|As filed with the Securities and Exchange Commission on December 12, 2002




UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, 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, 2002
| | --------------------------------------------

||_| |  | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- |  | ----------------------------------------------------------------------------------------

| | For
the transition period from _____________ to ____________
| | ------------------------------------------------------------

|Commission File Number 001-16397


Agere Systems Inc.
(Exact name of registrant as specified in its charter)
|------------------------------------------------------------------------------------------------------------

|Delaware
(State or other jurisdiction of
incorporation or organization) | 22-3746606
(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------- | -----------------------------------------------

|1110 American Parkway N.E.
Allentown, Pennsylvania
(Address of principal executive offices) | 18109
(Zip Code)
|------------------------------------------------------------------------------------------- | ----------------

|Registrants
telephone number, including area code: 610-712-6011


Securities
registered pursuant to Section 12(b) of the Act:
|------------------------------------------------------------------------------------------------------------------------------

|Title of Each Class
Class A Common Stock, $.01 par value
Class B Common Stock, $.01 par value | Name of Each Exchange on Which Registered
New York Stock Exchange
New York Stock Exchange
|--------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------

|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. |X| Yes     |_| 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 registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|


Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). |X| Yes     |_| No



The
aggregate market value of voting common equity held by non-affiliates of the registrant
as of December 1, 2002 was approximately $2.3 billion.


As
of December 1, 2002, 740,948,404 shares of Class A common stock and 907,995,677 shares of
Class B common stock were outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE


Certain
information required by Part III of this report (Items 10, 11, 12 and 13) is
incorporated by reference from the registrants proxy statement to be filed
pursuant to Regulation 14A with respect to the registrants 2003 annual
meeting of stockholders.

Agere Systems Inc.
Form 10-KFor the Year Ended September 30, 2002


PART I
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 1. | Business                                           
|------- | ---------------------------------------------------
|Item 2. | Properties                                         
|Item 3. | Legal Proceedings                                  
|Item 4. | Submission of Matters to a Vote of Security Holders
|        | Executive Officers of the Registrant               

|PART II
|-------

|Item 5.  | Market for Registrants Common Equity and Related Stockholder Matters                
|-------- | -------------------------------------------------------------------------------------
|Item 6.  | Selected Financial Data                                                              
|Item 7.  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 8.  | Financial Statements and Supplementary Data                                          
|Item 9.  | Change in and Disagreements with Accountants on Accounting and Financial Disclosure  

|PART III
|--------

|Item 10. | Directors and Executive Officers of the Registrant                                            
|-------- | ----------------------------------------------------------------------------------------------
|Item 11. | Executive Compensation                                                                        
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|Item 13. | Certain Relationships and Related Transactions                                                
|Item 14. | Controls and Procedures                                                                       

|PART IV
|-------

|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K
|-------- | ----------------------------------------------------------------

|FORWARD-LOOKING STATEMENTS



Certain
statements in this Form 10-K are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.
The words estimate, plan, intend,
expect, anticipate, believe and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this report
and in the documents incorporated herein by reference. Agere disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
Although we believe that our expectations are based on reasonable assumptions,
we can give no assurance that our goals will be achieved. Important factors that
could cause our actual results to differ from estimates or projections contained
in the forward-looking statements are described under Factors Affecting
Our Future Performance in Item 7.



PART I




Item 1. Business


General


We
design, develop and manufacture integrated circuits that access, move and store
information in a broad range of computing and communications applications. We
also offer related software and reference designs, as well as optoelectronic
components for communications networks.


Our
business operations are organized into two market-focused groups, the Client
Systems group, which serves the consumer communications market, and the
Infrastructure Systems group, which serves the network equipment market. Each of
these two groups is a reportable operating segment. The segments each include
revenue from the licensing of intellectual property assigned to that segment.



The
Client Systems group delivers integrated circuits, software and reference designs
for storage, personal computer connectivity and wireless data
applications, including hard disk drives and modems for computers,
Internet-enabled cellular terminals and wireless local area networking. The
Infrastructure Systems group delivers integrated circuit and optoelectronic
solutions for multi-service networking to makers of high-speed communications
systems, although we are exiting our optoelectronics business as described
below.


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. Reference designs are complete specifications for
products that a customer can use to build an end product, including components,
board layouts and software. By using a reference design, a customer can reduce
the amount of product design it must perform and the amount of time to introduce
a new product into the market. Optoelectronic components transmit, process, change,
amplify and receive light that carries data and voice traffic over optical
networks.


Prior
to October 1, 2001, our business was organized into integrated circuits and
optoelectronics segments. We have restated our financial information for periods
prior to October 1, 2001, to reflect our current segments.



On
August 14, 2002, we announced that we would exit our optoelectronics business.
On October 21, 2002, we entered into an agreement
to sell a substantial portion of our optoelectronics business
to TriQuint Semiconductor, Inc. for $40
million in cash. We expect this sale to close in January 2003, subject to
regulatory approval and other customary closing conditions. As part of the sale,
we expect to transfer approximately 300 employees and two manufacturing
facilities to TriQuint. We currently intend to sell or discontinue our remaining
optoelectronics business, which provides components for cable television
transmission systems.



We
sell our products primarily through our direct sales force, but we also utilize
distributors. Of our total revenue of $2.2 billion in the fiscal year ended
September 30, 2002, $1.3 billion, or 58%, was generated by our Client Systems
segment and $918 million, or 42%, was generated by our Infrastructure Systems
segment. In fiscal 2002, 31% of our revenue was generated in the United States
and 69% internationally. Of our total revenue of $4.1 billion in the fiscal year
ended September 30, 2001, $1.4 billion, or 34%, was generated by our Client
Systems segment and $2.7 billion, or 66%, was generated by our Infrastructure
Systems segment. In fiscal 2001, 45% of our revenue was generated in the United
States and 55% internationally. See note 19 to our financial statements in Item
8 for additional information about our Client Systems and Infrastructure Systems
segments.


As
of September 30, 2002, we had approximately 10,700 active employees
worldwide. We have major research and development and manufacturing sites in the
United States, Mexico, Singapore and Thailand.


We
were incorporated in Delaware in 2000 as part of Lucent Technologies Inc.s
plan to spin-off to its stockholders, its microelectronics business, which
included its integrated circuits and optoelectronics divisions. Lucent completed
our spin-off on June 1, 2002.


We
maintain an Internet website at http://www.agere.com. We make available
free of charge on our website our annual report on Form 10-K, our quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission.


Client Systems


Through
our Client Systems group, we offer integrated circuits, software and reference
designs for a variety of consumer-purchased products such as hard disk drives,
personal computers and cellular telephones.


Many
of our products convert analog signals into digital signals and vice versa.
Analog refers to a transmission technique employing a continuous signal that
varies in amplitude, frequency or phase of the transmission. Digital refers to a
method of transmitting, storing and processing data that uses distinct
electronic or optical pulses to represent the binary digits 0 and 1.

Storage
Products


We
sell integrated circuits for use in hard disk drives. Within the storage
products area we sell read channels, disk controllers and pre-amplifiers, or
preamps. Read channels convert an analog signal that is generated by reading the
stored data on the hard disk into digital signals. Preamps are used to amplify
the initial signal from the hard disk so the signal can be processed by the read
channel. Together, these are key components that are critical to determining the
overall performance of a hard disk drive. We also develop and sell disk drive
controllers, which are used to control signal processing and communications
functions within the disk drive. When a read channel and a disk controller are
integrated into a single solution, this is referred to as a system on a
chip. We design and sell hard disk drive systems on a chip to several
leading disk drive manufacturers.


Wireless
Local Area Networking Products


We
sell integrated circuits and network access cards for wireless networks, along with
associated software.


Our
network access cards primarily are used to connect computers, especially laptop
computers, with wireless networks. Our customers can use our integrated circuits
to build network access cards or other wireless local area networking equipment
of their own design.



Our
wireless local area networking solutions currently support data transmission speeds
of over 10 megabits per second, and we are developing higher speed products. We
recently entered into an agreement with Infineon Technologies AG to jointly
develop higher speed wireless local area networking products. These products
will use components previously designed by us and by Infineon as well as
components jointly designed by both companies.



We
sell our wireless local area networking products to personal computer
manufacturers and wireless networking equipment manufacturers who integrate our
products into their own products.


In
fiscal 2002, we sold our wireless local area networking equipment business to
Proxim Corporation, retaining our integrated circuit, software and network
access card business.


Computing
Connectivity Devices


Modem
Products. We sell integrated circuits and software for modem products
primarily to leading manufacturers of personal computers, modems and other
electronic equipment. We also offer integrated circuits and software for use in
digital telephony products. Digital telephony products provide access to merged
voice and data communications networks. We sell our digital telephony solutions
to manufacturers of business telephone equipment.


Input/Output
Products. Input/output refers to the transfer of data within and between
computers; peripheral equipment, such as printers, scanners and digital cameras;
and data networks. We sell input/output products primarily to manufacturers of
computers, peripheral equipment and communications equipment. A majority of our
sales are customized solutions that combine our intellectual property with that
of our customers in the design of our integrated circuits. Our products support
Universal Serial Bus, or USB, and IEEE-1394 industry standards, which are both
established connectivity and transmission standards.

Mobile
Terminal Devices


We
sell integrated circuits for use in digital mobile telephones, and other
wireless data and voice communications products. We also offer supporting
software as part of our comprehensive integrated circuit wireless product
solutions. These solutions include:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | digital
signal processors for speech compression and encoding and transmission of voice and data;
| | - |  | -------------------------------------------------------------------------------------------------

| |  |  | conversion
signal processors to convert signals between frequencies used in digital signal
processors and frequencies used for radio transmission; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | software
that controls the communication process.
| | - |  | -------------------------------------------------

|We
also license hardware and software designs for mobile telephones that use our
integrated circuits.


Most
of our mobile terminal products support General Packet Radio Service, or GPRS,
and operate on the Global Systems for Mobile Communications, or GSM, standard.
GPRS provides enhanced data transmission capabilities for GSM mobile phones.


Infrastructure Systems


Through
our Infrastructure Systems group, we offer solutions for high-speed
communications systems that encompass integrated circuits, software and
reference designs. Our products facilitate the transmission and switching of
voice, video and data signals within communications networks, including optical,
wireline and wireless networks. Our products are used primarily in the following
types of equipment:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | network
communications equipment, which facilitate the transmission, switching and management of
data and voice traffic within communications networks;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | network
access equipment, such as data communications equipment, which allow devices to connect
with communications networks; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------

| |  |  | wireless
infrastructure equipment, such as cellular base stations, which transmit and receive data
and voice communications through radio waves.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|Our
ongoing infrastructure systems product offerings support three primary
applications:
|----------------------------------------------------------------------------------------

| |  |  | networking;
| | - |  | -----------

| |  |  | processing,
aggregation and switching; and
| | - |  | ------------------------------------------

| |  |  | transport.
| | - |  | ----------

|We
sell integrated circuit solutions that include physical layer devices,
integrated circuits supporting SONET/SDH communication standards, multi-service
switching fabrics and network processing devices and broadband access devices,
each of which is described below.


In
addition, we currently sell optoelectronic components that are utilized in
optical networks, although we are selling or exiting this business. Optical
networks transmit information as pulses of light, or optical signals, through
optical fibers, which are hair-thin glass strands. We primarily offer active
optical components, including lasers, modulators, transmitters and amplifiers.
An active component is a device that has both optical and electronic properties.


Networking
Devices


The
majority of our revenue from networking devices is derived from the sale of
customized integrated circuits for our customers. These integrated circuits
incorporate our intellectual property or combine our intellectual property with
our customers intellectual property to create a customized solution for
these customers. For some customers, we design and manufacture the integrated
circuit while the key intellectual property belongs solely to our customers.


Our
systems-level knowledge and integrated circuit design methodologies allow us to
turn our customers design concepts into a systems solution quickly and
effectively. Our intellectual property gives our customers the flexibility to
customize their products to meet their individual cost and performance
objectives.


In
fiscal 2002, we sold our field-programmable gate array, or FPGA, and
field-programmable systems-on-a-chip, or FPSC, business to Lattice Semiconductor
Corporation, and we sold our analog line card business to Legerity, Inc. The
analog line card business provided integrated circuits to telecommunication
equipment manufacturers for use in traditional voice telephone networks.


Processing,
Aggregation and Switching Devices


Multi-Service
Switching Fabrics and Network Processing Devices. Switching devices guide
data to different local area networks and wide area networks based on the
intended destination. Multi-service switching devices support the transmission
of voice and video signals as well as data. We sell switch fabrics and
programmable network processors to communications equipment manufacturers. A
switch fabric directs the data within a switching device. A network processor is
a component that controls how data is sent over a network or over a switch
fabric such that the data retains its quality of service without interfering
with other data traffic. We also offer supporting software with our switching
products.


We
currently offer switching products for asynchronous transfer mode, or ATM, and
Internet protocol, or IP. Asynchronous transfer mode and Internet protocol refer
to different procedures for the formatting and timing of data transmission
between two pieces of equipment. Our switching integrated solutions reduce the
number of required integrated circuits needed in a switching device.

Broadband
Access Devices. Broadband is a general term that refers to high-speed data
transmission. Our broadband access integrated circuits, or mappers, support data
transport between central offices and enterprise sites by aggregation and
termination. Aggregation refers to the combining of many low-speed, or
tributary, data signals from enterprises into higher speed, or trunk, data
signals for transmission to a central office. Termination refers to the
separation of trunk data signals into lower-speed, tributary data signals.


Our
products support data transport for T-carrier data transport in North America.
T-carrier is a digital transmission service from a common carrier. We support
similar services worldwide which are referred to as J-carrier in Japan and
E-carrier in Europe. T-carrier services such as T1 and T3 lines are widely used
to create point-to-point networks for use by enterprises. T1 and T3 lines refer
to different levels of T-carrier service that transmit data at 1.5 megabits per
second and 44.7 megabits per second, respectively. A megabit is a unit of
measurement for data and is equal to approximately one million bits.


Wireless
Infrastructure Devices. We sell integrated circuit solutions used in
wireless infrastructure products, which are primarily cellular base stations and
cellular base transceiver stations. These devices include digital signal
processors for speech compression and encoding and transmission of voice and
data. We also are beginning to sample to some customers radio frequency devices
to transmit signals.


Transport
Devices


Physical
Layer Devices. High-speed physical layer devices are key elements in the
conversion between optical signals and electronic signals in communications
networks. High-speed physical layer devices accept the output from an optical
receiver and convert it into a digital data signal that can be used in
communications switching and processing functions. Our products include
integrated circuit components for physical layer devices that provide a complete
product offering for transmission up to and including 10 gigabits per second.


SONET/SDH
Network Devices. Synchronous optical networks, which are typically referred
to as SONET, and synchronous digital hierarchy standard networks, or SDH, carry
data, voice and video traffic through a network by combining lines carrying
traffic at slower speeds with lines carrying traffic at higher speeds. This
process is known as multiplexing, and involves directing traffic from the
individual lines into designated time slots in the higher speed lines, and those
lines into still higher speed lines. The SONET/ SDH equipment that handles the
directing of traffic into slower speed and faster speed lines is the add-drop
multiplexor, or ADM. Add-drop multiplexors handle the addition and removal of
traffic from a SONET/SDH communication transmission. We offer single-chip
integrated circuit solutions, or framers, for add-drop multiplexing of data and
voice traffic. In addition, our framers are used in high-speed routers within an
optical network. A router is an interface, or link, between two networks.


Optoelectronic
Components


We
currently sell the optoelectronic components described below. We expect to transfer these
product lines as part of the sale of a substantial portion of our optoelectronics
business to TriQuint, except where noted.

Lasers.
We offer a variety of lasers for use in high-speed transport, metropolitan and submarine
network applications. We also offer analog lasers for use in cable television
applications. These lasers are not included in the TriQuint sale.


Modulators.
Our lithium niobate modulators are used in high-speed transport and metropolitan network
applications, and our lithium niobate polarization controllers are used in high-speed
transport network applications.


Amplifiers.
We offer erbium doped fiber amplifiers and Raman amplifiers in high-speed transport and
metropolitan network applications.


Transmitters,
Receivers and Transceivers. We offer cooled laser transmitters for
high-speed transport and metropolitan network applications, and tunable laser
transmitters for high-speed transport network applications that are designed to
enable flexible and reconfigurable optical networks. We offer uncooled laser
transmitters for metropolitan network applications. Our positive intrinsic
negative, or PIN, receivers are used for high-speed transport, metropolitan and
cable television network applications. Our avalanche photo detector, or APD,
receivers are used for high-speed transport and metropolitan network
applications. We also offer combined transmitters and receivers, which are
called transceivers. Analog receivers and transmitters related to cable
television applications are not included in the sale to TriQuint.


Transponders.
Our transponders offer both integrated circuits and optoelectronic components in
one combined unit, or module. This module combines a transceiver with a
multiplexor/demultiplexor into a unified product. A multiplexor is an electronic
device that allows two or more signals to be combined for transmission over one
communications circuit. A demultiplexor separates two or more signals previously
combined by compatible multiplexing equipment.


Customers, Sales And Distribution


Customers


We
have a globally diverse base of customers, consisting primarily of manufacturers
of computer and communications equipment. We generally target as customers the
leaders in the market segments in which our products are used as well as the
companies we believe will be future leaders in these segments. In fiscal 2002,
we sold our products directly to approximately 260 end customers and indirectly,
through distributors, to approximately 800 end customers. For some end
customers, we deliver the product to, and are paid by, a third party associated
with the customer, such as their contract manufacturer. Our top 20 end customers
in fiscal 2002, based on revenue, accounted for approximately 68% of our revenue
and our top 10 end customers in fiscal 2002, based on revenue, accounted for
approximately 53% of our revenue. Our top ten end customers in fiscal 2002 were:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Apple Computer, Inc.Avaya Inc.Cisco Systems, Inc.Hewlett PackardLucent Technologies Inc. |  | Maxtor Corp.NEC CorporationSeagate Technology, Inc.Siemens AGWestern Digital Corp. | 
| | ---------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | 

|Our
sales to Lucent represented 10%, 15% and 21% of our revenue in fiscal 2002, 2001
and 2000, respectively, and our sales to Maxtor represented 13% of our revenue
in fiscal 2002. No other customer accounted for 10% or more of our revenue in
fiscal 2002, 2001 or 2000.


Sales
and Distribution


We
have a worldwide sales organization with approximately 420 employees as of
September 30, 2002, located in 9 domestic and 14 international sales
offices. We sell our products globally primarily through our direct sales force.
To complement our direct sales force, we also sell our products through
distributors, which sales in fiscal 2002 represented approximately 10% of our
revenue.



We
aim to have our customers incorporate our products into the end products they
design and develop. Typically, manufacturers of computer and communications
equipment conduct a competitive process to select suppliers for the parts that
they will include in their end products. Our sales, marketing and technical
personnel work with customers to demonstrate our products ability to
satisfy any specific requirements. We call winning the competitive process a
design win. A design win is important because it allows us to establish a
long-term relationship with the customer, at least through the life-cycle of the
product. We generally do not, however, enter into written agreements with our
customers after achieving a design win. A customer could terminate its
relationship with us or discontinue developing the product. Most of our revenue
originates from sales that are the result of design wins.



After
we achieve a design win and negotiate the terms of the sale, we deliver our
products to our end customers in a number of ways. Our end customers typically
have us ship our products to their facilities directly. In some instances,
however, our customer uses a contract manufacturer to manufacture and assemble
their end product. When our product is being incorporated into an end product
being manufactured by a contract manufacturer, we often ship our product
directly to the contract manufacturer and receive payment from that contract
manufacturer. To determine our sales to particular customers, however, we
recognize this type of transaction as a sale to, and revenue from, the end
customer. Sometimes a customer for whom we have achieved a design win will have
us sell that product to a distributor or trading company from whom the customer
then buys our product. We recognize these transactions as indirect sales.


Manufacturing



Our
operations support organization is responsible for the supply chain management
and manufacturing activities of both integrated circuits devices and
optoelectronics components. As of September 30, 2002, we had approximately 5,700
employees devoted to manufacturing and related support activities.


Integrated
Circuit Manufacturing


We
had 6 facilities located in 3 countries devoted to manufacturing integrated
circuits as of September 30, 2002. These sites utilized approximately 2.3
million square feet of space dedicated to manufacturing. As of September 30,
2002, our company-owned and joint venture wafer fabrication operations were in
the United States and Singapore, while our assembly and test operations were in
the United States, Singapore and Thailand. Since January 2002, we have been
consolidating our integrated circuit manufacturing operations and expect that by
September 2003, all our manufacturing in the United States will be conducted at
our facility in Orlando, Florida. We are seeking a buyer for that facility, but
will continue to operate it at least through September 2004, as we reduce the
amount of our owned manufacturing capacity to reduce our fixed costs. See note 5
to our financial statements in Item 8.


We
have a joint venture, called Silicon Manufacturing Partners, with Chartered
Semiconductor Manufacturing Ltd., that operates an integrated circuit
manufacturing facility in Singapore. We have agreed to purchase 51% of the
ventures managed wafer capacity and Chartered Semiconductor has agreed to
purchase the remaining 49% of the managed wafer capacity. Silicon Manufacturing
Partners determines its managed wafer capacity each year based on forecasts
provided by Agere and Chartered Semiconductor. If we do not purchase all the
wafers allotted to us, we may be obligated to reimburse the joint venture for
the portion of its fixed costs associated with the unpurchased wafers. Chartered
Semiconductor is similarly obligated with respect to the wafers allotted to it.
Chartered Semiconductor will also have the right of first refusal to the wafers
produced in excess of our requirements. The joint venture agreement may be
terminated by either party upon two years written notice, but may not be
terminated prior to February 2008. The agreement also may be terminated for
material breach, bankruptcy or insolvency.


Currently,
we manufacture most of our integrated circuits in facilities that we either own
or operate through a joint venture. We also have third-party manufacturing
relationships to improve our manufacturing efficiency and flexibility and to
allow us to focus on developing leading products. In the future, we expect to
increase the amount of integrated circuits we buy at market prices, whether
through our relationship with Chartered Semiconductor or other relationships.


Optoelectronic
Component Manufacturing


We
had six facilities located in the United States and one facility located in
Mexico devoted to manufacturing optoelectronic components as of September 30,
2002. These sites utilized approximately 500,000 square feet. As part of the
exit of our optoelectronics business we plan to sell or close all of our
optoelectronics manufacturing facilities.


Competition


We
sell products designed for communications and computer equipment manufacturers.
Our customers products are sold in market segments that are intensely
competitive and characterized by:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | rapid
technological change;
| | - |  | ---------------------------

| |  |  | evolving
standards;
| | - |  | -------------------

| |  |  | short
product life cycles; and
| | - |  | ------------------------------

| |  |  | price
erosion.
| | - |  | --------------

|There
are many competitors for our products. We expect the intensity of competition in
the market segments we serve to continue to increase in the future as existing
competitors enhance and expand their product offerings and as our customers
attempt to limit the number of suppliers from which they buy. Increased
competition may result in price reductions, reduced revenues and loss of market
share. We cannot assure you that we will be able to compete successfully against
existing or future competitors. Some of our customers and companies with which
we have strategic relationships also are, or may be in the future, competitors
of ours.


Our
primary competitors within our client product areas are listed in the table
below.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Storage                        |  | Wireless LocalArea Networking  |  | ComputingConnectivity              |  | MobileTerminals                   
|------------------------------ |  | ------------------------------ |  | ---------------------------------- |  | ----------------------------------
|Infineon Technologies AG       |  | Broadcom Corp.                 |  | Broadcom Corp.                     |  | Koninklijke Philips Electronics AG
|                              
|LSI Logic Corp.                |  | Intersil Holding Corp.         |  | Conexant Systems, Inc.             |  | Motorola, Inc.                    
|                              
|Marvell Communications Corp.   |  | Texas Instruments Incorporated |  | Infineon Technologies AG           |  | QUALCOMM Inc.                     
|                              
|STMicroelectronics N.V.        |  |                                |  | Koninklijke Philips Electronics AG |  | Skyworks Solutions, Inc.          
|                              
|Texas Instruments Incorporated |  |                                |  | Marvell Communications Corp.       |  | STMicroelectronics N.V.           
|                              
|                               |  |                                |  | PCTel, Inc.                        |  | Texas Instuments Incorporated     

|Our
primary competitors within our infrastructure product areas are listed in the
table below.
|----------------------------------------------------------------------------------------------

| | Networking |                          | Processing, AggregationAnd Switching |                                | Transport |                                  
| | ---------- | ------------------------ | ------------------------------------ | ------------------------------ | --------- | ---------------------------------
| |            | Broadcom Corp.           |                                      | Applied Micro Circuits Corp.   |           | Applied Micro Circuits Corp.     
|
| |            | IBM Corp.                |                                      | Conexant Systems, Inc.         |           | Intel Corp.                      
|
| |            | Infineon Technologies AG |                                      | IBM Corp.                      |           | PMC-Sierra, Inc.                 
|
| |            | LSI Logic Corp.          |                                      | Intel Corp.                    |           | Vitesse Semiconductor Corporation
|
| |            |                          |                                      | Motorola, Inc.                 |           |                                  
|
| |            |                          |                                      | Texas Instruments Incorporated |           |                                  

|Our
competitive position varies depending on the market segment and product areas
within these segments. For example, we are number one or two, based on revenue,
in many of our product areas, including analog modems, baseband integrated
circuits for wireless infrastructure, SONET/SDH integrated circuits and wired
communications integrated circuits. However, our competitive position is not as
strong in the wireless terminal and network processor product areas. While
improving our position in many of the product areas where our position is less
well-established is an objective of ours, we cannot assure you that we will be
able to accomplish this goal. Further, because we expect to face increasing
competitive pressures from both current and future competitors in the product
areas we serve, we may not be able to maintain our position in the product areas
in which we are currently a leader.

We
believe competition in our industry is based on the following factors:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | performance
and reliability;
| | - |  | ----------------------------

| |  |  | price;
| | - |  | ------

| |  |  | compatibility
of products with other products and communications standards used in communications
networks;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | product
size;
| | - |  | -------------

| |  |  | ability
to offer integrated solutions;
| | - |  | --------------------------------------

| |  |  | time
to market;
| | - |  | ---------------

| |  |  | breadth
of product line;
| | - |  | ------------------------

| |  |  | logistics
and planning systems; and
| | - |  | -----------------------------------

| |  |  | quality
of manufacturing processes.
| | - |  | -----------------------------------

|While
we believe we are competitive on the basis of all the factors listed above, we
believe some of our competitors compete more favorably on the basis of price and
on delivering products to market more quickly. However, we feel we are
particularly strong in offering integrated solutions, our broad product lines
and our logistics and planning systems.


Research and development


Our
research and development personnel focus on product and manufacturing process
development, which provides the technological basis for our commercial products,
and on basic research, which helps provide the scientific advances which
ultimately lead to new products and technology and manufacturing processes. As
of September 30, 2002, our product and process development team was comprised of
approximately 2,500 development engineers and scientists. Approximately 80
percent of these development engineers and scientists design and implement
product solutions. The remaining 20 percent work primarily on design and
manufacturing technology, such as the technology for system-on-a-chip and
integrated circuit design methodology.


In
addition to our internal research and development team, we work closely with
universities around the world and have entered into joint research and
development initiatives with other companies.

Our
research and development expenditures were $693 million, $951 million and $827
million for fiscal 2002, 2001 and 2000, respectively. We anticipate that we will
continue to make significant research and development expenditures to maintain
our competitive position with a continuing flow of innovative products and
technology.


Patents, Trademarks And Other Intellectual Property


We
own or have rights to a number of patents, trademarks, copyrights, trade secrets
and other intellectual property directly related to and important to our
business. We have approximately 5,700 U.S. patents and patent applications and
their corresponding foreign patents and patent applications. These patents
include patents related to the following technologies:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | integrated
circuit and optoelectronic manufacturing processes;
| | - |  | --------------------------------------------------------------

| |  |  | integrated
circuits for use in products such as modems, digital signal processors, wireless
communications, network processors and communication protocols; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | optoelectronic
products including lasers, optical modulators, optical receivers and optical amplifiers.
| | - |  | -------------------------------------------------------------------------------------------------------

|The
patents described above include patents of all ages ranging from pending
applications, which will have a duration of 20 years from their filing dates,
through patents soon to expire.


We
indemnify our customers for some of the costs and damages of patent infringement
in circumstances where our product is the primary factor creating the
customers infringement exposure. We generally exclude coverage where
infringement arises out of the combination of our products with products of
others.


We
expect to protect our products and processes by asserting our intellectual
property rights where appropriate and prudent. We also will obtain patents,
copyrights, and other intellectual property rights used in connection with our
business when practicable and appropriate.


