, could vary if there are differences in the timing or amount
of future reversals of existing deferred tax liabilities or changes in the
actual amounts of future taxable income.

The effective income tax rates exceed the U.S. federal statutory income tax
rates for the years ended September 30, 2000 and 1999 primarily due to the
write-offs of IPRD costs and merger-related expenses that are not deductible for
tax purposes.

INCOME (LOSS) FROM CONTINUING OPERATIONS

As a result of the above, income (loss) from continuing operations and
related per share amounts are as follows (amounts in millions, except per share
amounts):

YEARS ENDED SEPTEMBER 30,
-------------------------------
2001 2000 1999
---- ---- ----

Income (loss) from continuing operations............... $ (14,170) $ 1,433 $ 2,369
Basic earnings (loss) per share from continuing
operations........................................... $ (4.18) $ 0.44 $ 0.76
Diluted earnings (loss) per share from continuing
operations........................................... $ (4.18) $ 0.43 $ 0.74
Weighted average number of common shares
outstanding -- basic............................... 3,400.7 3,232.3 3,101.8
Weighted average number of common shares
outstanding -- diluted............................. 3,400.7 3,325.9 3,218.5

INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET

Income (loss) from discontinued operations, net for each of the three years
in the period ended September 30, 2001 was ($3.2) billion or ($0.93) per basic
and diluted share, ($214) million or ($0.06) per basic and diluted share and
$1.1 billion or $0.34 per diluted share, respectively (see 'Liquidity and
Capital Resources -- Agere Spin-Off Update' and Note 3 to the consolidated
financial statements filed as part of this report.

EXTRAORDINARY GAIN, NET

During the year ended September 30, 2001, we recorded a gain of $1.2
billion, net of a $780 million tax provision, or $0.35 per basic and diluted
share from the sale of our power systems business (see Note 4 to the
consolidated financial statements filed as part of this report).

CUMULATIVE EFFECT OF ACCOUNTING CHANGES, NET

Effective October 1, 2000, we recorded a net $38 million charge for the
cumulative effect of certain accounting changes. This comprised a $30 million
earnings credit ($0.01 per basic and diluted share) from the adoption of
Statement of Financial Accounting Standards No. 133, 'Accounting for Derivative
Instruments and Hedging Activities' and a $68 million charge to earnings ($0.02
per basic and diluted share) from the adoption of SAB 101 (see 'Risk Management'
and Note 5 to the consolidated financial statements filed as part of this
report).

Effective October 1, 1998, we recorded a cumulative effect of accounting
change, net of $1.3 billion ($0.41 per diluted share) resulting from changing
our method of calculating annual net pension and postretirement benefit costs
(see Note 12 to the consolidated financial statements filed as part of this
report).

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999

NET CASH USED IN OPERATING ACTIVITIES

Net cash used in operating activities was $3.4 billion for the year ended
September 30, 2001 and was primarily due to the loss from continuing operations
(adjusted for non-cash items) of $6.6 billion, a decrease in accounts payable of
$759 million and changes in other operating assets and liabilities of $548
million. Changes in other operating assets and liabilities primarily include a
net increase in notes receivable and higher software development assets, offset
in part by business restructuring liabilities. The increases in net cash used in
operating activities were partially offset by decreases in receivables of $3.6
billion and in inventories and contracts in process of $881 million. Receivable
improvement is largely due to improved collections in fiscal year 2001. Average
receivable days outstanding improved by 34 days from 114 days at September 30,
2000 to 80 days at September 30, 2001. Improvements in inventory and contracts
in process resulted from our efforts in fiscal year 2001 to streamline inventory
supply chain operations, as well as lower amounts in net contracts in process
due to the wind-down of the STC project.

Net cash used in operating activities of $703 million for the year ended
September 30, 2000 was primarily a result of increases in receivables and
inventories and contracts in process of $1.6 billion and $2.2 billion,
respectively, and changes in other operating assets and liabilities of $1.7
billion. Changes in other operating assets and liabilities primarily include
higher software development assets and decreases in accrued income tax and
payroll and benefit related liabilities. Net cash used in operating activities
was partially offset by income from continuing operations (adjusted for non-cash
items) of $3.6 billion and tax benefits from stock options of $1.1 billion, and
an increase in accounts payable of $263 million. The receivable deterioration in
fiscal year 2000 resulted from slower collections, partially offset by smaller
revenue growth in the fourth fiscal quarter of 2000 as compared with the same
period in fiscal year 1999. Average receivable days outstanding increased by
19 days to 114 days at September 30, 2000. The increase in inventories and
contracts in process resulted from our increased production to meet current and
anticipated sales commitments to customers and the start-up of several long-term
projects.

Net cash used in operating activities of $1.6 billion for the year ended
September 30, 1999 was primarily a result of increases in receivables and
inventories and contracts in process of $3.2 billion and $1.6 billion,
respectively, and changes in other operating assets and liabilities of $2.3
billion, offset in part by income from continuing operations (adjusted for
non-cash items) of $4.3 billion and tax benefits from stock options of $394
million, and an increase in accounts payable of $636 million. Changes in other
operating assets and liabilities primarily included increases in notes
receivable and prepaid expenses.

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

Net cash provided by investing activities was $2.0 billion for the year
ended September 30, 2001 and was primarily from $2.5 billion in proceeds from
the sale of the power systems business, $572 million from the sale of two of our
manufacturing operations to Celestica (see ' -- Liquidity -- Sale of
manufacturing operations') and sales or disposals of property, plant and
equipment of $177 million. These proceeds were partially offset by capital
expenditures of $1.4 billion.

Net cash used in investing activities was $1.6 billion for the year ended
September 30, 2000 primarily from capital expenditures of $1.9 billion and
purchases of investments of $680 million, offset in part by proceeds from the
sales or maturity of investments of $820 million and from the disposition of
businesses of $250 million, largely related to the sale of the remaining
consumer products business.

Net cash used in investing activities was $1.1 billion for the year ended
September 30, 1999 and primarily includes capital expenditures of $1.4 billion
and purchases of investments of $872 million, offset in part by proceeds from
the sales or maturity of investments of $1.4 billion.

Capital expenditures primarily relate to expenditures for equipment and
facilities used in manufacturing, research and development and internal use
software.

NET CASH PROVIDED BY FINANCING ACTIVITIES

Net cash provided by financing activities for the year ended September 30,
2001 was $2.6 billion and was primarily due to net proceeds received from the
issuance of redeemable convertible preferred stock in August 2001 of $1.8
billion (a portion of which was used to reduce borrowings under our credit
facilities), net borrowings under our credit facilities of $3.5 billion ($2.5
billion of the debt associated with borrowings was assumed by Agere -- see
Note 10 to the consolidated financial statements filed as part of this report)
and proceeds from a real estate debt financing of $302 million under which
certain real estate was transferred to a separate, consolidated wholly-owned
subsidiary. Borrowings under our credit facilities were primarily used to fund
our operations and to pay down $2.1 billion of short-term borrowings, which
primarily represented commercial paper. We had no commercial paper outstanding
as of September 30, 2001. In addition, we repaid the current portion of
long-term debt that matured in July 2001 of $750 million. Dividends paid on our
common stock in fiscal year 2001 were $204 million. On July 24, 2001, we
announced that we will no longer pay dividends on our common stock, which will
improve our cash flow. This saving would be offset by annual preferred dividend
requirements of approximately $150 million, if we elect to pay such dividends in
cash.

Net cash provided by financing activities for the year ended September 30,
2000 of $2.2 billion resulted primarily from issuances of common stock related
to the exercise of stock options of $1.4 billion and a net increase in
short-term borrowings of $1.4 billion, partially offset by repayments of
long-term debt of $387 million and dividends paid of $255 million.

Net cash provided by financing activities for the year ended September 30,
1999 of $3.4 billion resulted primarily from issuances of long-term debt of $2.2
billion, issuances of common stock related to the exercise of stock options of
$725 million and a net increase in short-term borrowings of $705 million,
partially offset by dividends paid of $222 million.

LIQUIDITY

Our cash requirements through the end of fiscal year 2002 are primarily to
fund:

- operations, including spending on R&D;

- capital expenditures;

- cash restructuring outlays (see ' -- Restructuring program');

- capital requirements in connection with our customer financing commitments;

- debt service; and

- preferred stock dividend requirements, if we elect to pay such dividends in
cash.

Although we have implemented a more selective customer financing program in
fiscal year 2001, we have existing, and expect to continue to enter into,
financing arrangements for our customers that involve significant capital
requirements. In addition, our capital needs associated with customer financing
may increase if our ability to sell the notes representing existing customer
financing or transfer future funding commitments on acceptable terms to
financial institutions and investors is limited by a deterioration in the credit
quality of the customers to which we have extended financing (see 'Customer
Financing').

RESTRUCTURING PROGRAM

We expect the implementation of our restructuring program to reduce, on an
annualized basis, our operating expenses and working capital, as defined below,
compared with our first fiscal quarter of 2001 levels as follows:

- reduce annual operating expense run rate by $4.0 billion by the end of
fiscal year 2002. As of September 30, 2001, we had achieved over 60% of
this objective on an annualized basis;

- reduce working capital (defined as the change in receivables and inventory
adjusted for non-cash charges and asset securitizations, and normalized
for the change in quarterly sales) by $4.0 billion. As of September 30,
2001, we had achieved over 75% of this objective; and

reduce our annual capital spending rate to approximately $750 million.

Subject to its timely and successful implementation, we expect our
restructuring program to yield gross cash savings in excess of $5 billion
annually. These anticipated savings result primarily from reduced headcount.
Total cash outlays under the restructuring program are expected to be
approximately $2.1 billion, of which approximately $530 million was paid during
the current fiscal year with the majority of the remainder to be paid by the end
of fiscal year 2002.

We expect to complete the restructuring program by the end of fiscal year
2002. If implemented in the manner and on the timeline we intend, we expect to
realize the full benefits of our restructuring program by the end of fiscal year
2002.

We cannot assure you that our restructuring program will achieve all of the
expense reductions and other benefits we anticipate or on the timetable
contemplated. Because this restructuring program involves realigning our
business units and sales forces, it may be disruptive to our customer
relationships. Decreases in spending by these large service providers would
likely also have an adverse effect on revenues.

If we do not complete our restructuring program and achieve our anticipated
expense reductions in the time frame we contemplate, our cash requirements to
fund our operations are likely to be significantly higher than we currently
anticipate. In addition, because market demand continues to be uncertain and
because we are currently implementing our restructuring program and new business
strategy, it is difficult to estimate our ongoing cash requirements. Our
restructuring program may also have other unanticipated adverse effects on our
business.

If our restructuring program is successful, we expect to fund our currently
expected cash requirements for fiscal year 2002 through a combination of the
following sources:

- cash and cash equivalents as of September 30, 2001;

- available credit under our credit facilities (see ' -- Credit
facilities');

- proceeds from the sale of our optical fiber business;

- accounts receivable securitization facility;

- capital market transactions;

- dispositions and sales of assets; and

- cash flows from operations, subject to the successful implementation of
our business strategy.

We had net liquidity of approximately $5.4 billion on September 30, 2001,
resulting from cash and cash equivalents of $2.4 billion and availability under
our credit facilities of $3.0 billion. As of September 30, 2001, we had $1.0
billion outstanding under these credit facilities, which was repaid on
November 20, 2001.

On June 28, 2001, we established a $750 million revolving accounts
receivable securitization facility. As of September 30, 2001, we had obtained
net proceeds of $286 million, collateralized by $1.3 billion in accounts
receivable. Our ability to maintain the facility at the September 30, 2001 level
is subject to our ability to generate the amount of eligible accounts receivable
sufficient to support such level under the terms of the facility. Our ability to
obtain further proceeds depends on a combination of factors, including our
credit ratings and increasing the level of our eligible accounts receivable.
This facility was reduced to $500 million in October 2001.

CREDIT FACILITIES

As of September 30, 2001, we had a 364-day $2 billion credit facility that
expires on February 21, 2002 and a $2 billion credit facility that expires on
February 26, 2003. These credit facilities are secured by liens on substantially
all of our assets, including the pledge of Agere stock owned by us. Our ability
to access our credit facilities is subject to our compliance with the terms and
conditions of the credit facilities, including financial covenants. These
financial covenants require us to have minimum earnings before interest, taxes,
depreciation and amortization ('EBITDA') and minimum net worth measured at the
end of each fiscal quarter. As of September 30, 2001, we were in compliance with
these covenants, as

amended (see below). In addition, in the event a subsidiary defaults on its
debt, as defined in the credit facilities, it would constitute a default under
our credit facilities.

On August 16, 2001, we amended both of our credit facilities. The amendments
modified the financial covenants and certain other conditions and terms,
including those necessary to allow the distribution of Agere stock to our
shareowners (see ' -- Agere Spin-Off Update'). In addition, we cannot resume
payment of dividends on our common stock unless we achieve certain credit
ratings or EBITDA levels and no event of default exists under the credit
facilities. Payment of dividends on the common stock is limited to the rate of
dividends paid prior to the discontinuation of the cash dividend. We are
permitted to pay cash dividends on our convertible preferred stock if no event
of default exists under the credit facilities.

The total lending commitments under our credit facilities are reduced if we
undertake certain debt reduction transactions or generate additional funds from
specified non-operating sources in excess of $2.5 billion. The first $2 billion
in excess of the amount above would result in the termination of the 364-day $2
billion credit facility. Additional amounts would reduce the total lending
commitments under the remaining $2 billion credit facility that expires in
February 2003; however, this lending commitment can be reduced to no less than
$1.5 billion. Any outstanding borrowings under our credit facilities that exceed
the reduced lending commitments are required to be repaid. As of November 16,
2001, we had generated $4.5 billion of funds from specified non-operating
sources, including the $1.8 billion of proceeds we received from the issuance of
our redeemable convertible preferred stock, the $2.1 billion of proceeds from
the sale of our optical fiber business, $519 million of debt reduction from a
debt for equity exchange (see Note 3 to the consolidated financial statements
filed as part of this report) and the balance from other specified types of
transactions. On November 20, 2001, the total lending commitments under our
credit facilities were reduced to approximately $2 billion.

CREDIT RATINGS

Our credit ratings as of October 31, 2001 were as follows:

RATING FOR
RATING FOR OUR
OUR LONG- COMMERCIAL RATING FOR OUR
RATING AGENCY TERM DEBT PAPER PREFERRED STOCK LAST UPDATE
------------- --------- ----- --------------- -----------

Standard & Poor's............... BB - C B - August 16, 2001
Moody's(a)...................... Ba3 Not Prime B3 August 17, 2001
Fitch(a)........................ BB - B B August 17, 2001

---------

(a) The rating for our senior unsecured long-term debt has a negative outlook.

The Standard & Poor's, Moody's and Fitch ratings are below investment grade.
We expect both the recent, and any future, lowering of the ratings of our debt
to result in higher financing costs and reduced access to the capital markets.
As a result of the reductions of our credit ratings in fiscal year 2001,
commercial paper and some other types of borrowings became unavailable and
financing costs increased. We cannot assure you that our credit ratings will not
be reduced in the future by Standard & Poor's, Moody's or Fitch.

SALE OF OPTICAL FIBER BUSINESS

On November 16, 2001, we completed the sale of our optical fiber business to
The Furukawa Electric Co., Ltd. for $2.3 billion, approximately $200 million of
which was paid to us in CommScope, Inc. securities. Furukawa and CommScope have
agreed to enter into one or more joint ventures that will be formed to operate
the optical fiber business. The transaction is expected to result in a gain in
the first quarter of fiscal year 2002. In addition, we entered into an agreement
on July 24, 2001 to sell two Chinese joint ventures -- Lucent Technologies
Shanghai Fiber Optic Co., Ltd. and Lucent Technologies Beijing Fiber Optic Cable
Co., Ltd. -- to Corning Incorporated for $225 million. This transaction, which

is subject to U.S. and foreign governmental approvals and other customary
closing conditions, is expected to close by the end of the first calendar
quarter of 2002.

SALE OF MANUFACTURING OPERATIONS

In August 2001, we received $572 million from the closing of our transaction
with Celestica Corporation to transition our manufacturing operations at
Oklahoma City, Oklahoma and Columbus, Ohio. At closing, we entered into a
five-year supply agreement for Celestica to be the primary manufacturer for our
switching and access and wireless networking systems products. Until the
inventory is sold to an end user, inventory associated with the transaction
remains in our inventory balance, with a corresponding liability for proceeds
received. This inventory amounted to approximately $310 million at
September 30, 2001. Additionally, we may be required to repurchase up to $90
million of this inventory not used within one year of the transaction. The work
force related to these two operations is expected to be reduced and/or
transferred to Celestica during the first quarter of fiscal year 2002, resulting
in a non-cash charge of approximately $380 million, which is included as a
component of our business restructuring employee separation charge.

FUTURE CAPITAL REQUIREMENTS

We believe our cash on hand, availability under our credit facilities and
other planned sources of liquidity are currently sufficient to meet our
requirements through the end of fiscal year 2002. We cannot assure you, however,
that these additional sources of liquidity will be available when needed or that
our actual cash requirements will not be greater than we currently expect. As
described under ' -- Liquidity -- Credit facilities,' the receipt of proceeds
from specified asset sales in excess of a specified threshold results in a
reduction in the amount of available borrowings under our credit facilities. If
our remaining sources of liquidity are not available or if we cannot generate
positive cash flow from operations, we will be required to obtain additional
sources of funds through additional operating improvements, asset sales, capital
market transactions and financing from third parties or a combination thereof.
Although we believe that we have the ability to take these actions, we cannot
assure you that these additional sources of funds, if available, would be
available on reasonable terms or at all.

AGERE SPIN-OFF UPDATE

Our agreement with Agere provides that if the Agere distribution was not
completed on or before September 30, 2001, we would complete the Agere spin-off
as promptly as practicable following our satisfaction or waiver of all
conditions of such agreement. This agreement also provides that we may terminate
our obligation to complete the distribution if, after consultation with Agere
senior management, our board of directors determines, in its sole discretion,
that the distribution is not in the best interests of us or our shareowners. The
amendments to our credit facilities, completed on August 16, 2001, have delayed
our ability to complete the spin-off. We remain committed to completing the
process of separating Agere from our company, and we intend to move forward with
our distribution of our shares of Agere stock in a tax-free spin-off to our
shareowners. However, we cannot assure you that the conditions to our obligation
to complete the distribution will be satisfied by a particular date or that the
terms and conditions of our indebtedness will permit the distribution by a
particular date or at all.

The amendments to our credit facilities revised the conditions necessary for
us to secure a release of the pledge of Agere stock we own. The pledge can be
released and the distribution can occur at our request if all the following
terms and conditions as defined under the credit facilities are met:

- no event of default exists under the credit facilities;

- we have generated positive EBITDA for the fiscal quarter immediately
preceding the distribution;

- we meet a minimum current asset ratio;

- we have received $5.0 billion in cash from certain non-operating sources;
and

- the 364-day $2 billion credit facility has been terminated and the $2
billion credit facility, expiring in February 2003, has been reduced to
$1.75 billion or less.

The current terms of our credit facilities will not allow the distribution
unless, at the time of the distribution, we have generated $5.0 billion of
additional funds or reduction in debt from specified non-operating sources. As
of November 16, 2001, we had generated $4.8 billion of funds to satisfy this
requirement ($1.8 billion of proceeds from our issuance of redeemable
convertible preferred stock, $572 million of proceeds received from the
transaction involving our Oklahoma and Ohio manufacturing operations, $2.1
billion of cash proceeds received from the sale of our optical fiber business,
and funds from other specified types of transactions of approximately $300
million). We expect to raise the additional proceeds to satisfy the requirement
under our credit facilities.

We have received a private letter ruling from the Internal Revenue Service
holding that the distribution of our shares of Agere common stock to our
shareowners in the spin-off and to holders of our debt in the debt for equity
exchange will be tax free to us and our shareowners. The effectiveness of the
original ruling was conditioned on completion of the spin-off by September 30,
2001. However, we have received a supplemental ruling from the Internal Revenue
Service that maintains the effectiveness of the original ruling so long as the
spin-off is completed on or before June 30, 2002. The supplemental ruling also
favorably resolves certain additional tax issues arising from the issuance of
preferred stock.

CUSTOMER FINANCING

The following table presents our customer financing commitments at September
30, 2001 and September 30, 2000 (dollars in billions):

SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
------------------------------- --------------------------------
TOTAL TOTAL LOANS
LOANS AND AND
GUARANTEES LOANS GUARANTEES GUARANTEES LOANS GUARANTEES
---------- ----- ---------- ---------- ----- ----------

Drawn commitments............ $3.0 $2.6 $0.4 $2.0 $1.3 $0.7
Available but not drawn...... 1.4 1.4 -- 3.9 3.3 0.6
Not available................ 0.9 0.6 0.3 2.2 2.1 0.1
---- ---- ---- ---- ---- ----
Total commitments........ $5.3 $4.6 $0.7 $8.1 $6.7 $1.4
---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ----

Some of our customers worldwide are requiring their suppliers to arrange or
provide long-term financing for them as a condition of obtaining or bidding on
infrastructure projects. These projects may require financing in amounts ranging
from modest sums to more than a billion dollars. We use a disciplined credit
evaluation and business review process that takes into account the credit
quality of individual borrowers and their related business plans, as well as
market conditions. We consider requests for financing on a case-by-case basis
and offer financing only after careful review. As market conditions permit, our
intention is to sell or transfer these long-term financing arrangements, which
may include both commitments and drawn-down borrowings, to financial
institutions and other investors. This enables us to reduce the amount of our
commitments and free up additional financing capacity. As part of the revenue
recognition process, we determine whether the notes receivable under these
contracts are reasonably assured of collection based on various factors,
including our ability to sell these notes.

Our credit process monitors the drawn and undrawn commitments and guarantees
of debt to our customers. Customers are reviewed on a quarterly or annual basis
depending upon their risk profile. As part of our review, we assess the
customer's short-term and long-term liquidity position, current operating
performance versus plan, execution challenges facing the company, changes in
competitive landscape, industry and macroeconomic conditions, and changes to
management and sponsors. Depending upon the extent of any deterioration of a
customer's credit profile or non-compliance with our legal documentation, we
undertake actions that could include canceling the commitment, compelling the
borrower to take corrective measures, and increasing efforts to mitigate
potential losses. These actions are designed to mitigate unexpected events that
could have an impact on our future results of operations and cash flows;
however, there can be no assurance that this will be the case. Adverse industry
conditions, such as the continued softening in the CLEC market, have negatively

affected the creditworthiness of several customers that participate in our
customer financing program. For the year ended September 30, 2001, we recorded
provisions for uncollectibles and customer financings of $2.2 billion, of which
approximately $1.3 billion was related to three customer finance projects,
including Winstar and One.Tel. On April 18, 2001, Winstar filed for Chapter 11
protection and in late May 2001, One.Tel filed for voluntary administration
(e.g. bankruptcy) and subsequently announced that it will be liquidated and its
assets sold. We have built a mobile fiber-optic network for One.Tel, which is
substantially complete. During November 2001, we entered into an agreement with
the liquidator affirming our ownership of the network. Reserves associated with
total drawn commitments were $2.1 billion, reflecting a net exposure of
approximately $900 million.

Our overall customer financing exposure, coupled with a continued decline in
telecommunications market conditions, negatively affected revenue, results of
operations and cash flows in fiscal year 2001. We will continue to provide or
commit to financing where appropriate for our business. Our ability to arrange
or provide financing for our customers will depend on a number of factors,
including our capital structure, credit rating and level of available credit,
and our continued ability to sell or transfer commitments and drawn-down
borrowings on acceptable terms. Due to recent economic uncertainties and reduced
demand for financings in capital and bank markets, we may be required to
continue to hold certain customer financing obligations for longer periods prior
to the sale to third-party lenders. In addition, specific risks associated with
customer financing, including the risks associated with new technologies, new
network construction, market demand and competition, customer business plan
viability and funding risks may require us to hold certain customer financing
obligations over a longer term. Any unexpected developments in our customer
financing arrangements could negatively affect revenue, results of operations
and cash flows in the future. In addition, we may be required to record
additional reserves related to customer financing in the future.

RISK MANAGEMENT

We are exposed to market risk from changes in foreign currency exchange
rates, interest rates and equity prices that could affect our results of
operations and financial condition. We manage our exposure to these market risks
through our regular operating and financing activities and, when deemed
appropriate, hedge these risks through the use of derivative financial
instruments. We use the term hedge to mean a strategy designed to manage risks
of volatility in prices or rate movements on certain assets, liabilities or
anticipated transactions and by creating a relationship in which gains or losses
on derivative instruments are expected to counterbalance the losses or gains on
the assets, liabilities or anticipated transactions exposed to such market
risks. We use derivative financial instruments as risk management tools and not
for trading or speculative purposes. In addition, derivative financial
instruments are entered into 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 them with either forward contracts or, to a lesser extent, option
contracts, swap derivatives or by embedding terms into certain contracts that
affect the ultimate amount of cash flows under the contract. We generally do not
hedge our credit risk on customer receivables.

FOREIGN CURRENCY RISK

We use foreign exchange forward contracts and, to a lesser extent, option
contracts to minimize exposure to the risk that the eventual net cash inflows
and outflows resulting from the sale of products to non-U.S. customers and
purchases from non-U.S. suppliers will be adversely affected by changes in
exchange rates. Foreign exchange forward and option contracts are utilized for
recognized receivables and payables, firmly committed or anticipated cash
inflows and outflows. 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. Cash inflows and outflows
denominated in the same foreign currency are netted on a legal entity basis and
the corresponding net cash flow exposure is appropriately hedged. We

do not hedge our net investment in non-U.S. entities because we view those
investments as long-term in nature.

As of September 30, 2001, our primary net foreign currency market exposures
were as follows (dollars in millions):

IMPACT ON DERIVATIVE
CONTRACTS OF A 10%
FAIR VALUE OF DEPRECIATION OF
FOREIGN CURRENCY NOTIONAL AMOUNTS OF FORWARD AND FOREIGN CURRENCY VS.
TRANSACTION EXPOSURE FORWARD AND OPTION OPTION CONTRACTS THE U.S. DOLLAR GAIN
CURRENCY LONG (SHORT) POSITIONS HEDGE CONTRACTS ASSET (LIABILITY) (LOSS)
-------- ---------------------- --------------- ----------------- ------

Euro and legacy
currencies............. $ 548 $ 488 $ 4 $ 49
Brazilian real........... 163 163 (4) 16
Japanese yen............. (32) 23 (6) (2)
Australian dollar........ 136 132 6 13
Danish kroner............ (236) 235 2 (24)
New Zealand dollar....... 95 89 4 9

The exposure positions above represent a portfolio containing all identified
booked and firmly committed exposures and 50% of the first six months of all
identified anticipated exposures, which is used as a benchmark by us for risk
management purposes. The hedge contracts represent the actual external
derivative transactions executed with financial counterparties to offset our net
exposure. The exposure and hedge positions are not always equal due to the fact
that some anticipated exposures included within these portfolios may be hedged
as little as 25% or as much as 100%, as deemed appropriate in accordance with
our corporate policy.

The fair value of foreign exchange forward and option contracts is subject
to changes in foreign currency exchange rates. For the purposes of assessing
specific risks, we use a sensitivity analysis to determine the effects that
market risk exposures may have on the fair value of our financial instruments
and results of operations. The financial instruments included in our sensitivity
analysis are foreign currency forward and option contracts. Such contracts
generally have durations of one to three months and are primarily used to hedge
recognized receivables and payables and anticipated transactions, and to a
lesser extent, unrecognized firm commitments. The sensitivity analysis excludes
the value of foreign currency denominated receivables and payables (other than
loans) because of their short maturities. To perform the sensitivity analysis,
we assess the risk of loss in fair values from the effect of a hypothetical 10%
change in the value of foreign currencies, assuming no change in interest rates.
However, these calculated exposures do not generally affect our use of
derivative financial instruments as described above. For contracts outstanding
as of September 30, 2001 and 2000, a 10% appreciation in the value of foreign
currencies against the U.S. dollar from the prevailing market rates would result
in an incremental pretax net unrealized loss of approximately $63 million and
$71 million, respectively. Conversely, a 10% depreciation in these currencies
from the prevailing market rates would result in an incremental pretax net
unrealized gain of approximately $63 million and $71 million, as of
September 30, 2001 and 2000, respectively. Consistent with the nature of the
economic hedge of such foreign exchange forward and option contracts, such
unrealized gains or losses would be offset by corresponding decreases or
increases, respectively, of the underlying instrument or transaction being
hedged.

The model to determine sensitivity assumes a parallel shift in all foreign
currency exchange spot rates, although exchange rates rarely move in the same
direction. Additionally, the amounts above do not necessarily represent the
actual changes in fair value we would incur under normal market conditions
because all variables other than the exchange rates are held constant in the
calculations. We have not changed our foreign exchange risk management strategy
from the prior year. We are reviewing plans to further centralize the foreign
exchange and liquidity management needs of many of our operating subsidiaries
under the model of an in-house bank. While this implementation would not change
the fundamental objective of our foreign currency risk management policy, it is
expected to yield benefits by way of economic efficiency, process efficiency and
improved visibility of financial flows. In conjunction with this, we foresee
replacing our existing sensitivity analysis of foreign exchange and

interest rate instruments with one based on value-at-risk or similar
methodologies commonly accepted within financial markets.

While we hedge certain foreign currency transactions, the decline in value
of non-U.S. dollar currencies may, if not reversed, 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.

INTEREST RATE RISK

We use a combination of financial instruments, including medium-term and
short-term financings, variable-rate debt instruments and, to a lesser extent,
interest rate swaps to manage the interest rate mix of our total debt portfolio
and related cash flows. To manage this mix in a cost-effective manner, we, from
time to time, may enter into interest rate swap agreements in which we agree to
exchange various combinations of fixed and/or variable interest rates based on
agreed-upon notional amounts. We had no material interest rate swap agreements
in effect at September 30, 2001 or September 30, 2000. The objective of
maintaining the mix of fixed and floating rate debt is to mitigate the
variability of cash flows resulting from interest rate fluctuations as well as
reduce the cash flows attributable to debt instruments. Our portfolio of
customer finance notes receivable predominantly comprises variable-rate notes at
LIBOR plus a stated percentage and subjects us to variability in cash flows and
earnings for the effect of changes in LIBOR. We do not enter into derivative
transactions on our cash equivalents and short-term investments, since our
relatively short maturities do not create significant risk.

The fair value of our fixed-rate long-term debt is sensitive to changes in
interest rates. Interest rate changes would result in gains/losses in the market
value of this debt due to the differences between the market interest rates and
rates at the inception of the debt obligation. We perform a sensitivity analysis
on our fixed-rate long-term debt to assess the risk of changes in fair value.
These debt instruments have original maturities ranging from five years to 30
years. The model to determine sensitivity assumes a hypothetical 150 basis point
parallel shift in interest rates. At September 30, 2001 and 2000, a 150 basis
point increase in interest rates would reduce the market value of our fixed-rate
long-term debt by approximately $191 million and $317 million, respectively.
Conversely, a 150 basis point decrease in interest rates would result in a net
increase in the market value of our fixed-rate long-term debt outstanding at
September 30, 2001 and 2000 of approximately $232 million and $397 million,
respectively. Our sensitivity analysis on debt obligations excludes commercial
paper, variable-rate debt instruments, secured borrowings and bank loans because
the changes in interest rates would not significantly affect the fair value of
such instruments. Interest rate swaps have also been excluded from the
sensitivity analysis since they are not material.

The earnings and cash flows to be received under our variable-rate customer
finance notes or paid under our credit facilities are sensitive to changes in
LIBOR. These notes have original maturities ranging from one year to 10 years.
To determine the specific risks on earnings and cash flows from this portfolio,
a sensitivity analysis was performed with a model assuming a 150 basis point
parallel shift in LIBOR. Under this model, the maximum annual variability on
earnings and cash flows we could experience on this portfolio as of
September 30, 2001 would be approximately $36 million. However, this model does
not necessarily reflect the actual volatility we would experience because
interest income on certain notes is not recognized until collected; certain
notes provide for interest to be capitalized to the principal balance and notes
may be sold off to third parties in the normal course of business.

We have not changed our interest rate risk management strategy from the
prior year and do not foresee or expect any significant changes in our exposure
to interest rate fluctuations, but we are considering expanding the use of
interest rate swaps in the near future on our debt obligations.

EQUITY PRICE RISK

Our investment portfolio consists of equity investments accounted for under
the cost and equity methods as well as equity investments in publicly-held
companies that are classified as available-for-sale. These available-for-sale
securities are exposed to price fluctuations and are generally concentrated in
the high-technology communications industry, many of which are small
capitalization stocks. At

September 30, 2001, the fair value of one available-for-sale security totaled
$48 million out of a total available-for-sale portfolio valued at $58 million.
We generally do not hedge our equity price risk, however, on occasion, we may
use equity derivative financial instruments that are subject to equity price
risks to complement our investment strategies. As of September 30, 2001, a 20%
adverse change in equity prices would result in an approximate $12 million
decrease in the fair value of our available-for-sale securities. As of
September 30, 2001, we had no outstanding hedging instruments for our equity
price risk. The model to determine sensitivity assumes a corresponding shift in
all equity prices; however, equity prices on individual companies dispersed
across many different industries may not always move in the same direction. This
analysis excludes stock purchase warrants as we do not believe that the value of
such warrants is significant.

IN-PROCESS RESEARCH AND DEVELOPMENT ('IPRD')

In connection with the acquisitions in fiscal years 2000 and 1999 of
Chromatis, Spring Tide and Stratus, we allocated non-tax impacting charges of
$428 million, $131 million and $267 million, respectively, of the total purchase
price to IPRD. As part of the process of analyzing each of these acquisitions,
we made a decision to buy technology that had not yet been commercialized rather
than develop the technology internally. We based this decision on a number of
factors including the amount of time it would take to bring the technology to
market. We also considered Bell Labs' resource allocation and its progress on
comparable technology, if any. We expect to use the same decision process in the
future.

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

Where appropriate, we deducted an amount reflecting the contribution of the
core technology from the anticipated cash flows from an IPRD project. At the
date of acquisition, the IPRD 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 are not completed in a timely manner, our
anticipated 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 significant acquired IPRD projects:

STRATUS

On October 20, 1998, Ascend completed the purchase of Stratus. Stratus was a
manufacturer of fault-tolerant computer systems. The allocation to IPRD of $267
million ($24 million of IPRD was subsequently reversed in March 1999)
represented its estimated fair value using the methodology described above. The
primary projects that made up the IPRD were as follows: HP-UX, Continuum 1248,
Continuum 448, M708, SPHINX, HARMONY, LNP, CORE IN, Personal Number Portability,
Signaling System 7 Gateway and Internet Gateway.

Revenues attributable to the projects were estimated to be $84 million in
1999 and $345 million in 2000. Revenue was expected to peak in fiscal year 2002
and decline thereafter through the end of the product's life (2009) as new
product technologies were expected to be introduced by us. Revenue growth was
expected to decrease from 310% in fiscal year 2000 to 6% in fiscal year 2002 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 projects
were expected to be $48 million.

A risk-adjusted discount rate of 35% was used to discount projected cash
flows.

The actual results to date have been consistent, in all material respects,
with our assumptions at the time of the acquisition, except as noted below.
During fiscal year 1999, product development relating to the HARMONY, SPHINX and
Continuum 448 projects was discontinued due to our reprioritization of product
direction. In addition, it was decided that development relating to the
Continuum 1248 project would cease by the quarter ended December 31, 1999.
Consequently, we did not realize the forecasted revenues from these projects.
During fiscal year 2001, substantially all of the goodwill and acquired
intangibles related to the purchase of Stratus were written off as part of our
restructuring program, which resulted in the exit of all but two of the
remaining projects within the original portfolio.

CHROMATIS NETWORKS

On June 28, 2000, we completed the purchase of Chromatis. Chromatis was
involved in the development of next-generation optical transport solutions that
provide telecommunications carriers with improvements in the cost, efficiency,
scale and management of multiservice metropolitan networks. The allocation to
IPRD of $428 million represented its estimated fair value using the methodology
described above. The $428 million was allocated to the first generation of its
metro optical product, which was expected to integrate data, voice and video
services on metropolitan networks and combine this traffic onto a wave division
multiplexing ('WDM') system.

Revenues attributable to the metro optical product were estimated to be $375
million in fiscal year 2001 and $1 billion in fiscal year 2002. Revenue was
expected to peak in fiscal year 2005 and decline thereafter through the end of
the product's life as new product technologies were expected to be introduced by
us. Revenue growth was expected to decrease from 196% in fiscal year 2002 to 10%
in fiscal year 2004 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 $7.8 million.

A risk-adjusted discount rate of 25% was used to discount projected cash
flows.

As part of our restructuring program in fiscal year 2001, the Chromatis
product portfolio was discontinued and all of the remaining assets, primarily
goodwill and other acquired intangibles, were written off.

SPRING TIDE NETWORKS

On September 19, 2000, we completed the purchase of Spring Tide. Spring Tide
was involved in the development of carrier-class network equipment that enables
service providers to offer new, value-added Internet protocol ('IP') services
and virtual private networks with low cost and complexity. Spring Tide was
involved in the development of Versions 2.0 and 2.1 of the IP Service Switch,
the next generations of Spring Tide's flagship product. The allocation to IPRD
of $131 million represented their estimated fair value using the methodology
described above. Approximately $128 million was allocated to the next-generation
IP Service Switch products, carrier-class platforms that will combine the
connectivity of a remote access server, the network intelligence of a remote
access server, and the switching capacity and quality of service capabilities of
an ATM switch in one integrated solution. The remaining $3 million was allocated
to projects designed to enhance the capabilities and decrease production costs
associated with the IP Service Switch.

Revenues attributable to the IP Service Switch products were estimated to be
$109 million in fiscal year 2001 and $337 million in fiscal year 2002. Revenue
was expected to peak in fiscal year 2006 and decline thereafter through the end
of the product's life as new product technologies were expected to be introduced
by us. Revenue growth was expected to decrease from 209% in 2002 to 4.4% in
fiscal year 2006, and be negative for the remainder of the projection period.
Although the actual results to date have been significantly less than
anticipated at the time of the acquisition, we believe this shortfall will be
made up in future years. At the acquisition date, costs to complete the research
and development efforts related to the product were expected to be $0.5 million
and $4.3 million in fiscal years 2000 and 2001, respectively.

A risk-adjusted discount rate of 25% was used to discount projected cash
flows.

Given the uncertainties of the development process, the aforementioned
estimates are subject to change, and no assurance can be given that deviations
from these estimates will not occur. Management expects to continue development
of these efforts and believes there is a reasonable chance of successfully
completing the development efforts. However, there are risks associated with the
completion of the projects and there can be no assurance that the projects will
realize either technological or commercial success. Failure to successfully
develop and commercialize the IPRD would result in the loss of the expected
economic return inherent in the fair value allocation.

EUROPEAN MONETARY UNION -- EURO

Several member countries of the European Union have established fixed
conversion rates between their existing sovereign currencies and the Euro and
have adopted the Euro as their new single legal currency. The legacy currencies
will remain legal tender in the participating countries for a transition period
until January 1, 2002. During the transition period, cashless payments can be
made in the Euro. Between January 1, 2002 and March 1, 2002, the participating
countries will introduce Euro notes and coins and withdraw all legacy currencies
so that they will no longer be available.

We have in place a joint European - United States team representing affected
functions within the company that is coordinated by a corporate program office.
This team has evaluated our Euro-related issues affecting our pricing/marketing
strategy, conversion of information technology systems and existing contracts.
We are now in the process of completing the conversion/upgrade of our affected
systems, applications, data, contracts, and processes.

We will continue to evaluate issues involving introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance becomes
available. Based on current information and our current assessment, we do not
expect that the Euro conversion will have a material adverse effect on our
business or financial condition.

RECENT PRONOUNCEMENTS

See discussion in Note 18 to the consolidated financial statements filed as
part of this report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated financial statements and financial statement schedule are
filed as part of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF NOVEMBER 30, 2001)

BECAME EXECUTIVE
NAME AGE TITLE OFFICER ON
---- --- ----- ----------

Henry B. Schacht................... 67 Chairman of the Board and Chief Executive 10/00
Officer
Bernardus J.M. Verwaayen........... 49 Vice Chairman 9/97
Robert C. Holder................... 55 Executive Vice President 11/00
William T. O'Shea.................. 54 President, Bell Labs and Executive Vice 10/99
President, Strategy and Marketing
Frank A. D'Amelio.................. 43 Executive Vice President and Chief 5/01
Financial Officer
Richard J. Rawson.................. 49 Senior Vice President, General Counsel and 2/96
Secretary
John A. Kritzmacher................ 41 Senior Vice President and Corporate 9/01
Controller

All of the executive officers have held high-level managerial positions and/or
directorships with us and, prior to us, with AT&T or its affiliates for more
than the past five years, except Mr. Verwaayen who has held his current position
since September 1997. Mr. Verwaayen joined us after serving as President of PTT
Telecom, the national telecommunications operator of the Netherlands, since
May 1988. He was a co-founder of Unisource, the pan-European alliance of Telia
of Sweden, Swiss Telecom and PTT Telecom. On December 12, 2001, the British
Telecommunications Group announced the appointment of Mr. Verwaayen as its chief
executive officer-designate, effective on January 14, 2002 and CEO on
February 1, 2002 when his predecessor leaves office. We have not yet decided if
we will appoint a replacement.

Officers are not elected for a fixed term of office but hold office until
their successors have been elected.

The other information required by Item 10 is included in our proxy statement
for our 2002 annual meeting of shareowners. Such information is incorporated
herein by reference, pursuant to General Instruction G (3).

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item 11 is included in our proxy statement
for our 2002 annual meeting of shareowners. Such information is incorporated
herein by reference, pursuant to General Instruction G (3).

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item 12 is included in our proxy statement
for our 2002 annual meeting of shareowners. Such information is incorporated
herein by reference, pursuant to General Instruction G (3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item 13 is included in our proxy statement
for our 2002 annual meeting of shareowners. Such information is incorporated
herein by reference, pursuant to General Instruction G (3).

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:

(1) Index to Financial Statements and Financial Statement Schedule..... 47
(2) Report of Independent Accountants.................................. 48
(3) Financial Statements:
(i) Consolidated Statements of Operations....................... 49
(ii) Consolidated Balance Sheets................................. 50
(iii) Consolidated Statements of Changes in Shareowners' Equity... 51
(iv) Consolidated Statements of Cash Flows....................... 52
(v) Notes to Consolidated Financial Statements.................. 53
(4) Financial Statement Schedule:
(i) Schedule II -- Valuation and Qualifying Accounts.......... 89

Separate financial statements of subsidiaries not consolidated and 50
percent or less owned persons are omitted since no such entity constitutes a
'significant subsidiary' pursuant to the provisions of Regulation S-X,
Article 3-09.

(5) Exhibits:

See Exhibit Index on page 90 for a description of the documents that are
filed as Exhibits to this report on Form 10-K or incorporated by reference
herein. Any document incorporated by reference is identified by a parenthetical
referencing the SEC filing which included such document.