Government Regulation


Many
of our customers end products that include our products are subject to
extensive telecommunications-based regulation by the United States and foreign
laws and international treaties. We must design and manufacture our products to
ensure that our customers are able to satisfy a variety of regulatory
requirements and protocols established to, among other things, avoid
interference among users of radio frequencies and to permit interconnection of
equipment. For example, disk drives that include our integrated circuits need to
satisfy Federal Communications Commission radio frequency emissions testing.
Cellular base stations that include our integrated solutions must be qualified
by the Federal Communications Commission that they meet radio frequency spectrum
requirements. In addition, some of our equipment products, such as our wireless
local area networking products, must be certified to electrical noise and
communications standards compliance.

Each
country has different regulations and a different regulatory process. In order
for our customers products to be used in some jurisdictions, regulatory
approval and, in some cases, specific country compliance testing may be
required. The delays inherent in this regulatory approval process may force our
customers to reschedule, postpone or cancel the incorporation of our products
into their products, which may result in significant reductions in our sales.
The failure to comply with current or future regulations or changes in the
interpretation of existing regulations in a particular country could result in
the suspension or cessation of sales in that country by us or our customers. It
also may require us to incur substantial costs to modify our products to aid our
customers in complying with the regulations of that country.


We
work with consultants, counsel and testing laboratories to support our
compliance efforts as necessary. These individuals work to ensure that our
products comply with the requirements of the Federal Communications Commission
in the United States and with the requirements of the European
Telecommunications Standards Institute in Western Europe, as well as with the
various individual regulations of other countries.


The
regulatory environment in which we operate is subject to changes due to
political, economic and technical factors. In particular, as use of wireless
technology expands and as national governments continue to develop regulations
for this technology, we may need to comply with new regulatory standards
applicable to our products. Changes in our regulatory environment that generally
result from our expansion into new areas or changes in current regulations could
increase the cost of manufacturing our products because we must continually
modify our products to respond to these changes.


In
addition, domestic and international authorities continue to regulate the
allocation and auction of the radio frequency spectrum. These regulations have a
direct impact on us because many of our customers licensed products can be
marketed only if permitted by suitable frequency allocations, auctions and
regulations. The implementation of these regulations may delay our end-users in
deploying their systems, which could, in turn, lead to delays in orders of our
products by our customers and end users. Further, when we license hardware and
software designs for mobile telephones that use our integrated circuits, we work
with our customers to help them achieve full certification approval for their
mobile telephones, which is a prerequisite for them to be able to sell their
mobile telephones.


Employees


As
of September 30, 2002, we employed approximately 10,700 active full-time
employees, including approximately 8,000 management and non union-represented
employees, and approximately 2,400 U.S. union-represented employees covered by
collective bargaining agreements. In addition, approximately 75 employees were
union-represented employees located in Mexico and covered by a collective
bargaining agreement. We expect that the total number of employees will decline
as we complete the exit of our optoelectronics business and our other
restructuring activities.


On
May 31, 1998, Lucent entered into a collective bargaining agreement with the
Communications Workers of America and a separate agreement with the
International Brotherhood of Electrical Workers. In connection with our
separation from Lucent, we have assumed the obligations under these agreements
with respect to our U.S. union-represented employees. These agreements will be
effective until May 31, 2003, unless the parties to each agreement reach a
mutual agreement to amend the terms.

All
our unionized employees in Mexico are members of the Mexican National Union of
Industrial Workers. We entered into a collective bargaining agreement with this
union in January 2002. As is typical in Mexico, wages are renegotiated every
year, while other terms and conditions of employment are renegotiated every two
years. Our facility in Mexico is part of the business that we are selling to
TriQuint.


We
believe that we generally have a good relationship with our employees and the
unions that represent them. In the United States, we are subject from time to
time to unfair labor charges filed by the unions with the National Labor
Relations Board. If we are unsuccessful in resolving these charges, our
operations may be disrupted or we may incur additional costs that may adversely
affect our results of operations.


Backlog


Our
backlog, which represents the aggregate of the sales price of orders received
from customers for delivery within six months, but not yet recognized as
revenue, was approximately $379 million and $542 million on September 30, 2002
and September 30, 2001, respectively. The majority of these orders are fulfilled
within three months. All orders, however, are subject to possible rescheduling
by customers. Our customers often change their order two or three times between
initial order and delivery. Our customers frequent changes usually relate
to quantities or delivery dates, but sometimes relate to the specifications of
the products we are shipping. Although we believe that the orders included in
the backlog are firm, generally orders may be cancelled by the customer without
penalty. We also may elect to permit cancellation of orders without penalty
where management believes it is in our best interests to do so. For these
reasons, we believe that our backlog at any given date may not be a reliable
indicator of future revenues.


Environmental, Health And Safety Matters


We
are subject to a wide range of laws and regulations relating to protection of
the environment and employee health and safety. Our manufacturing facilities
have undergone regular internal audits relating to environmental, health and
safety requirements. Most of those facilities also are regularly audited and
certified by an independent and accredited third party registrar, such as
Lloyds Register Quality Assurance, as conforming to the internationally
recognized ISO 14001 standard relating to environmental management. In addition,
our non-U.S. manufacturing facilities conform to BS 8800, the British standard
for occupational health and safety management systems. Based upon these reviews,
we believe that our manufacturing facilities are in substantial compliance with
all applicable environmental, health and safety requirements.


We
are subject to environmental laws, including the Comprehensive Environmental
Response, Compensation and Liability Act, also known as Superfund, that require
the cleanup of soil and groundwater contamination at sites currently or formerly
owned or operated by us, or at sites where we may have sent waste for disposal.
These laws often require parties to fund remedial action at sites regardless of
fault. We are a potentially responsible party at numerous Superfund sites and
sites otherwise requiring cleanup action. With some limited exceptions, under
the agreement governing our separation from Lucent, we have assumed all
environmental liabilities resulting from our businesses, which include
liabilities for the costs associated with eight of these sites  five
Superfund sites, two facilities formerly owned by Lucent and one of our current
manufacturing facilities.

Item 2. Properties


As
of September 30, 2002, we operated 12 manufacturing facilities and three
warehouse locations in the United States and four other countries. We also
operated an additional 54 facilities, including research and development
facilities and design centers. We operate facilities in a total of 18 countries.
Our principal owned manufacturing facilities were located in the United States,
Mexico, Singapore and Thailand. We also have a 51% interest in our Silicon
Manufacturing Partners joint venture located in Singapore, which is
predominantly used as a manufacturing site.


Our
facilities have an aggregate floor space of approximately 7.9 million square
feet, of which approximately 5.5 million square feet is owned and approximately
2.4 million square feet is leased. Our lease terms range from monthly leases to
14 years. We believe that all of our facilities and equipment are in good
condition and are well maintained and able to operate at present levels.


During
fiscal 2003, we expect to close or sell approximately seven manufacturing
facilities and reduce our office space as we complete various elements of our
restructuring and consolidation activities.




Item 3. Legal Proceedings


The
information required by this Item is included in Item 7 under the heading Legal
Proceedings.




Item 4. Submission of Matters to a Vote of Security Holders


During
the fourth quarter of fiscal 2002, no matter was submitted to a vote of our
security holders.




Executive Officers of the Registrant


Our
executive officers as of December 1, 2002 were as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name               |  | Age |  | Position                                             | 
|------------------ |  | --- |  | ---------------------------------------------------- | 
|John T. Dickson    |  | 56  |  | President, Chief Executive Officer                   | 
|                  
|Ronald D. Black    |  | 38  |  | Executive Vice President, Client Systems             | 
|                  
|Mark T. Greenquist |  | 44  |  | Executive Vice President and Chief Financial Officer | 
|                  
|Peter Kelly        |  | 45  |  | Executive Vice President, Operations                 | 
|                  
|Sohail A. Khan     |  | 48  |  | Executive Vice President, Infrastructure Systems     | 
|                  
|Ahmed Nawaz        |  | 53  |  | Executive Vice President, Worldwide Sales            | 

|John
T. Dickson has been our President and Chief Executive Officer since August
2000. Previously, Mr. Dickson was Executive Vice President and Chief Executive
Officer of Lucents Microelectronics and Communications Technologies Group
since October 1999. He joined AT&T in 1993 as Vice President of its
Integrated Circuit business unit, moved to Lucent following its spin-off in
1996, and was named Chief Operating Officer of Lucents Microelectronics
Group in 1997. Before joining AT&T, Mr. Dickson was Chairman and Chief
Executive Officer of Shographics from 1992 until 1993, was President and Chief
Executive Officer of Headland Technology Incorporated from 1991 to 1992, held
various management positions at ICL plc from 1983 until 1991 and held various
management positions at Texas Instruments from 1969 until 1983. Mr. Dickson is
currently a director of the Semiconductor Industry Association, or SIA, and
Mettler-Toledo International Inc. and a member of the board of trustees of
Lehigh Valley Health Network.


Ronald
D. Black has been our Executive Vice President, Client Systems since October 2001.
Previously, Mr. Black had been Senior Vice President, Strategy and Business Development
at Agere from March 2001 to October 2001. Before joining Agere, Mr. Black was Vice
President and General Manager, Next-Generation Networks Business Unit of Gemplus from
1998 to 2001. Prior to Gemplus, Mr. Black was the General Manager of the Networking and
Communications Systems Division of Motorolas Semiconductor Products Sector.


Mark
T. Greenquisthas been our Executive Vice President and Chief Financial
Officer since January 2001. Prior to joining our company, Mr. Greenquist had
been Chief Financial Officer of General Motors Europe from January 1999 to
January 2001. From October 1998 to January 1999, he was Vice President and
Corporate Treasurer of Delta Air Lines, Inc. Prior to joining Delta Air Lines,
Mr. Greenquist was at General Motors from 1986 to 1998 where he held a variety
of positions, including Assistant Treasurer of General Motors, Managing Director
and Finance Director of General Motors Poland and Corporate Treasurer and
Manager of Commercial Finance of Saab Automobile AB.


Peter
Kelly has been our Executive Vice President, Operations since October 2001. Previously,
Mr. Kelly had been Ageres Vice President of Operations for Integrated Circuits from
September 2000 to October 2001. Mr. Kelly joined Lucent Microelectronics in September
2000 from Fujitsu-ICL Systems Inc., a joint venture of ICL and Fujitsu, where he was
Executive Vice President and Chief Operating Officer. Mr. Kelly had been with Fujitsu-ICL
for six years.



Sohail
A. Khan has been our Executive Vice President, Infrastructure Systems since October 2001.
Previously, Mr. Khan had been Executive Vice President of Integrated Circuits since March
2001. Mr. Khan was President of the Integrated Circuits business of Lucents
Microelectronics and Communications Technologies Group from April 2000 to March 2001. Mr.
Khan was the strategy and business development Vice President of Lucents
Microelectronics and Communications Technologies Group from September 1996 to April 2000.
From April 1996 to September 1996, Mr. Khan was Vice President of Marketing for MMC
Networks, a developer and supplier of network processing platforms and services. Mr. Khan
joined AT&T in 1990 as the director of marketing and applications engineering for the
digital signal processing product line and moved to Lucent following its spin off in
1996. While at AT&T, he held a variety of positions, including Vice President and
General Manager of the Wireless and Multimedia business unit of AT&T from February
1994 to April 1996.


Ahmed
Nawaz has been our Executive Vice President, Worldwide Sales since March
2001. Mr. Nawaz was President of Worldwide Sales, Strategy and Business
Development of Lucents Microelectronics and Communications Technologies
Group from April 2000 to March 2001. He joined AT&T in 1992 and moved to
Lucent following its spin off in 1996. Mr. Nawaz was Vice President of
Lucents Network Communications business unit from January 1996 to July
1998. While at AT&T, he was Vice President of the Applications business unit
from 1994 to 1995. Prior to joining AT&T, Mr. Nawaz was at Texas
Instruments, where he was responsible for the personal computer business unit
from 1990 to 1992 and also held various marketing and product management
positions.


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


The
other information required by this Item is incorporated herein by reference to
the applicable information in the Proxy Statement for our 2003 annual meeting,
including the information set forth under the caption Election of
Directors.


PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters


Price
Range of Common Stock


Our
Class A common stock trades on the New York Stock Exchange under the symbol
AGR.A. The high and low sale prices for our Class A common stock for
each quarter since our initial public offering on March 27, 2001 are set forth
below, as reported in the consolidated transaction reporting system:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fiscal 2001                      |  | High  |  | Low   | 
|-------------------------------- |  | ----- |  | ----- | 
|                                
|Quarter Ended March 31, 2001     |  | $6.23 |  | $6.01 | 
|(trading began March 28, 2001)   |  |       |  |       | 
|                                
|Quarter Ended June 30, 2001      |  | $9.50 |  | $4.10 | 
|                                
|Quarter Ended September 30, 2001 |  | $7.50 |  | $3.10 | 

|Fiscal 2002                      |  |       |  |       | 
|-------------------------------- |  | ----- |  | ----- | 
|                                
|Quarter Ended December 31, 2001  |  | $6.30 |  | $4.06 | 
|                                
|Quarter Ended March 31, 2002     |  | $6.10 |  | $3.60 | 
|                                
|Quarter Ended June 30, 2002      |  | $4.49 |  | $1.40 | 
|                                
|Quarter Ended September 30, 2002 |  | $2.70 |  | $0.95 | 

|All
of our outstanding Class B common stock was held by Lucent until June 1, 2002,
when Lucent completed our spin-off, distributing to its stockholders all of our
Class A common stock and Class B common stock that it held on that date.



Our
Class B common stock has been traded on the New York Stock Exchange under the
symbol AGR.B since June 3, 2002. The following table sets forth, for
the indicated periods, the quarterly high and low sale prices of our Class B
common stock, as reported in the consolidated transaction reporting system.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Fiscal 2002                      |  | High  |  | Low   | 
|-------------------------------- |  | ----- |  | ----- | 
|                                
|Quarter ended June 30, 2002      |  | $3.32 |  | $1.35 | 
|(trading began June 3, 2002)     |  |       |  |       | 
|                                
|Quarter ended September 30, 2002 |  | $2.72 |  | $0.94 | 

|As
of December 1, 2002, there were 693,354 holders of record of the Class A
common stock and 1,385,080 holders of record of the Class B common stock.
We believe that the number of beneficial owners is substantially
greater than the number of record holders, because a large portion of our common
stock is held of record through brokerage firms in street name.


In
October 2002, we were advised by the New York Stock Exchange that we had fallen
below the exchanges continued listing standard relating to minimum share
price and that we had six months to cure the deficiency. See Factors
Affecting Our Future Performance-Our stock may be delisted from the New York
Stock Exchange if our stock price does not meet the exchanges continued
listing standards in Item 7.



Dividend
Policy


We
do not anticipate paying any dividends on our common stock in the foreseeable
future. We currently intend to retain our future earnings for use in the
operation and expansion of our business.

Item 6. Selected Financial Data



The
following table sets forth selected financial information for our company. The
financial information for the years ended September 30, 2002, 2001, and 2000,
and as of September 30, 2002 and 2001, has been derived from our audited
financial statements included in Item 8. The financial
information for the years ended September 30, 1999 and 1998, and as of September
30, 2000 and 1999, has been derived from our audited financial statements not
included in this report. The financial information as of September 30, 1998 has
been derived from our unaudited financial statements not included in this
report. The historical selected financial information may not be indicative of
our future performance and should be read in
conjunction with the information contained in Managements Discussion
and Analysis of Financial Condition and Results of Operations in Item 7 and the
financial statements and the related notes in Item 8.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   | Year Ended September 30, | 
|------------------------------------------------------------------ | ------------------------ | 
|
|
|Statement of operations information:                               |                          | 
|Revenue                                                            |                          | 
|Gross profit                                                       |                          | 
|Restructuring and other charges  net                              |                          | 
|Impairment of goodwill and other acquired intangibles              |                          | 
|Income (loss) before cumulative effect of accounting change        |                          | 
|Net income (loss)                                                  |                          | 
|                                                                  
|Basic and diluted earnings (loss) per share: (4)                   |                          | 
|Income (loss) before cumulative effect of accounting change        |                          | 
|Net income (loss)                                                  |                          | 
|Weighted average shares outstanding  basic and diluted (millions) |                          | 

|                           | September 30, | 
|-------------------------- | ------------- | 
|
|Balance sheet information: |               | 
|Working capital            |               | 
|Total assets               |               | 
|Short-term debt            |               | 
|Long-term debt             |               | 

|
|

| |  | (1) |  | During
fiscal 2002, our short-term debt decreased significantly as we repaid $2.5 billion of
borrowings under our credit facility. Also, our total assets decreased significantly as
we used $1.6 billion of cash on hand to repay our credit facility and recorded
significant impairments of plant and equipment, as well as goodwill and other acquired
intangibles, in fiscal 2002.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (2) |  | During
fiscal 2001, we received approximately $3.4 billion of net proceeds from our initial
public offering and recorded a $2.8 billion impairment of goodwill and other acquired
intangibles related to our acquisitions of Ortel Corporation, Herrmann Technology, Inc.,
Agere, Inc. and Enable Semiconductor, Inc. We also assumed $2.5 billion of debt from
Lucent, consisting of short-term borrowings under a credit facility provided by financial
institutions. We did not receive any of the proceeds of this short-term debt.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | During
fiscal 2000, goodwill and other acquired intangibles increased by $3.4 billion due to the
acquisitions of Ortel, Herrmann, Agere, Inc. and substantially all the assets of VTC
Inc., whose results of operations are included from their respective dates of acquisition.
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (4) |  | Basic
and diluted earnings (loss) per common share are calculated by dividing income (loss) by
the weighted average number of common shares outstanding during the period. The weighted
average number of common shares outstanding on a historical basis includes the
retroactive recognition to October 1, 1997 of the 1,035,000,000 shares owned by Lucent
prior to our initial public offering.
| |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



The
following discussion of our financial condition and results of operations should
be read in conjunction with our financial statements and the related notes in Item 8. This
discussion contains forward-looking statements. Please see Forward-Looking
Statements and Factors Affecting Our Future Performancefor a discussion of the uncertainties, risks and assumptions associated with
these statements.



Overview


We
provide advanced integrated circuit solutions that access, move and store
information. These solutions form the building blocks for a broad range of
communications and computing applications. We also provide optoelectronic
components, however, we have entered into an agreement to sell a substantial
portion of our optoelectronics business and are seeking a buyer for the
remainder of that business. See Exit from Optoelectronics Business
for additional details.


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



The
Client Systems segment delivers integrated circuit solutions for a variety of
end-user applications such as hard disk drives and modems for computers,
Internet-enabled cellular terminals and wireless local area networking. The segment is
comprised of a portion of our former Integrated Circuits segment.



The
Infrastructure Systems segment delivers solutions to makers of high-speed
communications systems. The segment is comprised of our former Optoelectronics
segment and the remainder of our former Integrated Circuits segment.


Separation
from Lucent


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


In
connection with our separation from Lucent, we entered into several agreements
with Lucent. For a summary of certain of these agreements, see Note 21 to our
financial statements in Item 8.


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

Lucent
was our majority stockholder and a related party prior to the spin-off on June
1, 2002. Revenue from products sold to Lucent in fiscal 2002, through June 1,
2002, was $162 million. Revenue from products sold to Lucent for fiscal 2001 and
2000 was $606 million and $1,002 million, respectively.


Operating
Trends


We
began experiencing significant declines in revenues in fiscal 2001 and these
declines continued through the first quarter of fiscal 2002 before beginning to
stabilize. We believe the decreases were due to weakness in our customers
markets. In the Client Systems segment, the computer and mobile devices markets
have suffered a slowdown in growth rates due to the overall economic downturn.
In the Infrastructure Systems segment, we have experienced lower demand from
network equipment manufacturers, as communications services providers continue
to reduce or defer spending on capital improvements. We have seen the greatest
revenue decline in our optoelectronics business, which we will exit by June 30,
2003. We do not expect a significant improvement in market conditions in fiscal
2003 and are continuing to reduce our cost structure with a goal of generating
positive cash flow from operations in the fourth quarter of fiscal 2003.


Our
sales are primarily concentrated in the communications and computer equipment
markets, which are competitive and rapidly changing. Significant technological
changes in these industries, new customer requirements, changes in customer
buying behavior or the emergence of competitive products with new capabilities
or technologies could adversely affect operating results. Also, portions of our
revenues have been derived from customers that individually accounted for
greater than 10% of our revenues. In fiscal 2002, two customers represented 13%
and 10%, respectively, of our revenue. In fiscal 2001 and 2000, one customer
represented 15% and 21% of our revenue, respectively.


Our
costs consist primarily of manufacturing overhead, materials and labor. Similar
to many other semiconductor manufacturers, we have had relatively high fixed
costs associated with our wafer manufacturing. As a result, our ability to
reduce costs quickly in times of decreased demand has been limited, which has an
adverse effect on margins. Because we anticipated higher revenues as we entered
both fiscal 2001 and 2002 than we actually experienced, our cost structure
reflected manufacturing capacity and resources greater than those actually
required for both fiscal years. In light of our lower revenues we have taken a
number of steps to reduce our cost structure, including restructuring and
consolidation actions, reductions in capital spending and the streamlining of
our product portfolio.


Exit
from Optoelectronics Business


On
August 14, 2002, we announced that we will exit our optoelectronics business and
discontinue optoelectronics operations no later than June 30, 2003. In fiscal
2002, revenue from our optoelectronics business, excluding intellectual property
revenue, represented 12% of our total revenue and decreased by approximately 80%
from the prior fiscal year. In the fourth quarter of fiscal 2002, we impaired
all of our remaining plant and equipment and goodwill and other acquired
intangibles related to our optoelectronics business. As a result of this exit,
we will discontinue or sell operations in our facilities in Breinigsville,
Pennsylvania; Dallas, Texas; Alhambra and Irwindale, California; and Matamoros,
Mexico.


On
October 21, 2002, we entered into an agreement with TriQuint Semiconductor, Inc.
to sell certain assets and liabilities related to the optoelectronics business
for $40 million in cash. The transaction includes the products, technology and
some facilities related to our optoelectronics business, which includes lasers,
detectors, modulators, passive components, arrayed waveguide-based components,
amplifiers, transmitters, receivers, transceivers, transponders, and micro
electro-mechanical systems. The agreement does not include our business that
provides optoelectronic components for cable television transmission systems. As
part of the sale, our facilities in Breinigsville and Matamoros are expected to
be transferred and approximately 300 of our employees are expected to join
TriQuint. In addition, we will manufacture and supply certain optoelectronic
components to TriQuint under a transitional manufacturing agreement ending on or
before March 31, 2003. We anticipate closing the sale in January 2003, subject
to regulatory approval and other customary closing conditions.

Restructuring
Activities


We
have announced a number of restructuring and consolidation actions to improve
gross profit, reduce expenses and streamline operations. These actions include a
workforce reduction, rationalization of manufacturing capacity, and the exit of
our optoelectronics business. We recorded net restructuring and related charges
of $971 million and $563 million in fiscal 2002 and 2001, respectively, which
are classified within restructuring and other charges  net. In addition,
within gross margin we recorded approximately $126 million of restructuring
related charges in fiscal 2002, of which $60 million resulted from increased
depreciation. This additional depreciation is due to the shortening of estimated
useful lives of certain assets in connection with our restructuring actions. For
additional details regarding our restructuring activities, see Note 5 to our
financial statements in Item 8.


The
plan announced on August 14, 2002 to exit the optoelectronics business
represents a significant change to our original consolidation plans announced on
January 23, 2002. However, we still plan to complete many of the initiatives
that we announced earlier, such as closing certain facilities and consolidating
our workforce into fewer sites. To complete the earlier initiatives and
implement the actions announced on August 14, 2002, we estimated we would incur
approximately $325 million in cash-related costs and as much as $775 million in
non-cash costs. As of September 30, 2002, we had incurred approximately $175
million of these cash-related costs and approximately $685 million of these
non-cash costs. We estimate our future annualized pre-tax savings associated
with the August 14, 2002 announcement will be approximately $680 million, of
which $280 million is related to lower employee costs, $200 million is from
savings in material and other costs related to the exit of the optoelectronics
business and $200 million is associated with reduced depreciation. We estimate
that approximately 70% of these savings will be reflected in gross margin with
the remaining 30% reflected in operating expenses.


Impairment
of Goodwill and Other Acquired Intangibles


We
review our long-lived assets for impairment when events or changes in
circumstances indicate the carrying amount of the assets may not be fully
recoverable. We performed assessments as a result of weakening economic
conditions and decreased current and expected future demand for products in the
markets in which we operate. As a result of these assessments, we determined
that an impairment of goodwill and other acquired intangibles existed related to
certain of our acquisitions. During fiscal 2002, we recorded a charge to reduce
goodwill and other acquired intangibles of $220 million, consisting of $113
million and $107 million related to Ortel and Herrmann, respectively. We also
recorded a charge to reduce goodwill and other acquired intangibles of $2,762
million during fiscal 2001, consisting of $2,220 million, $275 million, $240
million and $27 million related to Ortel, Herrmann, Agere, Inc. and Enable
Semiconductor Inc., respectively.


Inventory
Provisions


We
recorded inventory provisions, classified within costs, of $81 million, $409
million and $29 million for fiscal 2002, 2001 and 2000, respectively. The
inventory provisions were calculated in accordance with our inventory valuation
policy, which is based on a review of forecasted demand compared with existing
inventory levels. Inventory that is determined to be excessive or obsolete is
generally disposed of for little or no recoverable value. There are generally no
alternative uses for such inventory.


We
had experienced significant revenue growth in the years leading up to fiscal
2001 and had expected this pattern of growth to continue. However, in fiscal
2001 we experienced a significant decline in demand, which was supported by
evidence from our customers through canceled orders and through direct
communications with us. Therefore, given our forecast of continuing reductions
for future demand we recorded a substantial inventory charge in the second half
of fiscal 2001.

Application
of Critical Accounting Policies and Estimates


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


Goodwill
and Other Acquired Intangibles


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


Property,
Plant and Equipment



Property,
plant and equipment is reviewed for impairment whenever events or circumstances
indicate that their carrying amount may not be recoverable. We have impaired
property, plant and equipment in connection with our various restructuring
initiatives. These assets are either classified as held and used and
written-down to fair value or held for sale and written-down to fair value less
costs to sell. It is reasonably likely that the actual fair value may differ
from our current estimate, in which case we may under- or over-value our
property, plant and equipment and under- or over-value the related impairment
charge.



Tax
Valuation Allowance


A
tax valuation allowance is established, as needed, to reduce net deferred tax
assets to the amount for which recovery is probable. Commencing with the quarter
ended June 30, 2001, we established a full valuation allowance against our U.S.
net deferred tax assets because our lack of history as an independent company,
recent losses and the uncertainty of the timing of the recovery of our industry,
cause our long term financial forecast to have enough uncertainty that we do not
meet the standard of more likely than not that is required for
measuring the likelihood of realization of net deferred tax assets. In the event
it becomes more likely than not that some or all of the deferred tax assets will
be realized, our valuation allowance will be adjusted. Depending on the amount
and timing of taxable income we ultimately generate in the future, as well as
other factors, we could recognize no benefit from our deferred tax assets, in
accordance with our current estimate, or we could recognize their full value.

Tax
Contingencies


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


Employee
Benefits



Postemployment
liabilities are for benefits that we expect to pay to terminated employees. We
consider various factors in determining our postemployment liability, including
the number of employees who be will paid, the salary levels of those employees,
the years of service of those employees, and the type and length of benefits
they will receive. If the actual postemployment benefits paid differ from our
current estimate we may be over- or under-accrued.


Postretirement
liabilities are for benefits that we expect to pay to former employees who are
retired. We consider various factors in determining our postretirement
liability, including the number of employees who be will paid, the type and
length of benefits they will receive, trends in health care costs and other
actuarial assumptions. If the actual postretirement benefits paid differ from
our current estimate we may be over- or under-accrued.


We
have pension plans covering substantially all of our employees. We consider
various factors in determining our pension liability, including the number of
employees who be will paid, their salary levels and years of service, the
expected return on plan assets, the discount rate used to determine the benefit
obligation, the timing of the payment of benefits, and other actuarial
assumptions. If the actual results and events of our pension plan differ from
our current assumptions we may be over- or under-valued.



In
recognition of the current economic environment, we decreased our pension and
postretirement assumptions related to the expected return on plan assets and the
discount rate used to determine the benefit obligation. Should market values
continue their decline, a further change in assumptions would be likely which
could result in higher pension and postretirement expenses, as well as higher
funding requirements. The rate of return reflects our long-term expectations of
market performance based on our current asset allocations. The discount rate is
primarily based on long-term corporate bond rates. We also decreased our
assumption related to the rate of compensation increase from the previous year.


Results of Operations


Fiscal
Year Ended September 30, 2002 compared to Fiscal Year Ended September 30, 2001


The
following table shows the change in revenue, both in dollars and in percentage
terms by segment:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|                       | Year Ended September 30, |  | Change
|---------------------- | ------------------------ |  | ------
|
|
|Operating Segment:     |                          |  |       
|Client Systems         |                          |  | $     
|Infrastructure Systems |                          |  |       
|                       |                          |  |       
|Total Revenue          |                          |  | $     
|                       |                          |  |       

|Revenue.
Revenue decreased 47%, or $1,903 million, to $2,177 million in fiscal 2002 from
$4,080 million in fiscal 2001 due primarily to volume decreases. The decrease of
$147 million within the Client segment was driven by price erosion across the
entire segment, particularly in the wireless local area networking market, and
volume decreases across the majority of the segment, except for the hard disk
drive market which experienced substantial volume growth. The decrease of $1,756
million within the Infrastructure segment was due to depressed market conditions
and reduced expenditures by communication service providers and communication
equipment manufacturers, which drove volume decreases across the entire segment.
These volume decreases were especially severe in our optoelectronics business,
as revenues from this business, excluding intellectual property revenue,
decreased approximately 80% from the prior fiscal year to $254 million in the
current fiscal year.