We will furnish, without charge, to a security holder upon request a copy of
the proxy statement, portions of which are incorporated herein by reference
thereto. We will furnish any other exhibit at cost.

(B) REPORTS ON FORM 8-K DURING THE LAST QUARTER OF THE FISCAL YEAR COVERED BY
THIS REPORT:

On August 23, 2001, we filed a Current Report on Form 8-K pursuant to Item 9
(Regulation FD Disclosures) to furnish slides presented at an analyst session
held in New York.

On August 16, 2001, we filed a Current Report on Form 8-K pursuant to
Item 5 (Other Events) to announce that we and the Lenders Party to the 364-Day
Revolving Credit Facility Agreement, Amended and Restated 5-Year Revolving
Credit Facility Agreement and agreements collateral thereto, all dated as of
February 22, 2001, entered into an amendment to each of the above-referenced
facilities (the 'Amendments'), which allowed us to implement Phase II of our
restructuring program, and to furnish copies of the Amendments.

On August 2, 2001, we filed a Current Report on Form 8-K pursuant to Item 9
(Regulation FD Disclosures) to furnish the document entitled 'Recent
Developments,' which was included in our private offering document for
convertible preferred stock dated August 2, 2001.

On August 1, 2001, we filed a Current Report on Form 8-K pursuant to Item 5
(Other Events) to furnish our July 24, 2001 announcement that we had entered
into a definitive agreement with The Furukawa Electric Co., Ltd. for the sale of
our optical fiber solutions business and a copy of the related asset and stock
purchase agreement.

On August 1, 2001, we filed a Current Report on Form 8-K pursuant to Item 9
(Regulation FD Disclosures) to furnish the document entitled 'Recent
Developments' and a press release announcing our intention to make a private
offering of redeemable convertible preferred stock, both of which were issued on
July 31, 2001.

On July 31, 2001, we filed a Current Report on Form 8-K pursuant to Item 5
(Other Events) to furnish the restated consolidated financial information
reflecting the treatment of Agere and the power systems business as discontinued
operations pursuant to Accounting Principles Board Opinion No. 30, 'Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions.' These statements include our restated consolidated financial
statements at September 30, 2000 and 1999 and for the years ended September 30,
2000, 1999 and 1998.

On July 24, 2001, we filed a Current Report on Form 8-K pursuant to Item 9
(Regulation FD Disclosures) to furnish a press release reporting earnings
results of our third fiscal quarter.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.

LUCENT TECHNOLOGIES INC.

By: /s/ JOHN A. KRITZMACHER
----------------------------------------------------------------------
John A. Kritzmacher
Principal Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.

PRINCIPAL EXECUTIVE OFFICER
Henry B. Schacht
Chief Executive Officer
PRINCIPAL FINANCIAL OFFICER
Frank A. D'Amelio
Executive Vice President and
Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER By: /s/ JOHN A. KRITZMACHER
John A. Kritzmacher -----------------------
Senior Vice President and John A. Kritzmacher
Corporate Controller (attorney-in-fact)
December 28, 2001
DIRECTORS
Paul A. Allaire
Betsy S. Atkins
Carla A. Hills
Henry B. Schacht
Franklin A. Thomas
John A. Young

PAGE
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ----

Report of Independent Accountants............................ 48
Consolidated Statements of Operations for each of the three
years in the period ended September 30, 2001............... 49
Consolidated Balance Sheets as of September 30, 2001 and
2000....................................................... 50
Consolidated Statements of Changes in Shareowners' Equity for
each of the three years in the period ended September 30,
2001....................................................... 51
Consolidated Statements of Cash Flows for each of the three
years in the period ended September 30, 2001............... 52
Notes to Consolidated Financial Statements................... 53

Financial Statement Schedule:
Schedule II -- Valuation and Qualifying Accounts for
each of the three years in the period ended
September 30, 2001...................................... 89

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareowners of
LUCENT TECHNOLOGIES INC.:

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Lucent Technologies Inc. and its subsidiaries at September 30, 2001
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 2001, in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 5 to the consolidated financial statements, in 2001 the
Company changed its accounting methods for revenue recognition and for
derivative financial instruments. As discussed in Notes 1 and 12, in 2000 and
1999 the Company changed its accounting methods for computer software developed
or obtained for internal use and for calculating annual net pension and
postretirement benefit costs, respectively.

PRICEWATERHOUSECOOPERS LLP

New York, New York
October 23, 2001,
except for the fifth paragraph of Note 10 and Note 19, as to which the date is
November 20, 2001

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED SEPTEMBER 30,
----------------------------
2001 2000 1999
---- ---- ----

Revenues.................................................... $ 21,294 $ 28,904 $ 26,993
Costs....................................................... 19,236 17,190 14,024
-------- ------- --------
Gross margin................................................ 2,058 11,714 12,969
Operating expenses:
Selling, general and administrative..................... 7,410 5,610 5,371
Research and development................................ 3,520 3,179 3,536
Purchased in-process research and development........... -- 559 276
Business restructuring charges and asset impairments.... 10,157 -- --
-------- ------- --------
Total operating expenses............................ 21,087 9,348 9,183
-------- ------- --------
Operating income (loss)..................................... (19,029) 2,366 3,786
Other income (expense) -- net............................... (357) 333 357
Interest expense............................................ 518 342 318
-------- ------- --------
Income (loss) from continuing operations before provision
(benefit) for income taxes................................ (19,904) 2,357 3,825
Provision (benefit) for income taxes........................ (5,734) 924 1,456
-------- ------- --------
Income (loss) from continuing operations.................... (14,170) 1,433 2,369
Income (loss) from discontinued operations (net of taxes)... (3,172) (214) 1,112
-------- ------- --------
Income (loss) before extraordinary item and cumulative
effect of accounting changes.............................. (17,342) 1,219 3,481
Extraordinary gain (net of taxes)........................... 1,182 -- --
Cumulative effect of accounting changes (net of taxes)...... (38) -- 1,308
-------- ------- --------
Net income (loss)........................................... (16,198) 1,219 4,789
Preferred stock dividends and accretion..................... (28) -- --
-------- ------- --------
Net income (loss) applicable to common shareowners.......... $(16,226) $ 1,219 $ 4,789
-------- ------- --------
-------- ------- --------
Earnings (loss) per common share -- basic
Income (loss) from continuing operations................ $ (4.18) $ 0.44 $ 0.76
Net income (loss) applicable to common shareowners...... $ (4.77) $ 0.38 $ 1.54
Earnings (loss) per common share -- diluted
Income (loss) from continuing operations................ $ (4.18) $ 0.43 $ 0.74
Net income (loss) applicable to common shareowners...... $ (4.77) $ 0.37 $ 1.49

Weighted average number of common shares
outstanding -- basic...................................... 3,400.7 3,232.3 3,101.8
Weighted average number of common shares
outstanding -- diluted.................................... 3,400.7 3,325.9 3,218.5

See Notes to Consolidated Financial Statements.

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

SEPTEMBER 30, SEPTEMBER 30,
2001 2000
---- ----

ASSETS
Cash and cash equivalents................................... $ 2,390 $ 1,467
Receivables, less allowance of $634 in 2001 and $479 in
2000...................................................... 4,594 8,782
Inventories................................................. 3,646 5,100
Contracts in process, net of progress billings of $7,841 in
2001 and $6,744 in 2000................................... 1,027 1,881
Deferred income taxes, net.................................. 2,658 1,101
Other current assets........................................ 1,788 1,575
Net current assets of discontinued operations............... -- 634
-------- --------
Total current assets.................................... 16,103 20,540

Property, plant and equipment, net.......................... 4,416 5,046
Prepaid pension costs....................................... 4,958 6,238
Deferred income taxes, net.................................. 2,695 33
Goodwill and other acquired intangibles, net of accumulated
amortization of $1,768 in 2001 and $852 in 2000........... 1,466 6,463
Other assets................................................ 2,724 3,560
Net long-term assets of discontinued operations............. 1,302 5,632
-------- --------
Total assets............................................ $ 33,664 $ 47,512
-------- --------
-------- --------

LIABILITIES
Accounts payable............................................ $ 1,844 $ 2,583
Payroll and benefit-related liabilities..................... 1,500 1,010
Debt maturing within one year............................... 1,135 3,468
Other current liabilities................................... 5,285 3,099
Net current liabilities of discontinued operations.......... 405 --
-------- --------
Total current liabilities............................... 10,169 10,160

Postretirement and postemployment benefit liabilities....... 5,481 5,395
Long-term debt.............................................. 3,274 3,030
Deferred income taxes, net.................................. 152 1,203
Other liabilities........................................... 1,731 1,552
-------- --------
Total liabilities....................................... 20,807 21,340

Commitments and contingencies

8.00% redeemable convertible preferred stock................ 1,834 --

SHAREOWNERS' EQUITY

Preferred stock -- par value $1.00 per share;
issued and outstanding shares: none....................... -- --
Common stock -- par value $.01 per share;
Authorized shares: 10,000,000,000; 3,414,815,908 issued
and 3,414,167,155 outstanding shares at September 30, 2001
and 3,384,332,104 issued and outstanding shares at
September 30, 2000........................................ 34 34
Additional paid-in capital.................................. 21,702 20,374
Retained earnings (accumulated deficit)..................... (10,272) 6,129
Accumulated other comprehensive income (loss)............... (441) (365)
-------- --------
Total shareowners' equity............................... 11,023 26,172
-------- --------
Total liabilities, redeemable convertible preferred
stock and shareowners' equity......................... $ 33,664 $ 47,512
-------- --------
-------- --------

See Notes to Consolidated Financial Statements.

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS)

RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL TOTAL
PREFERRED COMMON PAID-IN (ACCUMULATED COMPREHENSIVE SHAREOWNERS' COMPREHENSIVE
STOCK STOCK CAPITAL DEFICIT) INCOME (LOSS) EQUITY INCOME (LOSS)
----- ----- ------- -------- ------------- ------ -------------

Balance at October 1, 1998........ $ -- $ 31 $ 6,725 $ 1,487 $ (283) $ 7,960
Net income (excluding
undistributed S-Corporation
earnings)........................ 4,781 $ 4,781
Foreign currency translation
adjustment....................... (33) (33)
Unrealized holding gains on
certain investments (net of tax
of $235)......................... 307 307
Reclassification adjustment for
realized holding gains on certain
investments (net of tax benefit
of $178)......................... (246) (246)
Effect of immaterial poolings..... 106 (26)
Common stock dividends declared... (222)
Issuance of common stock.......... 745
Tax benefit from employee stock
options.......................... 394
Adjustment to conform pooled
companies' fiscal year........... 170
Other............................. (9) (2) 11 19
------ --- ------- -------- ----- ------- --------
Total comprehensive income..... $ 4,828
--------
Balance at September 30, 1999..... -- 31 7,961 6,188 (244) 13,936
------ --- ------- -------- ----- -------
Net income........................ 1,219 $ 1,219
Foreign currency translation
adjustment....................... (185) (185)
Reclassification of foreign
currency translation losses
realized upon spin-off of
Avaya............................ 64 64
Unrealized holding gains on
certain investments (net of tax
of $124)......................... 190 190
Reclassification adjustment for
realized holding gains on certain
investments (net of tax benefit
of $126)......................... (194) (194)
Common stock dividends declared... (254)
Issuance of common stock.......... 1,397
Tax benefit from employee stock
options.......................... 1,064
Issuance of common stock and
conversion of stock options for
acquisitions..................... 3 9,901
Other............................. 45 (15) 2 2
Spin-off of Avaya................. 6 (1,009) 2
------ --- ------- -------- ----- ------- --------
Total comprehensive income..... $ 1,096
--------
Balance at September 30, 2000..... -- 34 20,374 6,129 (365) 26,172
------ --- ------- -------- ----- -------
Net loss.......................... (16,198) $(16,198)
Foreign currency translation
adjustment (net of tax benefit of
$16 related to temporary
investments in foreign
operations)...................... (30) (30)
Reclassification of foreign
currency translation losses
realized upon the sale of foreign
entities (net of tax of $2)...... (3) (3)
Unrealized holding losses on
certain investments (net of tax
benefit of $72).................. (95) (95)
Reclassification adjustment for
realized holding gains and
impairment losses on certain
investments (net of tax of
$32)............................. 50 50
Cumulative effect of accounting
change (SFAS 133)................ 11 11
Agere initial public offering..... 922
Preferred stock dividends and
accretion........................ (28)
Common stock dividends declared... (205)
Tax benefit from employee stock
options.......................... 18
Issuance of common stock.......... 234
Compensation on equity-based
awards........................... 87
Other............................. 95 2 (9) (9)
------ --- ------- -------- ----- ------- --------
Total comprehensive loss....... $ (16,274)
--------
--------
Balance at September 30, 2001..... $ -- $ 34 $ 21,702 $ (10,272) $ (441) $ 11,023
------ --- ------- -------- ----- -------
------ --- ------- -------- ----- -------

See Notes to Consolidated Financial Statements.

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)

YEARS ENDED SEPTEMBER 30,
-----------------------------
2001 2000 1999
---- ---- ----

Operating Activities
Net income (loss)........................................... $ (16,198) $ 1,219 $ 4,789
Less: Income (loss) from discontinued operations......... (3,172) (214) 1,112
Extraordinary gain................................... 1,182 -- --
Cumulative effect of accounting changes.............. (38) -- 1,308
--------- ------- --------
Income (loss) from continuing operations.................... (14,170) 1,433 2,369
Adjustments to reconcile income (loss) from continuing
operations to net cash used in operating activities, net of
effects of acquisitions and dispositions of businesses:
Non-cash portion of business restructuring charges and
asset impairments...................................... 9,322 -- 127
Business restructuring reversal.......................... -- (5) (108)
Depreciation and amortization............................ 2,536 1,667 1,282
Provision for uncollectibles and customer financings..... 2,249 505 66
Tax benefit from employee stock options.................. 18 1,064 394
Deferred income taxes.................................... (5,935) 491 936
Purchased in-process research and development............ -- 559 2
Net pension and postretirement benefit credit............ (1,137) (822) (481)
Adjustment to conform pooled companies' fiscal years..... -- 11 170
Other adjustments for non-cash items..................... 495 (258) 65
Changes in operating assets and liabilities:
Decrease (increase) in receivables....................... 3,627 (1,626) (3,150)
Decrease (increase) in inventories and contracts in
process................................................ 881 (2,242) (1,631)
(Decrease) increase in accounts payable.................. (759) 263 636
Changes in other operating assets and liabilities........ (548) (1,743) (2,296)
--------- ------- --------
Net cash used in operating activities from continuing
operations................................................. (3,421) (703) (1,619)
--------- ------- --------
Investing Activities
Capital expenditures..................................... (1,390) (1,915) (1,387)
Proceeds from the sale or disposal of property, plant and
equipment.............................................. 177 26 78
Dispositions of businesses............................... 2,615 250 16
Proceeds from the sale of manufacturing operations....... 572 -- --
Acquisitions of businesses -- net of cash acquired....... -- (52) (176)
Sales or maturity of investments......................... 57 820 1,358
Purchases of investments................................. (101) (680) (872)
Other investing activities............................... 21 (8) (83)
--------- ------- --------
Net cash provided by (used in) investing activities from
continuing operations...................................... 1,951 (1,559) (1,066)
--------- ------- --------
Financing Activities
Net borrowings under credit facilities................... 3,500 -- --
Net (repayments of) proceeds from other short-term
borrowings............................................. (2,147) 1,355 705
Payment of credit facility fees.......................... (119) -- --
Issuance of long-term debt............................... 302 72 2,193
Repayments of long-term debt............................. (754) (387) (11)
Issuance of redeemable convertible preferred stock....... 1,831 -- --
Issuance of common stock................................. 222 1,444 725
Dividends paid on common stock........................... (204) (255) (222)
Other financing activities............................... (6) -- (40)
--------- ------- --------
Net cash provided by financing activities from continuing
operations................................................. 2,625 2,229 3,350
Effect of exchange rate changes on cash and cash
equivalents................................................ 4 10 41
--------- ------- --------
Net cash provided by (used in) continuing operations........ 1,159 (23) 706
Net cash used in discontinued operations.................... (236) (196) (164)
--------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 923 (219) 542
Cash and cash equivalents at beginning of year.............. 1,467 1,686 1,144
--------- ------- --------
Cash and cash equivalents at end of year.................... $ 2,390 $ 1,467 $ 1,686
--------- ------- --------
--------- ------- --------

See Notes to Consolidated Financial Statements.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

The consolidated financial statements include all majority-owned
subsidiaries in which Lucent Technologies Inc. ('Lucent' or 'the Company')
exercises control. Investments in which Lucent exercises significant influence,
but which it does not control (generally a 20% to 50% ownership interest), are
accounted for under the equity method of accounting. All material intercompany
transactions and balances have been eliminated. Except as otherwise noted, all
amounts and disclosures have been restated to reflect only Lucent's continuing
operations (see Note 3).

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying disclosures. Actual results could differ from those
estimates. Estimates and assumptions are reviewed periodically and the effects
of revisions are reflected in the consolidated financial statements in the
period they are determined to be necessary.

FOREIGN CURRENCY TRANSLATION

For operations outside the U.S. that prepare financial statements in
currencies other than the U.S. dollar, results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates. Translation
adjustments are included as a separate component of accumulated other
comprehensive income (loss) in shareowners' equity.

REVENUE RECOGNITION

Revenue from product sales of hardware and software is generally recognized
when persuasive evidence of an agreement exists, delivery has occurred, the fee
is fixed and determinable, and collection of the resulting receivable, including
receivables of customers to which Lucent has provided customer financing, is
probable. The determination of whether the collectibility of receivables is
reasonably assured is based upon an assessment of the creditworthiness of the
customers and Lucent's ability to sell the receivable. In instances where
collection or sale of a receivable is not reasonably assured, revenue and the
related costs are deferred. The value allocated to elements in a multiple
element arrangement is based on objective evidence of relative fair values of
each element. Services revenues are generally recognized at time of performance.
Revenues and estimated profits on long-term contracts are generally recognized
under the percentage-of-completion method of accounting using either a
units-of-delivery or a cost-to-cost methodology. Profit estimates are revised
periodically based on changes in facts; any losses on contracts are recognized
immediately. Lucent makes certain sales through multiple distribution channels
including resellers and distributors. For products sold through these
distribution channels, revenue is generally recognized when the product is sold
by the reseller or distributor to the end user.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

Research and development costs are charged to expense as incurred. However,
the costs incurred for the development of computer software that will be sold,
leased or otherwise marketed are capitalized when technological feasibility has
been established. These capitalized costs are subject to an ongoing assessment
of recoverability based on anticipated future revenues and changes in hardware
and software technologies. Costs that are capitalized include direct labor and
related overhead.

Amortization of capitalized software development costs begins when the
product is available for general release. Amortization is provided on a
product-by-product basis on the straight-line method

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

over periods not exceeding two years. Unamortized capitalized software
development costs determined to be in excess of net realizable value of the
product are expensed immediately.

Effective October 1, 1999, Lucent adopted Statement of Position 98-1,
'Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use' ('SOP 98-1'). As a result, certain costs of computer software
developed or obtained for internal use have been capitalized as part of other
assets and are amortized over a three-year period. The impact of adopting SOP
98-1 was a reduction of costs and operating expenses of $206 for the fiscal year
ended September 30, 2000.

CASH AND CASH EQUIVALENTS

All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. These primarily consist of money
market funds and to a lesser extent certificates of deposit and commercial
paper.

INVENTORIES

Inventories are stated at the lower of cost (determined principally on a
first-in, first-out basis) or market.

CONTRACTS IN PROCESS

Contracts in process are stated at cost plus accrued profits less progress
billings. Net contracts in process balances include unbilled receivables of $358
and $1,272 at September 30, 2001 and 2000, respectively, which are generally
billable and collectible within one year.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is determined using a combination of accelerated and
straight-line methods over the estimated useful lives of the various asset
classes. Useful lives for buildings and building improvements, furniture and
fixtures and machinery and equipment principally range from 10 to 40 years, five
to 10 years and two to 10 years, respectively.

FINANCIAL INSTRUMENTS

Lucent uses various financial instruments, including foreign exchange
forward and option contracts and interest rate swap agreements to manage risk to
Lucent by generating cash flows that offset the cash flows of certain
transactions in foreign currencies or underlying financial instruments in
relation to their amount and timing. Lucent's derivative financial instruments
are for purposes other than trading. Lucent's non-derivative financial
instruments include letters of credit, commitments to extend credit and
guarantees of debt. See Note 5 and Note 15 for further discussions on derivative
financial instruments and hedging activities.

Lucent's investment portfolio consists of equity investments accounted for
under the cost and equity methods as well as equity investments in publicly held
companies that are generally concentrated in the high-technology communications
industry. These investments are included in other assets. Marketable equity
securities with readily determinable fair values are classified as
available-for-sale securities and reported at fair value. Unrealized gains and
losses on the changes in fair value of these securities are reported, net of
tax, as a component of accumulated other comprehensive income (loss) until sold
(see Note 8). At the time of sale, any such gains or losses are recognized in
Other income (expense) -- net. All equity investments are periodically
reviewed to determine if declines in fair value below cost basis are
other-than-temporary. Significant and sustained decreases in quoted market
prices,

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

a series of historic and projected operating losses by the investee or other
factors are considered as part of the review. If the decline in fair value has
been determined to be other-than-temporary, an impairment loss is recorded in
Other income (expense) -- net and the individual security is written down to a
new cost basis.

SECURITIZATIONS AND TRANSFERS OF FINANCIAL INSTRUMENTS

Sales, transfers and securitizations of financial instruments are accounted
for under Statement of Financial Accounting Standards ('SFAS') No. 140,
'Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities' ('SFAS 140'). From time to time, Lucent may sell trade
receivables and notes receivable with or without recourse and/or discounts in
the normal course of business. The receivables are removed from the Consolidated
Balance Sheet at the time they are sold. Sales and transfers that do not meet
the criteria for surrender of control under SFAS 140 are accounted for as
secured borrowings.

The value assigned to undivided interests retained in securitized trade
receivables is based on the relative fair values of the interest retained and
sold in the securitization. Fair values are measured by the present value of
estimated future cash flows of the securitization facility. See Note 16 for
further discussions on securitizations and transfers of financial instruments.

GOODWILL AND OTHER ACQUIRED INTANGIBLES

Goodwill and other acquired intangibles are amortized on a straight-line
basis over the periods benefited, principally in the range of five to 10 years.
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.

IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS

Goodwill and other long-lived assets are reviewed for impairment whenever
events such as product discontinuance, plant closures, product dispositions or
other changes in circumstances indicate that the carrying amount may not be
recoverable. When such events occur, Lucent compares the carrying amount of the
assets to 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. The discount rate
applied to these cash flows is based on Lucent's weighted average cost of
capital, which represents the blended after-tax costs of debt and equity.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the fiscal
year 2001 presentation.

2. BUSINESS RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS

On January 24, 2001 and on July 24, 2001, Lucent announced phase I and
phase II of its restructuring program. Under the restructuring program, Lucent
exited certain non-strategic wireless, optical networking and switching and
access product lines and streamlined its cost structure in various businesses
and corporate operations. This resulted in a pretax charge to earnings totaling
$11,416 for the year ended September 30, 2001. The charge includes restructuring
costs of $4,767 and asset write-downs of $6,649. Asset write-downs include
inventory write-downs of $1,259, which are recorded as a component of Costs.
Lucent expects to complete the restructuring program by the end of fiscal year
2002.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

The following table displays the activity and balances of the restructuring
reserve account for the year ended September 30, 2001:

DEDUCTIONS
-------------------------------------------------
Non- September 30,
Total Net Cash Cash 2001
Charge Payments Charges Reserve
------- -------- ------- ------------

Restructuring costs
Employee separations.................. $ 3,440 $ 179 $ 2,673 $ 588
Contract settlements.................. 944 334 -- 610
Facility closings..................... 304 8 -- 296
Other................................. 79(a) (46)(a) -- 125
------- ------ ------ ------
Total restructuring costs......... 4,767 475 2,673 1,619
------- ------ ------ ------
Asset write-downs
Goodwill and other acquired
intangibles......................... 4,081 -- 4,081 --
Inventory (b)......................... 1,259 -- 1,259 --
Capitalized software.................. 362 -- 362 --
Property, plant and equipment, net.... 425 -- 425 --
Other................................. 522 -- 522 --
------- ------ ------ ------
Total asset write-downs........... 6,649 -- 6,649 --
------- ------ ------ ------
Total......................... $ 11,416 $ 475 $ 9,322 $ 1,619
------- ------ ------ ------
------- ------ ------ ------

---------

(a) Includes proceeds from the sale of a product line.

(b) At September 30, 2001, the unutilized inventory reserve for restructuring
was $689.

EMPLOYEE SEPARATIONS

Lucent recorded charges during fiscal year 2001 associated with voluntary
and involuntary employee separations totaling approximately 39,000 employees,
including 8,500 related to a voluntary early-retirement offer to qualified U.S.
paid management employees. As of September 30, 2001, approximately 23,700 of
these employees had been terminated. In addition 5,300 of employee separations
since December 31, 2000, not included in above amounts, were achieved through
attrition and divestiture of businesses. The majority of the remaining employee
separations are expected to be completed by the end of the second fiscal quarter
of 2002. Employee separations impact all of Lucent's business groups and
geographic regions. Of the 39,000 employee separations, approximately 70% are
management and 60% are involuntary.

The non-cash portion of the employee separations charge reflects $2,113 of
net pension and postretirement termination benefits to certain U.S. employees
expected to be funded through Lucent's pension assets and $560 for net pension,
postretirement and postemployment benefit curtailment charges. Curtailment
charges were recognized since a significant number of expected years of future
service of present plan participants either were or will be eliminated (see
Note 12).

CONTRACT SETTLEMENTS

Contract settlements include settlements of purchase commitments with
suppliers of $508 and contract renegotiations or cancellations of contracts with
customers of $436. Approximately 50% of total purchase commitments relate to the
rationalization of certain optical networking products, including charges
relating to the discontinuance of the Chromatis product portfolio. Customer
settlements include charges associated with switching and access product
rationalizations and the

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Company's strategic decision to limit its investment in research and development
in certain wireless technologies.

FACILITY CLOSINGS

Facility closings reflect the costs associated with the consolidation of
offices and production facilities as a result of employee separations, product
rationalizations and the transition to contract manufacturing.

GOODWILL AND OTHER ACQUIRED INTANGIBLES

Impairment losses related to the write-down of goodwill and other acquired
intangibles to their fair value was estimated by discounting the expected future
cash flows. These impairment charges largely relate to the write-off of $3,707
of goodwill relating to the discontinuance of the Chromatis product portfolio,
the write-off of acquired intangibles related to the impairment of the TeraBeam
investment and rationalizations of products associated with the DeltaKabel,
Stratus and Ignitus acquisitions (see Note 4).

INVENTORY

Inventory write-downs resulted primarily from optical networking, switching
and access and wireless product rationalizations and discontinuances.

OTHER ASSET WRITE-DOWNS

The remainder of the asset write-downs consisted of property, plant and
equipment, capitalized software and other assets associated with Lucent's
product and system rationalizations resulting in sales of assets, closures and
consolidation of offices, research and development facilities and factories.

3. AGERE INITIAL PUBLIC OFFERING AND DISCONTINUED OPERATIONS

On December 29, 2000, Lucent completed the sale of its power systems
business (see Note 4). On April 2, 2001, Agere Systems Inc. ('Agere'), Lucent's
microelectronics business, completed an initial public offering ('IPO') of 600
million shares of Class A common stock, resulting in net proceeds of $3,440 to
Agere. As a result of the IPO and the planned spin-off of Agere described below,
Lucent recorded an increase to shareowners' equity of $922. In addition, on
April 2, 2001, Morgan Stanley exercised its overallotment option to purchase an
additional 90 million shares of Agere Class A common stock from Lucent. Morgan
Stanley exchanged $519 of Lucent commercial paper for the Agere common shares.
This transaction resulted in a gain of $141, which is included in the estimated
loss on disposal of Agere. After the exercise of the overallotment option by
Morgan Stanley, Lucent owned 57.8% of Agere common stock. If Lucent satisfies
certain conditions and terms under its credit facilities (see Note 10), it
intends to spin-off Agere through a tax-free distribution to its shareowners.
The Company has historically reported Agere and the power systems business as
part of a single significant segment. Accordingly, Lucent's consolidated
financial statements for all periods presented have been reclassified to reflect
Agere and the power systems business as a discontinued business segment in
accordance with Accounting Principles Board Opinion No. 30.

On September 30, 2000, Lucent completed the spin-off of Avaya Inc., Lucent's
former enterprise networks business, in a tax-free distribution to its
shareowners. The historical carrying amount of the net assets transferred to
Avaya was recorded as a stock dividend of $1,009. As a result of the final
transfer of assets and liabilities to Avaya, the stock dividend was adjusted by
$47 and reflected as a

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

reduction to additional paid-in-capital during fiscal year 2001. This segment
has also been treated as a discontinued operation.

Summarized financial information for the discontinued operations is as
follows:

Years ended September 30,
---------------------------
2001 2000 1999
---- ---- ----

Revenues
Agere and power systems.............................. $ 3,838 $ 4,909 $ 3,624
Avaya................................................ -- 7,607 8,157
-------- -------- -------
Total revenues................................... $ 3,838 $ 12,516 $ 11,781
-------- -------- --------
-------- -------- --------
Income (loss) from discontinued operations (net of taxes)
Agere and power systems (a).......................... $ (151) $ 248 $ 657
Avaya (b)............................................ -- 303 455
Loss on disposal of Agere (a)........................ (3,021) -- --
Loss on disposal of Avaya (b)........................ -- (765) --
-------- -------- --------
Income (loss) from discontinued operations............... $ (3,172) $ (214) $ 1,112
-------- -------- --------
-------- -------- --------

SEPTEMBER 30,
--------------------
2001 2000
---- ----

Net assets of discontinued operations (Agere and power
systems)
Current assets.......................................... $ 4,022 $ 1,583
Current liabilities..................................... 4,427 (c) 949
------- -------
Net current assets (liabilities) of discontinued
operations............................................ $ (405) $ 634
------ -------
Long-term assets........................................ $ 2,625 $ 6,050
Long-term liabilities................................... 1,323 (d) 418
------- -------
Net long-term assets of discontinued operations......... $ 1,302 $ 5,632
------- -------
------- -------

---------

(a) Agere and power systems' income (loss) from discontinued operations
includes income tax provisions of $107, $398 and $296 for fiscal years
ended September 30, 2001, 2000 and 1999, respectively.

The loss on disposal of Agere, net of a tax provision of $39, is composed
of Lucent's 57.8% share of the estimated net losses and separation costs of
the microelectronics business from the measurement date through the planned
spin-off date, partially offset by a gain of $141 associated with Lucent's
debt exchange on April 2, 2001, as noted above. The loss on disposal of
Agere includes Lucent's share of a $2,762 impairment charge for goodwill
and other acquired intangibles primarily associated with the product
portfolios of the Ortel Corporation, Herrmann Technology, Inc., and Agere,
Inc. acquisitions and costs associated with Agere's restructuring
initiatives, separation expenses related to the IPO and expected spin-off
and inventory provisions of $563, $99 and $409, respectively. Major
components of the restructuring charge include $386 for the rationalization
of under-utilized manufacturing facilities and other restructuring-related
activities, and $177 for work force reductions. In addition, Agere has
recorded a $538 tax valuation allowance for its deferred tax assets.

(b) Avaya's income from discontinued operations for the years ended
September 30, 2000 and 1999 is net of applicable income taxes of $160 and
$256, respectively. Income from discontinued operations includes an
allocation of Lucent's interest expense totaling $64 and $91 for the fiscal
years ended September 30, 2000 and 1999, respectively, based upon the
amount of debt assumed by Avaya.
(footnotes continued on next page)

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(footnotes continued from previous page)
Approximately $780 of commercial paper borrowings was assumed by Avaya as
part of the spin-off transaction. The loss on disposal of Avaya, net of a
tax benefit of $238, reflects the costs directly associated with the
spin-off and the net loss of Avaya between the measurement date and the
spin-off date of September 30, 2000. The loss includes those components of
the Avaya reorganization plan, including a business restructuring charge
and directly-related asset write-downs of $545, recorded during the year,
along with transaction costs of $56 for the spin-off. Major components of
this restructuring charge include $365 for employee separation and $101 for
real estate consolidation.

(c) Includes $2,500 of short-term debt assumed by Agere (see Note 10) and $565
of reserves associated with Lucent's share of Agere's estimated future
losses through the planned spin-off date. On October 4, 2001, Agere repaid
$1,000 of this debt.

(d) Amounts are shown net of the minority interest in the net assets of Agere
of $1,026 at September 30, 2001.

Summarized cash flow information for the discontinued operations is as
follows:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Net cash provided by operating activities of discontinued
operations................................................ $ 517 $ 1,640 $ 1,269
Net cash used in investing activities of discontinued
operations................................................ (744) (1,366) (812)
Net cash used in financing activities of discontinued
operations................................................ (9) (470) (621)
------ ------- -------
Net cash used in discontinued operations.................... $ (236) $ (196) $ (164)
------ ------- -------
------ ------- -------

4. BUSINESS DISPOSITIONS AND COMBINATIONS

DISPOSITIONS

On December 29, 2000, Lucent completed the sale of its power systems
business to Tyco International Ltd. for approximately $2,538 in cash. In
connection with the sale, Lucent recorded an extraordinary gain of $1,182 (net
of tax expense of $780).

On August 31, 2001, Lucent received $572 from the closing of its transaction
with Celestica Corporation to transition Lucent's manufacturing operations in
Oklahoma City, Oklahoma and Columbus, Ohio. At closing, Lucent entered into a
five-year supply agreement for Celestica to be the primary manufacturer of its
switching and access and wireless networking systems products. Until the
inventory is sold to an end user, inventory associated with the transaction
remains in Lucent's inventory balance, with a corresponding liability for
proceeds received. This inventory amounted to approximately $310 at
September 30, 2001. Additionally, Lucent may be required to repurchase up to $90
of this inventory not used within one year of the transaction. The work force
related to these two operations is expected to be reduced and/or transferred to
Celestica. As a result, Lucent recorded non-cash termination and curtailment
charges of approximately $378 during the fiscal year ended September 30, 2001,
which were included as a component of Lucent's employee separation restructuring
costs (see Note 2).

ACQUISITIONS

There were no acquisitions by Lucent in the fiscal year ended September 30,
2001.

The following table presents information about acquisitions by Lucent in the
fiscal years ended September 30, 2000 and 1999. All of these acquisitions were
accounted for under the purchase method

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

of accounting, and the acquired technology valuation included existing
technology, purchased in-process research and development ('IPRD') and other
intangibles. All IPRD charges were recorded in the quarter in which the
transaction was completed. On a pro forma basis, if the fiscal year 2000
acquisitions had occurred on October 1, 1999, the amortization of goodwill and
other acquired intangibles would have increased by approximately $675 for the
fiscal year ended September 30, 2000.

ACQUISITION PURCHASE EXISTING OTHER IPRD
DATE PRICE GOODWILL TECHNOLOGY INTANGIBLES (AFTER-TAX)
---- ----- -------- ---------- ----------- -----------

2000
Spring Tide(a) 9/00 $ 1,315 $ 1,075 $ 143 $ 14 $ 131
Stock & options
Chromatis(b)(f) 6/00 4,756 4,223 n/a 186 428
Stock & options
DeltaKabel(c)(f) 4/00 52 56 n/a n/a n/a
Cash
1999
Stratus(d)(f) 10/98 $ 917 $ 0 $ 130 $ 4 $ 267*
Stock & options
Other(e) various 125 79 14 12 23
Cash & notes

AMORTIZATION PERIOD (IN YEARS)
-----------------------------------
EXISTING OTHER
GOODWILL TECHNOLOGY INTANGIBLES
-------- ---------- -----------

2000
Spring Tide(a) 7 7 7
Chromatis(b)(f) 7 n/a 2-7
DeltaKabel(c)(f) 6 n/a n/a
1999
Stratus(d)(f) n/a 10 3
Other(e) 5-10 4-7 7-8

---------

(a) Spring Tide Networks was a provider of network switching equipment.

(b) Chromatis Networks Inc. was a supplier of metropolitan optical networking
systems.

(c) DeltaKabel Telecom cv was a developer of cable modem and Internet protocol
(IP) telephony products and services for the European market.

(d) Stratus Computer, Inc. was a manufacturer of fault-tolerant computer
systems, acquired by Ascend Communications, Inc. ('Ascend').

(e) Other acquisitions include WaveAccess Ltd.; Quadritek Systems, Inc.; XNT
Systems, Inc.; Quantum Telecom Solutions, Inc.; and InterCall
Communications and Consulting, Inc.

(f) In connection with Lucent's restructuring program, an impairment charge for
goodwill and other acquired intangibles was recorded in fiscal year 2001
relating to these acquisitions (see Note 2).

n/a Not applicable.

* $24 of IPRD was subsequently reversed in March 1999.

In connection with the acquisitions of Spring Tide and Chromatis, certain
key employees were entitled to receive additional Lucent common stock based on
the achievement of specified milestones. Lucent recorded compensation expense
for these milestones when it was deemed probable that the milestones were met.

Included in the purchase price for the acquisitions was IPRD, which was a
non-cash charge to earnings as this technology had not reached technological
feasibility and had no future alternative use. The remaining purchase price was
allocated to tangible assets and intangible assets, including goodwill and other
acquired intangibles, less liabilities assumed.

The value allocated to IPRD was determined using an income approach that
included an excess earnings analysis reflecting the appropriate cost of capital
for the investment. Estimates of future cash flows related to the IPRD were made
for each project based on Lucent's estimates of revenue, operating expenses and
income taxes from the project. These estimates were consistent with historical
pricing, margins and expense levels for similar products.

Revenues were estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. Estimated operating expenses, income
taxes and charges for the use of contributory assets were

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

deducted from estimated revenues to determine estimated after-tax cash flows for
each project. Estimated operating expenses include cost of goods sold; selling,
general and administrative expenses; and research and development expenses. The
research and development expenses include estimated costs to maintain the
products once they have been introduced into the market and generate revenues
and costs to complete the in-process research and development.

The discount rates utilized to discount the projected cash flows were based
on consideration of Lucent's weighted average cost of capital, as well as other
factors including the useful life of each project, the anticipated profitability
of each project, the uncertainty of technology advances that were known at the
time and the stage of completion of each project.

Management is primarily responsible for estimating the fair value of the
assets and liabilities acquired, and has conducted due diligence in determining
the fair value. Management has made estimates and assumptions that affect the
reported amounts of assets, liabilities and expenses resulting from such
acquisitions. Actual results could differ from those amounts.

TERABEAM CORPORATION

On April 9, 2000, Lucent and TeraBeam Corporation entered into an agreement
to develop TeraBeam's fiberless optical networking system that provides
high-speed data networking between local and wide area networks. Under the
agreement, Lucent paid cash and contributed research and development assets,
intellectual property and free-space optical products, valued in the aggregate
at $450. On September 26, 2001, Lucent and TeraBeam agreed to terminate most of
the existing arrangements between the parties. Pursuant to this agreement, the
30% interest that Lucent holds in the venture that develops the fiberless
optical networking system will be exchanged for a 15% interest in TeraBeam
Corporation in the second quarter of fiscal year 2002. As a result of exiting
the original arrangement and its evaluation of the restructured investment as of
September 30, 2001, Lucent wrote off its remaining investment and goodwill and
other acquired intangibles of $328, which is included as part of Lucent's fiscal
year 2001 business restructuring charge (see Note 2).

IGNITUS COMMUNICATIONS LLC

On April 4, 2000, Lucent acquired the remaining 44% of Ignitus
Communications LLC, a start-up company that focuses on high-speed optical
communications at the network edge, for approximately $33. Lucent previously
owned 56% of the company. In connection with Lucent's restructuring program, an
impairment charge for goodwill and other acquired intangibles was recorded in
fiscal year 2001 relating to the product rationalization of the technology
acquired from Ignitus (see Note 2).

SPECTRAN CORPORATION

On July 21, 1999, Lucent began its cash tender offer for the outstanding
shares of SpecTran Corporation, a designer and manufacturer of specialty optical
fiber and fiber-optic products. The tender offer expired on August 31, 1999, and
Lucent thereafter accepted and paid for shares giving it a 61% interest in
SpecTran. The acquisition was accounted for under the purchase method of
accounting. On February 4, 2000, Lucent acquired the remaining shares of
SpecTran, resulting in a total purchase price of approximately $68. SpecTran
Corporation is part of Lucent's optical fiber business, which Lucent sold on
November 16, 2001 (see Note 19).

POOLING-OF-INTERESTS MERGERS

The following table presents information about material mergers by Lucent
accounted for under the pooling-of-interests method of accounting in the fiscal
years ended September 30, 2000 and 1999:

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

TOTAL SHARES
OF COMMON
MERGER STOCK
DATE ISSUED DESCRIPTION OF BUSINESS
---- ------ -----------------------

2000
Excel Switching Corporation
('Excel').......................... 11/99 22 million Developer of programmable switches
International Network Services
('INS')(a)......................... 10/99 49 million Provider of network consulting,
design and integration services
1999
Ascend(b)............................ 6/99 371 million Developer, manufacturer and seller of
wide area networking equipment
Kenan Systems Corporation............ 2/99 26 million Developer of third-party billing and
customer care software

---------

(a) INS previously had a June 30 fiscal year-end. In order to conform the
fiscal year-ends for INS and Lucent, INS's results of operations and cash
flows for the three months ended September 30, 1999, were not reflected in
Lucent's financial statements for the first quarter of fiscal year 2000.
INS's revenue and net income for the three months ended September 30, 1999
were $100 and $11, respectively. At September 30, 2000, retained earnings
includes an adjustment to reflect the net income recognized by INS for the
three months ended September 30, 1999.

(b) Lucent assumed Ascend stock options equivalent to approximately 65 million
shares of Lucent common stock. In connection with the merger, Lucent
recorded a third fiscal quarter 1999 charge to operating expenses of
approximately $79 (non-tax deductible) for merger-related costs, primarily
fees for investment bankers, attorneys, accountants and financial printing.
For the nine months ended June 30, 1999, Ascend's historical revenue and
net income of $1,610 and $66, respectively, are included in Lucent's
historical revenues and income (loss) from continuing operations,
respectively, for the year ended September 30, 1999. Intercompany
transactions between Lucent and Ascend for the nine months ended June 30,
1999 of $138 and $86 have been eliminated from revenues and income (loss)
from continuing operations, respectively, for the year ended September 30,
1999.

Lucent has also completed other pooling transactions. The historical
operations of these entities were not material to Lucent's consolidated results
of operations either on an individual or aggregate basis; therefore, prior
periods have not been restated for these mergers.