Costs
and gross margin.Costs decreased 38%, or $1,158 million, to $1,926 million
in fiscal 2002 from $3,084 million in fiscal 2001. Gross margin decreased to
11.5% in fiscal 2002 from 24.4% in fiscal 2001, a decrease of 12.9 percentage
points. Gross margin for the Client segment increased to 27.8% in the current
fiscal year from 23.8% in the prior fiscal year. This increase was primarily due
to improved manufacturing capacity utilization as a result of actions taken
under our restructuring and cost saving initiatives and lower inventory
provisions of $22 million, partially offset by the effects of product price
reductions. Gross margin for the Infrastructure segment decreased to (10.8)% in
the current fiscal year from 24.8% in the prior fiscal year. The decrease was
due to excess manufacturing capacity as a result of the decline in sales volume,
which was partially offset by lower inventory provisions of $306 million. This
excess manufacturing capacity was especially prevalent in our optoelectronics
business that we are exiting, as the Infrastructure gross margin was
approximately 14% in fiscal 2002, excluding this business.


Selling,
general and administrative.Selling, general and administrative expenses
decreased 43%, or $256 million, from $597 million in fiscal 2001 to $341 million
in the current fiscal year. The decrease was primarily due to reduced salary,
benefit and other expenditures as a result of our restructuring and cost saving
initiatives.


Research
and development.Research and development expenses decreased 27%, or $258
million, from $951 million in fiscal 2001 to $693 million in the current fiscal
year. The decrease was primarily due to reduced expenditures as we focused our
product development efforts and realized savings from our restructuring and cost
saving initiatives.


Amortization
of goodwill and other acquired intangibles.Amortization expense decreased
86%, or $356 million, from $415 million in fiscal 2001 to $59 million in fiscal
2002. The decrease is due to impairments of goodwill and other acquired
intangibles of $2,762 million recognized in the second half of fiscal 2001 and
$220 million recognized during fiscal 2002. These impairments significantly
reduced our goodwill and other acquired intangibles and therefore, our current
fiscal year amortization.


Restructuring
and other charges  net. Net restructuring and other charges increased
48%, or $316 million, to $978 million in fiscal 2002 from $662 million in fiscal
2001. Net restructuring and related expenses increased 72%, or $408 million, to
$971 million in the current fiscal year from $563 million in the prior fiscal
year. Expenses associated with the separation from Lucent decreased 93%, or $92
million, to $7 million in the current fiscal year from $99 million in the prior
fiscal year, as the separation was mostly completed in fiscal 2001.


Impairment
of goodwill and other acquired intangibles.During fiscal 2002, we recorded
a charge of $220 million to reduce goodwill and other acquired intangibles,
consisting of $113 million and $107 million related to the acquisitions of Ortel
and Herrmann, respectively. During fiscal 2001, we recorded a charge of $2,762
million to reduce goodwill and other acquired intangibles, consisting of $2,220
million, $275 million, $240 million and $27 million related to Ortel, Herrmann,
Agere and Enable, respectively.


(Gain)
loss on sale of operating assets  net. (Gain) loss on sale of
operating assets  net increased $299 million, to a gain of $294 million in
fiscal 2002 from a loss of $5 million in fiscal 2001. The fiscal 2002 amount
consists principally of a $243 million gain related to the sale of our
field-programmable gate array business and a $58 million gain related to the
sale of our wireless local area network equipment business.

Operating
loss.We reported an operating loss of $1,746 million for fiscal 2002
compared to an operating loss of $4,396 million for fiscal 2001. This lower loss
was caused by a significant decrease in the impairment of goodwill and other
acquired intangibles, expense reductions, gains on sale of operating assets and
lower amortization of goodwill and other acquired intangibles, which were
partially offset by a decrease in gross profit and higher net restructuring and
other charges. Although performance measurement and resource allocation for the
reportable segments are based on many factors, the primary financial measure
used is operating income (loss) by segment, exclusive of amortization of
goodwill and other acquired intangibles, restructuring and other charges 
net, the impairment of goodwill and other acquired intangibles, and (gain) loss
on sale of operating assets  net, which is shown in the following table:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|                                | Year Ended September 30, |  | Change
|------------------------------- | ------------------------ |  | ------
|
|
|Operating Segment:              |                          |  |       
|Client Systems                  |                          |  | $     
|Infrastructure Systems          |                          |  |       
|                                |                          |  |       
|Total Operating Loss by Segment |                          |  | $     
|                                |                          |  |       

|Other
income  net. Other income  net increased $80 million, from
income of $40 million in fiscal 2001 to income of $120 million in fiscal 2002.
The major factors contributing to the increase include gains of $41 million from
sales of investments in fiscal 2002, a $38 million decrease in impairments of
non-consolidated investments, and a $17 million improvement in foreign currency
gain (loss), all of which were partially offset by a $39 million reduction in
interest income as a result of lower cash balances.


Interest
expense. Interest expense decreased 20%, or $30 million, from $151 million
in fiscal 2001 to $121 million in fiscal 2002. During fiscal 2002, our interest
expense is principally related to our credit facility, which we significantly
reduced throughout the year and fully repaid by year-end. During fiscal 2001,
our interest expense primarily reflects four months of allocations from Lucent
and the interest on the $2,500 million credit facility we assumed from Lucent in
April 2001.


Provision
for income taxes. For fiscal 2002 we recorded a provision for income
taxes of $64 million on a pre-tax loss of $1,747 million, yielding an effective
tax rate of (3.7)%. This rate differs from the U.S. statutory rate primarily due
to the impact of recording a valuation allowance of $630 million against U.S.
net deferred tax assets in fiscal 2002. For fiscal 2001 we recorded a provision
for income taxes of $105 million on a pre-tax loss of $4,507 million, yielding
an effective tax rate of (2.3)%. This rate differs from the U.S. statutory rate
primarily due to the impact of recording a valuation allowance of $553 million
against U.S. net deferred tax assets and non-tax deductible goodwill
amortization in fiscal 2001.


Fiscal
Year Ended September 30, 2001 compared to Fiscal Year Ended September 30, 2000


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

|                       | Year Ended September 30, |  | Change
|---------------------- | ------------------------ |  | ------
|
|
|Operating Segment:     |                          |  |       
|Client Systems         |                          |  | $     
|Infrastructure Systems |                          |  |       
|                       |                          |  |       
|Total Revenue          |                          |  | $     
|                       |                          |  |       

|Revenue.
Revenue decreased 13%, or $628 million, to $4,080 million in fiscal 2001 from
$4,708 million in fiscal 2000, primarily due to volume decreases in both
segments. The decrease of $243 million within the Client segment was due to
volume decreases across the segment, which were partially offset by strength in
the wireless local area networking market. The decrease of $385 million within
the Infrastructure segment was primarily due to decreased sales of $395 million
in integrated circuits, as system providers managed their orders and inventory
in light of the reduced capital spending by service providers. This decrease in
the Infrastructure segment was partially offset by an increase of $10 million in
sales of optoelectronic components.

During
fiscal 2001 revenues decreased sequentially each quarter due to declining market
conditions compared to sequential revenue growth each quarter in fiscal 2000.
Client revenues declined $181 million, or 37%, to $302 million in the fourth
quarter of fiscal 2001 from the peak quarterly revenue level of $483 million
experienced in the fourth quarter of fiscal 2000. Infrastructure revenues
declined $708 million, or 70%, to $298 million in the fourth quarter of fiscal
2001 from the peak quarterly revenue level of $1,006 million experienced in the
fourth quarter of fiscal 2000.


Costs
and gross margin. Costs increased 21%, or $529 million, to $3,084 million in
fiscal 2001 from $2,555 million in the prior fiscal year. Gross margin decreased
21.3 percentage points to 24.4% in fiscal 2001 from 45.7% in fiscal 2000,
primarily due to lower manufacturing capacity utilization and the impact of
inventory provisions of $409 million in fiscal 2001 compared to inventory
provisions of $29 million in fiscal 2000. Gross margin for the Client segment
decreased to 23.8% in fiscal 2001 from 38.3% in fiscal 2000 due to lower
manufacturing capacity utilization. Gross margin for the Infrastructure segment
declined to 24.8% in fiscal 2001 from 49.8% in fiscal 2000 primarily due to
lower manufacturing capacity utilization, inventory provisions of $378 million
in fiscal 2001 compared to inventory provisions of $20 million in fiscal 2000,
and a change in product mix, from higher margin components to lower margin
components.


Selling,
general and administrative. Selling, general and administrative expenses
increased 12%, or $62 million, to $597 million in fiscal 2001 from $535 million
in fiscal 2000. This was primarily due to increases in general and
administrative expenses associated with being a stand-alone company, which were
partially offset by lower bonus accruals of approximately $35 million.


Research
and development. Research and development expenses increased 15%, or $124
million, to $951 million in fiscal 2001 from $827 million in fiscal 2000. The
increase was due to new and ongoing product development expenses, including a
full year of expenses associated with acquisitions during fiscal 2000, partially
offset by lower bonus accruals of approximately $40 million.


Amortization
of goodwill and other acquired intangibles. Amortization expense increased
$226 million to $415 million in fiscal 2001 from $189 million in fiscal 2000 due
to the recognition in fiscal 2001 of amortization associated with acquisitions
completed during fiscal 2000.


Purchased
in-process research and development. Purchased in-process research and
development decreased to zero in fiscal 2001 from $446 million in fiscal 2000.
This was the result of no significant acquisitions being made in fiscal 2001,
while a number of acquisitions were completed in fiscal 2000.


Restructuring
and other charges  net. Restructuring and other charges of $662
million were incurred in fiscal 2001, which consisted of $563 million of
restructuring and related expenses and $99 million of expenses in connection
with our separation from Lucent. There were no such charges in fiscal 2000.


Impairment
of goodwill and other acquired intangibles. During fiscal 2001, we recorded
a charge of $2,762 million to reduce goodwill and other acquired intangibles,
primarily associated with Ortel. There were no such charges in fiscal 2000.


(Gain)
loss on sale of operating assets  net. We realized a loss on the sale
of operating assets of $5 million in fiscal to 2001 related to the sale of
property, plant and equipment. There was no such gain or loss in the prior
fiscal year.


Operating
income (loss). Operating loss was $4,396 million in fiscal 2001 compared to
$156 million of operating income in fiscal 2000. This change was driven
primarily by the impairment of goodwill and other acquired intangibles, a
decline in gross profit, restructuring and other charges and an increase in the
amortization of goodwill and other acquired intangibles, partially offset by the
absence of purchased in-process research and development costs in fiscal 2001.
Although performance measurement and resource allocation for the reportable
segments are based on many factors, the primary financial measure used is
operating income (loss) by segment, exclusive of amortization of goodwill and
other acquired intangibles, purchased in-process research and development costs,
restructuring and other charges  net, the impairment of goodwill and other
acquired intangibles, and (gain) loss on sale of operating assets  net,
which is shown in the following table:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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|                                         | Year Ended September 30, |  | Change
|---------------------------------------- | ------------------------ |  | ------
|
|
|Operating Segment:                       |                          |  |       
|Client Systems                           |                          |  | $     
|Infrastructure Systems                   |                          |  |       
|                                         |                          |  |       
|Total Operating Income (Loss) by Segment |                          |  | $     
|                                         |                          |  |       

|N/M = Not meaningful


Other
income  net. Other income  net increased 21%, or $7 million, to
$40 million in fiscal 2001 from $33 million in fiscal 2000. The $40 million in
fiscal 2001 was comprised primarily of interest income of $69 million from our
investment of the proceeds from our initial public offering and income of $42
million from our equity investment in Silicon Manufacturing Partners Pte Ltd.,
partially offset by the impairment of $47 million for several non-consolidated
investments and foreign exchange losses of $14 million. The $33 million in
fiscal 2000 was comprised primarily of gains of $18 million on the sale of
investments and foreign exchange gains of $6 million.


Interest
expense. Interest expense increased $93 million to $151 million in fiscal
2001 from $58 million in fiscal 2000. This increase is due to interest on the
$2,500 million of short-term debt we assumed from Lucent in April 2001.


Provision
for income taxes. For fiscal 2001 we recorded a provision for income taxes
of $105 million on a pre-tax loss of $4,507 million, yielding an effective tax
rate of (2.3)%. This rate differs from the U.S. statutory rate primarily due to
the impact of recording a valuation allowance of approximately $553 million
against U.S. net deferred tax assets and non-tax deductible goodwill
amortization in fiscal 2001. For fiscal 2000 we recorded a provision for income
taxes of $207 million on a pre-tax income of $131 million, yielding an effective
tax rate of 158%. This rate differs from the U.S. statutory rate primarily due
to the impact of non-tax deductible goodwill amortization and non-tax deductible
purchased in-process research and development in fiscal 2000.


Liquidity and Capital Resources


As
of September 30, 2002, our cash in excess of short-term debt was $694 million,
which reflects $891 million in cash and cash equivalents less $163 million of
borrowings under our accounts receivable securitization facility and $34 million
from the current portion of our capitalized lease obligations. In addition, we
have $16 million of cash held in trust that supports obligations of our captive
insurance company and is not immediately available to fund on-going operations.
As of September 30, 2002, our long-term debt is $486 million, which consists of
$410 million of convertible subordinated notes due December 15, 2009 and $76
million from the non-current portion of our capitalized lease obligations.


Net
cash used in operating activities was $660 million in fiscal 2002 compared to
$269 million of net cash provided by operating activities in fiscal 2001.
Although cash used for costs and operating expenses decreased in the current
year when compared to the prior year, this was more than offset by lower
revenues in fiscal 2002 than fiscal 2001.


Net
cash provided by operating activities was $269 million in fiscal 2001 compared
to $762 million for fiscal 2000. The decrease in fiscal 2001, compared with
fiscal 2000, reflects a reduction in revenues during a period in which we
increased our manufacturing capacity and infrastructure in anticipation of
higher revenues. The adverse impact on cash caused by our fiscal 2001 net loss
was offset by a $413 million reduction in accounts receivable and a $243 million
increase in accounts payable.

Net
cash provided by investing activities was $368 million in fiscal 2002 compared
to net cash used in investing activities of $723 million and $829 million in
fiscal 2001 and 2000, respectively. The increase in cash flow from investing
activities in fiscal 2002 is primarily due to proceeds of $382 million from the
sale of the field-programmable gate array, wireless local area networking
equipment and analog line card businesses, proceeds of $142 million from the
sale of property, plant and equipment, which includes the sale of the Madrid,
Spain facility and proceeds from sale-leaseback transactions, proceeds of $55
million from the sale of investments and a reduced level of capital expenditures
in the current period. Prior to fiscal 2002, capital expenditures had
historically been the primary component of our investing activities. However, in
response to adverse market conditions that began fiscal 2001, we significantly
reduced our capital spending in fiscal 2002. Capital expenditures were $195
million, $723 million and $672 million in fiscal 2002, 2001 and 2000,
respectively. The majority of our fiscal 2002 capital expenditures were related
to the completion of a new office facility adjacent to our existing Allentown
facility and facility consolidation activities. In fiscal 2003, we expect to
continue to limit our capital expenditures.


Net
cash used in financing activities was $1,970 million in fiscal 2002 compared to
net cash provided by financing activities of $3,607 million and $67 million in
fiscal 2001 and 2000, respectively. The current year reflects the repayment of
$2,500 million under our credit facility, offset in part by net proceeds of $396
million from the issuance of convertible notes and $163 million in net
borrowings under our accounts receivable securitization facility. The fiscal
2001 amount is primarily from the receipt of $3,448 million of net cash proceeds
from the sale of our common stock in our initial public offering. Prior to our
initial public offering, we relied on Lucent to provide financing for our
operations.


On
October 4, 2001, we amended our $2,500 million credit facility. In connection
with the amendment, we repaid $1,000 million from cash on hand, thereby reducing
the facility to $1,500 million, and extended the maturity of the facility to
September 30, 2002. We also paid $21 million in fees in connection with the
amendment, which were amortized over the life of the facility. The interest rate
applicable to borrowings under the facility was based on a scale indexed to our
credit rating.


Subsequent
to October 4, 2001, we repaid the remaining $1,500 million of borrowings under
the credit facility and on September 30, 2002 the facility expired in accordance
with its terms. The amounts used to make these repayments were from the
following sources: $634 million from existing cash on hand, $250 million from
the sale of our field-programmable gate array business, $198 million from our
convertible subordinated notes offering, $179 million from our accounts
receivables securitization, $67 million from the sale of our manufacturing
facility and related equipment located in Spain, $64 million from the sale of
our wireless local area networking equipment business, $55 million from the sale
of investments and $53 million from sale-leaseback and various other
transactions.



Agere
Systems Inc. and certain of its subsidiaries have entered into a securitization
transaction relating to certain accounts receivable, which was amended on
November 12, 2002. As part of the transaction, Agere Systems Inc. and certain of
its subsidiaries irrevocably transfer accounts receivable on a daily basis to a
wholly-owned, fully consolidated, bankruptcy-remote subsidiary. When we say that
the subsidiary is bankruptcy remote, we mean that it is unlikely that it will be
voluntarily placed into bankruptcy proceedings by us. In the event we were to be
the subject of bankruptcy proceedings, it is unlikely that our creditors would
have a claim on the subsidiarys assets, even though the subsidiary is
wholly owned by us. This is because we have taken a number of steps, including
the appointment of an independent director and the requirement of unanimous
board approval to commence bankruptcy proceedings, that we believe under current
law will result in the assets of this subsidiary not being available to our
creditors until the claims of the subsidiarys creditors are satisfied. The
subsidiary has entered into a loan agreement with certain financial
institutions, pursuant to which the financial institutions agreed to make loans
to the subsidiary secured by the accounts receivable. The financial institutions
have commitments under the loan agreement of up to $200 million; however, the
amount that the subsidiary can actually borrow at any time depends on the amount and nature
of the accounts receivable that we have transferred to the subsidiary. The loan
agreement expires on November 11, 2003. As of September 30, 2002, $163 million
was outstanding under this agreement.


The
majority of our accounts receivable are required to be pledged as security for
the outstanding loans even though some of those receivables may not qualify for
borrowings. As of September 30, 2002, $217 million of gross receivables was
pledged as security for the outstanding loans. We pay interest on amounts
borrowed under the agreement based on one-month LIBOR. The weighted average
annual interest rate on amounts borrowed as of September 30, 2002 was 1.8%. In
addition, we pay an annual commitment fee, which varies depending on our credit
rating, on the $200 million total loan commitment. As of September 30, 2002, the
commitment fee was 1.5% per annum. If our credit rating were to decline one or
two levels, the commitment fee will increase to 2% or 3% per annum,
respectively. As of September 30, 2002, our credit ratings were BB- with a
negative outlook from Standard & Poors and B1 from Moodys.


The
loan agreement has financial covenants which require us to (1) achieve a minimum
level of earnings before interest, taxes, and depreciation and amortization each
quarter, (2) maintain a minimum level of net worth each quarter, and (3) limit
our annual capital expenditures. A violation of these covenants will end our
ability to obtain further loans under the agreement, but will not accelerate
payment or require an immediate cash outlay to cover amounts previously loaned
under the accounts receivable securitization.



On
June 19, 2002, we issued $410 million of 6.5% Convertible Subordinated Notes due
December 15, 2009 and received net proceeds of $396 million. Interest on the
notes accrues at the rate of 6.5% per annum and is payable semi-annually on June
15 and December 15 of each year, beginning on December 15, 2002. The notes can
be converted into shares of Class A common stock at an initial price of $3.3075
per share, subject to adjustment in certain events, at any time prior to
maturity, unless previously redeemed or repurchased by us. We may redeem the
notes in whole or in part at any time on or after June 20, 2007. In addition,
upon a fundamental change in our company, which includes a change of control or
our Class A common stock not listed for trading on the New York Stock Exchange
nor approved for trading on the NASDAQ National Market, we may be required to
repurchase the notes at a price equal to 100% of the principal amount of the
notes plus any accrued and unpaid interest.



On
September 30, 2002, we completed the sale of certain assets and liabilities of
our analog line card business to Legerity, Inc. for $70 million in cash and
received $68 million of net proceeds.


As
a result of a significant decline in market demand for telecommunications
infrastructure products, we have been experiencing losses and have been using
cash in our operations for several quarters. In response to market conditions,
we have announced a number of restructuring and consolidation actions to reduce
our losses. We estimate that the cash requirements for these actions will be
approximately $250 million in fiscal 2003.



On
October 21, 2002, we entered into an agreement to sell certain assets and
liabilities of our optoelectronics business to TriQuint for $40
million in cash. We expect this transaction to close in the second quarter of
fiscal 2003, subject to regulatory approval and other customary closing
conditions.




Our
primary source of liquidity is our cash and cash equivalents. We believe our
cash and cash equivalents on hand will be sufficient to meet our projected cash
requirements for the next 12 months and for the foreseeable future thereafter,
including the cash requirements of the announced restructuring activities and
funding of on-going operations even if the accounts receivable securitization
program is not extended past its current expiration in November 2003.


Contractual
Obligations and Commitments


The
following table summarizes our contractual obligations and commitments with
definitive payment terms that will require significant cash outlays in the
future. These amounts are as of September 30, 2002, with the exception of the
accounts receivable securitization, which has been adjusted to reflect the
extension in November 2002 of the maturity of that facility to November 11,
2003.
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|                                         | Year Ending September 30, | 
|---------------------------------------- | ------------------------- | 
|
|
|Contractual obligations and commitments: |                           | 
|Convertible subordinated notes           |                           | 
|Accounts receivable securitization       |                           | 
|Capital leases                           |                           | 
|Operating leases                         |                           | 
|Unconditional purchase obligations (1)   |                           | 
|                                         |                           | 
|Total contractual cash obligations       |                           | 
|                                         |                           | 

|
|

|(1) |  | Our unconditional purchase obligations represent long-term contractual
obligations that are non-cancelable. These obligations relate to software
licenses and services, wafer production and equipment maintenance services.
These amounts are based on our contractual commitments; however, it is possible
we may be able to negotiate lower cash charges if we chose to exit these
contracts earlier. These amounts are accrued as we use the related services,
licenses or manufacturing activities. These accruals may not coincide with the
timing of our cash commitments.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our
material contractual obligations and commitments also include the following
commitments:


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


As
part of the sale of our analog line card business to Legerity, Inc., we are
obligated to supply chips to Legerity through early 2003, through a transitional
supply agreement, and estimate we will incur cash costs of approximately $40
million while fulfilling this obligation. We have deferred any gain that may be
recognized on this sale until we have satisfied all of our obligations to
Legerity. As of September 30, 2002, a deferred gain of $68 million has been
recorded in other current liabilities.


We
have pension plans covering substantially all of our employees. The funding
requirements related to our pension plans are dependent on many factors,
including actuarial assumptions and the actual performance of our plan assets.
The amount and timing of our future funding requirements cannot be determined at
this time; however, there will be no funding requirements for the pension plan
until fiscal 2004 at the earliest.

Acquisitions


During
fiscal 2000 we completed the acquisitions described below as part of our efforts
to broaden our portfolio of product offerings. We did not have any significant
acquisitions during fiscal 2002 and 2001.


In
June 2000, we acquired Herrmann, a developer and manufacturer of passive optical
filters that can be used in conjunction with active optoelectronic components in
products such as amplifiers. The purchase price was $432 million in Lucent
common stock and options. In connection with this acquisition, certain former
stockholders of Herrmann also received 677,019 additional shares of Lucent
common stock based on retention and the achievement of specified milestones.


In
April 2000, we acquired Ortel, a developer and manufacturer of semiconductor
optoelectronic components used in fiber optic systems for cable television and
data communications networks. The purchase price was $2,998 million in Lucent
common stock and options.


In
April 2000, we acquired Agere, Inc., a developer and supplier of network
processor integrated circuits. Network processors control how data is sent over
a network. The purchase price was $377 million in Lucent common stock and
options.


In
March 2000, we acquired substantially all the assets of VTC, a supplier of
integrated circuits to computer hard disk drive manufacturers. The purchase
price was $104 million in cash. In connection with this acquisition,
stockholders of VTC also received additional cash consideration of $50 million
as a result of meeting certain performance measures. The $50 million payment
resulted in additional goodwill related to the acquisition.


During
fiscal 2002 and 2001, we performed impairment evaluations of the goodwill and
other acquired intangibles from recent acquisitions because events and changes
in circumstances occurred that indicated the carrying amount of the assets may
not be fully recoverable. See Impairment of Goodwill and Other Acquired
Intangibles.


Purchased
In-process Research and Development


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


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


Core
technology is a product, service or process that exists at the date of the
acquisition and may contribute to the value of any product resulting from
in-process research and development. We deducted an amount representing the
estimated value of any core technologys contribution from the estimated
cash flows used to value in-process research and development. At the date of
acquisition, the in-process research and development projects had not yet
reached technological feasibility and had no alternative future uses.
Accordingly, the value allocated to these projects was capitalized and
immediately expensed at acquisition.

Set
forth below are descriptions of the major acquired in-process research and
development projects and our original assumptions in connection with these
acquisitions, followed by a current status of the projects. Due to significant
changes in economic, industry and market conditions, the original assumptions at
the time of acquisition for these acquisitions vary materially from our current
estimates as noted below. In addition, the Herrmann and Ortel operations are
part of the optoelectronics business that we are exiting, and we do not expect
to derive material revenues or cash flows from those operations in the future.


Agere,
Inc.


On
April 20, 2000, we completed the acquisition of Agere, Inc., which was a
developer and supplier of integrated circuits solutions used in network
processors, which control how data is sent over networks. At the acquisition
date, Agere, Inc. was conducting development and qualification activities
related to the development of a programmable network processor for various
protocols for 2.5 gigabits per second transmission speeds. A protocol is a set
of procedures for the formatting and timing of data transmission between two
pieces of equipment. A gigabit is a unit of measurement of data and is equal to
roughly one billion bits. The allocation to purchased in-process research and
development of $94 million represented its estimated fair value using the
methodology described above.


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


Agere,
Inc.s in-process research and development projects related to first
generation network processors were completed in the fourth quarter of fiscal
2000. The second generation processors were completed in the first quarter of
fiscal 2001. Actual costs related to completing these projects were $13 million.
Changing market demand for these network processors led to revenues which were
lower than originally anticipated. Actual revenues for fiscal 2001 were $4
million, consisting primarily of sales of development systems and models, which
are used by customers for system evaluations and qualifications. Actual revenues
for fiscal 2002 were $6.2 million. The long-term annual growth rate for these
products is expected to be 8%.


Ortel
Corporation


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


Ortels
in-process research and development projects were expected to be completed
during the period from June 2000 to April 2001 after approximately two to three
and a half years of research and development effort. Following completion, the
projects were expected to begin generating economic benefits. The allocation to
purchased in-process research and development of $307 million represented its
estimated fair value using the methodology described above. The $307 million was
allocated to the following projects, which are explained below.
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| |  |  | 10G
New Products - $61 million;
| | - |  | -------------------------------

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

| |  |  | 980
Products $95 million;
| | - |  | --------------------------

| |  |  | 1550
Products $27 million; and
| | - |  | -------------------------------

| |  |  | CATV
Products $19 million.
| | - |  | ---------------------------

|Projected
net cash flows attributable to Ortels in-process research and development,
assuming successful development, were discounted to net present value using a
discount rate of 25%.


At
the time of acquisition, revenue attributable to the 10G New Products was
estimated to be $5 million in fiscal 2001 and $30 million in fiscal 2002. 10G
New Products are receivers that incorporate new packaging technologies for
high-speed transport and metropolitan network applications at speeds of 10
gigabits per second. Revenue was expected to peak in fiscal 2009 and decline
thereafter through the end of the products life as new product
technologies were expected to be introduced by us. Revenue growth was expected
to decrease from 447% in fiscal 2002 to 8% in fiscal 2009, and be negative for
the remainder of the projection period. At the acquisition date, costs to
complete the research and development efforts related to the products were
expected to be $3 million.


Most
of the 10G New Products were completed in fiscal 2001 as anticipated at a cost
of $2 million. Development efforts on one remaining product ceased in fiscal
2002. There were no revenues attributable to the 10G New Products in fiscal
2001and fiscal 2002 revenues were less than $1 million.


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


The
10G OC-192 Receiver/Daytona Products were completed in fiscal 2001. Actual
revenues were $6 million and $40 million in fiscal 2002 and 2001, respectively.
Actual project costs were materially consistent with managements original
estimates.


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


The
980 Products were in development and therefore did not yield any revenues in
fiscal 2001. All design efforts on the 980 products were discontinued in fiscal
2002.