5. ACCOUNTING CHANGES

STAFF ACCOUNTING BULLETIN 101, 'REVENUE RECOGNITION IN FINANCIAL STATEMENTS'
('SAB 101')

In December 1999, the Securities and Exchange Commission issued SAB 101,
which provides guidance on the recognition, presentation and disclosure of
revenues in financial statements. During the fourth quarter of fiscal year 2001,
Lucent implemented SAB 101 retroactively to the beginning of fiscal year 2001,
resulting in a cumulative effect of a change in accounting principle of a $68
loss (net of a tax benefit of $45), or $0.02 loss per basic and diluted share,
and a reduction in the 2001 loss from continuing operations of $11, or $0.00 per
basic and diluted share. For the fiscal year ended September 30, 2001, Lucent
recognized $116 in revenue that is included in the cumulative effect adjustment
as of October 1, 2000. The cumulative effect adjustment results primarily from
the change in revenue recognized on intellectual property license agreements
that included settlements for which there was no objective evidence of the fair
value of the settlement. Under SAB 101, in the absence of objective evidence of
fair value of the settlement, revenue is recognized prospectively over the
remaining term of the intellectual property license agreement. In addition,
revenue recognition was deferred for certain products for multiple element
agreements where certain services, primarily installation and integration, were
deemed to be essential to the functionality of delivered elements.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Following are pro forma amounts showing the effects if the accounting change
were applied retroactively:

YEARS ENDED
SEPTEMBER 30,
---------------
2000 1999
---- ----

Income from continuing operations........................... $1,419 $2,333
Basic earnings per share -- continuing operations....... $ 0.44 $ 0.75
Diluted earnings per share -- continuing operations..... $ 0.43 $ 0.72

Net income.................................................. $1,151 $4,753
Basic earnings per share................................ $ 0.36 $ 1.53
Diluted earnings per share.............................. $ 0.35 $ 1.48

SFAS NO. 133, 'ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES'
('SFAS 133')

Effective October 1, 2000, Lucent adopted SFAS 133, and its corresponding
amendments under SFAS 138. SFAS 133 requires Lucent to measure all derivatives,
including certain derivatives embedded in other contracts, at fair value and to
recognize them in the Consolidated Balance Sheet as an asset or liability,
depending on Lucent'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
Other income (expense)-net. For derivatives designated as cash flow hedges, the
effective portions of changes in fair value of the derivative are reported in
other comprehensive income ('OCI') and are subsequently reclassified into Other
income (expense)-net when the hedged item affects Other income (expense)-net.
Changes in fair value of derivative instruments not designated as hedging
instruments and ineffective portions of hedges are recognized in Other income
(expense)-net in the period incurred. The adoption of SFAS 133 as of October 1,
2000, resulted in a cumulative after-tax reduction in net loss of $30 (net of a
$17 tax provision), or $0.01 per basic and diluted share, and an $11 credit to
OCI. The reduction in net loss is primarily attributable to derivatives not
designated as hedging instruments, including foreign currency embedded
derivatives, equity warrants and other derivatives.

6. SUPPLEMENTARY FINANCIAL INFORMATION

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

SUPPLEMENTARY STATEMENTS OF OPERATIONS INFORMATION:

Depreciation and amortization
Depreciation of property, plant and equipment........... $1,065 $ 908 $ 776
Amortization of goodwill................................ 805 283 224
Amortization of other acquired intangibles.............. 116 79 72
Amortization of software development costs.............. 501 395 235
Other amortization...................................... 49 2 (25)
------ ------ ------
Total depreciation and amortization......................... $2,536 $1,667 $1,282
------ ------ ------
------ ------ ------
Other income (expense) -- net
Interest income......................................... $ 255 $ 118 $ 129
Minority interests in earnings of consolidated
subsidiaries.......................................... (81) (50) (27)
Net losses from equity method investments............... (60) (31) (3)
Other than temporary write-downs of investments......... (266) (14) --
Loss on foreign currency transactions................... (58) (18) (8)
Net gains on sales and settlements of financial
instruments........................................... 34 347 270
Write-off of embedded derivative asset.................. (42) -- --
Miscellaneous -- net.................................... (139) (19) (4)
------ ------ ------
Other income (expense) -- net............................... $ (357) $ 333 $ 357
------ ------ ------
------ ------ ------

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

SEPTEMBER 30,
---------------
2001 2000
---- ----

SUPPLEMENTARY BALANCE SHEET INFORMATION:

Inventories
Completed goods......................................... $1,693 $2,810
Work in process......................................... 492 863
Raw materials........................................... 1,461 1,427
------ ------
Inventories................................................. $3,646 $5,100
------ ------
------ ------
Property, plant and equipment -- net
Land and improvements................................... $ 320 $ 309
Buildings and improvements.............................. 3,088 3,092
Machinery, electronic and other equipment............... 5,636 6,109
------ ------
Total property, plant and equipment......................... 9,044 9,510
Less: accumulated depreciation.......................... 4,628 4,464
------ ------
Property, plant and equipment -- net........................ $4,416 $5,046
------ ------
------ ------
Goodwill and other acquired intangibles -- net
Goodwill................................................ $1,239 $5,778
Other acquired intangibles.............................. 227 685
------ ------
Goodwill and other acquired intangibles -- net.............. $1,466 $6,463
------ ------
------ ------
Included in other assets
Capitalized software.................................... $ 583 $ 687
Internal use software................................... $ 261 $ 302

Included in other current liabilities
Deferred income......................................... $ 655 $ 287
Advance billings, progress payments and customer
deposits.............................................. $ 795 $ 719

YEARS ENDED SEPTEMBER 30,
-------------------------------
2001 2000 1999
---- ---- ----

SUPPLEMENTARY CASH FLOW INFORMATION:

Interest payments, net of amounts capitalized............... $490 $356 $316
Income tax payments, net.................................... $161 $ 34 $712
Acquisitions of businesses
Fair value of assets acquired, net of cash acquired..... $ -- $ 59 $299
Less: Fair value of liabilities assumed................. -- 7 123
---- ---- ----
Acquisitions of businesses, net of cash acquired............ $ -- $ 52 $176
---- ---- ----
---- ---- ----

NON-CASH TRANSACTIONS

On April 2, 2001, Morgan Stanley exchanged $519 of Lucent's commercial paper
for 90 million shares of Agere common stock (see Note 3) and Agere assumed from
Lucent $2,500 of debt maturing within one year (see Note 10).

7. EARNINGS (LOSS) PER COMMON SHARE

Basic earnings (loss) per common share is calculated by dividing net income
(loss) applicable to common shareowners by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) applicable to
common shareowners per share further reflects all potential

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

issuances of common stock. Amounts applicable to common shareowners reflect the
dividends and accretion on Lucent's redeemable convertible preferred stock (see
Note 11).

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Earnings (loss) per common share -- basic
Income (loss) from continuing operations................ $(4.18) $ 0.44 $ 0.76
Income (loss) from discontinued operations.............. (0.93) (0.06) 0.36
Extraordinary gain...................................... 0.35 -- --
Cumulative effect of accounting changes................. (0.01) -- 0.42
------ ------ ------
Net income (loss) applicable to common shareowners...... $(4.77) $ 0.38 $ 1.54
------ ------ ------
------ ------ ------
Earnings (loss) per common share -- diluted
Income (loss) from continuing operations................ $(4.18) $ 0.43 $ 0.74
Income (loss) from discontinued operations.............. (0.93) (0.06) 0.34
Extraordinary gain...................................... 0.35 -- --
Cumulative effect of accounting changes................. (0.01) -- 0.41
------ ------ ------
Net income (loss) applicable to common shareowners...... $(4.77) $ 0.37 $ 1.49
------ ------ ------
------ ------ ------
Weighted average number of common shares (in millions)
Common shares -- basic...................................... 3,400.7 3,232.3 3,101.8
Effect of dilutive securities:
Stock options........................................... -- 88.5 109.5
Other................................................... -- 5.1 7.2
------- ------- -------
Weighted average number of common shares -- diluted......... 3,400.7 3,325.9 3,218.5
------- ------- -------
------- ------- -------

Diluted earnings (loss) per share for the year ended September 30, 2001 does
not include the effect of the following potential common shares, because their
effect would reduce the loss per share from continuing operations (in millions):

Stock options.................................... 24
Redeemable convertible preferred stock........... 309
Other............................................ 6
---
Total........................................ 339

In addition, options where the exercise price was greater than the average
market price of the common shares of 407.0 million, 41.0 million and 5.5 million
for the years ended September 30, 2001, 2000 and 1999, respectively, were
excluded from the computation of diluted earnings (loss) per share.

8. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) represents net income (loss) plus the results of
certain shareowners' equity changes not reflected in the Consolidated Statements
of Operations.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

The after-tax components of accumulated other comprehensive income (loss)
are as follows:

NET UNREALIZED
FOREIGN NET UNREALIZED MINIMUM HOLDING TOTAL ACCUMULATED
CURRENCY HOLDING PENSION GAINS/(LOSSES) OTHER
TRANSLATION GAINS/(LOSSES) LIABILITY ON DERIVATIVE COMPREHENSIVE
ADJUSTMENT ON INVESTMENTS ADJUSTMENT INSTRUMENTS INCOME (LOSS)
---------- -------------- ---------- ----------- -------------

Beginning balance,
October 1, 1998......... $(280) $ 18 $(21) $-- $(283)
Current-period change..... (33) 61 11 -- 39
----- ---- ---- --- -----
Ending balance,
September 30, 1999...... (313) 79 (10) -- (244)
Current-period change..... (185) (4) 2 -- (187)
Amounts transferred to
Avaya................... 64 -- 2 -- 66
----- ---- ---- --- -----
Ending balance,
September 30, 2000...... (434) 75 (6) -- (365)
Cumulative effect of
accounting
change -- SFAS 133...... -- 9 -- 2 11
Current-period change..... (33) (45) (8) (1) (87)
----- ---- ---- --- -----
Ending balance,
September 30, 2001...... $(467) $ 39 $(14) $ 1 $(441)
----- ---- ---- --- -----
----- ---- ---- --- -----

Foreign currency translation adjustments are not generally adjusted for
income taxes as they relate to indefinite investments in non-U.S. subsidiaries.

9. INCOME TAXES

The following table presents the principal reasons for the difference
between the effective tax (benefit) rate on continuing operations and the U.S.
federal statutory income tax (benefit) rate:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

U.S. federal statutory income tax (benefit) rate............ (35.0)% 35.0 % 35.0 %
State and local income tax (benefit) rate, net of
federal income tax effect................................. (3.8)% 1.9 % 2.8 %
Foreign earnings and dividends taxed at different rates..... 2.4 % (0.4)% (1.0)%
Research credits............................................ (1.0)% (4.5)% (3.1)%
Acquisition-related costs(a)................................ 9.0 % 10.3 % 4.8 %
Other differences -- net.................................... (0.4)% (3.1)% (0.4)%
----- ---- ----
Effective income tax (benefit) rate......................... (28.8)% 39.2 % 38.1 %
----- ---- ----
----- ---- ----

---------

(a) Includes non-tax deductible IPRD, goodwill amortization and impairments
(including goodwill write-offs recognized under the restructuring program),
and merger-related costs.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

The following table presents the U.S. and non-U.S. components of income
(loss) from continuing operations before income taxes and the provision
(benefit) for income taxes:

YEARS ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
---- ---- ----

Income (loss) from continuing operations before income
taxes
U.S. ................................................. $(19,089) $2,055 $3,360
Non-U.S. ............................................. (815) 302 465
-------- ------ ------
Income (loss) from continuing operations before income
taxes................................................... $(19,904) $2,357 $3,825
-------- ------ ------
-------- ------ ------
Provision (benefit) for income taxes
Current
Federal........................................... $ 21 $ 159 $ 362
State and local................................... -- 9 (14)
Non-U.S. ......................................... 180 265 172
-------- ------ ------
Subtotal...................................... 201 433 520
-------- ------ ------
Deferred
Federal........................................... (5,183) 405 761
State and local................................... (679) 85 201
Non-U.S. ......................................... (73) 1 (26)
-------- ------ ------
Subtotal...................................... (5,935) 491 936
-------- ------ ------
Provision (benefit) for income taxes...................... $ (5,734) $ 924 $1,456
-------- ------ ------
-------- ------ ------

The components of deferred tax assets and liabilities are as follows:

SEPTEMBER 30,
------------------
2001 2000
---- ----

Deferred income tax assets
Bad debt and customer financing reserves................ $1,004 $ 82
Inventory reserves...................................... 685 314
Business restructuring reserves......................... 632 --
Other operating reserves................................ 536 407
Postretirement and other benefits....................... 2,386 2,352
Net operating loss/credit carryforwards................. 2,538 240
Other................................................... 636 364
Valuation allowance..................................... (742) (197)
------ ------
Total deferred tax assets........................... $7,675 $3,562
------ ------
------ ------
Deferred income tax liabilities
Pension................................................. $1,971 $2,480
Property, plant and equipment........................... 5 417
Other................................................... 521 734
------ ------
Total deferred tax liabilities...................... $2,497 $3,631
------ ------
------ ------

As of September 30, 2001, Lucent had tax credit carryforwards of $898 and
federal, state and local, and non-U.S. net operating loss carryforwards of
$1,640 (tax-effected), most of which expire primarily after the year 2019. As of
September 30, 2001, Lucent has recorded valuation allowances totaling $742
against these carryforwards, primarily in certain state and foreign
jurisdictions in which Lucent has concluded it is more likely than not that
these carryforwards would not be realized. Although realization is not assured,
Lucent has concluded that it is more likely than not that the remaining deferred
tax assets will be realized based on the scheduling of deferred tax liabilities
and projected

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

taxable income. The amount of the net deferred tax assets actually realized,
however, could vary if there are differences in the timing or amount of future
reversals of existing deferred tax liabilities or changes in the actual amounts
of future taxable income.

Lucent has not provided for U.S. deferred income taxes or foreign
withholding taxes on $4,180 of undistributed earnings of its non-U.S.
subsidiaries as of September 30, 2001, since these earnings are intended to be
reinvested indefinitely. It is not practical to estimate the amount of
additional taxes that might be payable on such earnings.

10. DEBT OBLIGATIONS

DEBT MATURING WITHIN ONE YEAR

SEPTEMBER 30,
---------------
2001 2000
---- ----

Commercial paper............................................ $ -- $2,475
Long-term debt.............................................. -- 750
Revolving credit facilities (5.7% weighted average interest
rate)..................................................... 1,000 --
Other....................................................... 135 243
------ ------
Total debt maturing within one year..................... $1,135 $3,468
------ ------
------ ------

Weighted average interest rates for commercial paper were 7.4% and 6.3% for
the years ended September 30, 2001 and 2000, respectively. Weighted average
interest rates for revolving credit facilities were 6.0% for the year ended
September 30, 2001.

On February 22, 2001, Lucent completed arrangements for $6,500 of Credit
Facilities with financial institutions. These Credit Facilities consist of a
replacement for the 364-day $2,000 Credit Facility that expired on February 22,
2001 and a new 364-day $2,500 assumable Credit Facility for Agere ('Assumable
Credit Facility'). In addition to these two Credit Facilities, Lucent amended an
existing $2,000 Credit Facility expiring in February 2003. Under the 364-day
$2,000 Credit Facility, any loans outstanding at maturity may be extended by
Lucent to February 26, 2003. The interest rate on the Credit Facilities is based
on LIBOR rates plus a spread, which is dependent on Lucent's credit rating.
Lucent borrowed $2,500 under the Assumable Credit Facility, which was assumed by
Agere on April 2, 2001, the closing of the Agere IPO.

On August 16, 2001, Lucent entered into an amendment to each of the Credit
Facilities ('Amendments'). The Amendments modified the financial covenants and
certain other conditions and terms, including those necessary to allow the
distribution of Agere stock to Lucent shareowners.

The Credit Facilities are secured by liens on substantially all of Lucent's
assets ('Collateral'), including the pledge of the Agere stock owned by Lucent.
Certain other existing financings and obligations are, and certain future
financings and obligations could be, similarly secured during the time the
Collateral arrangements for the Credit Facilities are in effect. The Credit
Facilities contain affirmative and negative covenants, including financial
covenants requiring the maintenance of specified consolidated minimum net worth
and earnings before interest, taxes, depreciation and amortization ('EBITDA')
levels as defined in the Credit Facilities. In addition, in the event a
subsidiary defaults on its debt, as defined in the Credit Facilities, it would
constitute a default under Lucent's Credit Facilities.

The total lending commitments under the Credit Facilities are reduced if
certain debt reduction transactions are undertaken or if additional funds are
generated from specified non-operating sources in excess of $2,500. These
sources of funds include the proceeds received from issuing redeemable
convertible preferred stock, the proceeds received from the sale of the optical
fiber business (see Note 19), $519 of debt reduction from a debt for equity
exchange (see Note 3) and other specified types of transactions. The first
$2,000 in excess of the amount above would result in the termination of the

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

364-day $2,000 Credit Facility. Additional amounts would reduce the total
lending commitments under the remaining $2,000 Credit Facility that expires in
February 2003, however, the lending commitments under the facility that expires
in February 2003 can be reduced to no less than $1,500. After the sale of the
optical fiber business on November 16, 2001, Lucent had generated $4,500 from
specified non-operating sources, which resulted in a reduction in the total
lending commitments on November 20, 2001 to approximately $2,000.

The pledge of Agere stock owned by Lucent can be released and the
distribution can occur at Lucent's request if the following terms and conditions
as defined under the Credit Facilities are met by Lucent:

- no event of default exists under the Credit Facilities;

- generate positive EBITDA for the fiscal quarter immediately preceding the
distribution;

- meet a minimum current asset ratio;

- receipt of $5,000 in cash from certain non-operating sources; and

- the 364-day $2,000 Credit Facility has been terminated and the $2,000
Credit Facility, expiring in February 2003, has been reduced to $1,750 or
less.

Lucent cannot resume payment of dividends on its common stock unless it
achieves certain credit ratings or EBITDA levels and no event of default exists
under the Credit Facilities. Payment of dividends on the common stock is limited
to the rate of $0.02 per share per quarter. Lucent is permitted to pay cash
dividends on its redeemable convertible preferred stock (see Note 11) if no
event of default exists under the Credit Facilities.

LONG-TERM DEBT

SEPTEMBER 30,
---------------
2001 2000
---- ----

6.90% notes due July 15, 2001............................... $ -- $ 750
7.25% notes due July 15, 2006............................... 750 750
5.50% notes due November 15, 2008........................... 500 500
6.50% debentures due January 15, 2028....................... 300 300
6.45% debentures due March 15, 2029......................... 1,360 1,360
7.70% notes due May 19, 2010................................ 20 20
8.00% notes due May 18, 2015................................ 25 25
11.755% notes due July 1, 2006.............................. 330 --
Other (8.1% and 6.9% weighted average interest rates,
respectively)............................................. 56 116
------ ------
Total long-term debt........................................ 3,341 3,821
Less: unamortized discount.................................. 38 41
Amounts maturing within one year.................... 29 750
------ ------
Long-term debt...................................... $3,274 $3,030
------ ------
------ ------

Lucent has an effective shelf registration statement for the issuance of
debt securities up to $1,800, of which $1,755 remains available at
September 30, 2001.

Aggregate maturities, by year, of the $3,341 in total long-term debt
obligations at September 30, 2001 for fiscal year 2002 through fiscal year 2006
and thereafter were $29, $33, $48, $44, $950 and $2,237, respectively.

11. REDEEMABLE CONVERTIBLE PREFERRED STOCK

Lucent has 250,000,000 shares of preferred stock authorized. On August 6,
2001, Lucent designated and sold 1,885,000 shares of non-cumulative 8%
redeemable convertible preferred stock having an

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

initial liquidation preference of $1,000 per share, subject to accretion as
described below, in a private placement, resulting in net proceeds of $1,831.
The redeemable convertible preferred stock has an annual dividend rate of 8%,
payable semi-annually in cash or Lucent common stock at Lucent's option. Any
unpaid dividends will increase the liquidation preference at an accretion rate
of 10% per year, calculated on a semi-annual basis. From and after the earlier
of the Agere spin-off or May 6, 2002, at the holder's option, each share of
convertible preferred stock is convertible into Lucent's common stock at an
initial conversion price of $7.48 per share, subject to adjustment under certain
circumstances, including the Agere spin-off. Although Lucent is prohibited from
exercising this right under the current terms of the Credit Facilities, Lucent
can, at its option, require all holders to exchange their shares of redeemable
convertible preferred stock for convertible subordinated debentures having terms
substantially similar to the preferred stock. The redeemable convertible
preferred stock is redeemable, at Lucent's option after August 15, 2006 and at
the option of the holders on August 2 of 2004, 2007, 2010 and 2016. Provided
certain criteria are met, Lucent has the option to redeem the convertible
preferred stock for cash or its common stock at a 5% discount from the then
current market price or a combination of cash and shares of its common stock.
Lucent is obligated to redeem all outstanding preferred shares on August 1,
2031. The initial carrying value is being accreted to liquidation value as a
charge to shareowners' equity over the earliest redemption period of three
years. Holders of the preferred stock have no voting rights except as required
by law, and rank junior to Lucent's debt obligations. In addition, upon
dissolution or liquidation of Lucent, holders are entitled to the liquidation
preference plus any accrued and unpaid dividends prior to any distribution of
net assets to common shareowners.

12. EMPLOYEE BENEFIT PLANS

PENSION AND POSTRETIREMENT BENEFITS

Lucent maintains defined benefit pension plans covering the majority of its
employees and retirees, and postretirement benefit plans for retirees that
include health care and dental benefits and life insurance coverage. In fiscal
year 2001, Lucent recorded final adjustments to the pension and postretirement
asset and obligation amounts that were transferred to Avaya on September 30,
2000. The following information summarizes activity in the pension and
postretirement benefit plans for the entire Company, including discontinued
operations:

POSTRETIREMENT
PENSION BENEFITS BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
----------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----

Change in benefit obligation
Benefit obligation at October 1......................... $26,113 $ 27,401 $ 8,242 $ 8,604
Service cost........................................ 316 478 35 67
Interest cost....................................... 1,926 1,915 604 601
Actuarial losses.................................... 1,434 370 761 33
Amendments.......................................... 9 (1) (58) --
Benefits paid....................................... (2,788) (2,294) (709) (651)
Settlements......................................... (3) -- (10) --
Termination benefits................................ 1,954 -- 197 --
Impact of curtailments.............................. 715 -- 288 --
Benefit obligation assumed by Avaya................. 174 (1,756) 48 (412)
------- -------- ------- -------
Benefit obligation at September 30...................... $29,850 $ 26,113 $ 9,398 $ 8,242
------- -------- ------- -------
------- -------- ------- -------
(table continued on next page)

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(table continued from previous page)

POSTRETIREMENT
PENSION BENEFITS BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- -------- ------- --------

Change in plan assets
Fair value of plan assets at October 1.............. $45,262 $ 41,067 $ 4,557 $ 4,467
Actual (loss) return on plan assets................. (6,830) 9,791 (827) 654
Company contributions............................... 25 19 17 8
Benefits paid....................................... (2,788) (2,294) (709) (651)
Assets transferred from (to) Avaya.................. 259 (2,984) 36 (255)
Other (including transfer of assets from pension to
postretirement plans)............................. (389) (337) 366 334
------- -------- ------- -------
Fair value of plan assets at September 30............... $35,539 $ 45,262 $ 3,440 $ 4,557
------- -------- ------- -------
------- -------- ------- -------
Funded (unfunded) status of the plan.................... $ 5,689 $ 19,149 $(5,958) $(3,685)
Unrecognized prior service cost (credit)................ 1,228 2,086 (135) 49
Unrecognized transition asset........................... (103) (322) -- --
Unrecognized net (gain) loss............................ (1,790) (14,499) 1,035 (1,208)
------- -------- ------- -------
Net amount recognized................................... $ 5,024 $ 6,414 $(5,058) $(4,844)
------- -------- ------- -------
------- -------- ------- -------

POSTRETIREMENT
PENSION BENEFITS BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- -------- ------- --------

Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid pension costs............................... $ 4,958 $ 6,238 $ -- $ --
Prepaid pension costs allocated to discontinued
operations........................................ 122 202 -- --
Accrued benefit liability........................... (73) (37) (4,972) (4,786)
Accrued benefit liability allocated to discontinued
operations........................................ (2) -- (86) (58)
Intangible asset.................................... 5 5 -- --
Accumulated other comprehensive income.............. 14 6 -- --
------- -------- ------- -------
Net amount recognized................................... $ 5,024 $ 6,414 $(5,058) $(4,844)
------- -------- ------- -------
------- -------- ------- -------

Pension plan assets include $17 and $102 of Lucent common stock at
September 30, 2001 and 2000, respectively. Postretirement plan assets include $1
and $3 of Lucent common stock at September 30, 2001 and 2000, respectively.

In fiscal year 2001, Lucent recorded charges totaling $2,151 for pension and
postretirement termination benefits in connection with voluntary
early-retirement offers and other involuntary terminations as part of the
business restructuring (see Note 2). Of this amount, $2,113 reflected
termination charges associated with Lucent's business restructuring, $28 was
associated with Agere's restructuring (discontinued operations) and $10 was
associated with Lucent's supplemental pension plan. In fiscal year 2001, Lucent
recorded charges of $660 for pension and postretirement curtailments; of which
$632 was included in the net business restructuring curtailment charge (see
Note 2) and $28 was associated with reductions in postretirement benefits for
active management employees.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

COMPONENTS OF NET PERIODIC BENEFIT COST:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Pension cost (credit)
Service cost............................................ $ 316 $ 478 $ 509
Interest cost on projected benefit obligation........... 1,926 1,915 1,671
Expected return on plan assets.......................... (3,373) (3,229) (2,957)
Amortization of unrecognized prior service costs........ 326 362 461
Amortization of transition asset........................ (222) (300) (300)
Amortization of net (gain) loss......................... (387) (197) 2
------- ------- -------
Subtotal............................................ (1,414) (971) (614)
Termination benefits.................................... 1,954 -- --
Curtailments............................................ 562 -- --
Settlements............................................. (12) -- --
------- ------- -------
Net pension cost (credit)........................... $ 1,090 $ (971) $ (614)
------- ------- -------
------- ------- -------
Distribution of net pension cost (credit)
Continuing operations................................... $ 1,064 $(1,113) $ (779)
Discontinued operations................................. 26 142 165
------- ------- -------
Net pension cost (credit)........................... $ 1,090 $ (971) $ (614)
------- ------- -------
------- ------- -------

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Postretirement cost
Service cost............................................ $ 35 $ 67 $ 80
Interest cost on accumulated benefit obligation......... 604 601 537
Expected return on plan assets.......................... (352) (338) (308)
Amortization of unrecognized prior service costs........ 22 37 53
Amortization of net (gain) loss......................... (25) (12) 6
------- ------- -------
Subtotal............................................ 284 355 368
Termination benefits.................................... 197 -- --
Curtailments............................................ 98 -- --
Settlements............................................. (5) -- --
------- ------- -------
Net postretirement benefit cost..................... $ 574 $ 355 $ 368
------- ------- -------
------- ------- -------
Distribution of net postretirement benefit cost
Continuing operations................................... $ 564 $ 291 $ 298
Discontinued operations................................. 10 64 70
------- ------- -------
Net postretirement benefit cost..................... $ 574 $ 355 $ 368
------- ------- -------
------- ------- -------
Pension and postretirement benefits weighted average
assumptions as of September 30
Discount rate........................................... 7.0% 7.5% 7.25%
Expected return on plan assets.......................... 9.0% 9.0% 9.0%
Rate of compensation increase........................... 4.5% 4.5% 4.5%

Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-plan-asset component of annual net pension and postretirement benefit
costs. Under the previous accounting method, the calculation of the market-
related value of plan assets included only interest and dividends immediately,
while all other realized and unrealized gains and losses were amortized on a
straight-line basis over a five-year period. The new

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

method used to calculate market-related value includes immediately an amount
based on Lucent's historical asset returns and amortizes the difference between
that amount and the actual return on a straight-line basis over a five-year
period.

The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.42 and $0.41 earnings per
basic and diluted share, respectively) is a one-time, non-cash credit to fiscal
year 1999 earnings. This accounting change also resulted in a reduction in
benefit costs in the year ended September 30, 1999 that increased income by $427
($260 after-tax, or $0.08 earnings per basic and diluted share) as compared with
the previous accounting method.

In 1999, Lucent changed its pension plan benefit for management, technical
pay plan, and non-represented occupational employees hired on or after
January 1, 1999, and certain U.S. employees of companies acquired since
October 1, 1996, who were not participating in a defined benefit pension plan.
These employees receive a different pension benefit, known as an account balance
program, effective January 1, 2000. Expenses related to the account balance
program are included in the previous pension cost table.

Lucent has several non-pension postretirement benefit plans. For
postretirement health care benefit plans, Lucent assumed an 8.6% weighted
average annual health care cost trend rate for 2002, gradually declining to 4.9%
(excluding postretirement dental benefits, the annual medical cost trend rate
would be 9.1% in 2002 gradually declining to 5.0%). The assumed health care cost
trend rate has a significant effect on the amounts reported. A
one-percentage-point change in the assumed health care cost trend rate would
have the following effects on the entire Company, including discontinued
operations:

1 PERCENTAGE POINT
-------------------
INCREASE DECREASE
-------- --------

Effect on total of service and interest cost components... $ 25 $ 22
Effect on postretirement benefit obligation............... $360 $321

SAVINGS PLANS

Lucent's savings plans allow employees to contribute a portion of their
compensation on a pretax and/or after-tax basis in accordance with specified
guidelines. Lucent matches a percentage of the employee contributions up to
certain limits. Savings plan expense amounted to $150, $228 and $318 for the
years ended September 30, 2001, 2000 and 1999, respectively. Lucent's savings
plan expense charged to continuing operations was $125, $161 and $222 for the
years ended September 30, 2001, 2000 and 1999, respectively.

EMPLOYEE STOCK OWNERSHIP PLAN

Lucent's leveraged Employee Stock Ownership Plan ('ESOP') previously funded
the employer contributions to the Long-Term Savings and Security Plan for
non-management employees. The ESOP obligation is reported as a reduction in
additional paid-in capital. During 2001, the remaining shares of Lucent common
stock in the ESOP were allocated to participants.

13. STOCK COMPENSATION PLANS

Lucent has stock-based compensation plans under which outside directors and
certain employees receive stock options and other equity-based awards. The plans
provide for the grant of stock options, stock appreciation rights, performance
awards, restricted stock awards and other stock unit awards.

Stock options generally are granted with an exercise price equal to 100% of
the market value of a share of common stock on the date of grant, have
two-to-10-year terms and vest within four years from the date of grant. Subject
to customary antidilution adjustments and certain exceptions, the total number
of shares of common stock authorized for option grants under the plans,
including options granted in acquisitions, was 963 million shares at
September 30, 2001.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

In connection with certain of Lucent's acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for Lucent common stock effective at the acquisition date. These
options did not reduce the shares available for grant under any of Lucent's
other option plans. For acquisitions accounted for as purchases, the fair value
of these options was generally included as part of the purchase price. As of
July 1, 2000, Lucent began recording deferred compensation related to unvested
options held by employees of companies acquired in a purchase acquisition, in
accordance with the Financial Accounting Standards Board ('FASB') Interpretation
No. 44. Unamortized deferred compensation expense was $5 and $34 at
September 30, 2001 and 2000, respectively. The deferred expense calculation and
future amortization is based on the graded vesting schedule of the awards.

Lucent established an Employee Stock Purchase Plan ('ESPP') effective
October 1, 1996. Under the terms of this ESPP, eligible employees could have up
to 10% of eligible compensation deducted from their pay to purchase common
stock. The per share purchase price was 85% of the average high and low per
share trading price of common stock on the New York Stock Exchange ('NYSE') on
the last trading day of each month. In fiscal years 2001, 2000 and 1999, 17.6
million, 7.8 million and 7.5 million shares, respectively, were purchased under
this ESPP and the employer stock purchase plans of acquired companies, at
weighted average per share prices of $10.04, $46.75 and $43.60, respectively.
This ESPP expired on June 30, 2001.

Effective July 1, 2001, Lucent established a new ESPP ('2001 ESPP'). Under
the terms of the 2001 ESPP, eligible employees may have up to 10% of eligible
compensation deducted from their pay to purchase common stock during an offering
period, consisting of four purchase periods, generally six months long. An
employee may purchase up to 500 shares on the last trading date of each purchase
period. The per share purchase price is 85% of the average high and low per
share trading price of common stock on the NYSE on either the employee's entry
date for the relevant offering period, or on the last trading day of the
relevant purchase period, whichever is lower. The amount that may be offered
pursuant to this new plan is 250 million shares. As of September 30, 2001, no
shares were purchased under the 2001 ESPP.

Lucent has adopted the disclosure requirements of SFAS No. 123, 'Accounting
for Stock-Based Compensation,' ('SFAS 123') and, as permitted under SFAS 123,
applies Accounting Principles Board Opinion No. 25 ('APB 25') and related
interpretations in accounting for its plans. Compensation expense recorded under
APB 25 was $147, $49 and $50 for the years ended September 30, 2001, 2000 and
1999, respectively. If Lucent had elected to adopt the optional recognition
provisions of SFAS 123 for its stock option and purchase plans, net income
(loss) and earnings (loss) per share would have been changed to the pro forma
amounts indicated below:

YEARS ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
---- ---- ----

Net income (loss)
As reported........................................... $(16,198) $1,219 $4,789
Pro forma............................................. $(17,172) $ 452 $4,239
Earnings (loss) per share -- basic
As reported........................................... $ (4.77) $ 0.38 $ 1.54
Pro forma............................................. $ (5.05) $ 0.14 $ 1.37
Earnings (loss) per share -- diluted
As reported........................................... $ (4.77) $ 0.37 $ 1.49
Pro forma............................................. $ (5.05) $ 0.13 $ 1.27

The pro forma information presented above includes Lucent's share of Agere's
compensation expense related to Agere stock options issued to Agere employees
subsequent to the IPO. As of

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

September 30, 2001, Agere had 142.8 million stock options outstanding at a
weighted average exercise price per share of $5.81.

The fair value of stock options used to compute pro forma net income (loss)
and earnings (loss) per share disclosures is the estimated fair value at grant
date using the Black-Scholes option-pricing model with the following
assumptions:

YEARS ENDED SEPTEMBER 30,
--------------------------
2001 2000 1999
---- ---- ----

Dividend yield....................................... 0.49% 0.23% 0.10%
Expected volatility -- Lucent...................... 60.2% 39.2% 33.8%
-- Acquisitions(a)............. n/a 55.3% 58.2%
Risk-free interest rate.............................. 4.9% 6.5% 5.2%
Expected holding period (in years)................... 2.4 2.9 3.7

---------

(a) Pre-merger assumptions for companies acquired in a pooling-of-interests.

n/a Not applicable.

The fair value of the employee's purchase rights under the 2001 ESPP is
calculated using the Black-Scholes model, with the following assumptions for
fiscal year 2001: dividend yield of 0%; expected life of four, 10, 16 and 22
months corresponding to each purchase period in the initial offering period;
expected volatility of 85% for the four- and 10-month purchase periods and 104%
for the 16- and 22-month periods; and risk-free interest rates ranging from 3.2%
to 4.1% in each period. The weighted average fair value of those purchase rights
granted in fiscal year 2001 was $3.53.

The weighted average fair value of stock options, calculated using the
Black-Scholes option-pricing model, granted during the years ended
September 30, 2001, 2000 and 1999 is $4.59, $16.15 and $16.65 per share,
respectively.

Presented below is a summary of the status of Lucent stock options and the
related activity for the years ended September 30, 2001, 2000 and 1999:

WEIGHTED AVERAGE
SHARES EXERCISE PRICE
(IN THOUSANDS) PER SHARE
-------------- ---------

Options outstanding at October 1, 1998................. 267,133 $ 19.40
Granted/assumed(a)................................. 61,944 47.68
Exercised.......................................... (30,951) 12.20
Forfeited/expired.................................. (11,834) 23.16
------- -------
Options outstanding at September 30, 1999.............. 286,292 $ 26.15
Granted/assumed(a)................................. 285,798 47.95
Exercised.......................................... (74,963) 15.38
Forfeited/expired.................................. (38,815) 41.56
------- -------
Options outstanding at September 30, 2000.............. 458,312 $ 40.20
------- -------
Options outstanding at September 30, 2000, after
spin-off adjustments(b).............................. 431,509 $ 39.34
Granted............................................ 347,557 12.56
Exercised.......................................... (10,496) 4.73
Forfeited/expired.................................. (85,957) 37.77
------- -------
Options outstanding at September 30, 2001(c)........... 682,613 $ 26.43
------- -------

---------

(a) Includes options converted in acquisitions.

(footnotes continued on next page)

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(footnotes continued from previous page)

(b) Effective with the spin-off of Avaya on September 30, 2000, unvested Lucent
stock options held by Avaya employees were converted into Avaya stock
options. For remaining unexercised Lucent stock options, the number of
Lucent stock options and the exercise price were adjusted to preserve the
intrinsic value of the stock options that existed prior to the spin-off.

(c) Lucent stock options held by Agere employees will convert to Agere stock
options upon Lucent's intended spin-off of Agere.

The following table summarizes the status of stock options outstanding and
exercisable at September 30, 2001:

STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE SHARES LIFE PRICE SHARES PRICE
PRICES PER SHARE (IN THOUSANDS) (YEARS) PER SHARE (IN THOUSANDS) PER SHARE
---------------- -------------- ------- --------- -------------- ---------

$ 0.01 to $ 11.72.................... 143,826 5.0 $ 7.87 50,405 $ 9.45
$11.73 to $ 12.15.................... 131,566 4.5 $12.14 50,110 $12.14
$12.16 to $ 23.18.................... 131,917 5.6 $16.57 46,419 $17.24
$23.19 to $ 42.18.................... 144,679 3.6 $37.72 106,015 $39.88
$42.19 to $101.73.................... 130,625 8.3 $58.73 52,730 $58.32
------- -------
Total............................ 682,613 $26.43 305,679 $30.06
------- -------
------- -------

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 employees for the years ended September 30, 2001, 2000 and 1999:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Other stock unit awards granted (in thousands).............. 5,400 858 532
Weighted average market value of shares granted during the
period.................................................... $13.64 $59.23 $31.82

14. OPERATING SEGMENTS

Lucent operates in the global telecommunications networking industry and
designs, develops, manufactures and services communication systems, software and
related products. Lucent has reported the results of operations related to
Agere, its power systems business and Avaya as discontinued operations (see
Note 3). Agere and the power systems business were previously disclosed within
the Microelectronics and Communications Technologies segment. Avaya was
previously disclosed as the Enterprise Networks segment. Lucent's remaining
operations include two reportable segments: Products and Services. The two
reportable segments are managed separately. The Products segment provides public
networking systems and software to telecommunications service providers and
public network operators around the world and optical fiber for applications in
the communications and computing industries. The Services segment includes the
full life cycle of planning and design, consulting and integration support
services as well as network engineering, provisioning, installation and warranty
support. Prior years' data has been reclassified to reflect the current segment
structure.

Performance measurement and resource allocation for the reportable operating
segments are based on many factors. The primary financial measure is
contribution margin, which includes the revenues, costs and expenses directly
controlled by the reportable segment. In addition, contribution margin includes
allocations of the provision for uncollectibles and customer financings, the
related assets of

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

which are managed on a common basis. Contribution margin for reportable segments
excludes certain personnel costs including those related to pension and
postretirement and certain other costs related to shared services such as
general corporate functions and regional sales and marketing, which are managed
on a common basis in order to realize economies of scale and efficient use of
resources. Contribution margin for reportable segments also excludes
acquisition-related costs such as goodwill and other acquired intangibles
amortization, IPRD and other costs from business acquisitions and, in fiscal
year 2001, business restructuring charges and asset impairments. However, the
related goodwill and acquired technology asset balances are reflected in each
reportable segment and in Other as appropriate. The accounting policies of the
reportable segments are essentially the same as those applied in the
consolidated financial statements to the extent that the related items are
included within contribution margin (see Note 1). Intersegment sales are based
on current market prices and are not material. All intersegment profit is
eliminated in consolidation.

During July 2001, Lucent announced that it is realigning its business into
two customer focused segments: an Integrated Network Solutions unit, targeting
wireline customers, and a Mobility Solutions unit, targeting wireless customers,
which will result in a change in its reportable segments during the first
quarter of fiscal year 2002.

The following tables present Lucent's revenues and contribution margin by
reportable operating segment and a reconciliation of the totals reported for the
contribution margin of the segments to Operating income (loss):

YEARS ENDED SEPTEMBER 30,
----------------------------
2001 2000 1999
---- ---- ----

External Revenues
Products................................................ $ 16,847 $23,361 $21,822
Services................................................ 4,162 4,926 4,211
-------- ------- -------
Total reportable segments........................... 21,009 28,287 26,033
Other(a)................................................ 285 617 960
-------- ------- -------
Total external revenues............................. $ 21,294 $28,904 $26,993
-------- ------- -------
-------- ------- -------
Contribution Margin
Products................................................ $ (3,448) $ 5,015 $ 7,031
Services................................................ (501) 531 685
-------- ------- -------
Total reportable segments........................... (3,949) 5,546 7,716
Business restructuring charges and asset impairments.... (11,416) -- --
Acquisition/integration-related costs................... -- (620) (514)
Goodwill and other acquired intangibles amortization.... (921) (362) (296)
Regional sales and marketing expenses................... (2,046) (2,444) (2,309)
Other(a)................................................ (697) 246 (811)
-------- ------- -------
Operating income (loss)............................. $(19,029) $ 2,366 $ 3,786
-------- ------- -------
-------- ------- -------

---------

(a) Other primarily includes the results from other smaller units, eliminations
of internal business and unallocated costs of shared services. In addition,
Other includes the Company's remaining consumer products business in fiscal
years 2000 and 1999, which was sold in the second quarter of fiscal year
2000.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

SUPPLEMENTAL SEGMENT INFORMATION:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Assets
Products................................................ $ 7,479 $13,738 $ 7,677
Services................................................ 633 721 326
------- ------- -------
Total reportable segments(a)........................ 8,112 14,459 8,003
Other(b)................................................ 25,552 33,053 26,243
------- ------- -------
Total assets........................................ $33,664 $47,512 $34,246
------- ------- -------
------- ------- -------
Capital Expenditures
Products................................................ $ 870 $ 1,068 $ 845
Services................................................ 28 88 31
------- ------- -------
Total reportable segments........................... 898 1,156 876
Other(b)................................................ 492 759 511
------- ------- -------
Total capital expenditures.......................... $ 1,390 $ 1,915 $ 1,387
------- ------- -------
------- ------- -------
Depreciation and Amortization
Products................................................ $ 1,046 $ 995 $ 778
Services................................................ 58 43 28
------- ------- -------
Total reportable segments(c)........................ 1,104 1,038 806
Other(b)................................................ 1,432 629 476
------- ------- -------
Total depreciation and amortization................. $ 2,536 $ 1,667 $ 1,282
------- ------- -------
------- ------- -------

---------

(a) Assets included in reportable segments consist primarily of inventory,
property, plant and equipment and goodwill and other acquired intangibles.