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

The
1550 Products had four distinct product lines. Of these product lines, one has
been completed and three have been cancelled. Product development costs for the
1550 products since acquisition have been $1.5 million. There were no revenues
attributable to these products in fiscal 2001. Actual revenues in fiscal 2002
were less than $1 million.


At
the time of acquisition, revenue attributable to the CATV Products was estimated
to be $28 million in fiscal 2001 and $58 million in fiscal 2002. CATV Products
are receivers and return path products for cable television network
applications. The return path allows cable system operators to offer Internet
and telephone services, in direct competition with network services providers.
Revenue was expected to peak in fiscal 2004 and decline thereafter through the
end of the products life as new product technologies were expected to be
introduced by us. Revenue growth was expected to decrease from 107% in fiscal
2002 to 4% in fiscal 2004 and be negative for the remainder of the projection
period. At the acquisition date, costs to complete the research and development
efforts related to the CATV Products were expected to be $1 million.


The
CATV Products were completed in fiscal 2001 at a cost of $2 million. Actual
revenues were $35 million and $44 million in fiscal 2002 and 2001, respectively.


Herrmann
Technology, Inc.


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


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


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


Hermanns
in-process research and development projects were either completed by July of
2001 or discontinued due to market conditions. Actual costs to complete the
projects were $1.3 million. Actual revenue attributable to these products was
significantly lower than anticipated at $2 million and $3 million in fiscal 2002
and 2001, respectively.


Recent Pronouncements


In
July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. Statement 142 provides guidance on the financial accounting and
reporting for acquired goodwill and other intangible assets. Under Statement
142, goodwill and indefinite lived intangible assets will no longer be
amortized. Intangible assets with finite lives will continue to be amortized
over their useful lives, which will no longer be limited to a maximum life of
forty years. The criteria for recognizing an intangible asset have also been
revised. Statement 142 requires that goodwill be tested for impairment at least
annually. The goodwill impairment test is a two-step process that requires
goodwill to be allocated to reporting units. In the first step, the fair value
of the reporting unit is compared to the carrying value of the reporting unit.
If the fair value of the reporting unit is less than the carrying value of the
reporting unit, a goodwill impairment may exist, and the second step of the test
is performed. In the second step, the implied fair value of the goodwill is
compared to the carrying value of the goodwill and an impairment loss is
recognized to the extent that the carrying value of the goodwill exceeds the
implied fair value of the goodwill. We adopted Statement 142 effective October
1, 2002. As a result, we have re-assessed the classification and useful lives of
our previously acquired goodwill and other intangible assets. The assessment did
not result in any adjustments to previously recorded amounts. In addition, we
have completed the first step of the goodwill impairment test. Since the
carrying value of each of our reporting units did not exceed their fair value,
no goodwill impairment charges were recorded upon the adoption of Statement 142.
At September 30, 2002, we had $84 of goodwill that will no longer be amortized
and $17 of other acquired intangible assets that will continue to be amortized
over their useful lives.

Also
in July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations. Statement 143 provides the financial accounting and reporting
for the cost of legal obligations associated with the retirement of tangible
long-lived assets. In accordance with Statement 143, asset retirement
obligations will be recorded at fair value in the period they are incurred. When
the liability is initially recorded, the cost is capitalized as part of the
related long-lived asset and subsequently depreciated over its remaining useful
life. Changes in the liability resulting from the passage of time are recognized
as operating expense. We adopted Statement 143 effective October 1, 2002 and
will record a charge as a cumulative effect accounting adjustment of $5 million
in our fiscal 2003 statement of operations. This adjustment represents the
depreciation and other operating expenses that would have been recorded
previously if Statement 143 had been in effect in prior years.


In
October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Statement 144 supersedes Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long Lived-Assets to be Disposed of, and the
accounting and reporting provisions for the disposal of a segment of a business
contained in APB Opinion No. 30 Reporting the Effects of a Disposal of a
Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions. Statement 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and broadens the
presentation of discontinued operations. Although we were not required to adopt
Statement 144 until the first quarter of fiscal 2003, we elected to adopt this
Statement effective October 1, 2001. Accordingly, our prior year consolidated
financial statements have been reclassified for comparative purposes in
accordance with the transition guidance in Statement 144. The early adoption of
Statement 144 did not have a material effect on our financial condition or
results of operations.


In
July 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Exit or Disposal
Activities. Statement 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that currently are
accounted for pursuant to the guidance that the Emerging Issues Task Force set
forth in Issue No. 94-3. The scope of Statement 146 also includes (1) costs
related to terminating a contract that is not a capital lease, (2) termination
benefits that employees who are involuntarily terminated receive under the terms
of a one-time benefit arrangement that is not an ongoing benefit arrangement or
an individual deferred-compensation contract and (3) costs to consolidate
facilities or relocate employees. Statement 146 is required to be effective for
our exit or disposal activities initiated after December 31, 2002. However, in
accordance with the transition provisions of Statement 146, we have elected to
adopt this Statement effective October 1, 2002. This Statement has no effect on
our previously announced restructuring initiatives.

Environmental, Health and Safety Matters


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


Legal Proceedings


An
investigation was commenced on April 4, 2001, by the U.S. International Trade
Commission based on a request of Proxim, Inc., alleging patent infringement by
14 companies, including some of our customers, for wireless local area
networking products. Proxim alleged infringement of three patents related to
spread-spectrum coding techniques. Spread-spectrum coding techniques refers to a
way of transmitting a signal for wireless communications by spreading the signal
over a wide frequency band. One of our subsidiaries, Agere Systems Guardian
Corp., filed a lawsuit on May 23, 2001, in the U.S. District Court in Delaware
against Proxim alleging infringement of three patents used in Proxims
wireless local area networking products. In connection with the sale of our
wireless local area network equipment business to Proxim, both parties have
entered into a cross license which resulted in the dismissal on September 6,
2002, of the International Trade Commission proceeding against our customers to
the extent based on the use of our products as well as the Delaware proceeding
against Proxim.



On
October 17, 2002, we filed a patent infringement lawsuit against Intersil
Corporation in the United States District Court in Delaware. We alleged that
Intersil had infringed six of our patents related to 802.11 wireless networking
and are seeking monetary damages for Intersils infringement of these
patents and an injunction prohibiting Intersil from using the patents in the
future. On November 6, 2002, Intersil filed a counterclaim in this matter,
alleging that ten patents of Intersil are infringed by unspecified Agere
products. Two of the patents relate to system-level circuits, and eight patents
relate to semiconductor processing. The complaint seeks an injunction and
damages. We believe that Intersil's claims are without merit.


On
October 30, 2002, Choice-Intersil Microsystems, Inc. filed a lawsuit against us in the United States District Court for
the Eastern District of Pennsylvania. The complaint alleges misappropriation of
trade secrets that were jointly developed and jointly owned by Digital Ocean,
Inc. (which, following several acquisitions and corporate reorganizations, is
now Choice-Intersil) and Lucent. The trade secrets relate to media access
controller technology for wireless local area networks. The complaint seeks an
injunction and damages. We believe that Choice-Intersils claims are without
merit.


On
November 19, 2002, we filed a lawsuit against Choice-Intersil, Intersil and
Intersil Americas Inc. in state court in Delaware. We alleged, among other things,
misappropriation of trade secrets and breach of contract relating to the trade
secrets that were jointly developed and jointly-owned by Digital Ocean, Inc. and
Lucent. We are seeking an injunction against further use and disclosure of the
trade secrets and damages for past disclosure and misuse.


We
intend to vigorously defend ourself against the claims of the Intersil parties.


Factors Affecting Our Future Performance


Set
forth below and elsewhere in this report and in other documents we file with the
Securities and Exchange Commission are risks and uncertainties that could cause
our actual results to differ materially from the results contemplated by the
forward-looking statements contained in this report and other public statements
we make.


Risks
Related To Our Business



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



The
demand for our products can change quickly and in ways we may not anticipate because our
industry is generally characterized by:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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| |  |  | rapid,
and sometimes disruptive, technological developments;
| | - |  | ------------------------------------------------------------

| |  |  | evolving
industry standards;
| | - |  | ----------------------------

| |  |  | changes
in customer requirements;
| | - |  | ---------------------------------

| |  |  | limited
ability to accurately forecast future customer orders;
| | - |  | --------------------------------------------------------------

| |  |  | frequent
new product introductions and enhancements; and
| | - |  | --------------------------------------------------------

| |  |  | short
product life cycles with declining prices over the life cycle of the product.
| | - |  | -----------------------------------------------------------------------------------

|If
we fail to make sufficient investments in research and development programs in
order to develop new and enhanced products and solutions, or if we focus on
technologies that do not become widely adopted, new technologies could render
our current and planned products obsolete, resulting in the need to change the
focus of our research and development and product strategies and disrupting our
business significantly.



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



The
market for integrated circuits is intensely competitive and subject to rapid and
disruptive technological change. We expect the intensity of competition to
continue to increase as existing competitors enhance and expand their product
offerings and as new participants enter the market. Increased competition may
result in price reductions, reduced gross margins and loss of market share. We
may not be able to compete successfully against existing or future competitors,
which may hurt our revenue.


The
size and number of our competitors vary across our product areas, as do the
resources we have allocated to the segments we target. Therefore, many of our
competitors have greater financial, personnel, production capacity and other
resources than we have in a particular market segment or overall. Competitors
with greater financial resources may be able to offer lower prices, additional
products or services or other incentives that we cannot match or offer. These
competitors may be in a stronger position to respond quickly to new technologies
and may be able to undertake more extensive marketing campaigns. They also may
adopt more aggressive pricing policies and make more attractive offers to
potential customers, employees and strategic partners. These competitors may
make strategic acquisitions or establish cooperative relationships among
themselves or with third parties to increase their ability to gain market share.

Further,
some of our competitors are currently selling commercial quantities of products
that we are sampling to our customers, that are still in the initial stages of
development or that we may develop in the future. By being able to offer these
products in commercial quantities before we do, our competitors can establish
significant market share, acquire design wins in customer equipment programs and
create a market position that we may be unable to overcome once we have
completed development and testing of that product.



Joint ventures and
other third-parties manufacture some of our products for us. If these
manufacturers are unable to fill our orders on a timely and reliable basis, our
revenue may be adversely affected.



We
currently manufacture our integrated circuits through a combination of internal
capability, joint ventures and external sourcing with contract manufacturers. In
fiscal 2002, approximately 35% of our revenue was derived from integrated
circuits manufactured at joint ventures or through other external sourcing
arrangements. To the extent we rely on joint ventures and third-party
manufacturing relationships, with respect to integrated circuits, we face the
following risks:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | their
inability to develop manufacturing methods appropriate for our products;
| | - |  | ------------------------------------------------------------------------------

| |  |  | that
manufacturing costs will be higher than planned;
| | - |  | -----------------------------------------------------

| |  |  | that
reliability of our products will decline;
| | - |  | ----------------------------------------------

| |  |  | their
unwillingness to devote adequate capacity to produce our products;
| | - |  | ------------------------------------------------------------------------

| |  |  | their
inability to maintain continuing relationships with our suppliers; and
| | - |  | ----------------------------------------------------------------------------

| |  |  | the
reduction of our control over delivery schedules and costs of our products.
| | - |  | -------------------------------------------------------------------------------

|If
any of these risks were to be realized, we could experience an interruption in
supply or an increase in costs, which could delay or decrease our revenue or
adversely affect our results of operations.


We
are in the process of reducing our owned manufacturing capacity. In the event of
an increase in demand, failure to increase our manufacturing volumes or obtain
capabilities from third parties may result in our not being able to meet
customer demand for our products, which could hurt our relationships with our
customers and result in our recording lower revenues than would be the case if
we had greater manufacturing capacity.

The demand for
components in the communications equipment industry has recently declined, and
we cannot predict the duration or extent of this trend. Our revenue will depend
in part on demand for these types of components.



We
derive, and expect to continue to derive, a significant portion of our revenue
from the sale of integrated circuits used in communications networks. Since
early 2001, communications equipment makers have significantly reduced purchases
of components for their products, including the components we sell. If demand
for these components declines further, our revenues may be adversely affected.



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



We
are in the process of consolidating our manufacturing and office facilities, and
exiting our optoelectronics business, in an effort to reduce our costs. The
process of moving manufacturing lines from one facility to another can be
complicated, involving initiating operations in a new facility and having
customers qualify the new manufacturing lines before shutting down operations in
the original facility. While we believe our restructuring and consolidation
actions will reduce our cost structure, if we encounter delays in moving
operations or completing the exit of our optoelectronics business, we may not
achieve the cost reductions we are expecting. Because of the extensive nature of
our restructuring activities, we may find that even if we complete these
activities as planned, we may not realize all the benefits we expected.



Our revenue and
operating results may fluctuate because we expect to derive most of our revenue
from semiconductor devices and the integrated circuits industry is highly
cyclical, and because of other characteristics of our business, and these
fluctuations may cause our stock price to fall.



We
expect to derive most of our revenue from the sale of integrated circuits.
Because the integrated circuits market segment is highly cyclical, we may
experience declines in our revenue that are primarily related to industry
conditions and not our products. This industry has experienced significant
downturns, often in connection with, or in anticipation of, excess manufacturing
capacity worldwide, maturing product cycles and declines in general economic
conditions, and we are currently experiencing such a downturn.


We
focus primarily on winning competitive selection processes to develop products
for use in our customers equipment. These selection processes can be
lengthy. After winning and beginning a product design for a customer, that
customer may not begin volume production of their equipment for a period of up
to two years, if at all. Due to this lengthy design and development cycle, we
may experience delays from the time we begin incurring expenses until the time
we generate revenue from our products. We have no assurances that our customers
will ultimately market and sell their equipment or that such efforts by our
customers will be successful. Thus, we may never generate any revenue from our
products after incurring significant design and development expenditures.

If
we are not selected by a customer to provide a product, we may experience
significantly lower revenue later, as compared to prior periods with more
revenue from earlier design wins. In addition, sales of our products for
specific customer projects often begin and end abruptly, so revenue may increase
rapidly and later decrease just as quickly. The relative timing of the beginning
and end of our sales and design processes can make our revenues less
predictable.


Fluctuations
in our revenue or operating results could cause our stock price to decline, even
if our results meet expectations. Further, stock prices in our industry have
recently been highly volatile for reasons that sometimes are unrelated to the
performance of the companies in the industry. These broad fluctuations could
adversely affect our stock price.



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



Our
products are highly complex and may contain undetected defects, errors or
failures. These products can only be fully tested when deployed in commercial
applications and other equipment. Consequently, our customers may discover
errors after the products have been deployed. The occurrence of any defects,
errors or failures could result in:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------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| |  |  | cancellation
of orders;
| | - |  | -----------------------

| |  |  | product
returns, repairs or replacements;
| | - |  | -----------------------------------------

| |  |  | diversion
of our resources;
| | - |  | ---------------------------

| |  |  | legal
actions by our customers or our customers end-users;
| | - |  | -----------------------------------------------------------

| |  |  | increased
insurance costs; and
| | - |  | ------------------------------

| |  |  | other
losses to us or to our customers or end users.
| | - |  | ----------------------------------------------------

|Any
of these occurrences could also result in the loss of or delay in market
acceptance of our products and loss of sales, which would harm our business and
adversely affect our revenue and results of operations. We have from time to
time experienced defects and expect to experience defects in the future. Because
the trend in our industry is moving toward even more complex products in the
future, this risk will intensify over time and may result in increased expenses.



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



Our
customer base is highly concentrated. Our top ten end-customers accounted for
approximately 53% of our revenue in fiscal 2002. If any one of our key customers
decides to purchase significantly less from us or to terminate its relationship
with us, our revenue may materially decline. Because our strategy has generally
been to develop long-term relationships with a few key customers in the product
areas in which we focus and we have a long product design and development cycle
for most of our products, we may be unable to replace these customers quickly or
at all. We could lose our key customers or significant sales to our key
customers because of factors beyond our control, such as a significant
disruption in our customers businesses generally or in a specific product
line.

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



In
some of our fields of operation, there are only a limited number of people in
the job market who possess the requisite skills. In the past we have experienced
difficulty in identifying and hiring qualified engineers in many areas of our
business as well as in retaining our current employees. The loss of the services
of any key personnel or our inability to hire new personnel with the requisite
skills could restrict our ability to develop new products or enhance existing
products in a timely manner, sell products to our customers or manage our
business effectively.



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



We
generally sell products pursuant to purchase orders that customers may cancel or
defer on short notice without incurring a significant penalty. Cancellations or
deferrals could cause us to hold excess inventory, which could adversely affect
our results of operations and restrict our ability to fund our operations. If a
customer cancels or defers product shipments, we may incur unanticipated
reductions or delays in our revenue. If a customer refuses to accept shipped
products or does not timely pay for these products, we could incur significant
charges against our income, which could materially and adversely affect our
operating results.



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



Because
the manufacturing costs at our owned and joint venture manufacturing facilities
are relatively fixed, efficient utilization of manufacturing facilities and
manufacturing yields are critical to our results of operations. Some of our
manufacturing facilities have been underutilized in recent periods, which has
reduced our gross margins. Lower than expected manufacturing yields could impair
our gross margins and delay product shipments.


The
manufacture of our products involves highly complex and precise processes,
requiring production in highly controlled and clean environments. Changes in our
manufacturing processes or those of our suppliers or contractors, or their
inadvertent use of defective or contaminated materials, could significantly
reduce our manufacturing yields and product reliability.

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



The
revenue we generate from the licensing of our intellectual property has a high
gross margin compared to the revenue we generate from our integrated circuits
products. Although we have derived less than 6% of our total revenue in recent
years from the licensing of intellectual property, a decline in this licensing
revenue would have a greater impact on our profitability than a similar decline
in revenues from our integrated circuits products.



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



Some
customers will not purchase any of our products, other than limited numbers of
evaluation units, prior to qualification of the manufacturing line for the
product. We may not always be able to satisfy the qualifications. Delays in
qualification can cause a customer to discontinue use of our products and result
in a significant loss of revenue. Because we are consolidating our manufacturing
operations into fewer facilities, the specific facility that manufacturers a
customers product may change, resulting in the customer requiring us to
requalify the product.



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



In
fiscal 2002, we derived 69% of our revenue from sales of our products shipped to
locations outside the United States. We also manufacture a significant portion
of our products outside the United States and are dependent on international
suppliers for many of our parts. We intend to continue to pursue growth
opportunities in both sales and manufacturing internationally. International
operations are subject to a number of risks and potential costs, which could
adversely affect our revenue and results of operations, including:
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| |  |  | our
new brand will not be locally recognized, which will cause us to spend significant
amounts of time and money to build a brand identity;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | unexpected
changes in regulatory requirements;
| | - |  | ----------------------------------------------

| |  |  | inadequate
protection of intellectual property in some countries outside of the United States;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | currency
exchange rate fluctuations;
| | - |  | ------------------------------------

| |  |  | political
and economic instability; and
| | - |  | ---------------------------------------

| |  |  | disruptions
in international air transport systems
| | - |  | --------------------------------------------------

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



We
are subject to a variety of laws relating to the use, disposal, clean-up of, and
human exposure to, hazardous chemicals. Any failure by us to comply with present
and future environmental, health and safety requirements could subject us to
future liabilities or the suspension of production. In addition, compliance with
these or future laws could restrict our ability to expand our facilities or
require us to acquire costly pollution control equipment, incur other
significant expenses or modify our manufacturing processes. If additional
contaminants are discovered or the additional cleanup obligations imposed at
these or other sites, we could be adversely affected.



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



Like
other companies in the semiconductor industry, we are frequently involved in
litigation regarding patent and other intellectual property rights. From time to
time, we receive notices from third parties of potential infringement and
receive claims of potential infringement when we attempt to license our
intellectual property to others. Defending these claims could be costly and time
consuming and would divert the attention of management and key personnel from
other business issues. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement also might require us to enter into costly
royalty or license agreements. However, we may be unable to obtain royalty or
license agreements on terms acceptable to us or at all. In addition, third
parties may attempt to appropriate the confidential information and proprietary
technologies and processes used in our business, which we may be unable to
prevent and which would harm our business and prospects.



We believe that
financing has recently been difficult to obtain for companies in our industry
and if we need additional cash to fund our operations or to finance future
strategic initiatives, we may not be able to obtain it on acceptable terms or at
all.



We
believe that lenders have recently become less willing to extend credit to
companies in the telecommunications and semiconductor industries, making debt
financing difficult to obtain. As described below under Risks Associated
with Our Separation from LucentWe are limited in the amount of stock that
we can issue to raise capital because of potential adverse tax
consequences, in connection with our spin-off from Lucent, we are
significantly restricted in our ability to issue stock in order to raise
capital.


If
we are not able to obtain sufficient funds on acceptable terms, we may not have
sufficient funds to take advantage of market opportunities or to finance future
strategic initiatives, such as to fill gaps in our product portfolio.



We
believe that our cash and cash equivalents will be sufficient to fund our
operations until such time as we are able to generate sufficient cash internally
to fund our operations. If, however, the market for our products is worse than
we expect, we may need additional funds, without which we will have to
reduce our expenditures, which may harm our business.


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



There
are more shares of Class B common stock than Class A common stock outstanding.
Consequently, the Class B common stock may be more liquid than the Class A
common stock. In addition, because the Class B common stock has greater voting
power per share for the election and removal of directors than the Class A
common stock, some investors may prefer the Class B common stock as a means of
investing in our company. The greater potential voting power and liquidity of
the Class B common stock may cause the Class B common stock to trade at a higher
market price than the Class A common stock.



The development and
evolution of markets for our integrated circuits are dependent on factors over
which we have no control. For example, if our customers adopt new or competing
industry standards with which our products are not compatible or fail to adopt
standards with which our products are compatible, our existing products would
become less desirable to our customers and our sales would suffer.



The
emergence of markets for our integrated circuits is affected by a variety of
factors beyond our control. In particular, our products are designed to conform
to current specific industry standards. Our customers may not adopt or continue
to follow these standards, which would make our products less desirable to our
customers and reduce our sales. Also, competing standards may emerge that are
preferred by our customers, which could also reduce our sales and require us to
make significant expenditures to develop new products. To the extent that we are
not able to effectively and expeditiously adapt to new standards our business
will suffer.



Class action
litigation due to stock price volatility or other factors could cause us to
incur substantial costs and divert our managements attention and
resources.



In
the past, securities class action litigation often has been brought against a
company following periods of volatility in the market price of its securities.
Companies in the integrated circuit industry and other technology industries are
particularly vulnerable to this kind of litigation due to the high volatility of
their stock prices. Accordingly, we may in the future be the target of
securities litigation. Any securities litigation could result in substantial
costs and could divert the attention and resources of our management.



Our stock may be
delisted from the New York Stock Exchange if our stock price does not meet the
exchanges continued listing standards.




Our
common stock trades on the New York Stock Exchange. The exchange has a number of
continued listing criteria, including a minimum share price requirement, that a
company must satisfy in order for its securities to continue trading on the
exchange. Under the minimum stock price requirement, the exchange will notify a
company if the average closing price per share of the companys securities
over a 30 consecutive trading-day period is less than $1.00 and will provide the
company with a six-month period to cure the deficiency or the exchange will
begin suspension and delisting proceedings. These proceedings would result in
the companys securities no longer trading on the New York Stock Exchange.
In order to cure the deficiency, at the expiration of the six-month cure period,
both a $1.00 share price and a $1.00 average share price over the preceding 30
trading days must be attained. The exchange notified us in October 2002 that our
common stock did not meet the minimum share price requirement and we are currently
in the six-month cure period. If the deficiency is not cured, the exchange may
delist our shares.


Having
our common stock delisted would likely result in our having to offer to repurchase $410 million of
convertible debt that otherwise would not be due until 2009. Such a repurchase would
significantly reduce the amount of cash available to us to fund our current operations.
Delisting from the New York Stock Exchange could also result in a reduction in the
liquidity of any investment in our common stock and an adverse effect on the trading price
of our common stock. Delisting could also reduce the ability of holders of our common
stock to purchase or sell shares as quickly and as inexpensively as they have done
historically. This lack of liquidity could make it more difficult for us to raise capital
in the future.



We may effect a
reverse stock split and if we do so, our stock price may decline after the
reverse stock split.




In
response to the potential delisting of our common stock due to the failure to
meet the New York Stock Exchanges minimum share price requirement discussed
above, we expect to ask our stockholders to authorize a reverse stock split at
our annual meeting in February 2003. If the reverse stock split is approved by
our stockholders and we effect the reverse stock split, we would reduce the
number of outstanding shares of both our Class A and Class B common stock. With
fewer shares outstanding, we would expect our stock price to increase. While a
reverse stock split may enable us to cure the minimum share price deficiency,
share prices of companies effecting reverse stock splits often decline and we
cannot assure you that our stock price would not decline after a reverse stock
split.



Risks
Related to Our Separation From Lucent



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



Under
Section 355(e) of the Internal Revenue Code, Lucent will recognize a taxable
gain on the distribution of our stock if there are one or more acquisitions of
our stock representing 50% or more of our stock (by vote or value) and the stock
acquisitions are part of a plan or series of related transactions that includes
the distribution. Any shares of our stock acquired within two years before or
after the distribution are presumed to be part of such a plan unless we can
rebut that presumption. If an issuance of our stock causes the distribution to
be taxable to Lucent under Section 355(e), we would be required to indemnify
Lucent against that tax under our tax sharing agreement with Lucent.



The
shares of our Class A common stock issued in our initial public offering are considered to
be part of a plan that includes the distribution, and the shares of our Class A common
stock issued upon the conversion of our 6.5% convertible subordinated notes may also be
considered to be part of a plan that includes the distribution. Assuming that all of the
convertible notes were converted, approximately 46% of our outstanding shares may be
treated as acquired as part of such a plan. As a practical matter, this prevents us from
effecting any significant issuance of our shares if such issuance might be treated as part
of a plan that includes the distribution.


Treasury
Regulations issued on April 24, 2002 provide safe harbors that may be used to
rebut the presumption that shares issued less than two years after the spin-off
are part of a plan that includes the spin-off. However, the application of the
safe harbors is not clear in many respects, and they might not be available to
us for future share issuances. As a result, Section 355(e) may effectively
prevent us from issuing shares to raise capital for at least two years after the
spin-off. However, the safe harbors in these new Treasury Regulations generally
provide that issuances of our stock to our employees pursuant to ordinary course
employee compensation arrangements (such as employee stock purchase plans) will
not be treated as acquisitions of our stock pursuant to a plan that includes the
spin-off.



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



Our
historical financial statements covering periods prior to February 1, 2001, may
not be indicative of our future performance as a stand-alone company. This is
primarily a result of the three factors described below.
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| |  |  | First,
those financial statements reflect allocations, primarily with respect to general
corporate expenses, research expense and interest expense, which may be less than the
expenses we incur as a stand-alone company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Second,
those financial statements do not reflect significant changes that have occurred as a
result of our separation from Lucent, including changes in how we fund our operations,
conduct research and handle tax and employee matters.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Third,
those financial statements include substantial revenue from sales to Lucent. This revenue
may not reflect the pricing, volume or percentage of our sales we would have derived from
Lucent if we had been a stand-alone company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



If
our separate research efforts are not as successful as when we were part of
Lucent, we may not be able to keep pace with the rapid technological change in
our industry and our prospects may be harmed. Many of our products incorporate
technology and manufacturing processes derived from innovations developed by
Lucents Bell Laboratories central research organization. Lucent no longer
provides research and development for us. Our independent research efforts may
not be as successful as the efforts of Bell Laboratories have been historically
and our efforts may require us to increase our expenditures for the same
services over the amounts in our historical financial statements. We may not be
able to attract engineers and other research and development employees as
effectively as Bell Laboratories was able to because of its history, name
recognition and size.

We could incur
significant tax liabilities and payment obligations if Lucent fails to pay the
tax liabilities attributable to Lucent under our tax sharing agreement.



We
have entered into a tax sharing agreement with Lucent that allocates
responsibility for tax liabilities between them and us. For a description of
this agreement, see note 21 to our financial statements in Item 8. Under U.S.
federal income tax laws, Lucent and we are jointly and severally liable for
Lucents federal income taxes attributable to periods prior to and
including Lucents taxable year ended September 30, 2001. This means that
if Lucent were to fail to pay the taxes attributable to it under the tax sharing
agreement for those periods, we may be liable for all or any part of these
liabilities.



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



On
November 21, 2000, and again on December 21, 2000, Lucent brought to the
attention of the staff of the Securities and Exchange Commission matters
relating to its recognition of revenue. Lucent also publicly disclosed these
matters in press releases on those dates. Although Lucent has informed us that
it has no reason to believe that this investigation by the Division of
Enforcement of the Securities and Exchange Commission into these matters
concerns our business and we are not aware of any reason why the investigation
would affect us, it is possible that the results of the investigation may have
an impact on us. Although the investigation could result in no action being
taken by the Securities and Exchange Commission, if an action were taken and the
investigation is found to concern our business, the action could result in
monetary fines or changes in some of our financial and other practices and
procedures that we are unable to foresee at this time.