(b) Other consists principally of cash and cash equivalents, deferred income
taxes, receivables, prepaid pension costs, property, plant and equipment
supporting corporate and research operations, other assets and net assets
from discontinued operations.

(c) Depreciation and amortization for reportable segments excludes goodwill and
other acquired intangibles amortization, which is included in Other.

PRODUCTS AND SERVICES REVENUES

The table below presents external revenues for groups of similar products
and services:

YEARS ENDED SEPTEMBER 30,
---------------------------
2001 2000 1999
---- ---- ----

Switching and access..................................... $ 5,598 $10,767 $10,482
Optical networking....................................... 3,206 3,298 3,551
Wireless................................................. 5,234 6,108 5,502
Optical fiber............................................ 2,023 1,842 1,149
Services................................................. 4,162 4,926 4,211
Other(a)................................................. 1,071 1,963 2,098
------- ------- -------
Totals............................................... $21,294 $28,904 $26,993
------- ------- -------
------- ------- -------

---------

(a) Principally includes billing and customer care software products, messaging
products and, in fiscal years 2000 and 1999, the consumer products
business.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

GEOGRAPHIC INFORMATION

EXTERNAL REVENUES(a) LONG-LIVED ASSETS(b)
--------------------------- -------------------------
YEARS ENDED SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----

U.S. ................................... $13,776 $19,829 $18,407 $5,261 $10,283 $4,200
Non-U.S. countries...................... 7,518 9,075 8,586 621 1,226 1,137
------- ------- ------- ------ ------- ------
Totals.................................. $21,294 $28,904 $26,993 $5,882 $11,509 $5,337
------- ------- ------- ------ ------- ------
------- ------- ------- ------ ------- ------

---------

(a) Revenues are attributed to geographic areas based on the location of
customers.

(b) Represents property, plant and equipment, net and goodwill and other
acquired intangibles, net.

CONCENTRATIONS

Historically, Lucent has relied on a limited number of customers for a
substantial portion of its total revenues. Revenues from Verizon accounted for
approximately 17%, 14% and 11% of consolidated revenues in the years ended
September 30, 2001, 2000 and 1999, respectively, principally in the Products
segment. Revenues from AT&T accounted for approximately 11% and 16% of
consolidated revenues in the years ended September 30, 2000 and 1999,
respectively, principally in the Products segment. Lucent expects a significant
portion of its future revenues to continue to be generated by a limited number
of customers. The loss of any of these customers or any substantial reduction in
orders by any of these customers could materially and adversely affect Lucent's
operating results. Lucent does not have a concentration of available sources of
supply materials, labor, services or other rights that, if eliminated suddenly,
could impact its operations severely. The transition of manufacturing operations
to several contract manufacturers may cause a concentration in fiscal year 2002
(see Note 17).

15. FINANCIAL INSTRUMENTS

FAIR VALUES

The carrying values of cash and cash equivalents, investments, receivables,
payables and debt maturing within one year contained in the Consolidated Balance
Sheets approximate fair value.

The carrying values of foreign exchange forward and option contracts at
September 30, 2001 equals their fair value (see Derivative Financial
Instruments) and the carrying values and estimated fair values of foreign
exchange forward and option contracts at September 30, 2000 were $31 and $32,
respectively, for assets and $8 and $13, respectively, for liabilities.

The carrying value and estimated fair value of long-term debt at September
30, 2001 were $3,274 and $2,324, respectively, and at September 30, 2000 were
$3,030 and $2,731, respectively.

Fair values of foreign exchange forward and option contracts and long-term
debt are determined using quoted market rates.

CREDIT RISK AND MARKET RISK

By their nature, all financial instruments involve risk, including credit
risk for non-performance by counterparties. The contract or notional amounts of
these instruments reflect the extent of involvement Lucent has in particular
classes of financial instruments. The maximum potential loss may exceed any
amounts recognized in the Consolidated Balance Sheets. However, Lucent's maximum
exposure to credit loss in the event of non-performance by the other party to
the financial instruments for

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

commitments to extend credit and financial guarantees is limited to the amount
drawn and outstanding on those instruments.

Exposure to credit risk is controlled through credit approvals, credit
limits and continuous monitoring procedures and reserves for losses are
established when deemed necessary. Lucent seeks to limit its exposure to credit
risks in any single country or region, although Lucent's customers are primarily
in the telecommunications service provider industry.

All financial instruments inherently expose the holders to market risk,
including changes in currency and interest rates. Lucent manages its exposure to
these market risks through its regular operating and financing activities and
when appropriate, through the use of derivative financial instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

FOREIGN CURRENCY RISK

Lucent conducts its business on a multinational basis in a wide variety of
foreign currencies. The objective of Lucent's foreign currency risk management
policy is to preserve the economic value of cash flows in non-functional
currencies. Toward this end, Lucent's policy is to hedge all significant booked
and firmly committed cash flows identified as creating foreign currency exposure
on a rolling 12-month basis. In addition, Lucent typically hedges a portion of
its exposure resulting from identified anticipated cash flows, providing the
flexibility to deal with the variability of longer-term forecasts as well as
changing market conditions, in which the cost of hedging may be excessive
relative to the level of risk involved.

To manage this risk, Lucent enters into various foreign exchange forward and
option contracts. In some cases, Lucent may hedge foreign exchange risk in
certain sales and purchase contracts by embedding terms in the contracts that
affect the ultimate amount of cash flows under the contract. Principal
currencies hedged as of September 30, 2001 are as follows:

EMBEDDED FOREIGN
FORWARD AND OPTION CURRENCY
CONTRACTS DERIVATIVE INSTRUMENTS
---------------------------- -----------------------
NOTIONAL FAIR VALUE NOTIONAL FAIR VALUE
CURRENCY AMOUNT ASSET (LIABILITY) AMOUNT ASSET
-------- ------ ----------------- ------ -----

Euros....................................... $488 $ 4 $ 9 $ --
Danish kroner............................... 235 2 -- --
Brazilian real.............................. 163 (4) 27 9
Australian dollar........................... 132 6 -- --
New Zealand dollar.......................... 89 4 -- --
Japanese yen................................ 23 (6) -- --

Lucent's policy is to designate certain freestanding foreign currency
derivatives as hedging instruments under SFAS 133 against its intercompany and
external foreign-currency-denominated loans. These exposures make up a large
proportion of the notional value of Lucent's total foreign currency risk and are
well defined as to amounts and timing of repayments. The derivatives hedging
these exposures are designated as cash flow hedging instruments for anticipated
cash flows not to exceed 12 months. Lucent will continue to hedge all other
types of foreign currency risk to preserve the economic cash flows of the
Company in accordance with corporate risk management policies but generally does
not expect to designate related derivative instruments as hedges under SFAS 133
for cost/benefit reasons. Accordingly, the changes in fair value of these
undesignated freestanding foreign currency derivative instruments are recorded
in other income (expense) -- net in the period of change and have not been
material to Lucent due to the short maturities of these instruments.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Lucent's foreign currency embedded derivatives consist of sales and purchase
contracts with cash flows indexed to changes in or denominated in a currency
that neither party to the contract uses as their functional currency. Changes in
the fair value of these embedded derivatives were not significant during the
year ended September 30, 2001.

Prior to the adoption of SFAS 133, foreign exchange forward contracts were
designated as hedges for firmly committed or forecasted sales and purchases that
were expected to occur in less than one year. Gains and losses on all derivative
contracts were either deferred in other current assets and liabilities or were
recognized in other income (expense) -- net depending upon the nature of the
transaction hedged and the type of derivative instrument used. These gains and
losses were not material to the consolidated financial statements at
September 30, 2000.

INTEREST RATE RISK

Lucent uses a combination of financial instruments, including medium-term
and short-term financings, variable-rate debt instruments and to a lesser
extent, interest rate swaps to manage its interest rate mix of the total debt
portfolio and related overall cost of borrowing. To manage this mix in a
cost-effective manner, Lucent, from time to time, may enter into interest rate
swap agreements, in which it agrees to exchange various combinations of fixed
and/or variable interest rates based on agreed upon notional amounts. The
objective of maintaining this mix of fixed and floating rate debt allows Lucent
to manage its overall value of cash flows attributable to its debt instruments.
There were no material interest rate swaps in effect at September 30, 2001 and
2000.

OTHER DERIVATIVES

From time to time, Lucent may obtain warrants to purchase equity securities
in other companies to complement its investment portfolio. Warrants that provide
for net share settlement are considered to be derivative instruments and are
generally not eligible to be designated as hedging instruments as there is no
corresponding underlying exposure. The fair value of these warrants was not
material at September 30, 2001.

NON-DERIVATIVE AND OFF-BALANCE SHEET INSTRUMENTS

Requests for providing commitments to extend credit and financial guarantees
are reviewed and approved by senior management. Management regularly reviews all
outstanding commitments, letters of credit and financial guarantees, and the
results of these reviews are considered in assessing the adequacy of Lucent's
reserve for possible credit and guarantee losses.

The following table presents Lucent's non-derivative and off-balance sheet
instruments for amounts drawn, available but not drawn and not available to be
drawn. These instruments may expire without being drawn upon. Therefore, the
amounts available but not drawn and not available do not necessarily represent
future cash flows. The amounts drawn on these instruments are generally
collateralized by substantially all of the assets of the respective creditors.

SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
--------------------------------- ---------------------------------
TOTAL LOANS TOTAL LOANS
AND AND
GUARANTEES LOANS GUARANTEES GUARANTEES LOANS GUARANTEES
---------- ----- ---------- ---------- ----- ----------

Drawn commitments................. $2,956 $2,528 $428 $2,034 $1,263 $ 771
Available but not drawn........... 1,447 1,411 36 3,872 3,270 602
Not available..................... 911 655 256 2,196 2,121 75
------ ------ ---- ------ ------ ------
Total......................... $5,314 $4,594 $720 $8,102 $6,654 $1,448
------ ------ ---- ------ ------ ------
------ ------ ---- ------ ------ ------

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

COMMITMENTS TO EXTEND CREDIT

Commitments to extend credit to third parties are conditional agreements
generally having fixed expiration or termination dates and specific interest
rates and purposes. In certain situations, credit may not be available for draw
down until certain conditions precedent are met.

GUARANTEES OF DEBT

From time to time, Lucent guarantees the financing for product purchases by
customers. Requests for providing such guarantees are reviewed and approved by
senior management. Certain financial guarantees are assigned to a third-party
reinsurer.

LETTERS OF CREDIT

Letters of credit are purchased guarantees that ensure Lucent's performance
or payment to third parties in accordance with specified terms and conditions,
which amounted to $900 and $897 as of September 30, 2001 and 2000, respectively.
The estimated fair value of letters of credit are $12 and $2 as of
September 30, 2001 and 2000, respectively, which are valued based on fees paid
to obtain the obligations.

16. SECURITIZATIONS AND TRANSFERS OF FINANCIAL INSTRUMENTS

In June 2001, Lucent established a $750 revolving accounts receivable
securitization facility expiring in June 2003. Under the terms of the facility,
Lucent may sell an undivided interest in collateralized accounts receivable from
specified customers in exchange for cash and a subordinated retained interest in
the remaining outstanding accounts receivables. At September 30, 2001, unrelated
third parties held an undivided interest of $286 in the collateralized accounts
receivables. The balance of retained interests is included in Receivables and
varies based on changes in Lucent's credit ratings and the credit ratings of the
customers included in the securitization facility, changes in the sufficiency of
eligible accounts receivable and concentration of credit risk among obligors.
Accordingly, unfavorable changes in these factors require Lucent to repurchase
undivided interests in securitized accounts receivable and favorable changes in
the factors allow Lucent to sell additional undivided interests in accounts
receivable. In order to maintain the facility level, Lucent must continue to
generate eligible accounts receivable sufficient to support such level under the
terms of the facility. This facility was reduced to $500 on October 19, 2001.

Lucent services these securitized receivables for a fee that approximates
Lucent's cost of servicing and such fees were not significant. The investors in
the securitized receivables have no recourse to Lucent's other assets as a
result of debtors' defaults except for the retained interests in the
collateralized accounts receivable.

The following table provides the cash flows in the year ended September 30,
2001 related to this securitization facility:

Proceeds from receivables initially securitized............. $ 435
Proceeds from collections reinvested in revolving
securitization.......................................... 1,913
Repurchases of undivided interests.......................... 182
Average securitized balance during the 94 days that
receivables were securitized in 2001.................... 1,188

The following table provides the valuation of retained interests at
September 30, 2001:

Total securitized balance................................... $1,277
Fair value of retained interests in outstanding
receivables............................................. 939
Discount for time value................................. 7
Net reserve for credit losses........................... 13

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Retained interests are valued based on the historical payment patterns and
the discount rate implicit in the underlying invoices. The expected reserve for
credit losses is 1.27%. A discount is imputed based on the expected number of
days that receivables will remain outstanding and a discount rate commensurate
with the risks involved. Assuming hypothetical simultaneous unfavorable
variations of up to 20% in credit losses and the discount rate used, the pretax
impact on the value of retained interests would not be significant.

In September 2000, Lucent and a third-party financial institution arranged
for the creation of a non-consolidated Special Purpose Trust ('Trust') for the
purpose of allowing Lucent from time to time to sell on a limited-recourse basis
up to a maximum of $970 of customer finance loans and receivables ('Loans') at
any given point in time through a wholly owned bankruptcy-remote subsidiary,
which in turn would sell the Loans to the Trust. Lucent had originally intended
to periodically sell Loans to the Trust, however, due to Lucent's credit
downgrade in February 2001, Lucent is unable to sell additional Loans to the
Trust, as defined by agreements between Lucent and the Trust. Lucent has also
agreed, in the case of foreign currency denominated Loans and Loans with a fixed
interest rate, to indemnify the Trust for foreign exchange losses and losses due
to movements in interest rates (if any) if hedging instruments have not been
entered into for such Loans. Lucent will receive a fee from the Trust for either
arranging hedging instruments or providing the indemnity. Lucent will continue
to service, administer and collect the Loans on behalf of the Trust and receive
a fee for performance of these services until the Loans are either fully
collected or sold by the Trust to an unrelated third party. Lucent also receives
a fee for referring Loans to the Trust that the Trust purchased from Lucent.
Cash flows received from (paid to) the Trust during 2001 and 2000 were as
follows:

YEARS ENDED
SEPTEMBER 30,
--------------
2001 2000
---- ----

Proceeds from sales of loans................................ $ 382 $575
Repurchases of loans........................................ (355) --
Losses on sales of loans and other costs.................... (7) (4)
Fees received............................................... 6 --
Servicing advances.......................................... (8) --
Reimbursements of servicing advances........................ 8 --

In September 1999, a subsidiary of Lucent sold approximately $625 of
accounts receivable from one large non-U.S. customer to a non-consolidated
qualified special purpose entity ('QSPE') which, in turn, sold an undivided
ownership interest in these receivables to entities managed by an unaffiliated
financial institution. Additionally, Lucent transferred a designated pool of
qualified accounts receivable of approximately $700 to the QSPE as collateral
for the initial sale. During December 1999, Lucent repurchased $408 of the $625
of accounts receivable, the previously reported arrangement was terminated and
Lucent established a new arrangement whereby its subsidiary sold $750 of
accounts receivable (including the repurchased receivables) to a consortium of
banks with limited recourse.

17. COMMITMENTS AND CONTINGENCIES

In the normal course of business, Lucent is subject to proceedings, lawsuits
and other claims, including proceedings under laws and government regulations
related to environmental, labor, product and other matters. Such 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 September 30, 2001, 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

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

liability or financial impact to Lucent, from matters other than those described
in the next paragraph, beyond that provided for at September 30, 2001 would not
be material to the annual consolidated financial statements.

Lucent and certain of its former officers are defendants in several
purported shareowner class action lawsuits for alleged violations of federal
securities laws, which have been consolidated in a single action. Specifically,
the complaint alleges, among other things, that beginning in late October 1999,
Lucent and certain of its officers misrepresented Lucent's financial condition
and failed to disclose material facts that would have an adverse impact on
Lucent's future earnings and prospects for growth. This action seeks
compensatory and other damages, and costs and expenses associated with the
litigation. This action is in the early stages and Lucent is unable to determine
its potential impact on the consolidated financial statements. Lucent intends to
defend this action vigorously. In July 2001, a purported class action complaint
was filed under ERISA alleging, among other things, that Lucent and certain
unnamed officers breached their fiduciary duties with respect to Lucent's
employee savings plans claiming that the defendants were aware that Lucent stock
was inappropriate for retirement investment and continued to offer such stock as
a plan investment option. The complaint seeks damages, injunctive and equitable
relief, interest and fees and expenses associated with the litigation. In August
2001, a separate purported class action complaint was filed under ERISA
alleging, among other things, that Lucent breached its fiduciary duties with
respect to its employee benefit and compensation plans by offering Lucent stock
as an investment to employees participating in the plans despite the fact that
Lucent allegedly knew it was experiencing significant business problems. The
August complaint seeks a declaration that Lucent breached its fiduciary duties
to plan participants, an order compelling Lucent to return all losses to the
plans, injunctive relief to prevent future breaches of fiduciary duties, as well
as costs and expenses associated with litigation. Both actions are in the early
stages and the Company is unable to determine the potential impact of either
case on the consolidated financial statements. Lucent intends to defend these
actions vigorously.

SEPARATION AGREEMENTS

In connection with the formation of Lucent from certain units of AT&T Corp.
and the associated assets and liabilities of those units and AT&T's distribution
of its remaining interest in Lucent to its shareowners, Lucent, AT&T and NCR
Corporation executed and delivered the Separation and Distribution Agreement,
dated as of February 1, 1996, as amended and restated, and certain related
agreements. The Separation and Distribution Agreement, among other things,
provides that Lucent will indemnify AT&T and NCR for all liabilities relating to
Lucent's business and operations and for all contingent liabilities relating to
Lucent's business and operations or otherwise assigned to Lucent. In addition to
contingent liabilities relating to the present or former business of Lucent, any
contingent liabilities relating to AT&T's discontinued computer operations
(other than those of NCR) were assigned to Lucent. The Separation and
Distribution Agreement provides for the sharing of contingent liabilities not
allocated to one of the parties, in the following proportions: AT&T: 75%,
Lucent: 22%, and NCR: 3%. The Separation and Distribution Agreement also
provides that each party will share specified portions of contingent liabilities
related to the business of any of the other parties that exceed specified
levels.

In connection with the spin-off of Avaya, Lucent and Avaya executed and
delivered a Contribution and Distribution Agreement ('CDA') that provides for
indemnification by each company with respect to contingent liabilities primarily
relating to their respective businesses or otherwise assigned to each, subject
to certain sharing provisions. In the event the aggregate value of all amounts
paid by each company, in respect of any single contingent liability or any set
or group of related contingent liabilities, is in excess of $50 each company
will share portions in excess of the threshold amount based on agreed-upon
percentages. The CDA also provides for the sharing of certain contingent
liabilities, specifically: (1) any contingent liabilities that are not primarily
contingent liabilities of Lucent or contingent

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

liabilities associated with the businesses attributed to Avaya; (2) certain
specifically identified liabilities, including liabilities relating to
terminated, divested or discontinued businesses or operations; and (3) shared
contingent liabilities within the meaning of the Separation and Distribution
Agreement with AT&T Corp.

In connection with the intended spin-off of Agere and the contribution to it
of certain businesses Lucent and Agere entered into a Separation and
Distribution Agreement ('SDA') that provides for indemnification by each company
with respect to contingent liabilities primarily relating to their respective
businesses or otherwise assigned to each, subject to certain sharing provisions.
In the event the aggregate value of all amounts paid by each company, in respect
of any single contingent liability or any set or group of related contingent
liabilities, is in excess of net insurance proceeds, each company will share
portions in excess of the threshold amount based on agreed-upon percentages. The
SDA also provides for the sharing of certain contingent liabilities,
specifically: (1) any contingent liabilities that are not primarily contingent
liabilities of Lucent or contingent liabilities associated with the businesses
attributed to Agere; (2) certain specifically identified liabilities, including
liabilities relating to terminated, divested or discontinued businesses or
operations; and (3) shared contingent liabilities within the meaning of the
Separation and Distribution Agreement with AT&T Corp.

OTHER COMMITMENTS

In connection with the intended spin-off of Agere, Lucent entered into a
purchase agreement that governs the purchase of goods and services by Lucent
from Agere. Under the agreement, Lucent committed to purchase at least $2,800 of
products from Agere over a three-year period beginning February 1, 2001. In
limited circumstances, Lucent's purchase commitment may be reduced or the term
may be extended. For the period February 1, 2001 through September 30, 2001,
Lucent's purchases under this agreement were $325. Agere and Lucent are
currently discussing ways to restructure Lucent's obligations under the
agreement.

In connection with Lucent's transaction with Celestica (see Note 4), Lucent
entered into a five-year supply agreement whereby Celestica will be the primary
manufacturer for Lucent's switching and access and wireless products in North
America.

ENVIRONMENTAL MATTERS

Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities under way at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ('PRP') at numerous 'Superfund' sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ('CERCLA') or
comparable state statutes. Under the Separation and Distribution Agreement with
AT&T, Lucent is responsible for all liabilities primarily resulting from or
relating to the operation of Lucent's business as conducted at any time prior to
or after the Separation from AT&T including related businesses discontinued or
disposed of prior to the Separation, and Lucent's assets including, without
limitation, those associated with these sites. In addition, under such
Separation and Distribution Agreement, Lucent is required to pay a portion of
contingent liabilities paid out in excess of certain amounts by AT&T and NCR,
including environmental liabilities.