Item 7A. Quantitative
and Qualitative Disclosures About Market Risk


Risk Management


We
are exposed to market risk from changes in foreign currency exchange rates and
interest rates that could impact our results of operations and financial
position. We manage our exposure to these market risks through our regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. We use derivative financial instruments as
risk management tools and not for speculative purposes. In addition, 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 the risks.


We
use foreign currency forward contracts, and may from time to time use foreign
currency options, to manage the volatility of non-functional currency cash flows
resulting from changes in exchange rates. Foreign currency exchange contracts
are designated for recorded, firmly committed or anticipated purchases and
services. 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. As of September 30, 2002, our primary net
foreign currency market exposures included Singapore dollars, British Pounds
Sterling, and Euros and were not material.

The
fair value of foreign currency exchange contracts is subject to changes in
foreign currency exchange rates. For the purpose 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 contracts. These contracts generally have a duration of
three to six months and are primarily used to hedge firmly committed and
anticipated transactions. The sensitivity analysis excludes the values of
foreign currency denominated receivables and payables 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 foreign currency
exchange spot rates assuming no change in interest rates. For contracts
outstanding as of September 30, 2002 and 2001, a 10% appreciation in
foreign currency exchange rates against the U.S. dollar from the prevailing
market rates would have increased our pre-tax earnings by approximately $3
million and $2 million, respectively. Conversely, a 10% depreciation in these
exchange rates from the prevailing market rates would have decreased our pre-tax
earnings by approximately $3 million and $2 million, respectively. Consistent
with the nature of the economic hedge of foreign currency exchange contracts,
these gains or losses would be offset by corresponding changes in the value of
the underlying instrument or transaction being hedged.


The
model assumes a parallel shift in all foreign currency exchange spot rates.
Exchange rates, however, rarely move in the same direction. The assumption that
all exchange rates change in a parallel manner does not necessarily represent
the actual changes in fair value we would incur under normal market conditions
because all variables other than the specific market risk are held constant.


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.


As
of September 30, 2002, we had $163 million of short-term variable rate debt
outstanding. To manage the cash flow risk associated with this debt, we may from
time to time enter into interest rate swap agreements. There were no interest
rate swap agreements in effect during fiscal 2002 or 2001. As of September 30,
2002, a variation of 100 basis points in the interest rate charged on the
short-term debt would result in a change of approximately $2 million in annual
interest expense.


As
of September 30, 2002, we had outstanding $410 million of fixed rate long-term
convertible notes. The fair value of this debt is sensitive to changes in
interest rates and the price of our Class A common stock. Interest rate changes
and changes in the value of our Class A common stock would result in changes in
the market value of the debt. We perform a sensitivity analysis on our fixed
rate long-term convertible debt to assess the risk of changes in fair value. The
model to determine interest rate sensitivity assumes a hypothetical 150 basis
point parallel shift in interest rates, while keeping the price of our Class A
common stock constant. At September 30, 2002, assuming a 150 basis point
increase in interest rates, the fair value of our fixed rate long-term
convertible debt would decrease by $16 million. Conversely, a 150 basis point
decrease in interest rates at September 30, 2002 would increase the fair value
of our fixed rate long-term convertible debt by $17 million. The model to
determine equity price sensitivity assumes a hypothetical 10% change in the
price of our Class A common stock, while keeping the interest rate constant. At
September 30, 2002, assuming a 10% change in the price of our Class A common
stock, the fair value of our fixed rate long-term convertible debt would change
by $11 million.

Item 8. Financial Statements and Supplementary Data


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

|Consolidated and Combined Financial Statements:                                                                                                                           
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Report of Independent Accountants                                                                                                                                         
|Consolidated and Combined Statements of Operations for the years ended September 30, 2002, 2001 and 2000                                                                  
|Consolidated Balance Sheets as of September 30, 2002 and 2001                                                                                                             
|Consolidated and Combined Statements of Changes in Stockholders Equity/Invested Equity and Total Comprehensive Loss for the years ended September 30, 2002, 2001 and 2000
|Consolidated and Combined Statements of Cash Flows for the years ended September 30, 2002, 2001 and 2000                                                                  
|Notes to Consolidated and Combined Financial Statements                                                                                                                   
|Financial Statement Schedule:                                                                                                                                             
|Schedule IIValuation and Qualifying Accounts for the years ended September 30, 2002, 2001 and 2000                                                                       

|Report
of Independent Accountants


To the Board of Directors and
Stockholders of Agere Systems Inc.:


In
our opinion, the consolidated and combined financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Agere Systems Inc. and its subsidiaries at September 30, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 2002 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
indexpresents fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated and
combinedfinancial 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.


Prior
to its separation from Lucent Technologies Inc. (Lucent) on February
1, 2001 the Company was comprised of businesses which were integrated with the
businesses of Lucent; consequently, as indicated in Note 1, the financial
statement amounts prior to this date have been derived from the consolidated
financial statements and accounting records of Lucent, and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, the Company
relied on Lucent and its other businesses for administrative, management,
research and other services. Accordingly, these financial statements do not
necessarily reflect the financial position, results of operations, and cash
flows of the Company had it been a stand-alone company.


As
discussed in Note 3 to the consolidated and combined financial statements,
effective October 1, 2001, the Company changed its accounting method for the
impairment or disposal of long-lived assets. As discussed in Note 4 to the
consolidated and combined financial statements, effective October 1, 2000, the
Company changed its accounting method for derivative instruments and hedging
activity.


PricewaterhouseCoopers LLP
Florham Park, New Jersey
October 22, 2002

AGERE
SYSTEMS INC. AND SUBSIDIARIES


CONSOLIDATED
AND COMBINED STATEMENTS OF OPERATIONS(dollars in
millions except per share amounts)
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                     | Year EndedSeptember 30, | 
|-------------------------------------------------------------------------------------------------------------------- | ----------------------- | 
|
|REVENUE                                                                                                              |                         | 
|COSTS                                                                                                                |                         | 
|                                                                                                                     |                         | 
|GROSS PROFIT                                                                                                         |                         | 
|                                                                                                                     |                         | 
|OPERATING EXPENSES                                                                                                   |                         | 
|Selling, general and administrative                                                                                  |                         | 
|Research and development                                                                                             |                         | 
|Amortization of goodwill and other acquired intangibles                                                              |                         | 
|Purchased in-process research and development                                                                        |                         | 
|Restructuring and other charges - net                                                                                |                         | 
|Impairment of goodwill and other acquired intangibles                                                                |                         | 
|(Gain) loss on sale of operating assets - net                                                                        |                         | 
|                                                                                                                     |                         | 
|TOTAL OPERATING EXPENSES                                                                                             |                         | 
|                                                                                                                     |                         | 
|OPERATING INCOME (LOSS)                                                                                              |                         | 
|Other income - net                                                                                                   |                         | 
|Interest expense                                                                                                     |                         | 
|                                                                                                                     |                         | 
|Income (loss) before provision for income taxes                                                                      |                         | 
|Provision for income taxes                                                                                           |                         | 
|                                                                                                                     |                         | 
|Loss before cumulative effect of accounting change                                                                   |                         | 
|Cumulative effect of accounting change (net of benefit for income taxes of $2 for the year ended September 30, 2001) |                         | 
|                                                                                                                     |                         | 
|                                                                                                                    
|NET LOSS                                                                                                             |                         | 
|                                                                                                                     |                         | 
|                                                                                                                    
|Basic and diluted loss per share:                                                                                    |                         | 
|Loss before cumulative effect of accounting change                                                                   |                         | 
|Cumulative effect of accounting change                                                                               |                         | 
|                                                                                                                     |                         | 
|Net loss                                                                                                             |                         | 
|                                                                                                                     |                         | 
|Weighted average shares outstandingbasic and diluted(in millions)                                                   |                         | 
|                                                                                                                     |                         | 

|See Notes to Consolidated and Combined Financial Statements.

AGERE
SYSTEMS INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS(dollars in millions except per share amounts)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                                              | September 30, | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------- | 
|
|ASSETS                                                                                                                                                                                                                                                                        |               | 
|CURRENT ASSETS                                                                                                                                                                                                                                                                |               | 
|Cash and cash equivalents                                                                                                                                                                                                                                                     |               | 
|Cash held in trust                                                                                                                                                                                                                                                            |               | 
|Trade receivables, less allowances of $9 and $33 at September 30, 2002 and 2001, respectively                                                                                                                                                                                 |               | 
|Inventories                                                                                                                                                                                                                                                                   |               | 
|Prepaid expense                                                                                                                                                                                                                                                               |               | 
|Other current assets                                                                                                                                                                                                                                                          |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL CURRENT ASSETS                                                                                                                                                                                                                                                          |               | 
|Assets held for sale                                                                                                                                                                                                                                                          |               | 
|Property, plant and equipment - net                                                                                                                                                                                                                                           |               | 
|Goodwill and other acquired intangibles - net of accumulated amortization of $93 and $93 at September 30, 2002 and 2001, respectively                                                                                                                                         |               | 
|Deferred income taxes - net                                                                                                                                                                                                                                                   |               | 
|Other assets                                                                                                                                                                                                                                                                  |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL ASSETS                                                                                                                                                                                                                                                                  |               | 
|                                                                                                                                                                                                                                                                              |               | 
|                                                                                                                                                                                                                                                                             
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                          |               | 
|CURRENT LIABILITIES                                                                                                                                                                                                                                                           |               | 
|Accounts payable                                                                                                                                                                                                                                                              |               | 
|Payroll and related benefits                                                                                                                                                                                                                                                  |               | 
|Short-term debt                                                                                                                                                                                                                                                               |               | 
|Income taxes payable                                                                                                                                                                                                                                                          |               | 
|Restructuring reserve                                                                                                                                                                                                                                                         |               | 
|Other current liabilities                                                                                                                                                                                                                                                     |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL CURRENT LIABILITIES                                                                                                                                                                                                                                                     |               | 
|Postemployment benefits                                                                                                                                                                                                                                                       |               | 
|Pension and postretirement benefits                                                                                                                                                                                                                                           |               | 
|Long-term debt                                                                                                                                                                                                                                                                |               | 
|Other liabilities                                                                                                                                                                                                                                                             |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL LIABILITIES                                                                                                                                                                                                                                                             |               | 
|                                                                                                                                                                                                                                                                              |               | 
|                                                                                                                                                                                                                                                                             
|Commitments and contingencies                                                                                                                                                                                                                                                 |               | 
|                                                                                                                                                                                                                                                                             
|STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                          |               | 
|Preferred stock, par value $1.00 per share, 250,000,000 shares authorized and no shares issued and outstanding                                                                                                                                                                |               | 
|Class A common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 734,785,226 shares issued and outstanding after deducting 4,248 treasury shares issued as of September 30, 2002 and 727,000,107 shares issued and outstanding as of September 30, 2001   |               | 
|Class B common stock, par value $0.01 per share, 5,000,000,000 shares authorized and 907,995,677 shares issued and outstanding after deducting 104,323 treasury shares issued as of September 30, 2002 and 908,100,000 shares issued and outstanding as of September 30, 2001 |               | 
|Additional paid-in capital                                                                                                                                                                                                                                                    |               | 
|Accumulated deficit                                                                                                                                                                                                                                                           |               | 
|Accumulated other comprehensive loss                                                                                                                                                                                                                                          |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                    |               | 
|                                                                                                                                                                                                                                                                              |               | 
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                    |               | 
|                                                                                                                                                                                                                                                                              |               | 

|See Notes to
Consolidated and Combined Financial Statements.

AGERE
SYSTEMS INC. AND SUBSIDIARIES




CONSOLIDATED AND
COMBINED STATEMENTS OF CHANGES IN STOCKHOLDERSEQUITY/INVESTED EQUITY AND TOTAL
COMPREHENSIVE LOSS(dollars in millions)
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                             | Year EndedSeptember 30, | 
|---------------------------------------------------------------------------- | ----------------------- | 
|
|CLASS A COMMON STOCK                                                         |                         | 
|Beginning balance                                                            |                         | 
|Issuance of Class A common stock                                             |                         | 
|Conversion of Class B to Class A common stock                                |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|CLASS B COMMON STOCK                                                         |                         | 
|Beginning balance                                                            |                         | 
|Conversion of Class B to Class A common stock                                |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|OWNERS NET INVESTMENT                                                       |                         | 
|Beginning balance                                                            |                         | 
|Net loss prior to February 1, 2001                                           |                         | 
|Transfers to Lucent Technologies Inc.                                        |                         | 
|Transfers from Lucent Technologies Inc.                                      |                         | 
|Transfer to additional paid-in capital                                       |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|ADDITIONAL PAID-IN CAPITAL                                                   |                         | 
|Beginning balance                                                            |                         | 
|Transfer from owners net investment                                         |                         | 
|Transfers to Lucent Technologies Inc.                                        |                         | 
|Transfers from Lucent Technologies Inc.                                      |                         | 
|Debt transferred from Lucent Technologies Inc.                               |                         | 
|Issuance of common stock - net of expense                                    |                         | 
|Equity-based compensation                                                    |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|ACCUMULATED DEFICIT                                                          |                         | 
|Beginning balance                                                            |                         | 
|Net loss from February 1, 2001                                               |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|ACCUMULATED OTHER COMPREHENSIVE LOSS                                         |                         | 
|Beginning balance                                                            |                         | 
|Minimum pension liability adjustment                                         |                         | 
|Foreign currency translations                                                |                         | 
|Reclassification adjustment for realized foreign currency translation losses |                         | 
|Unrealized gain (loss) on cash flow hedges                                   |                         | 
|Unrealized holding gains                                                     |                         | 
|Reclassification adjustment for realized holding gains                       |                         | 
|                                                                             |                         | 
|Ending balance                                                               |                         | 
|                                                                             |                         | 
|TOTAL STOCKHOLDERS EQUITY/INVESTED EQUITY                                   |                         | 
|                                                                             |                         | 
|                                                                            
|TOTAL COMPREHENSIVE LOSS                                                     |                         | 
|Net loss                                                                     |                         | 
|Other comprehensive income (loss)                                            |                         | 
|                                                                             |                         | 
|TOTAL COMPREHENSIVE LOSS                                                     |                         | 
|                                                                             |                         | 

|See Notes to
Consolidated and Combined Financial Statements.

AGERE
SYSTEMS INC. AND SUBSIDIARIES




CONSOLIDATED
AND COMBINED STATEMENTS OF CASH FLOWS(dollars in
millions)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                     | Year EndedSeptember 30, | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------------------- | 
|
|OPERATING ACTIVITIES                                                                                                                 |                         | 
|Net loss                                                                                                                             |                         | 
|Adjustments to reconcile net loss to net cash (used) provided by operating activities, net of effects of acquisitions of businesses: |                         | 
|Cumulative effect of accounting change                                                                                               |                         | 
|Restructuring expense-net of cash payments                                                                                           |                         | 
|Provision for inventory write-downs                                                                                                  |                         | 
|Depreciation and amortization                                                                                                        |                         | 
|(Benefit) provision for uncollectibles                                                                                               |                         | 
|Provision (benefit) for deferred income taxes                                                                                        |                         | 
|Purchased in-process research and development                                                                                        |                         | 
|Impairment of investments                                                                                                            |                         | 
|Impairment of goodwill and other acquired intangibles                                                                                |                         | 
|Equity earnings from investments                                                                                                     |                         | 
|Gain on sales of investments                                                                                                         |                         | 
|Gain on disposition of businesses                                                                                                    |                         | 
|Amortization of debt issuance costs                                                                                                  |                         | 
|Decrease (increase) in receivables                                                                                                   |                         | 
|Decrease (increase) in inventories                                                                                                   |                         | 
|(Decrease) increase in accounts payable                                                                                              |                         | 
|Decrease in payroll and benefit liabilities                                                                                          |                         | 
|Changes in other operating assets and liabilities                                                                                    |                         | 
|Other adjustments for non-cash items - net                                                                                           |                         | 
|                                                                                                                                     |                         | 
|NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES                                                                                     |                         | 
|                                                                                                                                     |                         | 
|                                                                                                                                    
|INVESTING ACTIVITIES                                                                                                                 |                         | 
|Capital expenditures                                                                                                                 |                         | 
|Proceeds from the sale or disposal of property, plant and equipment                                                                  |                         | 
|Purchases of investments                                                                                                             |                         | 
|Sales of investments                                                                                                                 |                         | 
|Proceeds from disposition of businesses                                                                                              |                         | 
|Acquisitions of businesses - net of cash acquired                                                                                    |                         | 
|Cash held in trust                                                                                                                   |                         | 
|Other investing activities - net                                                                                                     |                         | 
|                                                                                                                                     |                         | 
|NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES                                                                                     |                         | 
|                                                                                                                                     |                         | 
|                                                                                                                                    
|FINANCING ACTIVITIES                                                                                                                 |                         | 
|Transfers from Lucent Technologies Inc.                                                                                              |                         | 
|Payment of credit facility fees                                                                                                      |                         | 
|Proceeds from the issuance of long-term debt - net of expenses                                                                       |                         | 
|Net proceeds from the issuance of short-term debt                                                                                    |                         | 
|Principal repayments of credit facility                                                                                              |                         | 
|Principal repayments on long-term debt                                                                                               |                         | 
|Proceeds from issuance of stock - net of expense                                                                                     |                         | 
|                                                                                                                                     |                         | 
|NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES                                                                                     |                         | 
|                                                                                                                                     |                         | 
|                                                                                                                                    
|Effect of exchange rate changes on cash                                                                                              |                         | 
|Net (decrease) increase in cash and cash equivalents                                                                                 |                         | 
|Cash and cash equivalents at beginning of year                                                                                       |                         | 
|                                                                                                                                     |                         | 
|Cash and cash equivalents at end of period                                                                                           |                         | 
|                                                                                                                                     |                         | 

|See Notes to
Consolidated and Combined Financial Statements.

NOTES TO
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS(dollars in
millions except per share amounts)


1. Background and Basis of Presentation


Background


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


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


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


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


The
Company adopted a rights agreement prior to the completion of the IPO. The
delivery of a share of the Companys common stock currently constitutes the
delivery of a preferred stock purchase right associated with such share. These
rights may have anti-takeover effects in that the existence of the rights may
deter a potential acquiror from making a takeover proposal or a tender offer.


Basis of Presentation


The
consolidated and combined financial statements include amounts prior to February
1, 2001 that have been derived from the consolidated financial statements and
accounting records of Lucent using the historical results of operations and
historical basis of the assets and liabilities of the Companys Businesses.
Management believes the assumptions underlying the consolidated and combined
financial statements are reasonable. However, the consolidated and combined
financial statements that were derived from Lucents financial records may
not necessarily reflect the Companys results of operations, financial
position and cash flows in the future or what its results of operations,
financial position and cash flows would have been had the Company been a
stand-alone company. Because a direct ownership relationship did not exist among
all the various units comprising the Company, Lucents net investment in
the Company is shown in lieu of stockholders equity in the combined
financial statements prior to the Separation. The Company began accumulating
retained earnings (losses) on February 1, 2001, the date on which Lucent
transferred substantially all of the assets and liabilities of the
Companys Businesses to the Company. The formation of the Company and the
transfers of assets and liabilities from Lucent have been accounted for as a
reorganization of entities under common control in a manner similar to a pooling
of interests. The consolidated and combined financial statements include
allocations of certain Lucent expenses, assets and liabilities, including the
items described below.

Prior
to February 1, 2001, general corporate expenses were allocated from Lucent based
on revenue. These allocations were reflected in the selling, general and
administrative, costs and research and development line items in the
consolidated and combined statements of operations. The general corporate
expense allocations were primarily for cash management, legal, accounting, tax,
insurance, public relations, advertising, human resources, and data services.
These allocations amounted to $60 and $178 for fiscal 2001 and 2000,
respectively. Management believes the costs of these services charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed these functions as a stand-alone company.


Prior
to February 1, 2001, research and development expenses included an allocation
from Lucent to fund a portion of the costs of basic research conducted by
Lucents Bell Laboratories. This allocation was based on the number of
individuals conducting basic research who were transferred from Lucents
Bell Laboratories to the Company as part of the Separation. This allocation
amounted to $23 and $66 for fiscal 2001 and 2000, respectively. Management
believes the costs of this research charged to the Company are a reasonable
representation of the costs that would have been incurred if the Company had
performed this research as a stand-alone company.


Prior
to February 1, 2001, interest expense was allocated from Lucent as Lucent
provided financing to the Company and incurred debt at the parent level. This
allocation was based on the ratio of the Companys net assets, excluding
debt, to Lucents total net assets, excluding debt. The allocation amounted
to $32 and $52 for fiscal 2001 and 2000, respectively. Interest expense also
includes interest expense related to the Companys capitalized lease
obligations.


Prior
to the IPO, the Companys income taxes were calculated on a separate tax
return basis. This reflects Lucents tax strategies and is not necessarily
reflective of the tax strategies that the Company would have followed or follows
as a stand-alone company.


2. Summary of Significant Accounting Policies


Principles of Consolidation and Combination


The
consolidated financial statements include all majority-owned subsidiaries in
which the Company exercises control. Investments in which the Company 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.
Investments in which the Company does not exercise significant influence are
recorded at cost (generally less than a 20% interest). All material intercompany
transactions and balances have been eliminated. Prior to the Separation, the
combined financial statements included certain majority owned subsidiaries and
assets and liabilities of the Companys Businesses not owned by the Company
that were transferred to the Company from Lucent on February 1, 2001.


Use of Estimates


The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America (the
U.S.) requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenue and expenses during the period reported. These estimates include
assessing the collectability of accounts receivable, the use and recoverability
of inventory, the realization of deferred tax assets, tax contingencies, pension
and other employee benefits, restructuring reserves, useful lives for
depreciation and amortization periods of tangible and intangible assets,
long-lived asset impairments and allocation of costs by Lucent among others. The
markets for the Companys products are characterized by intense
competition, rapid technological development, evolving standards, short product
life cycles and price erosion, all of which could impact the future
realizability of the Companys assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. Actual results could differ from those
estimates.

Revenue Recognition


Revenue
is derived from sales of products and intellectual property licensing. Revenue
is recognized when persuasive evidence of an arrangement exists, the product has
been delivered and title and risk of loss have been transferred, the sales price
is fixed or determinable and collection of the resulting receivable is
reasonably assured. The Company recognizes revenue from product sales to
distributors when all obligations have been satisfied. The Companys
distributor arrangements generally provide for limited product returns and price
protection. A provision for estimated sales returns and other allowances is
recognized as a reduction of revenue at the time of revenue recognition based
upon historical experience. Revenue from intellectual property licensing is
generally recognized over the license term if the license grants a right to use
patents and technology developed in the future. If the license does not grant a
right to use patents and technology developed in the future, licensing revenue
is generally recognized at the beginning of the license term if the collection
of the resulting receivable is reasonably assured.


Research and Development Costs


Research
and development costs are charged to expense as incurred.


Income Taxes


The
asset and liability approach is used to recognize deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities. A
valuation allowance is established, as needed, to reduce net deferred tax assets
to the amount for which recovery is probable.


Loss Per Share


Basic
and diluted loss per common share for all periods following the IPO is
calculated by dividing net loss by the weighted average number of common shares
outstanding during the period. Due to the Companys net losses, the effect
of potentially dilutive securities or common stock equivalents that could be
issued was excluded from the diluted loss per share calculation due to its
anti-dilutive effect. Prior to the IPO, basic and diluted loss per common share
is calculated by dividing net loss by 1,035,000,000, which is the number of
shares issued to Lucent on August 1, 2000, as retroactively adjusted for the
Recapitalization.


Other Comprehensive Income (Loss)


Total
comprehensive loss includes, in addition to net loss, changes in equity that are
excluded from the consolidated and combined statements of operations and are
recorded directly into a separate section of stockholders equity/invested
equity on the consolidated balance sheets. The Companys accumulated other
comprehensive loss shown on the consolidated balance sheets consists of minimum
pension liability adjustments, foreign currency translation adjustments, and
unrealized gains and losses on cash flow hedges and investment holdings.


Foreign Currency Translation


Balance
sheet accounts of the Companys foreign operations for which the local
currency is the functional currency are translated into U.S. dollars at
period-end exchange rates, while income, expenses and cash flows are translated
at average exchange rates during the period. Translation gains or losses related
to net assets of such operations are shown as a component of accumulated other
comprehensive loss in stockholders equity/invested equity. Gains and
losses resulting from foreign currency transactions, which are transactions
denominated in a currency other than the entitys functional currency, are
included in the consolidated and combined statements of operations.


Cash and Cash Equivalents


The
Company considers all liquid investments with original maturities of ninety days
or less to be cash equivalents.

Inventories


Inventories
are stated at the lower of cost, determined on a first-in, first-out basis, or
market. The Company records inventory provisions, classified within costs, based
on a review of forecasted demand compared with existing inventory levels.


Property, Plant and Equipment


Property,
plant and equipment are stated at cost less accumulated depreciation.
Depreciation and amortization is determined primarily using the straight-line
method over the estimated useful lives of the various asset classes. Equipment
leases qualifying as capital leases are also included in property, plant and
equipment.


Estimated
useful lives range from three to five years for machinery, electronic and other
equipment, and up to forty years for buildings. Major renewals and improvements
are capitalized and minor replacements, maintenance, and repairs are charged to
current operations as incurred. Upon retirement or disposal of assets, the cost
and related accumulated depreciation are removed from the consolidated balance
sheets and any gain or loss is reflected in the consolidated and combined
statements of operations.


Internal Use Software


Certain
costs of computer software developed or obtained for internal use are
capitalized and amortized on a straight-line basis over three years. Costs for
general and administrative, overhead, maintenance and training, as well as the
cost of software that does not add functionality to the existing system, are
expensed as incurred.


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 four to nine 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 Long-lived Assets


Long-lived
assets, including goodwill and other acquired intangibles, are reviewed for
impairment whenever events such as a significant industry downturn, product
discontinuance, plant closures, product dispositions, technological obsolescence
or other changes in circumstances indicate that the carrying amount may not be
recoverable. When such events occur, the Company compares the carrying amount of
the assets to the undiscounted expected future cash flows. If this comparison
indicates that there is an impairment, the amount of the impairment is
calculated using discounted expected future cash flows.


Financial Instruments


The
Company uses various financial instruments, including foreign exchange forward
contracts, to manage and reduce risk to the Company by generating cash flows
which offset the cash flows of certain transactions in foreign currencies or
underlying financial instruments in relation to their amount and timing. The
Companys derivative financial instruments are for purposes other than
trading. The Companys non-derivative financial instruments include letters
of credit.


Investments


Investments
in marketable securities that are available for sale are recorded at fair value.
Fair value is based upon market prices quoted on the last day of the fiscal
year. Unrealized gains and losses related to these securities are excluded from
earnings and are included as a separate component of other comprehensive income
(loss) until such gains or losses are realized. Minority equity investments in
non-publicly traded companies are generally carried at cost. The Company
monitors these investments for impairment and makes appropriate reductions in
carrying values when necessary.

Pension Benefits


The
Company has pension plans covering substantially all of it employees. Depending
on when employees joined the Company, retirement benefits are based on either a
career average or a flat dollar formula.


Postretirement Benefits


The
Company accrues a liability related to postretirement benefits that it expects
to pay to retired employees. These benefits include the continuation of
healthcare and life insurance coverage after employment.


Postemployment Benefits


The
Company accrues a liability related to postemployment benefits that will be paid
to terminated employees.


Reclassifications


Certain
prior year amounts have been reclassified to conform to the fiscal 2002
presentation.


3. Recent Pronouncements


SFAS 142


In
July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS
142 provides guidance on the financial accounting and reporting for acquired
goodwill and other intangible assets. Under SFAS 142, goodwill and indefinite
lived intangible assets will no longer be amortized. Intangible assets with
finite lives will continue to be amortized over their useful lives, which will
no longer be limited to a maximum life of forty years. The criteria for
recognizing an intangible asset have also been revised. SFAS 142 requires that
goodwill be tested for impairment at least annually. The goodwill impairment
test is a two-step process that requires goodwill to be allocated to reporting
units. In the first step, the fair value of the reporting unit is compared to
the carrying value of the reporting unit. If the fair value of the reporting
unit is less than the carrying value of the reporting unit, a goodwill
impairment may exist, and the second step of the test is performed. In the
second step, the implied fair value of the goodwill is compared to the carrying
value of the goodwill and an impairment loss is recognized to the extent that
the carrying value of the goodwill exceeds the implied fair value of the
goodwill. The Company will adopt SFAS 142 effective October 1, 2002. As a
result, the Company has re-assessed the classification and useful lives of its
previously acquired goodwill and other intangible assets. The assessment did not
result in any adjustments to previously recorded amounts. In addition, the
Company has completed the first step of the goodwill impairment test. Since the
carrying value of each of the Companys reporting units did not exceed
their fair value, no goodwill impairment charges are expected upon the adoption
of SFAS 142. At September 30, 2002, the Company had $84 of goodwill that will no
longer be amortized and $17 of other acquired intangible assets that will
continue to be amortized.


SFAS 143


Also
in July 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143). This standard provides the
financial accounting and reporting for the cost of legal obligations associated
with the retirement of tangible long-lived assets. In accordance with SFAS 143,
asset retirement obligations will be recorded at fair value in the period they
are incurred. When the liability is initially recorded, the cost is capitalized
as part of the related long-lived asset and subsequently depreciated over its
remaining useful life. Changes in the liability resulting from the passage of
time are recognized as operating expense. The Company will adopt SFAS 143
effective October 1, 2002 and expects to record a charge as a cumulative effect
accounting adjustment of approximately $5 in its fiscal 2003 statement of
operations. This adjustment represents the depreciation and other operating
expenses that would have been recorded previously if SFAS 143 had been in effect
in prior years.

SFAS 144


In
October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). SFAS 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long Lived-Assets to be Disposed of (SFAS 121),
and the accounting and reporting provisions for the disposal of a segment of a
business contained in APB Opinion No. 30 Reporting the Effects of a
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions. SFAS 144 establishes a
single accounting model for long-lived assets to be disposed of by sale and
broadens the presentation of discontinued operations. Although Agere was not
required to adopt SFAS 144 until the first quarter of fiscal 2003, the Company
elected to adopt this pronouncement effective October 1, 2001. Accordingly, the
Companys prior year consolidated financial statements have been
reclassified for comparative purposes in accordance with the transition guidance
in SFAS 144. The early adoption of SFAS 144 did not have a material effect on
the Companys financial condition or results of operations.


SFAS 146


In
June 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal
Activities (SFAS 146). SFAS 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) set forth in EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). The scope of SFAS 146 also
includes (1) costs related to terminating a contract that is not a capital
lease, (2) termination benefits that employees who are involuntarily terminated
receive under the terms of a one-time benefit arrangement that is not an ongoing
benefit arrangement or an individual deferred-compensation contract and (3)
costs to consolidate facilities or relocate employees. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. However, in
accordance with the transition provisions of SFAS 146, the Company will adopt
this pronouncement effective October 1, 2002. Although the timing of the
liability recognition for new restructuring initiatives will change from the
commitment date to the date the liability is incurred, the Company does not
expect any material impacts on its financial condition or results of operations.
This statement has no effect on the Companys previously announced
restructuring initiatives.


4. Accounting Changes


Effective
October 1, 2000, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), and
its corresponding amendments under SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities  an Amendment of FAS
133 (SFAS 138). SFAS 133 requires the Company to measure all
derivatives, including certain derivatives embedded in other contracts, at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on the Companys rights or obligations under the applicable
derivative contract. For derivatives designated as fair value hedges, the
changes in the fair value of both the derivative instrument and the hedged item
are recorded in earnings. For derivatives designated as cash flow hedges, the
effective portions of changes in fair value of the derivative are reported in
other comprehensive income and are subsequently reclassified into earnings when
the hedged item affects earnings. Changes in fair value of derivative
instruments not designated as hedging instruments and ineffective portions of
hedges are recognized in earnings in the current period. The adoption of SFAS
133 as of October 1, 2000, resulted in a cumulative after-tax increase in net
loss of $4 (net of a tax benefit of $2). The increase in net loss is primarily
due to derivatives not designated as hedging instruments. For fiscal 2002 and
2001, the change in fair market value of derivative instruments was recorded in
other income  net and was not material.


5. Restructuring and Other Charges - Net


Restructuring and Related Expenses


The
Company has announced a number of restructuring and consolidation actions to
improve gross profit, reduce expenses and streamline operations. These actions
include a workforce reduction, rationalization of manufacturing capacity, and
the exit of the optoelectronics business. The Company recorded net restructuring
and related charges of $971 in fiscal 2002, classified within restructuring and
other charges  net. This amount is comprised of charges of $1,098, offset
by credits of $127. The Company recorded restructuring and related charges of
$563 in fiscal 2001.

During
the third quarter of fiscal 2001, the Company announced a workforce reduction of
6,000 employees and actions to resize the business consistent with the market
environment at that time. The workforce reduction spanned various business
functions, operating units and geographic regions and included management and
occupational employees. On December 5, 2001, the Company announced an additional
workforce reduction of 950 positions, affecting primarily management positions
within the Companys product groups, sales organizations and corporate
support functions located in New Jersey and Pennsylvania.


On
January 23, 2002, the Company announced plans to further improve its operating
efficiency by consolidating its facilities including manufacturing, research and
development, business management and administrative facilities in Pennsylvania
and New Jersey. These plans included the elimination of approximately 300
employee positions. In addition to these announced plans, the Company initiated
actions in the third quarter of fiscal 2002 to consolidate its California
operations in Irwindale into its existing Alhambra campus.


On
August 14, 2002, in response to the continuing downturn affecting the
telecommunications industry, the Company announced plans to exit its
optoelectronics business and cease operations at its facilities in
Breinigsville, Pa., Dallas, Texas, Alhambra and Irwindale, California, and
Matamoros, Mexico by no later than June 30, 2003. See Note 24 Subsequent
Events. In addition, the Company will not move its manufacturing
operations from the Reading and Breinigsville, Pa. facilities to the Allentown,
Pa. facility as previously planned and is seeking a buyer for the Reading
property. The Company also plans to consolidate the majority of its remaining
U.S. integrated circuit wafer fabrication operations into its Orlando facility.
These actions are expected to reduce the Companys active workforce by
approximately 4,000 employees by the end of December 2003. The Company continues
to seek a buyer for the Orlando operations and intends to sell the plant as an
ongoing operation, allowing the Company to continue sourcing products from this
facility. If the Company does not find a buyer, it plans to operate that
facility at least through September 2004.


Year
Ended September 30, 2002


The
following table sets forth the Companys restructuring reserves as of
September 30, 2002, and reflects the activity related to the workforce reduction
and the rationalization of manufacturing capacity and other charges affecting
the reserve for fiscal 2002:
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|                                                            |  | Year EndedSeptember 30, 2002 | 
|----------------------------------------------------------- |  | ---------------------------- | 
|
|
|Workforce reduction                                         |  |                              | 
|Rationalization of manufacturing capacity and other charges |  |                              | 
|                                                            |  |                              | 
|Total                                                       |  |                              | 
|                                                            |  |                              | 

|Workforce
Reduction


During
fiscal 2002, the Company recorded restructuring charges of $402 related to
workforce reductions of approximately 5,000 employees. Of the total workforce
reduction charges, $316 represents non-cash charges that consist of the
following: $16 for curtailment charges relating to an acceleration of the prior
service cost of the Companys qualified pension plan as employees are
retiring earlier than actuarially anticipated, $32 for increased charges to the
postretirement medical liability as employees are eligible for retiree health
benefits sooner than actuarially anticipated, and $268 for termination benefits
to certain U. S. employees, including occupational employees covered under the
terms of a collective bargaining agreement. Of the $268 termination benefits,
$103 represents charges incurred as the result of actions of the Company prior
to June 1, 2002 that will be paid from Lucents pension assets while $165
represents charges subsequent to June 1, 2002 that will be paid from the
Companys pension assets.

In
fiscal 2002, the Company recorded workforce related restructuring credits of
$39. Of this amount, $20 represents a reversal of the restructuring reserve
associated with workforce reductions, resulting from severance and benefit cost
estimates that exceeded amounts paid during the second half of calendar 2001.
The original reserve included an estimate of termination pay and benefits for
occupational employees that was based on the average rate of pay and years of
service of the occupational employee pool at risk. The Companys collective
bargaining agreements allow for a period when employees at risk can opt for
positions filled by employees with less seniority. When that period ended, a
series of personnel moves followed that ultimately resulted in lower severance
and benefit payments than originally expected. This was due principally to the
termination of occupational employees with fewer years of service and fewer
weeks of severance entitlement. These personnel moves were substantially
finished at the end of calendar 2001. The balance of $19 represents a non-cash
credit for the decrease in the actuarially calculated severance liability due to
the population decrease that was driven by the various restructuring
initiatives. Severance costs and other exit costs were determined in accordance
with EITF 94-3. The postretirement charge was determined in accordance with SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than
Pensions and the actuarially calculated severance liability credit was
determined in accordance with SFAS No. 112, Employers Accounting for
Postemployment Benefits.


The
Company has completed the workforce reductions announced in fiscal 2001, with
approximately 6,000 employees taken off-roll as of March 31, 2002 and has
separated approximately 1,200 employees as of September 30, 2002 from
initiatives announced in the first and second quarters of fiscal 2002, which are
substantially complete. Moreover, continuing cost reduction initiatives,
including the plans to exit the optoelectronics business and consolidate
manufacturing operations in Orlando, are expected to reduce the Companys
active workforce by approximately 4,000 additional employees by the end of
December 2003.


Rationalization
of Manufacturing Capacity and Other Charges


The
Company recorded restructuring and related charges of $696 in fiscal 2002
relating to the rationalization of under-utilized manufacturing facilities, the
exit of the optoelectronics business and other restructuring related activities.
Of the charges recorded for fiscal 2002, $520 was for asset impairments, $76 for
facility closings, $51 for contract terminations, $9 for additional
depreciation, and $40 for other related costs. The additional depreciation
charges were recognized due to the shortening of estimated useful lives of
certain assets in connection with the planned closing of certain administrative
facilities. The other related costs are for the implementation and integration
of the initiatives and include costs for the relocation and training of
employees and for relocation of equipment.


Of
the asset impairment charges of $520 in fiscal 2002, $353 resulted from actions
associated with the Companys exit of the optoelectronics business of the
Infrastructure Systems segment. Of the remaining $167, $75 was related to
ceasing operations at Reading, $76 was for resizing Orlandos research and
development and manufacturing operations, and $16 was for all other impairments
related to the rationalization of underutilized manufacturing facilities. All
affected assets were classified as held and used. In accordance with SFAS 144,
the carrying amounts of all held and used asset groups were compared to their
undiscounted future cash flows expected to be generated over their estimated
remaining useful lives. Cash flows were projected based upon historical results
and estimates of future performance. In cases where the expected future cash
flows were less than the carrying amounts of the assets, those assets were
considered impaired and were written down to fair value which was determined
using the present value of estimated future cash flows. The impaired assets that
were disposed of other than by sale were written-down to fair value, less costs
of disposal.


The
facility closing charges of $76 in fiscal 2002 consist of $41 due to facility
lease terminations, including non-cancelable leases, and facility restoration
costs of which $20 is associated with the exiting of the optoelectronics
business and $21 is associated with the consolidation of the Pennsylvania and
New Jersey facilities and the consolidation of the majority of the U.S.
integrated circuit manufacturing operations into Orlando, Florida. The balance
of $35 is a non-cash charge for the realization of the cumulative translation
adjustment resulting from the substantial liquidation of the Companys
investment in the legal entity associated with its Madrid, Spain manufacturing
operations, which were sold in fiscal 2002. This charge was recognized in
accordance with EITF Issue No. 01-5, Issue Summary No. 1, Application of
SFAS No. 52, and Foreign Currency Translation, to an Investment Being Evaluated
for Impairment That Will Be Disposed Of.

The
contract termination charges of $51, including a non-cash charge of $5 for the
write-off of prepaid operating lease costs, are principally due to operating
lease termination fees and non-cancelable asset leases associated with the
consolidation of the Pennsylvania and New Jersey facilities and the
consolidation of the majority of the U.S. integrated circuit manufacturing
operations into Orlando, Florida.


The
Company recorded restructuring credits of $88 in fiscal 2002. These credits
consist of $69 for asset impairment adjustments, $6 for facility lease
terminations and facility restoration, $7 for contract terminations and $6 for a
reversal of a reserve that is not needed. The asset impairment adjustments were
due to realizing $40 more proceeds than expected from asset dispositions,
including $25 from the sale of assets associated with the Madrid, Spain
facility. The impairment adjustment also includes $20 due to the redeployment of
assets and $9 from the reversal of a reserve that is not needed. The facility
lease and restoration reversals, as well as the contract termination reversals,
resulted from favorable lease and contract termination negotiations and lower
facility restoration costs than previously reserved.


Restructuring
Reserve Balances as of September 30, 2002


The
Company anticipates that most of the $60 restructuring reserve as of September
30, 2002, relating to workforce reductions, will be paid by the third quarter of
fiscal 2003. The Company also anticipates that the restructuring reserve balance
of $102 relating to the rationalization of manufacturing capacity and other
charges as of September 30, 2002 will be paid as follows: the majority of the
contract terminations of $55 will be paid by the third quarter of fiscal 2003;
facility termination fees and non-cancelable lease obligations of $17 will be
paid over the respective lease terms through 2005; and most of the facility
restoration costs and other costs of $30 will be paid by the end of fiscal 2003.
The Company expects to fund these cash outlays with cash on hand.


Year
Ended September 30, 2001


The
following table sets forth the Companys restructuring reserves as of
September 30, 2001 and reflects the activity related to the workforce reductions
and the rationalization of manufacturing capacity and other charges affecting
the reserve for fiscal 2001:
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|                                                            | September 30,2000 | Year EndedSeptember 30, 2001 | September 30,2001
|----------------------------------------------------------- | ----------------- | ---------------------------- | -----------------
|
|Workforce reduction                                         |                   |                              |                  
|Rationalization of manufacturing capacity and other charges |                   |                              |                  
|                                                            |                   |                              |                  
|Total                                                       |                   |                              |                  
|                                                            |                   |                              |                  

|Workforce
Reduction


The
restructuring initiatives announced in fiscal 2001 resulted in a workforce
reduction of approximately 6,000 employees across various business functions,
operating units and geographic regions, and included management and occupational
employees. The Company recorded a restructuring charge of $177 for fiscal 2001
relating to the termination of approximately 5,500 employees, of which
approximately 4,300 employees were taken off-roll as of September 30, 2001. Of
the $177 charge, $28 represents termination benefits to certain U.S. management
employees that were funded through Lucents pension assets. Severance costs
and other exit costs noted above were determined in accordance with EITF 94-3.

Rationalization
of Manufacturing Capacity and Other Charges


The
Company recorded a restructuring charge of $386 in fiscal 2001 relating to the
rationalization of underutilized manufacturing facilities and other
restructuring related activities. As part of these efforts, the Company
discontinued its manufacturing operations at its chip fabrication plant in
Madrid, Spain and rationalized underutilized manufacturing capacity at its
facilities in Orlando, Florida, and in Allentown, Breinigsville, and Reading,
Pennsylvania. In addition, the Company has consolidated several
satellite-manufacturing sites as well as leased corporate offices. The
restructuring charge for fiscal 2001 includes $37 related to facility closings,
primarily for lease terminations, non-cancelable leases and related costs. It
also includes asset impairment charges of $287 for fiscal 2001 related to
property, plant, and equipment associated with the consolidation of
manufacturing and other corporate facilities. This charge was recognized in
accordance with the guidance on impairment of assets in SFAS 121. The remaining
restructuring charges of $62 for fiscal 2001 are related primarily to contract
terminations.


Separation Expenses


The
Company incurred costs, fees and expenses relating to the Separation. These
costs, fees and expenses were primarily related to legal separation matters,
designing and constructing the Companys computer infrastructure,
information and data storage systems, marketing expenses relating to building a
company brand identity and implementing treasury, real estate, pension and
records retention management services. The Company incurred $7 and $99 of
separation expenses in fiscal 2002 and 2001, respectively, which are included in
restructuring and other charges  net.


6. Exit of Optoelectronics Business


On
August 14, 2002, the Company announced that it will exit its optoelectronics
business. The Company is seeking a buyer for all or parts of this business, but
will discontinue optoelectronics operations no later than June 30, 2003. As a
result of this exit, the Company will discontinue or sell operations in its
facilities in Breinigsville, Pennsylvania; Dallas, Texas; Alhambra and
Irwindale, California; and Matamoros, Mexico. See Note 24 Subsequent
Events.


The
following unaudited pro forma consolidated statement of operations has been
prepared as if the Companys exit from the optoelectronics business
occurred on October 1, 2001. The adjustments included in the statement of
operations reflect revenues, costs and expenses directly associated with the
optoelectronics business, but excludes intellectual property revenues and
allocations of corporate expenses such as general corporate overhead, interest
and taxes. The unaudited pro forma consolidated statement of operations does not
purport to represent the results of operations had the exit from the
optoelectronics business occurred on October 1, 2001 or to project future
financial performance for any future period. The unaudited pro forma adjustments
are based upon available information and certain assumptions that the Company
believes are reasonable. An unaudited pro forma consolidated balance sheet is
not provided since the exit of the optoelectronics business does not have a
material impact to the Companys balance sheet as of September 30, 2002.

Unaudited
Proforma Consolidated Statement of OperationsYear Ended
September 30, 2002(dollars in millions except per share amounts)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   | Historical | Adjustments | Pro Forma
|------------------------------------------------------------------ | ---------- | ----------- | ---------
|REVENUE                                                            |            |             |          
|COSTS                                                              |            |             |          
|                                                                   |            |             |          
|GROSS PROFIT (LOSS)                                                |            |             |          
|                                                                   |            |             |          
|OPERATING EXPENSES                                                 |            |            
|Selling, general and administrative                                |            |             |          
|Research and development                                           |            |             |          
|Amortization of goodwill and other acquired intangibles            |            |             |          
|Restructuring and other charges - net                              |            |             |          
|Impairment of goodwill and other acquired intangibles              |            |             |          
|(Gain) loss on sale of operating assets - net                      |            |             |          
|                                                                   |            |             |          
|TOTAL OPERATING EXPENSES                                           |            |             |          
|                                                                   |            |             |          
|OPERATING LOSS                                                     |            |             |          
|Other income - net                                                 |            |             |          
|Interest expense                                                   |            |             |          
|                                                                   |            |             |          
|Loss before provision for income taxes                             |            |             |          
|Provision for income taxes                                         |            |             |          
|                                                                   |            |             |          
|NET LOSS                                                           |            |             |          
|                                                                   |            |             |          
|                                                                  
|Basic and diluted loss per share                                   |            |             |          
|                                                                   |            |             |          
|Weighted average shares outstandingbasic and diluted(in millions) |            |             |          
|                                                                   |            |             |          

|7. Impairment of Goodwill and Other Acquired Intangibles


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


As
a result of these assessments, the Company determined that an impairment of
goodwill and other acquired intangibles existed related to certain of the
Companys acquisitions. During fiscal 2002, the Company recorded a charge
to reduce goodwill and other acquired intangibles of $220, consisting of $113
and $107 related to Ortel Corporation and Herrmann Technology, Inc.,
respectively. During fiscal 2001, the Company recorded a charge to reduce
goodwill and other acquired intangibles of $2,762, consisting of $2,220, $275,
$240 and $27 related to Ortel, Herrmann, Agere, Inc. and Enable Semiconductor,
respectively.


8. Debt


Convertible Subordinated Notes


On
June 19, 2002, the Company issued $410 of 6.5% Convertible Subordinated Notes
due December 15, 2009 (the Notes). The Company received proceeds of
$396 in connection with this offering, net of $14 in underwriting fees and other
expenses, which have been deferred and will be amortized to interest expense
over the term of the Notes.

Interest
on the Notes accrues at the rate of 6.5% per annum and is payable semi-annually
on June 15 and December 15 of each year, beginning on December 15, 2002. The
Notes can be converted into shares of Class A common stock at an initial price
of $3.3075 per share, subject to adjustment in certain events, at any time prior
to maturity, unless previously redeemed or repurchased by the Company. The
Company may redeem the Notes in whole or in part at any time on or after June
20, 2007. In addition, upon a fundamental change in the Company, which includes a change
of control or our Class A common stock not listed for trading on the New York Stock
Exchange nor approved for trading on the NASDAQ National Market, the Company may be
required to repurchase the Notes at a price equal to 100% of the principal amount of the
Notes plus any accrued and unpaid interest. The Notes are unsecured subordinated
obligations and will be subordinated in right of payment to all the Companys
existing and future senior debt.



Accounts Receivable Securitization



On
January 22, 2002, Agere Systems Inc. and certain of its subsidiaries entered
into a securitization transaction relating to certain accounts receivable. As
part of the transaction, Agere Systems Inc. and certain of its subsidiaries
irrevocably transfer accounts receivable on a daily basis to a wholly-owned,
fully consolidated, bankruptcy-remote subsidiary, Agere Systems Receivables
Funding LLC (ASRF). ASRF has entered into a loan agreement with
certain financial institutions, pursuant to which the financial institutions
agreed to make loans to ASRF secured by the accounts receivable. The financial
institutions have commitments under the loan agreement of up to $200; however
the amount the ASRF can actually borrow at any time depends on the amount and
nature of the accounts receivable that the Company has transferred to ASRF. The
loan agreement expires on January 21, 2003. See Note 24 Subsequent
Events.




As
of September 30, 2002, ASRF had borrowings of $163 outstanding under this
agreement. The majority of the Companys accounts receivable are required
to be pledged as security for the outstanding loans even though some of those
receivables may not qualify for borrowings. As of September 30, 2002, $217 of
gross receivables was pledged as security for the outstanding loans. ASRF
pays interest on amounts borrowed under the agreement based on one-month LIBOR.
The weighted average annual interest rate on amounts borrowed at September 30,
2002 was 1.8%. In addition, ASRF pays an annual 1.5% commitment fee on
the total loan commitment of $200.



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


Credit Facility


On
April 2, 2001, in connection with the IPO, the Company assumed $2,500 of
short-term borrowings from Lucent under a credit facility. The Company did not
receive any of the proceeds of this short-term debt. On October 4, 2001, the
Company amended this credit facility. In connection with the amendment, the
Company repaid $1,000 of the $2,500 then outstanding, permanently reduced the
size of the facility to $1,500, and extended the maturity date from February 22,
2002 to September 30, 2002. The Company also paid $21 in fees in connection with
the amendment, which were amortized over the life of the facility. On September
30, 2002, the credit facility expired in accordance with its terms. Prior to its
expiration, the Company had completely repaid all borrowings under the facility
and had no amounts outstanding.


Other Debt


The
remainder of the Companys debt relates to obligations under capitalized
leases. See Note 22 Commitments and Contingences  Leases for
information regarding the future minimum lease payments under non-cancelable
leases.


9. Divestitures of Businesses


Sale of FPGA Business


On
January 18, 2002, the Company completed the sale of certain assets and
liabilities related to the field-programmable gate array (FPGA)
business of the Infrastructure Systems segment to Lattice Semiconductor
Corporation (Lattice) for $250 in cash. The transaction included the
Companys general-purpose ORCA® FPGA product portfolio,
field-programmable system chip product portfolio and related software design
tools. As part of the transaction, approximately 100 employees transferred to
Lattice. The Company recognized a gain of $243 from the sale, which is included
in (gain) loss on sale of operating assets  net.

Sale of Wireless Local Area Network Equipment Business


On
August 5, 2002, the Company completed the sale of certain assets and liabilities
of the 802.11 wireless local area network equipment business of the Client
Systems segment, including its ORiNOCO® product family, to Proxim
Corporation (Proxim) for $65 in cash. As part of the sale,
approximately 150 employees transferred to Proxim. In addition, the Company and
Proxim have entered into a three-year strategic supply agreement under which the
Company will provide chips, modules and cards to Proxim as needed, a license
agreement for Agere technology used in the ORiNOCO business and a patent
cross-license agreement for their respective patent portfolios which resulted in
the dismissal of patent-related litigation between the two companies. The
Company recognized a gain of $58 from the sale, which is included in (gain) loss
on sale of operating assets  net.


Sale of Analog Line Card Business


On
September 30, 2002, the Company completed the sale of certain assets and
liabilities of the analog line card business of the Infrastructure Systems
segment to Legerity, Inc. (Legerity) for $70 in cash. The sale
consists of certain products, technology, intellectual property and equipment
related to the analog line card business, which provides integrated circuits
used in telephone network equipment. As part of the transaction, approximately
40 employees transferred to Legerity. In addition, through a transitional supply
agreement, the Company is obligated to supply chips for Legerity through early
2003. The Company will defer any gain that may be recognized on the sale until
the Company has satisfied all of it obligations to Legerity. As of September 30,
2002, a deferred gain of $68 has been recorded in other current liabilities.


10. Acquisitions


The
following table presents information about certain acquisitions in fiscal 2000.
No significant acquisitions occurred during fiscal 2002 and 2001. All the
acquisitions were accounted for under the purchase method of accounting, and the
acquired technology valuation included existing technology, purchased in-process
research and development (IPRD) and other intangibles. IPRD charges
were recorded in the quarter in which the transaction was completed. The
consolidated and combined financial statements include the results of operations
and the estimated fair value of assets and liabilities assumed from the
respective dates of acquisitions. The acquired entities are 100% owned.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |  |  |      |  |  | Amortization Period (in years)
|----------------- |  |  |  | ---- |  |  | ------------------------------
|
|Herrmann (1)      |  |  |  | 6/00 |  |  | $   432                       
|                 
|Ortel (2)         |  |  |  | 4/00 |  |  | 2,998                         
|                 
|Agere, Inc. (3)   |  |  |  | 4/00 |  |  | 377                           
|                 
|Assets of VTC (4) |  |  |  | 3/00 |  |  | 104                           

|
|

|(1) |  | Herrmann
Technology, Inc. was a developer and manufacturer of passive optical filters that could
be used in conjunction with active optoelectronic components. The purchase price was paid
in Lucent common stock and options.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Ortel Corporation was a developer and manufacturer of optoelectronic components
used in fiber optic systems for cable television and data communications
networks. The purchase price was paid in Lucent common stock and options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Agere,
Inc. was a developer of network processor integrated circuits. The purchase price was
paid in Lucent common stock and options.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | VTC
Inc. was a supplier of integrated circuits to computer hard disk drive manufacturers. The
purchase price was paid in cash.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|In
connection with the acquisition of Herrmann, certain former stockholders of
Herrmann also received 677,019 additional shares of Lucent common stock based on
retention and the achievement of specified milestones.


In
connection with the acquisition of substantially all the assets of VTC,
stockholders of VTC also received additional cash consideration of $50 as a
result of meeting certain performance measures. The $50 payment resulted in
additional goodwill.


Included
in the purchase price for the above acquisitions was IPRD, which was a non-cash
charge to earnings for technology that 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 utilizing 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, gross
margins and expense levels for similar products.


Management
is primarily responsible for estimating the fair value of the assets and
liabilities acquired. 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.


During
fiscal 2002 and 2001, the Company determined that there was an impairment to
some of the goodwill and other acquired intangibles related to the acquisitions
of Ortel, Herrmann, Agere and Enable. See Note 7 Impairment of Goodwill
and Other Acquired Intangibles.


If
the acquisition of Ortel had occurred on October 1, 1999, the pro forma income
statement would have reflected revenues of $4,760 and income before cumulative
effect of accounting change of $48 for fiscal 2000. Pro forma adjustments to
loss before cumulative effect of accounting change include the impact of a full
year of amortization of goodwill and other acquired intangibles but exclude the
effect of IPRD of $307 for fiscal 2000. These unaudited amounts are presented
for information purposes only and are not necessarily indicative of the results
of future operations or results that would have been achieved had this
acquisition taken place at the beginning of fiscal 2000.


11. Investment in Silicon Manufacturing Partners


In
December 1997, the Company entered into a joint venture, called Silicon
Manufacturing Partners Pte Ltd. (SMP), with Chartered Semiconductor
Manufacturing Ltd. (Chartered Semiconductor), a leading
manufacturing foundry for integrated circuits, to operate a 54,000 square foot
integrated circuit manufacturing facility in Singapore. The Company owns a 51%
equity interest in this joint venture, and Chartered Semiconductor owns the
remaining 49% equity interest. The Companys 51% interest in SMP is
accounted for under the equity method due to Chartered Semiconductors
participatory rights under the joint venture agreement. Under the joint venture
agreement, each partner is entitled to the margins from sales to customers
directed to SMP by that partner, after deducting their respective share of the
overhead costs of SMP. Accordingly, SMPs net income (loss) is not expected
to be shared in the same ratio as equity ownership. The Company recognized
equity earnings of $40, $54 and $0 in fiscal 2002, 2001 and 2000, respectively.

The
following table shows the condensed balance sheets and statements of operations
of SMP:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | September 30, | 
| | ------------- | 
|
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 

| | Year Ended September 30, | 
| | ------------------------ | 
|
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|Effective
January 1, 2001, SMP adopted SFAS 133 and its corresponding amendments under
SFAS 138. SMP has entered into interest rate swaps, which have been designated
as cash flow hedges, to manage interest rate risk from its floating interest
rate debt and has recorded the unrealized gain or loss from these hedges as a
separate component of other comprehensive income (loss). The Company has a 51%
equity interest in these transactions and, as a result, recorded an unrealized
gain of $3 and an unrealized loss of $13 in other comprehensive income (loss) in
fiscal 2002 and 2001, respectively. The Companys investment in SMP was
$179 and $136 at September 30, 2002 and 2001, respectively, and is recorded in
other assets.