It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. Lucent records an environmental
reserve when it is probable that a liability has been incurred and the amount of
the liability is 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 periods of remediation for the applicable sites, which
typically range from five to 30 years. Reserves for estimated losses from
environmental remediation are, depending on the site, based primarily on
internal

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

or third-party environmental studies and estimates as to the number,
participation level and financial viability of any other PRPs, the extent of the
contamination and the nature of required remedial actions. Accruals are adjusted
as further information develops or circumstances change. The amounts provided
for in Lucent's consolidated financial statements for environmental reserves are
the gross undiscounted amounts of such reserves, without deductions for
insurance or third-party indemnity claims. In those cases where insurance
carriers or third-party indemnitors have agreed to pay any amounts and
management believes that collectibility of such amounts is probable, the amounts
are reflected as receivables in the consolidated financial statements. Although
Lucent believes that its reserves are adequate, there can be no assurance that
the amount of capital expenditures and other expenses which will be required
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amounts reflected in Lucent's reserves or will not have a
material adverse effect on Lucent's financial condition, results of operations
or cash flows. Any possible loss or range of possible loss that may be incurred
in excess of that provided for at September 30, 2001 cannot be estimated.

LEASE COMMITMENTS

Lucent leases land, buildings and equipment under agreements that expire in
various years through 2020. Rental expense, net of sublease rentals, under
operating leases was $476, $420 and $341 for the years ended September 30, 2001,
2000 and 1999, respectively. Future minimum lease payments due under
non-cancelable operating leases at September 30, 2001 for fiscal year 2002
through fiscal year 2006 and thereafter were $304, $248, $205, $165, $117 and
$727, respectively.

18. RECENT PRONOUNCEMENTS

In June 2001, the FASB issued SFAS No. 141, 'Business Combinations,' and
SFAS No. 142, 'Goodwill and Other Intangible Assets.' Under these new standards,
all acquisitions subsequent to June 30, 2001 must be accounted for under the
purchase method of accounting, and purchased goodwill is no longer amortized
over its useful life. Rather, goodwill will be subject to a periodic impairment
test based upon its fair value.

In August 2001, the FASB issued SFAS No. 143, 'Accounting for Asset
Retirement Obligations' ('SFAS 143'). SFAS 143 establishes accounting standards
for recognition and measurement of a liability for the costs of asset retirement
obligations. Under SFAS 143, the costs of retiring an asset will be recorded as
a liability when the retirement obligation arises, and will be amortized to
expense over the life of the asset.

In October 2001, the FASB issued SFAS No. 144, 'Accounting for the
Impairment or Disposal of Long-Lived Assets' ('SFAS 144'). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and discontinued operations.

Lucent is currently evaluating the impact of these pronouncements to
determine the effect, if any, they may have on the consolidated financial
position and results of operations. Lucent is required to adopt each of these
standards in the first quarter of fiscal year 2003.

19. SUBSEQUENT EVENT -- SALE OF OPTICAL FIBER BUSINESS

On November 16, 2001, Lucent completed the sale of its optical fiber
business to The Furukawa Electric Co., Ltd. for $2,300, approximately $200 of
which was in CommScope, Inc. securities. The transaction will result in a gain
in the first quarter of fiscal year 2002. In addition, Lucent entered into an
agreement on July 24, 2001 to sell two Chinese joint ventures -- Lucent
Technologies Shanghai Fiber Optic Co., Ltd. and Lucent Technologies Beijing
Fiber Optic Cable Co., Ltd. -- to Corning Incorporated for $225. This
transaction, which is subject to U.S. and foreign governmental approvals

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

and other customary closing conditions, is expected to close by the end of the
first quarter of fiscal year 2002.

20. QUARTERLY INFORMATION (UNAUDITED)

FIRST SECOND THIRD FOURTH(j) TOTAL
----- ------ ----- --------- -----

YEAR ENDED SEPTEMBER 30, 2001
AS RESTATED FOR SAB 101
Revenues.......................................... $ 4,346 $ 5,907 $ 5,886 $ 5,155 $ 21,294
Gross margin...................................... $ 681 $ 485 $ 829 $ 63 $ 2,058
Loss from continuing operations................... $(1,575) $(3,388)(b) $(1,878)(c) $(7,329)(d) $(14,170)
Loss from discontinued operations................. (5) (308) (1,360) (1,499) (3,172)
------- ------- ------- ------- --------
Loss before extraordinary item and cumulative
effect of accounting changes..................... $(1,580) $(3,696) $(3,238) $(8,828) $(17,342)
Net loss.......................................... $ (464)(a) $(3,696) $(3,238) $(8,800)(e) $(16,198)

Loss per common share -- basic and diluted (f):
Loss from continuing operations................... $ (0.47) $ (1.00)(b) $ (0.55)(c) $ (2.16)(d) $ (4.18)
Loss from discontinued operations................. (0.00) (0.09) (0.40) (0.44) (0.93)
------- ------- ------- ------- --------
Loss before extraordinary item and cumulative
effect of accounting changes..................... $ (0.47) $ (1.09) $ (0.95) $ (2.60) $ (5.11)
Net loss applicable to common shareowners......... $ (0.14)(a) $ (1.09) $ (0.95) $ (2.59)(e) $ (4.77)

Dividends per share.................................. $ 0.02 $ 0.02 $ 0.02 $ 0.00 $ 0.06

AS PREVIOUSLY REPORTED QUARTERLY
Revenues.......................................... $ 4,354 $ 5,915 $ 5,819
Gross margin...................................... $ 682 $ 499 $ 814
Loss from continuing operations................... $(1,574) $(3,380) $(1,887)
Net loss.......................................... $ (395) $(3,688) $(3,247)
Loss per common share -- basic and diluted (f):
Loss from continuing operations................... $ (0.47) $ (0.99)(b) $ (0.55)(c)
Net loss.......................................... $ (0.12) $ (1.08) $ (0.95)

YEAR ENDED SEPTEMBER 30, 2000
Revenues.......................................... $ 7,090 $ 7,230 $ 7,412 $ 7,172 $ 28,904
Gross margin...................................... $ 3,214 $ 2,939 $ 3,134 $ 2,427 $ 11,714
Income (loss) from continuing operations.......... $ 979 (g) $ 462 $ 286 (h) $ (294)(i) $ 1,433
Income (loss) from discontinued operations........ 270 293 (587) (190) (214)
------- ------- ------- ------- --------
Net income (loss)................................. $ 1,249 $ 755 $ (301) $ (484) $ 1,219

Earnings (loss) per common share -- basic:
Income (loss) from continuing operations.......... $ 0.31 (g) $ 0.15 $ 0.09 (h) $ (0.09)(i) $ 0.44
Income (loss) from discontinued operations........ 0.09 0.09 (0.18) (0.05) (0.06)
------- ------- ------- ------- --------
Net income (loss)................................. $ 0.40 $ 0.24 $ (0.09) $ (0.14) $ 0.38

Earnings (loss) per common share -- diluted:
Income (loss) from continuing operations.......... $ 0.30 (g) $ 0.14 $ 0.09 (h) $ (0.09)(f)(i) $ 0.43
Income (loss) from discontinued operations........ 0.08 0.09 (0.18) (0.05)(f) (0.06)
------- ------- ------- ------- --------
Net income (loss)................................. $ 0.38 $ 0.23 $ (0.09) $ (0.14)(f) $ 0.37

Dividends per share.................................. $ 0.04 $ 0.00 $ 0.02 $ 0.02 $ 0.08

(a) Includes an extraordinary gain of $1,154 ($0.34 per basic and diluted
share) related to the sale of the power systems business, a gain from a
cumulative effect of accounting change of $30 ($0.01 per basic and diluted
share) related to the adoption of SFAS 133 and a loss from a cumulative
effect of accounting change of $68 ($0.02 loss per basic and diluted share)
related to the adoption of SAB 101.

(b) Includes total business restructuring and one-time charges of $2,710, of
which $536 of inventory write-downs are included in Gross margin.

LUCENT TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(c) Includes total business restructuring and one-time charges of $684, of
which $143 of inventory write-downs are included in Gross margin.

(d) Includes total business restructuring and one-time charges of $8,022, of
which $580 of inventory write-downs are included in Gross margin.

(e) Includes an extraordinary gain of $28 ($0.01 per basic and diluted share)
related to the sale of the power systems business.

(f) As a result of the loss reported from continuing operations, potentially
dilutive securities have been excluded from the calculation of diluted
earnings (loss) per share because their effect would be antidilutive. In
addition, the fourth fiscal quarter loss per common share from continuing
operations and the net loss per share includes the $28 impact of preferred
dividends and accretion.

(g) Includes a gain of $189 associated with the sale of an equity investment
and a charge of $61 primarily associated with the mergers with INS, Excel
and Xedia.

(h) Includes a charge of $428 of IPRD related to the acquisition of Chromatis.

(i) Includes a charge of $131 of IPRD related to the acquisition of Spring
Tide.

(j) During the fourth quarter of fiscal year 2001, Lucent implemented SAB 101
retroactively to the beginning of fiscal year 2001, resulting in a loss
from a cumulative effect of accounting change of $68 ($0.02 loss per basic
and diluted share). Results for the first three quarters of fiscal year
2001 have been restated. On a pro forma basis, had Lucent adopted SAB 101
prior to October 1, 2000, revenue, gross margin, loss from continuing
operations and net loss for the fourth quarter of fiscal year 2000 would
have been $7,220, $2,407, $306 and $496, respectively, and basic and
diluted loss from continuing operations per share and net loss per share
would have been $0.09 and $0.15, respectively.

LUCENT TECHNOLOGIES INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------------- ---------- ----------
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS & OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (NET) DEDUCTIONS PERIOD
----------- --------- -------- -------------- ---------- ------
(DOLLARS IN MILLIONS)

Year 2001
Allowance for doubtful
accounts.................. $479 $ 462 -- $ 307(a) $ 634
Customer financing
reserves.................. 604 1,787 $257 539(a) 2,109
Deferred tax asset valuation
allowance................. 197 559 -- 14(b) 742
Inventory valuation
reserves.................. $805 $2,400(c) -- $1,391(c) $1,814(c)

Year 2000
Allowance for doubtful
accounts.................. $303 $ 245 -- $ 69(a) $ 479
Customer financing
reserves.................. 34 260 $432 122(a) 604
Deferred tax asset valuation
allowance................. 146 64 6 19(b) 197
Inventory valuation
reserves.................. $624 $ 360 $ 8 $ 187(d) $ 805

Year 1999
Allowance for doubtful
accounts.................. $327 $ 59 $ 26 $ 109(a) $ 303
Customer financing
reserves.................. 30 7 3(a) 34
Deferred tax asset valuation
allowance................. 240 65 3 162(b) 146
Inventory valuation
reserves.................. $626 $ 134 $(74) $ 62(d) $ 624

---------

(a) Represents amounts written off as uncollectible, net of recoveries.

(b) Realization of deferred tax assets for which a valuation allowance had
previously been provided.

(c) Charged to costs and expenses include $1,259 of inventory related to
Lucent's business restructuring program of which $570 was written off and
included in deductions. The remaining balance of deductions is primarily
related to the write-off of obsolete and scrapped inventory.

(d) Primarily related to the write-off of obsolete and scrapped inventory.

Amounts above reflect continuing operations. All amounts have been reclassified
to exclude Avaya, Agere and the power systems business.

EXHIBIT INDEX

The following documents are filed as Exhibits to this report on Form 10-K or
incorporated by reference herein. Any document incorporated by reference is
identified by a parenthetical reference to the SEC filing which included such
document.

Exhibit
Number
--------

(3)(i) 1 Certificate of Incorporation of the Registrant, as amended effective February
16, 2000 (Exhibit 3 to Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000).

(3)(i) 2 Certificate of Designations of 8.00% Redeemable Convertible Preferred Stock
Setting Forth the Powers, Preferences and Rights, and the Qualifications,
Limitations and Restrictions thereof, of such Preferred Stock of Lucent
Technologies Inc. (Exhibit 3 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001).

(3)(ii) By-Laws of the Registrant (Exhibit 3(ii) to the Annual Report on
Form 10-K for the year ended September 30, 2000).

(4)(i) Indenture dated as of April 1, 1996 between Lucent Technologies Inc. and The
Bank of New York, as Trustee (Exhibit 4A to Registration Statement on Form
S-3 No. 333-01223).

(4)(ii) First Supplemental Indenture dated as of April 17, 2000 to Indenture dated
April 1, 1996 (Exhibit 4 to Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000).

(4)(iii) Other instruments in addition to Exhibit 4(i) which define the rights of
holders of long-term debt of the Registrant and all of its consolidated
subsidiaries are not filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees
to furnish a copy of any such instrument to the SEC upon request.

(10)(i) 1 Separation and Distribution Agreement by and among Lucent Technologies Inc.,
AT&T Corp. and NCR Corporation, dated as of February 1, 1996 and amended and
restated as of March 29, 1996 (Exhibit 10.1 to Registration Statement on Form
S-1 No. 333-00703).

(10)(i) 2 Tax Sharing Agreement by and among Lucent Technologies Inc., AT&T Corp. and
NCR Corporation, dated as of February 1, 1996 and amended and restated as of
March 29, 1996 (Exhibit 10.6 to Registration Statement on Form S-1 No.
333-00703).

(10)(i) 3 Employee Benefits Agreement by and between AT&T Corp. and Lucent Technologies
Inc., dated as of February 1, 1996 and amended and restated as of March 29,
1996 (Exhibit 10.2 to Registration Statement on Form S-1 No. 333-00703).

(10)(i) 4 Rights Agreement between Lucent Technologies Inc. and The Bank of New York
(successor to First Chicago Trust Company of New York), as Rights Agent,
dated as of April 4, 1996 (Exhibit 4.2 to Registration Statement on Form S-1
No. 333-00703).

(10)(i) 5 Amendment to Rights Agreement between Lucent Technologies Inc. and The Bank
of New York (successor to First Chicago Trust Company of New York), dated as
of February 18, 1998 (Exhibit (10)(i)5 to the Annual Report on Form 10-K for
the year ended September 30, 1998).

EXHIBIT NUMBER
--------------

(10)(i) 6 364-Day Revolving Credit Facility Agreement, dated as of
February 22, 2001 among Lucent Technologies Inc., several
banks and other financial institutions or entities from time
to time parties thereto, Salomon Smith Barney Inc., as
Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent (Exhibits 99.1 to the Current Report on
Form 8-K dated February 27, 2001).

(10)(i) 7 364-Day Revolving Credit and Term Loan Facility Agreement,
dated as of February 22, 2001 among Lucent Technologies
Inc., Agere Systems Inc., the lenders party thereto, Salomon
Smith Barney Inc., as Syndication Agent, and The Chase
Manhattan Bank, as Administrative Agent (Exhibit 99.2 to the
Current Report on Form 8-K dated February 27, 2001).

(10)(i) 8 5-Year Amended and Restated Revolving Credit Facility
Agreement, dated as of February 26, 1998, as Amended and
Restated as of February 22, 2001 among Lucent Technologies
Inc., the lenders party thereto, Salomon Smith Barney Inc.,
as Syndication Agent, and The Chase Manhattan Bank, as
Administrative Agent (Exhibit 99.3 to the Current Report on
Form 8-K dated February 27, 2001).

(10)(i) 9 Guarantee and Collateral Agreement made by Lucent
Technologies Inc. and certain of its subsidiaries in favor
of The Chase Manhattan Bank, as Collateral Agent, dated as
of February 22, 2001 (Exhibit 99.4 to the Current Report on
Form 8-K dated February 27, 2001).

(10)(i) 10 Collateral Sharing Agreement among Lucent Technologies Inc.,
various Grantors and The Chase Manhattan Bank, as Collateral
Agent, dated as of February 22, 2001 (Exhibit 99.5 to the
Current Report on Form 8-K dated February 27, 2001).

(10)(i) 11 First Amendment to 364-Day Revolving Credit Facility
Agreement and First Amendment to Guarantee and Collateral
Agreement, dated as of June 11, 2001 (Exhibit 99.1 to the
Current Report on Form 8-K dated August 16, 2001).

(10)(i) 12 First Amendment to Five-Year Revolving Credit Facility
Agreement and First Amendment to Guarantee and Collateral
Agreement, dated as of June 11, 2001 (Exhibit 99.2 to the
Current Report on Form 8-K dated August 16, 2001).

(10)(i) 13 Second Amendment to 364-Day Revolving Credit Facility, dated
as of August 16, 2001 (Exhibit 99.3 to the Current Report on
Form 8-K dated August 16, 2001).

(10)(i) 14 Second Amendment to Five-Year Amended and Restated Revolving
Credit Facility Agreement, dated as of August 16, 2001
(Exhibit 99.4 to the Current Report on Form 8-K dated August
16, 2001).

(10)(ii)(B) 1 Brand License Agreement by and between Lucent Technologies
Inc. and AT&T, dated as of February 1, 1996 (Exhibit 10.5 to
Registration Statement on Form S-1 No. 333-00703).

(10)(ii)(B) 2 Patent License Agreement among AT&T Corp., NCR Corporation
and Lucent Technologies Inc., effective as of March 29, 1996
(Exhibit 10.7 to Registration Statement on Form S-1 No.
333-00703).

EXHIBIT NUMBER
--------------

(10)(ii)(B) 3 Amended and Restated Technology License Agreement among AT&T
Corp., NCR Corporation and Lucent Technologies Inc.,
effective as of March 29, 1996 (Exhibit 10.8 to Registration
Statement on Form S-1 No. 333-00703).

(10)(iii)(A) 1 Lucent Technologies Inc. Short Term Incentive Program
(Exhibit (10)(iii)(A) 2 to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998). Management contract
or compensatory plan or arrangement.*

(10)(iii)(A) 2 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Exhibit 10(iii)(A) 2 to the Annual Report on Form 10-K for
the year ended September 30, 2000).*

(10)(iii)(A) 3 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Restricted Stock Unit Award Agreement (Exhibit
(10)(iii)(A) 3 to the Annual Report on Form 10-K for the
year ended September 30, 2000).*

(10)(iii)(A) 4 Lucent Technologies Inc. 1996 Long Term Incentive Program
(Plan) Nonstatutory Stock Option Agreement (Exhibit
(10)(iii)(A) 4 to the Annual Report on Form 10-K for the
year ended September 30, 2000).*

(10)(iii)(A) 5 Lucent Technologies Inc. Deferred Compensation Plan (Exhibit
(10)(iii)(A) 5 to the Annual Report on Form 10-K for the
year ended September 30, 2000).*

(10)(iii)(A) 6 Lucent Technologies Inc. Stock Retainer Plan for
Non-Employee Directors (Exhibit (10)(iii)(A) 5 to the Annual
Report on Form 10-K for the year ended September 30, 1998).*

(10)(iii)(A) 7 Lucent Technologies Inc. Officer Long-Term Disability and
Survivor Protection Plan (Exhibit (10)(iii)(A) 8 to the
Annual Report on Form 10-K for the Transition Period ended
September 30, 1996).*

(10)(iii)(A) 8 Employment Agreement of Mr. Verwaayen dated June 12, 1997
(Exhibit (10)(iii)(A) 9 to the Annual Report on Form 10-K
for the year ended September 30, 1997).*

(10)(iii)(A) 9 Description of the Lucent Technologies Inc. Supplemental
Pension Plan (Exhibit (10)(iii)(A) 13 to the Annual Report
on Form 10-K for the year ended September 30, 1998).*

(10)(iii)(A) 10 Lucent Technologies Inc. 1999 Stock Compensation Plan for
Non-Employee Directors (Exhibit (10)(iii)(A) 14 to the
Annual Report on Form 10-K for the year ended September 30,
1998).*

(10)(iii)(A) 11 Lucent Technologies Inc. Voluntary Life Insurance Plan
(Exhibit (10)(iii)(A) 15 to the Annual Report on Form 10-K
for the year ended September 30, 1998).

(10)(iii)(A) 12 Richard A. McGinn Settlement Agreement, dated as of June 6,
2001 (Exhibit 99.1 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001).

(10)(iii)(A) 13 Deborah C. Hopkins Separation Agreement, dated as of May 4,
2001 (Exhibit 99.2 to the Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001).

(10)(iii)(A) 14 Compensatory Actions for Proxy Reportable Persons.

EXHIBIT NUMBER
--------------

(10)(iii)(A) 15 Officer Severance Policy for Robert Holder, dated
February 14, 2001.*

(10)(iii)(A) 16 Officer Severance Policy for William O'Shea, dated
February 14, 2001.*

(10)(iii)(A) 17 Officer Severance Policy for Ben Verwaayen, dated
February 14, 2001.*

(10)(iii)(A) 18 Officer Severance Policy for Arun Netravali, dated
January 23, 2001.*

(10)(iii)(A) 19 Henry Schacht letter to Robert Holder, dated
December 3, 2001.*

(10)(iii)(A) 20 Henry Schacht letter to William O'Shea, dated
December 3, 2001.*

(10)(iii)(A) 21 Henry Schacht letter to Arun Netravali, dated March 13,
2001.*

(12) Computation of Deficiency of Earnings to Cover Combined Fixed
Charges and Preferred Stock Dividend Requirements and Ratio of
Earnings to Combined Fixed Charges and Preferred Stock Dividend
Requirements.

(21) List of subsidiaries of Lucent Technologies Inc.

(23) Consent of PricewaterhouseCoopers LLP.

(24) Powers of Attorney executed by officers and directors who
signed this report.

---------

* Management contract or compensatory plan or arrangement.

STATEMENT OF DIFFERENCES

The trademark symbol shall be expressed as..................................'TM'
The registered trademark symbol shall be expressed as........................'r'