12. Available-for-Sale Securities


The
Companys investments in marketable securities are classified as
available-for-sale. The fair market value of available-for-sale
securities included in the consolidated balance sheet was $41 as of September
30, 2001 and the Company had no available-for-sale securities as of September
30, 2002 and 2000. The unrealized gain recorded as a separate component of other
comprehensive income (loss) for fiscal 2001 was $30. The Company sold its
available-for-sale investment in fiscal 2002 for $49 and recognized a gain of
$38.


13. Supplementary Financial Information


Statement of Operations Information


The
Company recorded inventory provisions classified within costs of $81, $409 and
$29 in fiscal 2002, 2001 and 2000, respectively. These amounts are calculated in
accordance with the Companys inventory valuation policy, which is based on
a review of forecasted demand compared with existing inventory levels.


The
Company recorded increased depreciation of $69 in fiscal 2002, $60 of which is
recorded in costs and $9 of which is recorded in restructuring and other charges
 net. The increased depreciation was due to a change in accounting
estimate as a result of shortening the estimated useful lives of certain assets
in connection with the Companys restructuring activities. This additional
depreciation is reflected in net loss and resulted in a $.04 per share loss in
fiscal 2002.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                               | Year EndedSeptember 30, | 
|-------------------------------------------------------------- | ----------------------- | 
|
|INCLUDED IN COSTS AND OPERATING EXPENSES:                      |                         | 
|Depreciation and amortization of property, plant and equipment |                         | 
|                                                               |                         | 
|                                                              
|OTHER INCOME - NET:                                            |                         | 
|Interest income                                                |                         | 
|Gain (loss) on foreign currency transactions                   |                         | 
|Gain on sales of investments                                   |                         | 
|Impairment of investments                                      |                         | 
|Equity earnings from investments                               |                         | 
|Other income (loss)                                            |                         | 
|                                                               |                         | 
|Other income - net                                             |                         | 
|                                                               |                         | 

|Balance Sheet Information


As
of September 30, 2002, the Company has $16 of cash held in trust in support of
obligations of the Companys captive insurance company.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | September 30, | 
|----------------------------------------------- | ------------- | 
|
|INVENTORIES                                     |               | 
|Completed goods                                 |               | 
|Work in process                                 |               | 
|Raw materials                                   |               | 
|                                                |               | 
|Inventories                                     |               | 
|                                                |               | 
|                                               
|ASSETS HELD FOR SALE:                           |               | 
|Land and improvements                           |               | 
|Buildings and improvements                      |               | 
|Machinery, electronic and other equipment       |               | 
|                                                |               | 
|Total assets held for sale                      |               | 
|Less: accumulated depreciation and amortization |               | 
|                                                |               | 
|Assets held for sale                            |               | 
|                                                |               | 
|                                               
|PROPERTY, PLANT AND EQUIPMENTNET               |               | 
|Held and Used:                                  |               | 
|Land and improvements                           |               | 
|Buildings and improvements                      |               | 
|Machinery, electronic and other equipment       |               | 
|                                                |               | 
|Total property, plant and equipment             |               | 
|Less: accumulated depreciation and amortization |               | 
|                                                |               | 
|Property, plant and equipmentnet               |               | 
|                                                |               | 

|At
September 30, 2001, property, plant and equipment held for sale was related to
the Companys manufacturing operations at its chip fabrication plant in
Madrid, Spain.


Cash Flow Information


Prior
to the Separation, interest and income taxes were paid by Lucent on behalf of
the Company and do not necessarily reflect what the Company would have paid had
it been a stand-alone company. Following the Separation, the Company began to
pay interest and income tax expenses. Cash paid for interest was $71 and $84 for
fiscal 2002 and 2001, respectively. Cash paid for income taxes was $38 and $52
for fiscal 2002 and 2001, respectively.

Non-cash
transactions in fiscal 2002 with Lucent resulted in a net increase to additional
paid-in capital of $227. The increase is primarily the result of activity
related to pension and postretirement benefits. In fiscal 2001, transfers from
Lucent included a $2,500 decrease to additional paid-in capital to reflect the
transfer of the credit facility; Agere did not receive any of the proceeds. In
fiscal 2000, a $3,807 increase in owners net investment was recorded to
reflect the Ortel, Herrmann and Agere, Inc. acquisitions that were made with
Lucent common stock and options.


Capital
lease obligations of $80 were entered into in fiscal 2002, for the lease of
semiconductor manufacturing equipment and other assets.


Acquisitions
of Businesses


Shown
below is the impact on cash flows related to the acquisition of businesses for
cash in the fiscal years presented.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year EndedSeptember 30, | 
| | ----------------------- | 
|
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 

|14. Income Taxes


The
following table presents the principal reasons for the difference between the
effective tax rate and the U.S. federal statutory income tax rate.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year EndedSeptember 30, | 
| | ----------------------- | 
|
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 

|(1) Non-tax deductible IPRD and
amortization of goodwill.


The
fiscal 2002 and 2001 rates include the impact of recording a charge of
approximately $630 and $553, respectively, to increase the valuation allowance
for deferred tax assets. A full valuation allowance has been recorded for fiscal
2002 and 2001.

The
following table presents the U.S. and foreign components of income (loss) before
income taxes and the provision for income taxes.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year EndedSeptember 30, | 
| | ----------------------- | 
|
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 
| |                         | 

|As
of September 30, 2002, the Company had total federal and state net operating
loss carryforwards (tax-effected) of approximately $740, and federal research
and development credit carryforwards of approximately $35, the majority of which
expires in fiscal 2022.


The
components of deferred tax assets and liabilities at September 30, 2002 and 2001
are as follows:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | September 30, | 
| | ------------- | 
|
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 
| |               | 

|The
Company has not provided for U.S. deferred income taxes or foreign withholding
taxes on $290 and $423 of undistributed earnings of its non-U.S. subsidiaries as
of September 30, 2002 and 2001, respectively, because these earnings are
intended to be reinvested indefinitely.

15. Comprehensive Income (Loss)


Total
comprehensive loss represents net loss plus the results of certain equity
changes not reflected in the consolidated and combined statements of operations.
The components of accumulated other comprehensive loss are shown below.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | ForeignCurrencyTranslation | UnrealizedHoldingGains | UnrealizedGains(Losses) onCash FlowHedges | MinimumPensionLiabilityAdjustment | TotalAccumulatedOtherComprehensiveIncome (Loss)
|--------------------------------- | -------------------------- | ---------------------- | ----------------------------------------- | --------------------------------- | -----------------------------------------------
|Ending balance September 30, 1999 |                            |                        |                                           | $   (17                           | )                                              
|Fiscal 2000 change                |                            |                        |                                           | (35                               | )                                              
|                                  |                            |                        |                                           |                                   |                                                
|Ending balance September 30, 2000 |                            |                        |                                           | (52                               | )                                              
|Fiscal 2001 change                |                            |                        |                                           | 26                                |                                                
|                                  |                            |                        |                                           |                                   |                                                
|Ending balance September 30, 2001 |                            |                        |                                           | (26                               | )                                              
|Fiscal 2002 change                |                            |                        |                                           | 32                                |                                                
|                                  |                            |                        |                                           |                                   |                                                
|Ending balance September 30, 2002 |                            |                        |                                           | $      6                          |                                                
|                                  |                            |                        |                                           |                                   |                                                

|The
foreign currency translation adjustments are not currently adjusted for income
taxes because they relate to indefinite investments in non-U.S. subsidiaries.
The unrealized gains (losses) on cash flow hedges are related to hedging
activities by SMP and there are no income taxes provided as they relate to an
equity method investee. There were also no income taxes provided for the
unrealized holding gains on investments and the minimum pension liability
adjustment due to the recording of a full valuation allowance against U.S. net
deferred tax assets.


16. Stock Compensation Plans


Agere
has stock-based compensation plans under which employees and outside directors
receive stock options and other equity-based awards. The plans provide for the
granting of stock options, performance awards, restricted stock awards, cash
awards, stock appreciation rights and other stock unit awards. The Company has
authorized a total of 362 million shares for issuance under these plans. At
September 30, 2002, awards relating to 127,092,621 shares were outstanding and
234,907,379 shares remain available for the grant of awards under these plans.
These shares can be either Class A or Class B common stock. All awards granted
through September 30, 2002 under the stock-based compensation plans were related
to Class A common stock. During fiscal 2002 and 2001, employees of the Company
were granted stock options and other equity-based awards under Ageres 2001
Long-Term Incentive Plan. Agere stock options are granted with an exercise price
equal to 100% of the market value of a share of common stock on the date of the
grant, have seven-year terms, and generally vest no later than four years from
the date of grant.


Employees
of the Company were also granted stock options and other equity-based awards
under Lucent stock-based compensation plans, generally before the IPO. In
connection with certain of the Companys acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for Lucents common stock effective at the acquisition date.
On June 1, 2002, at the time of the Distribution, awards outstanding under
Lucents stock-based compensation plans and held by Company employees were
converted to Company stock-based awards. The pre-converted Lucent stock options
generally were granted with an exercise price equal to 100% of the market value
of a share of common stock on the date of grant, had two to ten year terms and
vested no later than four years from the date of grant. The Company stock
options and other awards, as converted or adjusted, have the same vesting
provisions, option periods, and other terms and conditions as the Lucent stock
options and awards they replaced. The number of shares covered by, and the
exercise prices of each stock option were adjusted so that immediately following
conversion, each option had the same ratio of the exercise price per share to
the market value per share, and the same aggregate difference between market
value and exercise price as the Lucent stock options immediately prior to the
conversion. No new measurement date occurred upon conversion of the stock
options. In connection with the Distribution, Lucent stock options held by
Company employees were converted into Agere stock options for a total of
57,138,106 shares of Class A common stock.

Agere
maintains an Employee Stock Purchase Plan (the ESPP) with
consecutive offering periods, each consisting of four purchase periods of
approximately six months in length. The first offering period commenced on March
27, 2001 and ends April 30, 2003. Subsequent offering periods will run generally
for 24 months beginning May 1 of every other year. Under the terms of the ESPP,
participating employees may have up to 10% of eligible compensation (subject to
certain limitations on the number of shares and fair market value of shares that
may be acquired each purchase period) deducted from their pay to purchase the
Companys common stock. The per share purchase price is equal to 85% of the
lower of either the market price on the employees entry date for the
current offering period, or the last trading day of each purchase period. The
amount that may be offered pursuant to this plan is 85 million shares. Through
September 30, 2002, 4,553,052 shares had been purchased under the ESPP and
80,446,948 shares remained available for purchase.


Agere
has adopted the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation and, as permitted under SFAS No. 123, applies
Accounting Principles Board Opinion (APB) No. 25 and related
interpretations in accounting for its plans. Compensation expense recorded under
APB No. 25, which uses the intrinsic value method, was $3, $4 and $1 for the
years ended September 30, 2002, 2001 and 2000, respectively. If Agere had
elected to adopt the optional recognition provisions of SFAS No. 123, which uses
the fair value-based method, for its stock option plans and ESPP, net loss for
the Company would have been changed to the pro forma amounts indicated below:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ended September 30, | 
| | ------------------------ | 
|
| |                          | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|
|

|(1) |  | The
pro forma amounts shown above include the fair values of all Agere stock options,
including Lucent options that were converted to Agere options at the Distribution date.
Also included is the fair value of the option embedded in the Agere shares under the ESPP.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
fair value of each stock option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following assumptions:
|-----------------------------------------------------------------------------------------------------------------------------------------------------

| | Year Ended September 30, | 
| | ------------------------ | 
|
| |                          | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 
|
| |                          | 
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|n/a - not applicable


Presented
below is a summary of the status of the Lucent stock options held by Company
employees prior to the Distribution and the related transactions for the eight
months ended May 31, 2002 and the years ended September 30, 2001 and 2000. Also
presented below is a summary of the status of Agere stock options and related
transactions for fiscal years 2002 and 2001. The Lucent stock option activity is
not necessarily indicative of what the activity would have been had Agere been a
separate stand-alone company during the periods presented, or what the activity
may be in the future.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Shares(000s) |                                                                          | WeightedAverageExercise Price | 
| |  | ------------- | ------------------------------------------------------------------------ | ----------------------------- | 
| |  |               | LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999                         |                               | 
| |  |               | Granted or Assumed (1)                                                   |                               | 
| |  |               | Exercised                                                                |                               | 
| |  |               | Forfeited or Expired                                                     |                               | 
| |  |              
| |  |               | LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000                         |                               | 
| |  |               | Avaya Inc. spin-off adjustments (2)                                      |                               | 
| |  |              
| |  |               | LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000                         |                               | 
| |  |               | Granted or Assumed (1)                                                   |                               | 
| |  |               | Exercised                                                                |                               | 
| |  |               | Forfeited or Expired                                                     |                               | 
| |  |              
| |  |               | LUCENT OPTIONS OUTSTANDING AT SEPTEMBER 30, 2001                         |                               | 
| |  |               | Granted                                                                  |                               | 
| |  |               | Exercised                                                                |                               | 
| |  |               | Forfeited or Expired                                                     |                               | 
| |  |              
| |  |               | LUCENT OPTIONS OUTSTANDING AT MAY 31, 2002                               |                               | 
| |  |               | Agere spin-off adjustments (3)                                           |                               | 
| |  |              
| |  |               | AGERE OPTIONS SUBSTITUTED FOR LUCENT OPTIONS,OUTSTANDING AT JUNE 1, 2002 |                               | 
| |  |              
|
| |  |               | AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000                          |                               | 
| |  |               | Granted                                                                  |                               | 
| |  |               | Exercised                                                                |                               | 
| |  |               | Forfeited or Expired                                                     |                               | 
| |  |              
| |  |               | AGERE OPTIONS OUTSTANDNG AT SEPTEMBER 30, 2001                           |                               | 
| |  |               | Granted                                                                  |                               | 
| |  |               | Agere options substituted for Lucent options                             |                               | 
| |  |               | Exercised                                                                |                               | 
| |  |               | Forfeited or Expired                                                     |                               | 
| |  |              
| |  |               | AGERE OPTIONS OUTSTANDING AT SEPTEMBER 30, 2002                          |                               | 
| |  |              

|
|

|(1) |  | Includes
options converted in acquisitions.
|--- |  | -------------------------------------------

|(2) |  | Effective
with the spin-off of Avaya Inc. on September 30, 2000, the number of Lucent shares
covered by each outstanding option was adjusted and all exercise prices were decreased to
preserve the economic values of the options that existed prior to the spin-off.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Effective
with the Distribution on June 1, 2002, the outstanding Lucent options were converted to
Agere options. The number of Agere shares covered by substituted options was adjusted and
all exercise prices were decreased immediately following the Distribution date to
preserve the economic values of the options that existed prior to the Distribution.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
weighted average fair value of the Agere stock options, and Lucent stock options
held by Agere employees prior to the Distribution, was calculated using the
Black-Scholes option-pricing model. The weighted average fair value of Agere
stock options granted during fiscal 2002 and 2001 was $2.17 and $2.43 per share,
respectively. The weighted average fair value of stock options granted by Lucent
during fiscal 2001 and 2000 was $7.36 and $15.88 per share, respectively.

The following table
summarizes the status of Agere stock options outstanding at September 30, 2002:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock Options Outstanding |  | Stock Options Exercisable | 
| | ------------------------- |  | ------------------------- | 
|
| |                           |  | $0.08 to $5.15            | 
| |                           |  | $5.16 to $5.85            | 
| |                           |  | $5.86 to $6.00            | 
| |                           |  | $6.01 to $10.30           | 
| |                           |  | $10.31 to $15.45          | 
| |                           |  | $15.46 to $25.75          | 
| |                           |  | $25.76 to $36.00          | 
| |                           |  | $36.01 to $41.25          | 
| |                           |  | $41.26 to $51.56          | 
| |                           |  |                           | 
|
| |                           |  | Total                     | 
| |                           |  |                           | 

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

| | Year Ended September 30, | 
| | ------------------------ | 
|
| |                          | 
| |                          | 
| |                          | 
| |                          | 

|
|

|(1) |  | Following the Distribution, the remaining 434 Lucent other stock unit awards
were converted to 649 Agere other stock unit awards, with a weighted average
market value at grant date of $11.73.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17. Loss Per Common Share


Basic
and diluted loss per common share is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. As a
result of the net loss reported for the years ended September 30, 2002 and 2001,
35,076,790 potential common shares related to the convertible notes have been
excluded from the fiscal 2002 calculation of diluted loss per share and 2,229
potential common shares related to other stock units have been excluded from the
fiscal 2001 calculation of diluted loss per share because their effect would be
anti-dilutive. For fiscal 2002 and 2001, 173,446,189 and 142,750,376 outstanding
stock options, respectively, were excluded from the computation of loss per
share because their effect would be anti-dilutive.

18. Benefit Obligations


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


Prior
to the Distribution, most of the Companys management and occupational
employees participated in Lucents pension and postretirement plans.
Effective June 1, 2002, the Company assumed responsibility for all pension and
postretirement benefits covering active employees of the Company, as well as
employees who retired or terminated subsequent to the IPO. During June 2002,
Lucent transferred to the Company the pension and postretirement assets and
obligations related to these employees based on then available census data. This
census data is subject to revisions that may result in transfers of assets to or
from the Lucent plans. The Company anticipates finalizing the amounts to be
transferred by no later than June 2003. Obligations related to retired and
terminated vested employees prior to the IPO are the responsibility of Lucent.


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

|                                   | Year Ended September 30, | 
|---------------------------------- | ------------------------ | 
|
|Net periodic benefit cost (credit) |                          | 
|Pension benefits                   |                          | 
|Postretirement benefits            |                          | 

|Net
periodic benefit cost (credit) from the beginning of June 2002, when the pension
and postretirement assets and obligations were transferred from Lucent, includes
the following components:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | PensionBenefits | PostretirementBenefits
|---------------------------------- | --------------- | ----------------------
|Service cost                       |                 |                       
|Interest cost                      |                 |                       
|Expected return on plan assets     |                 |                       
|Amortization of prior service cost |                 |                       
|Recognized net actuarial gain      |                 |                       
|Transition asset                   |                 |                       
|Special termination benefits       |                 |                       
|Curtailment charges                |                 |                       
|                                   |                 |                       
|Net periodic benefit cost (credit) |                 |                       
|                                   |                 |                       

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

|                                                               | PensionBenefits | PostretirementBenefits
|-------------------------------------------------------------- | --------------- | ----------------------
|Change in benefit obligation                                   |                 |                       
|Obligation transferred from Lucent in June 2002                |                 |                       
|Service cost                                                   |                 |                       
|Interest cost                                                  |                 |                       
|Actuarial loss                                                 |                 |                       
|Benefits paid                                                  |                 |                       
|Special termination benefits                                   |                 |                       
|Curtailment charges                                            |                 |                       
|                                                               |                 |                       
|Benefit obligation at September 30, 2002                       |                 |                       
|                                                               |                 |                       
|                                                              
|Change in plan assets                                          |                 |                       
|Fair value of plan assets transferred from Lucent in June 2002 |                 |                       
|Actual loss on plan assets                                     |                 |                       
|Employer contributions                                         |                 |                       
|Benefits paid                                                  |                 |                       
|                                                               |                 |                       
|Fair value of plan assets at September 30, 2002                |                 |                       
|                                                               |                 |                       
|                                                              
|Funded status of the plan                                      |                 |                       
|Unrecognized net actuarial loss                                |                 |                       
|Unrecognized prior service cost                                |                 |                       
|                                                               |                 |                       
|Net amount recognized                                          |                 |                       
|                                                               |                 |                       

|The
special termination benefits are separation payments made to employees and are
included in restructuring and other charges  net. The curtailment charges
reflect an increase in the liabilities on the plans as employees are retiring
sooner than what was originally anticipated, primarily due to the restructuring
activities.


Amounts
recognized in the consolidated balance sheet consist of:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | PensionBenefits | PostretirementBenefits
|-------------------------------------- | --------------- | ----------------------
|Accrued benefit liability              |                 |                       
|Intangible asset                       |                 |                       
|Accumulated other comprehensive income |                 |                       
|                                       |                 |                       
|Net amount recognized                  |                 |                       
|                                       |                 |                       

|Actuarial
assumptions used to determine costs and benefit obligations for the principal
pension plans and the postretirement benefit obligations were as follow:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | June 1, 2002 | September 30, 2002
|------------------------------ | ------------ | ------------------
|
|Weighted average assumptions:  |              |                   
|Discount rate                  |              |                   
|Expected return on plan assets |              |                   
|Rate of compensation increase  |              |                   

|For
fiscal 2002, the assumed health care cost trend rates are 10.0% for participants
under age 65 and 11.1% for participants age 65 or older. For dental care, for
all ages, the trend rate is 3.8%. The health care and dental care cost trend
rates for participants under age 65 is assumed to decrease gradually to 5% and
3.5% respectively, in the year 2006. A one percent annual change in the assumed
cost trend rate would have a minimal effect on the total service and interest
cost components and on the postretirement benefit obligation.

Savings Plans


The
Company established savings plans for its employees effective January 1, 2002.
The majority of the Companys employees are eligible to participate in
these plans. Prior to January 1, 2002, the employees participated in similar
plans sponsored by Lucent. The plans allow employees to contribute a portion of
their compensation on a pre-tax and/or after-tax basis in accordance with
specified guidelines. The Company matches a percentage of employee contributions
up to certain limits. The Companys contribution to the savings plans was
$17 in fiscal 2002. The Companys contribution related to the Lucent plans
was $25 and $21 in fiscal 2001 and 2000, respectively.


Effective
April 1, 2002, the Company began funding the employer match for U.S. employees
with newly issued Class A common stock. Through September 30, 2002, 3,130,588
shares had been issued to the savings plan to fund the employer match.


19. Operating Segments


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



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



The
Infrastructure Systems segment delivers solutions to the high-speed
communications systems market. The segment is comprised of the former
Optoelectronics segment and portions of the former Integrated Circuits segment.
On August 14, 2002, the Company announced that it will exit its optoelectronics
business. See Note 6 Exit of Optoelectronics Business.


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


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

Reportable Segments
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                                                                                                                                       | Year Ended September 30, | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | 
|
|Revenue                                                                                                                                                                                                                                                |                          | 
|Client Systems                                                                                                                                                                                                                                         |                          | 
|Infrastructure Systems                                                                                                                                                                                                                                 |                          | 
|                                                                                                                                                                                                                                                       |                          | 
|Total                                                                                                                                                                                                                                                  |                          | 
|                                                                                                                                                                                                                                                       |                          | 
|                                                                                                                                                                                                                                                      
|Operating income (loss) (excluding amortization of goodwill and other
acquired intangibles, IPRD, restructuring and other charges  net,
impairment of goodwill and other acquired intangibles, and (gain) loss
on the sale of operating assets  net) |                          | 
|Client Systems                                                                                                                                                                                                                                         |                          | 
|Infrastructure Systems                                                                                                                                                                                                                                 |                          | 
|                                                                                                                                                                                                                                                       |                          | 
|Total                                                                                                                                                                                                                                                  |                          | 
|                                                                                                                                                                                                                                                       |                          | 

|Reconciling Items


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

|                                                        | Year Ended September 30, | 
|------------------------------------------------------- | ------------------------ | 
|
|Reportable segment operating income (loss)              |                          | 
|Less:                                                   |                          | 
|Amortization of goodwill and other acquired intangibles |                          | 
|IPRD                                                    |                          | 
|Restructuring and other charges - net                   |                          | 
|Impairment of goodwill and other acquired intangibles   |                          | 
|(Gain) loss on the sale of operating assets - net       |                          | 
|                                                        |                          | 
|Total operating income (loss)                           |                          | 
|                                                        |                          | 

|Revenue by Product


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

|                       | Year Ended September 30, | 
|---------------------- | ------------------------ | 
|
|Integrated circuits    |                          | 
|Optoelectronic devices |                          | 
|                       |                          | 
|Total revenue          |                          | 
|                       |                          | 

|Geographic Information
|----------------------

|                                          | Revenue (1)Year Ended September 30, |  | Long-lived Assets (2)September 30, |      
|----------------------------------------- | ----------------------------------- |  | ---------------------------------- | -----
|
|U.S.                                      |                                     |  | $                                  | 674  
|Foreign Regions                           |                                     | 
|Asia Pacific & Pacific Rim (3)            |                                     |  |                                    | 1,154
|Europe, Middle East & Africa              |                                     |  |                                    | 273  
|Caribbean, Canada, Mexico & Latin America |                                     |  |                                    | 76   
|                                          |                                     |  |                                    |      
|Totals                                    |                                     |  | $                                  | 2,177
|                                          |                                     |  |                                    |      

|
|

|(1) |  | Revenue
is attributed to geographic areas based on the customers shipped-to location, except for
intellectual property license revenue which is attributed to the U.S. operations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Represents
property, plant and equipment-net and goodwill and other acquired intangibles.
|--- |  | -----------------------------------------------------------------------------------------

|(3) |  | Singapore
accounted for $349 of revenue in fiscal 2002 and $118 of long-lived assets as of
September 30, 2002, which were greater than 10% of the Companys revenues and
long-lived assets.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Concentrations


The
Companys sales are concentrated primarily in the communications and
computer equipment markets, which are competitive and rapidly changing.
Significant technological changes in these markets or customer requirements,
changes in customer buying behavior, or the emergence of competitive products
with new capabilities or technologies could adversely affect operating results.
Also, portions of the Companys revenues are derived from customers that
individually accounted for greater than 10% of the Companys revenues for
the years presented. In fiscal 2002, two customers represented 13% and 10%,
respectively, of the Companys revenue. In fiscal 2001 and 2000, one
customer represented 15% and 21% of the Companys revenue, respectively.


20. Financial Instruments


Fair Values


The
carrying values and estimated fair values of cash and cash equivalents,
investments, receivables, payables and debt maturing within one year contained
in the consolidated and combined balance sheets approximate fair value.


The
carrying values of foreign exchange forward contracts at September 30, 2002 and
2001 equal their fair value. The carrying value and the fair value of the
long-term convertible notes at September 30, 2002 were $410 and $225,
respectively. The fair values of foreign exchange forward contracts and the
long-term convertible notes were determined using quoted market rates.


Credit and Market Risk


By
their nature, all financial instruments involve risk, including credit risk for
non-performance by counterparties. The Company seeks to reduce credit risk on
financial instruments by dealing only with financially secure counterparties and
establishes reserves for losses when deemed necessary. The Company seeks to
limit its exposure to credit risks in any single country or region.


All
financial instruments inherently expose the holders to market risk, including
changes in currency and interest rates. Agere 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


The
Company conducts its operations on a multinational basis, principally in U.S.
dollars but also in several foreign currencies. Generally, foreign exchange
forward contracts are designated for firmly committed and forecasted purchases
and services that are expected to occur in less than one year. Agere enters into
various foreign exchange forward contracts to manage its exposure to changes in
those foreign exchange rates. The Companys derivative financial
instruments are used as risk management tools and are not for trading purposes.


The
notional amounts for foreign exchange forward contracts represent the U.S.
dollar equivalent of an amount exchanged. As of September 30, 2002, Agere had
outstanding forward exchange contracts primarily for Singapore dollars, British
Pounds Sterling, and Euros. The notional amounts for these contracts were $14,
$8, and $7, respectively. As of September 30, 2001, Agere had outstanding
forward exchange contracts for British Pounds Sterling and Singapore dollars.
The notional amounts for these contracts were $12 and $6, respectively. The fair
values of the assets and liabilities associated with these instruments were $0
at September 30, 2002 and 2001.


Agere
engages in foreign currency hedging activities as a defensive strategy designed
to protect the Company from adverse changes in foreign currency exchange rates
that may affect the eventual net cash flows resulting from the sale of products
to foreign customers and purchases from foreign suppliers. Agere expects to
continue to hedge foreign currency risk to preserve the economic cash flows of
the Company, but does not expect to designate related derivative instruments as
hedges for cost/benefit reasons. Accordingly, the changes in fair value of these
undesignated, freestanding foreign currency derivative instruments are recorded
in other income-net in the period of change and have not been material to Agere.


Letters of Credit


The
Company is a party to letters of credit that represent purchased guarantees
ensuring the Companys performance or payment to third parties in
accordance with specified terms and conditions which amounted to approximately
$8 and $17 as of September 30, 2002 and 2001. The estimated fair value of these
letters of credit was $0 as of September 30, 2002 and 2001, which is based on
fees paid to obtain the obligations.


21. Transactions with Lucent


Lucent
was the majority stockholder and a related party of the Company until the
Distribution, which occurred on June 1, 2002. Revenue from products sold to
Lucent in fiscal 2002, through June 1, 2002, was $162. Revenue from products
sold to Lucent for fiscal 2001 and 2000 was $606 and $1,002, respectively.
Included in these amounts are revenues of $65 in fiscal 2000 from sales to
Avaya, which was the enterprise networks business of Lucent until its spin-off
from Lucent on September 30, 2000. Sales to Avaya after that date are not
considered transactions with Lucent. Products purchased from Lucent were $22 and
$23 for fiscal 2001 and 2000, respectively. There were no material purchases of
products from Lucent in fiscal 2002. There was also $42 of trade receivables due
from Lucent as of September 30, 2001. In addition, Lucent billed the Company $23
and $67 in fiscal 2001 and 2000, respectively, for specific research and
development projects related to the Companys businesses.


In
connection with the Separation and Distribution, the Company and Lucent entered
into the Separation and Distribution Agreement and other related agreements,
certain of which are summarized below. This summary is qualified in all respects
by the terms of the actual agreements.


Separation and Distribution Agreement


The
Separation and Distribution Agreement governs the transfer by Lucent to the
Company of all the assets, liabilities and operations associated with the
Companys Businesses and, among other things, provides that the Company
will indemnify Lucent for all liabilities relating to the Companys
Businesses and for all contingent liabilities primarily relating to the
Companys Businesses. In addition, the Separation and Distribution
Agreement provides that certain contingent liabilities will be shared by Lucent
and the Company based on agreed upon percentages.

Microelectronics Product Purchase Agreements


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

| |  |  | The
term of the agreement was extended to September 30, 2006.
| | - |  | -------------------------------------------------------------

| |  |  | For
existing products, Lucent agreed that, as long as Ageres terms and
products are competitive:
| | - |  | ---------------------------------------------------------------------------------------------------

| |  |  |  |  |  | During
the fiscal year ending September 30, 2002, and each of the next four fiscal years, it
would purchase from Agere 90% of its requirements for existing products.
| |  |  |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | In
the fiscal year ending September 30, 2002, it would purchase a specified amount of
existing products, if that amount is greater than 90% of its requirements for those
products.
| |  |  |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Existing
products are products of the kind being purchased by Lucent from Agere as of the
date of the amendment, as well as any next generation or successor products.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | For
new products:
| | - |  | -------------------

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

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

| | New
products are products within Ageres served available market that are not
existing products.
| | --------------------------------------------------------------------------------------------------

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

| |  |  | Lucent
assigned to Agere a number of patents and intellectual property license agreements.
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | Lucent
forgave specified amounts owed by Agere to Lucent under existing intellectual property
license agreements.
| | - |  | -----------------------------------------------------------------------------------------------------------------

| |  |  | Lucent
provided Agere with the ability to terminate leases at Lucents New Jersey locations
earlier than contemplated by the original agreements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|Interim Services and Systems Replication Agreement


The
Company and Lucent entered into an Interim Service and Systems Replication
Agreement to provide each other, on an interim, transitional basis, with various
data processing services, telecommunications services and corporate support
services, including: accounting, financial management, information systems
management, tax, payroll, legal, human resources administration, procurement and
other general support. This agreement also provided for the replication and
transfer of designated computer systems used for administrative support or used
in the Companys Businesses or Lucents other businesses. The systems
include specified hardware, software, data storage or maintenance and support
components. Costs and expenses of purchasing hardware or obtaining software are
borne by the party purchasing the hardware or licensing the software. The costs
associated with this agreement amounted to $7 and $73 for fiscal 2002 and 2001,
respectively. The Company does not anticipate any additional costs related to
this agreement subsequent to September 30, 2002.


Tax Sharing Agreement


The
Company and Lucent entered into a Tax Sharing Agreement, which governs the
Companys and Lucents respective rights, responsibilities and
obligations after the Distribution with respect to taxes for the periods ending
on or before the Distribution. Generally, pre-Distribution taxes that are
clearly attributable to the business of one party will be borne solely by that
party, and other pre-Distribution taxes will be shared by the parties based on a
formula set forth in the Tax Sharing Agreement. In addition, the Tax Sharing
Agreement addresses the allocation of liability for taxes that are incurred as a
result of the corporate restructuring activities undertaken to implement the
Separation. If the Distribution fails to qualify as a tax-free distribution
under Section 355 of the Internal Revenue Code because of an acquisition of the
Companys stock or assets, or some other actions taken by the Company, then
the Company will be solely liable for any resulting corporate taxes.

Patent Assignments


The
Company and Lucent executed patent assignments and other agreements related to
patents owned or controlled by Lucent. The patent assignments divided ownership
of patents, patent applications and foreign counterparts between the Company and
Lucent. Lucent transferred to Agere ownership of or exclusive rights in certain
patents and patent applications held by Lucent before the Separation that relate
principally to the Companys Businesses. Lucent retained ownership of all
other patents and patent applications.


Technology Assignment and Joint Ownership Agreement


The
Company and Lucent executed assignments and other agreements, including the
technology assignment, related to technology owned or controlled by Lucent and
its subsidiaries. Technology included copyrights, mask works and other
intellectual property other than trademarks, trade names, service marks and
patent rights. The technology assignment generally divided ownership of
technology between the Company and Lucent, with each owning technology that was
developed by or for, or purchased for the respective businesses of each company.
Certain specified technology is owned jointly by the Company and Lucent.


Patent and Technology License Agreement


The
Company and Lucent entered into a Patent and Technology License Agreement
related to patents and technology owned or controlled by the Company and Lucent.
The Patent and Technology License Agreement provides for cross-licenses to each
company. The Company and Lucent granted to each other, under the patents that
each company has, a nonexclusive, personal, nontransferable license to make,
have made, use, lease, import, offer to sell, and sell any and all products and
services of the businesses in which the licensed company, including related
companies, is now or hereafter engaged. The cross-licenses also permit each
company, subject to limitations, to have third parties make items under the
other companys patents, as well as to pass through to customers limited
rights under the other companys patents with respect to products and
services furnished to customers by the licensed company. Certain patents are
licensed exclusively to each party, including the right to grant sublicenses,
subject to retention of a right to use those patents by the licensing party.
Otherwise, the right to sublicense to unaffiliated third parties was not granted
under the cross-licenses, except for limited rights in connection with
establishing second source suppliers, performing joint development activities
and rights to sublicense a divested business. The cross-licenses between the
Company and Lucent cover all of each companys patents, including patents
issued on patent applications with a filing date prior to February 1, 2003. The
Patent and Technology License Agreement also grants to the Company a joint
ownership interest to a limited number of patents and patent applications.


22. Commitments and Contingencies


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


The
Company has an agreement with SMP under which it has agreed to purchase 51% of
the managed wafer capacity from SMPs integrated circuit manufacturing
facility and Chartered Semiconductor agreed to purchase the remaining 49% of the
managed wafer capacity. SMP determines its managed wafer capacity each year
based on forecasts provided by Agere and Chartered Semiconductor. If the Company
fails to purchase its required commitments, it will be required to pay SMP for
the fixed costs associated with the unpurchased wafers. Chartered Semiconductor
is similarly obligated with respect to the wafers allotted to it. The agreement
may be terminated by either party upon two years written notice, but may not be
terminated prior to February 2008. The agreement may also be terminated for
material breach, bankruptcy or insolvency. Based on forecasted demand, the
Company believes it is unlikely that it would have to pay any significant
amounts for underutilization in the near future. However, if the Companys
purchases under this agreement are less than anticipated, the Companys
cash obligation to SMP may be significant.

Legal Proceedings


An
investigation was commenced on April 4, 2001, by the U.S. International Trade
Commission based on a request of Proxim, alleging patent infringement by 14
companies, including some of the Companys customers, for wireless local
area networking products. Proxim alleged infringement of three patents related
to spread-spectrum coding techniques. Spread-spectrum coding techniques refers
to a way of transmitting a signal for wireless communications by spreading the
signal over a wide frequency band. One of the Companys subsidiaries, Agere
Systems Guardian Corp., filed a lawsuit on May 23, 2001, in the U.S. District
Court in Delaware against Proxim alleging infringement of three patents used in
Proxims wireless local area networking products. In connection with the
Companys sale of its wireless LAN equipment business to Proxim, the
Company and Proxim entered into a cross license which resulted in the dismissal
on September 6, 2002, of the International Trade Commission proceeding against
the Companys customers to the extent based on the use of the
Companys products, as well as the Delaware proceeding against Proxim.


Environmental, Health and Safety


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


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


Leases


The
Company leases land, buildings and equipment under agreements that expire in
various years through 2013. Rental expense under operating leases was $125, $133
and $97 for the fiscal years ended September 30, 2002, 2001 and 2000,
respectively. The table below shows the future minimum lease payments due under
non-cancelable leases at September 30, 2002. Such payments total $221 for
operating leases. The net present value of such payments on the capital lease
obligations was $110 after deducting imputed interest of $22.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year EndedSeptember 30,
| | -----------------------
|
|
| |                        
| |                        
| |                        
| |                        
| |                        

|23. Quarterly Information (Unaudited)
|-------------------------------------

|                                                                     | Fiscal Quarters | 
|-------------------------------------------------------------------- | --------------- | 
|
|YEAR ENDED SEPTEMBER 30, 2002                                        |                 | 
|Revenue                                                              |                 | 
|Gross profit                                                         |                 | 
|Net loss                                                             |                 | 
|Basic and diluted loss per share                                     |                 | 
|Weighted average shares outstanding basic and diluted (in millions) |                 | 
|                                                                    
|YEAR ENDED SEPTEMBER 30, 2001                                        |                 | 
|Revenue                                                              |                 | 
|Gross profit (loss)                                                  |                 | 
|Loss before cumulative effect of accounting change                   |                 | 
|Cumulative effect of accounting change                               |                 | 
|Net loss                                                             |                 | 
|Basic and diluted loss per share:                                    |                 | 
|Loss before cumulative effect of accounting change                   |                 | 
|Cumulative effect of accounting change                               |                 | 
|Net loss                                                             |                 | 
|Weighted average shares outstanding basic and diluted (in millions) |                 | 

|24. Subsequent Events


Sale of certain assets and liabilities of the optoelectronics business


On
October 21, 2002, the Company entered into an agreement with TriQuint
Semiconductor, Inc. (TriQuint) to sell certain assets and
liabilities related to the optoelectronics business of the Infrastructure
Systems segment for $40 million in cash. The transaction includes the products,
technology and some facilities related to the Companys optoelectronics
business, which includes lasers, detectors, modulators, passive components,
arrayed waveguide-based components, amplifiers, transmitters, receivers,
transceivers, transponders, and micro electro-mechanical systems. The agreement
does not include the Companys business that provides optoelectronic
components for cable television transmission systems.


As
part of the sale, the Companys facilities in Breinigsville, Pa. and
Matamoros, Mexico, are expected to be transferred and approximately 300 of the
Companys employees are expected to join TriQuint. In addition, Agere will
manufacture and supply certain optoelectronic components to TriQuint under a
transitional manufacturing agreement ending on or before March 31, 2003. The
companies anticipate closing the sale in January 2003, subject to regulatory
approval and other customary closing conditions.


Patent infringement litigation



On
October 17, 2002, the Company filed a patent infringement lawsuit against
Intersil Corporation (Intersil) in the United States District Court
in Delaware. The Company alleged that Intersil had infringed six of the
Companys patents related to 802.11 wireless networking and is seeking
monetary damages for Intersils infringement of these patents and an
injunction prohibiting Intersil from using the patents in the future. On
November 6, 2002, Intersil filed a counterclaim in this matter, alleging that
ten patents of Intersil are infringed by unspecified Agere products. Two of the
patents relate to system-level circuits, and eight patents relate to
semiconductor processing. The complaint seeks an injunction and damages.
The Company believes that Intersil's claims are without merit.


On
October 30, 2002, Choice-Intersil Microsystems, Inc. (Choice-Intersil), filed
a lawsuit against the Company in the United States District Court for the Eastern District
of Pennsylvania. The complaint alleges misappropriation of trade secrets that were jointly
developed and jointly owned by Digital Ocean, Inc. (which, following several acquisitions
and corporate reorganizations, is now Choice-Intersil) and Lucent. The trade secrets
relate to media access controller technology for wireless local area networks. The
complaint seeks an injunction and damages. The Company believes that
Choice-Intersils claims are without merit.


On
November 19, 2002, the Company filed a lawsuit against Choice-Intersil, Intersil
and Intersil Americas Inc. in state court in Delaware. The Company alleged, among
other things, misappropriation of trade secrets and breach of contract relating
to the trade secrets that were jointly developed and jointly-owned by Digital
Ocean, Inc. and Lucent. The Company is seeking an injunction against further use
and disclosure of the trade secrets and damages for past disclosure and misuse.


The
Company intends to vigorously defend itself against the claims of the Intersil parties.



Amendment of the Accounts Receivable Securitization


On
November 12, 2002, Agere Systems Inc. and certain of its subsidiaries amended
the accounts receivable securitization agreement. In connection with the
amendment, the expiration of the agreement was extended from January 21, 2003 to
November 11, 2003. The pricing index for the annual commitment fee was also
revised to specify that if Ageres credit rating were to decrease one or
two levels, the commitment fee will increase to 2% or 3% per annum,
respectively. The overall committed amounts under the loan agreement of $200
remains unchanged.

AGERE
SYSTEMS INC.SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS(dollars in millions)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Column A                               |  | Column B | Column C |     | Column D |  | Column E
|-------------------------------------- |  | -------- | -------- | --- | -------- |  | --------
|
|
|Fiscal 2002                            |  |          |          |     |          |  |         
|Allowance for doubtful accounts        |  |          |          | 33  |          |  | (4      
|Deferred tax asset valuation allowance |  |          |          | 537 |          |  | 630     
|Fiscal 2001                            |  |         
|Allowance for doubtful accounts        |  |          |          | 17  |          |  | 26      
|Deferred tax asset valuation allowance |  |          |          |    |          |  | 553     
|Fiscal 2000                            |  |         
|Allowance for doubtful accounts        |  |          |          | 11  |          |  | 10      
|Deferred tax asset valuation allowance |  |          |          |    |          |  |        

| |  | (a) |  | Amounts
written off as uncollectible, payments or recoveries.
| |  | --- |  | -------------------------------------------------------------

| |  | (b) |  | Amount
offsets deferred tax asset associated with future tax deductions upon payment of pension
liabilities.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------

| |  | (c) |  | Deductions
represent adjustments to prior year valuation allowance based on tax return filings.
| |  | --- |  | -----------------------------------------------------------------------------------------------

| |  | (d) |  | Amount
offsets deferred tax liability associated with the potential future gain on the sale of
available-for-sale securities.
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------

|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



      Apart
        from certain information concerning our executive officers which is set
        forth in Part I of this report, other information required by this Item
        is incorporated herein by reference to the applicable information in the
        proxy statement for our 2003 annual meeting, including the information
        set forth under the caption Election of Directors.





Item 11. Executive Compensation


The
information required by this Item is incorporated herein by reference to the
applicable information in the proxy statement for our 2003 annual meeting,
including the information set forth under the captions Executive
Compensation and Compensation Committee Interlocks and Insider
Participation.




Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


EQUITY COMPENSATION PLAN INFORMATION


The following table
summarizes information about our equity compensation plans as of September 30,
2002. All outstanding awards relate to our Class A common stock. For additional
information about our equity compensation plans, see note 16 to our financial
statements in Item 8.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Plan Category                                                  |  | Number of securities tobe issued upon exerciseof outstanding options,warrants and rights (1) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |  | Number of securitiesremaining available forfuture issuance under equitycompensation plans(excluding securitiesreflected in column (a)) |         
|-------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------- | --------
|
|                                                              
|Equity compensation plans approved by security holders         |  |                                                                                              |  | 137,757,394                                                              |  |                                                                                                                                        | $7.0357 
|                                                              
|Equity compensation plans not approved by security holders (3) |  |                                                                                              |  | 29,219,668                                                               |  |                                                                                                                                        | $24.3795
|                                                              
|                                                               |  |                                                                                              |  |                                                                          |  |                                                                                                                                       
|Total                                                          |  |                                                                                              |  | 166,977,062                                                              |  |                                                                                                                                        | $10.0707
|                                                               |  |                                                                                              |  |                                                                          |  |                                                                                                                                       

|
|

|(1) |  | In connection with our spin-off from Lucent, we assumed stock options that had
originally been granted by Lucent or AT&T or companies that Lucent had
acquired. The table does not include information for equity compensation plans
assumed by Lucent in connection with acquisitions of the companies that
originally established those plans. At September 30, 2002, 7,108,283shares were issuable upon exercise of outstanding options, with a
weighted-average exercise price of $5.0058 per share, under these plans. Since
the spin-off we have not granted, and we will not grant in the future, any
additional options under these plans.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Includes 233,292,379shares available for issuance under our 2001 Long
Term Incentive Plan in connection with stock options, stock appreciation rights,
restricted stock awards, performance shares and units, dividend equivalents and
other stock unit awards. Under that plan, 39,975,000 shares remain available for
the grant of stock appreciation rights, restricted stock, performance shares and
other stock unit awards.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|(3) |  | All of the shares reported in this row were stock options granted prior to our
spin-off by Lucent under Lucent plans that had not been approved by
Lucents stockholders and that we assumed in connection with the spin-off.
Since the spin-off, we have not granted, and we will not grant in the future,
any further awards under these plans.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
other information required by this Item is incorporated by reference to the
applicable information in the proxy statement for our 2003 annual meeting,
including the information set forth under the caption Beneficial Ownership
of Agere Common Stock.





Item 13. Certain Relationships and Related Transactions



The
information required by this Item is incorporated by reference to the applicable
information in the proxy statement for our 2003 annual meeting, including the
information set forth under the caption Executive Agreements and Related
Transactions.





Item 14. Controls and Procedures



Within
90 days of the filing of this Form 10-K, we carried out an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of our disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 under the Securities Exchange
Act of 1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in periodic filings with the Securities and Exchange Commission.



There
were no significant changes in our internal controls or in other factors that
could significantly affect these internal controls subsequent to the date of our
most recent evaluation.


PART IV




Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K


(a)(1) Financial Statements


The
information required by this Item is included in Item 8 of Part II of this
report.


(a)(2) Financial Statement Schedule


The
information required by this Item is included in Item 8 of Part II of this
report.


(a)(3) Exhibits


See
Item 15(c) below.

(b) Reports on Form 8-K


Current
Report on Form 8-K filed July 18, 2002 pursuant to Item 5 (Other Events).


Current Report
on Form 8-K/A filed July 19, 2002 pursuant to Item 5 (Other Events).


Current
Report on Form 8-K filed on August 13, 2002 pursuant to Item 7 (Financial
Statements).


Current
Report on Form 8-K filed on August 14, 2002 pursuant to Item 5 (Other Events).


Current Report
on Form 8-K filed on September 30, 2002 pursuant to Item 5 (Other Events).


(c) Exhibits:
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 |  | Separation
and Distribution Agreement (incorporated by reference to Exhibit 2 to
our Registration Statement on Form S-1, File No. 333-51594)
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Certificate
of Incorporation (incorporated by reference to Exhibit 4.1 to our Registration Statement
on Form S-8, File No. 333-58324)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | By-laws
of Agere Systems Inc. (incorporated by reference to Exhibit 3.2 to our Registration
Statement on Form S-1, File No. 333-51594)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|4.1 |  | Specimen
Class A Common Stock certificate (incorporated by reference to Exhibit
4.1 to our Registration Statement on Form S-1, File No. 333-51594)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Specimen
Class B Common Stock certificate*
|--- |  | ------------------------------------------

|4.3 |  | Certificate
of Incorporation (filed as Exhibit 3.1 hereto)
|--- |  | ----------------------------------------------------------

|4.4 |  | By-laws
of Agere Systems Inc. (filed as Exhibit 3.2 hereto)
|--- |  | -----------------------------------------------------------

|4.5 |  | Rights
Agreement between Agere Systems Inc. and The Bank of New York, as Rights Agent
(incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-8, File
No. 333-58324)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.6 |  | Form
of Rights Certificate (attached as Exhibit B to the Rights Agreement filed as Exhibit 4.4
hereto)
|--- |  | ------------------------------------------------------------------------------------------------------

|4.7 |  | Indenture
for $410,000,000 Convertible Subordinated Notes (incorporated by
reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed August 9,
2002)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Separation
and Distribution Agreement (filed as Exhibit 2 hereto)
|---- |  | -----------------------------------------------------------------

|10.2 |  | Interim Services and Systems Replication Agreement (incorporated by reference to
Exhibit 10.2 to our Registration Statement on Form S-1, File No. 333-51594)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Amended
and Restated Employee Benefits Agreement (incorporated by reference to Exhibit 99.1 to
our Form 8-K filed July 18, 2002)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Tax Sharing Agreement (incorporated by reference to Exhibit 10.4 to our
Registration Statement on Form S-1, File No. 333-51594)
|---- |  | -------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Letter
Agreement amending the Tax Sharing Agreement (incorporated by reference to Exhibit 10.29
to our Registration Statement on Form S-1, File No. 333-81632, filed March 11, 2002)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Trademark License Agreement (incorporated by reference to Exhibit 10.12 to our
Registration Statement on Form S-1, File No. 333-51594)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | Patent and Technology License Agreement (incorporated by reference to Exhibit
10.12 to our Registration Statement on Form S-1, File No. 333-51594)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Technology Assignment and Joint Ownership Agreement (incorporated by reference
to Exhibit 10.14 to our Registration Statement on Form S-1, File No. 333-51594)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.9 |  | Joint
Design Center Operating Agreement (incorporated by reference to Exhibit 10.15 to our
Registration Statement on Form S-1, File No. 333-51594)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | Termination
Agreement for Joint Design Center Operating Agreement*
|----- |  | ------------------------------------------------------------------

|10.11 |  | Fiber Product Purchase Agreement (incorporated by reference to Exhibit 10.16 to
our Registration Statement on Form S-1, File No. 333-51594)
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | Microelectronics Product Purchase Agreement (incorporated by reference to
Exhibit 10.17 to our Registration Statement on Form S-1, File No. 333-51594)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | Amendment
to Microelectronics Product Purchase Agreement (incorporated by reference to Exhibit 99.1
to our Report on Form 8-K, filed July 18, 2002)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|10.14 |  | Joint
Venture Agreement with Chartered Semiconductor Manufacturing Ltd. (incorporated by
reference to Exhibit 10.19 to our Registration Statement on Form S-1, File No. 333-51594)
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Receivables
Loan Agreement (incorporated by reference to Exhibit 10 of our Registration Statement on
Form S-3, File No. 333-81632, filed May 21, 2002)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Amendment
No. 1 to Receivables Loan Agreement*
|----- |  | ----------------------------------------------

|10.17 |  | Amendment
No. 2 to Receivables Loan Agreement*
|----- |  | ----------------------------------------------

|10.18 |  | Agere
Systems Inc. Short Term Incentive Plan (incorporated by reference to Exhibit 10.5 to our
Registration Statement on Form S-1, File No. 333-81632, filed March 11, 2002)+
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Agere
Systems Inc. 2001 Long Term Incentive Plan (incorporated by reference to Exhibit 10.6 to
our Registration Statement on Form S-1, File No. 333-81632, filed March 11, 2002)+
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Agere
Systems Inc. 2001 Long Term Incentive Plan Restricted Stock Unit Award Agreement
(incorporated by reference to Exhibit 10.7 to our Registration Statement on Form S-1,
File No. 333-51594)+
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Agere
Systems Inc. 2001 Long Term Incentive Plan Nonstatutory Stock Option Agreement
(incorporated by reference to Exhibit 10.8 to our Registration Statement on Form S-1,
File No. 333-51594)+
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Agere
Systems Inc. Non-Employee Director Stock Plan (incorporated by reference to Exhibit 10.20
to our Registration Statement on Form S-1, File No. 333-51594)+
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Agere
Systems Inc. 2001 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.21 to our Registration Statement on Form S-1, File No. 333-51594)+
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Agere
Systems Inc. Deferred Compensation Plan (incorporated by reference to Exhibit 10.9 to our
Registration Statement on Form S-1, File No. 333-51594)+
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Agere
Systems Inc. Supplemental Pension Plan (incorporated by reference to Exhibit 10.10 to our
Registration Statement on Form S-1, File No. 333-51594)+
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | Agere
Systems Inc. Officer Severance Policy+ *
|----- |  | ----------------------------------------------

|10.27 |  | Agere
Systems Inc. Medium-Term Incentive Plan+ *
|----- |  | ------------------------------------------------

|10.28 |  | 1996
Lucent Long Term Incentive Program For Agere Employees+ *
|----- |  | --------------------------------------------------------------

|10.29 |  | 1997
Lucent Long Term Incentive Plan For Agere Employees+ *
|----- |  | -----------------------------------------------------------

|10.30 |  | 1998
Global Stock Option Plan For Agere Employees+ *
|----- |  | ----------------------------------------------------

|10.31 |  | Founders
Grant Stock Option Plan For Agere Employees+ *
|----- |  | -------------------------------------------------------

|10.32 |  | 1987
AT&T Stock Option Plan For Agere Employees+ *
|----- |  | --------------------------------------------------

|10.33 |  | Letter Agreement with Mark Greenquist (incorporated by reference to Exhibit
10.23 to our Annual Report on Form 10-K, filed December 10, 2001)+
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | Amendment
to Letter Agreement with Mark Greenquist (incorporated by reference to Exhibit 10.28 to
our Registration Statement on Form S-1, File No. 333-81632, filed March 11, 2002)+
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | Letter Agreement with Ronald Black (incorporated by reference to Exhibit 24 to
our Annual Report on Form 10-K, filed December 10, 2001)+
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Amendment
to Letter Agreement with Ronald Black (incorporated by reference to Exhibit 10.27 to our
Registration Statement on Form S-1, File No. 333-81632, filed March 11, 2002)+
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12 |  | Computation
of Ratio of Earnings to Fixed Charges*
|-- |  | --------------------------------------------------

|21 |  | List
of Subsidiaries of Agere Systems Inc.*
|-- |  | -------------------------------------------

|23 |  | Consent
of PricewaterhouseCoopers LLP*
|-- |  | --------------------------------------

|24 |  | Powers
of Attorney*
|-- |  | -------------------

|99.1 |  | Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350*
|---- |  | --------------------------------------------------------------------

|99.2 |  | Certification
of Chief Financial Officer pursuant to 18 U.S.C. 1350*
|---- |  | --------------------------------------------------------------------

|
|

|+ |  | Exhibit
represents a management contract or compensatory plan or arrangement.
|- |  | -----------------------------------------------------------------------------

|* |  | Filed
herewith.
|- |  | ---------------

|SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed on behalf of the Registrant by the
undersigned, thereunto duly authorized, in the City of Allentown, Commonwealth
of Pennsylvania, on the 12th day of December, 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | AGERE SYSTEMS INC.
By: /s/ MARK T. GREENQUIST

Mark T. Greenquist
Executive Vice President and
Chief Financial Officer
| |  | ------------------------------------------------------------------------------------------------------------------------------------

|Signature                                                |  | Title                                                                                                            |  | Date             
|-------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | -----------------
|                                                        
|                                                        
|/s/ JOHN T. DICKSON

John T. Dickson       |  | President, Chief ExecutiveOfficer and Director(Principal Executive Officer)                                      |  | December 12, 2002
|                                                        
|                                                        
|/s/ MARK T. GREENQUIST

Mark T. Greenquist |  | Executive Vice President andChief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer) |  | December 12, 2002
|                                                        
|                                                        
|*

Richard L. Clemmer                      |  | Director                                                                                                         |  |                  
|                                                        
|                                                        
|*

Rajiv L. Gupta                          |  | Director                                                                                                         |  |                  
|                                                        
|                                                        
|*

Rae F. Sedel                            |  | Director                                                                                                         |  |                  
|                                                        
|                                                        
|*

Harold A. Wagner                        |  | Chairman of the Board                                                                                            |  |                  
|                                                        
|                                                        
|*

John A. Young                           |  | Director                                                                                                         |  |                  

|* By: |  | /s/ MARK T. GREENQUIST,

(Attorney in Fact)December 12, 2002
|----- |  | --------------------------------------------------------------------------

|CERTIFICATIONS


I, John T. Dickson, certify that:


1. I have reviewed this annual report on Form 10-K of Agere Systems Inc.;


2. Based on my knowledge,
this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;


3. Based on my knowledge,
the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;


4. The registrants
other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a)
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
evaluated the effectiveness of the registrants disclosure controls and procedures
as of a date within 90 days prior to the filing date of this annual report (the Evaluation
Date); and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c)
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. The registrants
other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
functions):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a)
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|6. The registrants
other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date:  December 12, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | /s/ JOHN T. DICKSON

John T. Dickson
President and Chief ExecutiveOfficer
| |  | ---------------------------------------------------------------------------------------

|I, Mark T. Greenquist, certify that:


1. I have reviewed this annual
report on Form 10-K of Agere Systems Inc.;


2. Based on my knowledge,
this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with
respect to the period covered by this annual report;


3. Based on my knowledge,
the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;


4. The registrants
other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a)
designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual
report is being prepared;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
evaluated the effectiveness of the registrants disclosure controls and procedures
as of a date within 90 days prior to the filing date of this annual report (the Evaluation
Date); and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c)
presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. The registrants
other certifying officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of
registrants board of directors (or persons performing the equivalent
functions):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a)
all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b)
any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrants internal controls; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|6. The registrants
other certifying officers and I have indicated in this annual report whether
there were significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: December 12, 2002
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | /s/ MARK T. GREENQUIST

Mark T. Greenquist
Executive Vice President andChief Financial Officer
| |  | ------------------------------------------------------------------------------------------------------------