AS FILED WITH THE SEC ON
MAY 4, 2005

UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT
OF 1934

For the quarterly period
ended March 31, 2005

OR

[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE
ACT OF 1934

For the transition
period from _____________to _____________

Commission file number
001-11639

LUCENT TECHNOLOGIES INC.

|            |                
|----------- | ---------------
|A Delaware  | I.R.S. Employer
|Corporation | No. 22-3408857 

600 Mountain Avenue,
Murray Hill, New Jersey 07974

Telephone Number:
908-582-8500

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No_____

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes X No______

At April 30, 2005, 4,430,154,451
  common shares were outstanding.

---



|         |                   
|-------- | ------------------
|<PAGE> 2 | Form 10-Q - Part I

INDEX

|                                |                                                                                                   |   
|------------------------------- | ------------------------------------------------------------------------------------------------- | --
|Part I - Financial Information: |                                                                                                  
|Item 1.                         | Financial Statements                                                                              |   
|                                | Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2005 and 2004  | 3 
|                                | Consolidated Balance Sheets as of March 31, 2005 and September 30, 2004                           | 4 
|                                | Consolidated Statement of Changes in Shareowners' Deficit for the Six Months Ended March 31, 2005 | 5 
|                                | Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2005 and 2004            | 6 
|                                | Notes to Consolidated Financial Statements                                                        | 7 
|Item
      2.                   | Management's Discussion and Analysis of Financial Condition and Results of Operations             | 18
|Item 3.                         | Quantitative and Qualitative Disclosures About Market Risk                                        | 34
|Item 4.                         | Controls and Procedures                                                                           | 35
|Part II - Other Information:    |                                                                                                  
|Item 1.                         | Legal Proceedings                                                                                 | 36
|Item 4.                         | Submission of Matters to a Vote of Security Holders                                               | 36
|Item
      6.                   | Exhibits                                                                                          | 36

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|         |                   
|-------- | ------------------
|<PAGE> 3 | Form 10-Q - Part I

PART 1  Financial
Information

Item 1. Financial
Statements

LUCENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF OPERATIONS
(Amounts in Millions,
Except Per Share Amounts)
(Unaudited)

|                                                        | Three months ended
March 31, |  | Six months ended
March 31, |      
|------------------------------------------------------- | ---------------------------- |  | -------------------------- | -----
|                                                        | 2005                         |  | 2004                       |      
|Revenues:                                               |                              |  |                            |      
|Products                                                |                              |  | $                          | 1,836
|Services                                                |                              |  |                            | 499  
|                                                        |                              |  |                            |      
|Total revenues                                          |                              |  |                            | 2,335
|                                                        |                              |  |                            |      
|Costs:                                                  |                              | 
|Products                                                |                              |  |                            | 980  
|Services                                                |                              |  |                            | 380  
|                                                        |                              |  |                            |      
|Total costs                                             |                              |  |                            | 1,360
|                                                        |                              |  |                            |      
|Gross margin                                            |                              |  |                            | 975  
|Operating expenses:                                     |                              | 
|Selling, general and administrative                     |                              |  |                            | 423  
|Research and development                                |                              |  |                            | 292  
|Business restructuring                                  |                              |  |                            | (8   
|                                                        |                              |  |                            |      
|Total operating expenses                                |                              |  |                            | 707  
|                                                        |                              |  |                            |      
|Operating income                                        |                              |  |                            | 268  
|Other income (expense), net                             |                              |  |                            | 43   
|Interest expense                                        |                              |  |                            | 85   
|                                                        |                              |  |                            |      
|Income before income taxes                              |                              |  |                            | 226  
|Income taxes                                            |                              |  |                            | (41  
|                                                        |                              |  |                            |      
|Net income                                              |                              |  |                            | 267  
|Conversion and  redemption cost - 8.00% preferred stock |                              |  |                            |     
|Preferred stock dividends and accretion                 |                              |  |                            |     
|                                                        |                              |  |                            |      
|Net income applicable to common shareowners             |                              |  | $                          | 267  
|                                                        |                              |  |                            |      
|Net income per share applicable to common shareowners:  |                              | 
|Basic                                                   |                              |  | $                          | 0.06 
|Diluted                                                 |                              |  | $                          | 0.06 
|Weighted average common shares outstanding:             |                              | 
|Basic                                                   |                              |  |                            | 4,421
|Diluted                                                 |                              |  |                            | 5,047

See Notes to Unaudited
Consolidated Financial Statements.

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|         |                   
|-------- | ------------------
|<PAGE> 4 | Form 10-Q - Part I

LUCENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(Amounts in Millions,
Except Per Share Amounts)
(Unaudited)

|                                                                                                                   | March 31,
      2005 |  | September 30,
      2004 |        
|------------------------------------------------------------------------------------------------------------------ | -------------------- |  | ------------------------ | -------
|ASSETS                                                                                                             |                      |  |                          |        
|Cash and
      cash equivalents                                                                                    |                      |  | $                        | 1,967  
|Marketable
      securities                                                                                        |                      |  |                          | 798    
|Receivables,
      net                                                                                             |                      |  |                          | 1,544  
|Inventories                                                                                                        |                      |  |                          | 882    
|Other current
      assets                                                                                         |                      |  |                          | 1,615  
|                                                                                                                   |                      |  |                          |        
|Total
      current assets                                                                                         |                      |  |                          | 6,806  
|Marketable
      securities                                                                                        |                      |  |                          | 1,342  
|Property,
      plant and equipment, net                                                                           |                      |  |                          | 1,302  
|Prepaid
      pension costs                                                                                        |                      |  |                          | 5,684  
|Goodwill
      and other acquired intangibles, net                                                                 |                      |  |                          | 427    
|Other assets                                                                                                       |                      |  |                          | 856    
|                                                                                                                   |                      |  |                          |        
|Total
      assets                                                                                                 |                      |  | $                        | 16,417 
|                                                                                                                   |                      |  |                          |        
|                                                                                                                   |                      | 
|LIABILITIES                                                                                                        |                      | 
|Accounts
      payable                                                                                             |                      |  | $                        | 738    
|Payroll
      and benefit-related liabilities                                                                      |                      |  |                          | 828    
|Debt maturing
      within one year                                                                                |                      |  |                          |       
|Other current
      liabilities                                                                                    |                      |  |                          | 1,855  
|                                                                                                                   |                      |  |                          |        
|Total
      current liabilities                                                                                    |                      |  |                          | 3,421  
|Postretirement
      and postemployment benefit liabilities                                                        |                      |  |                          | 4,878  
|Pension
      liabilities                                                                                          |                      |  |                          | 1,668  
|Long-term
      debt                                                                                               |                      |  |                          | 4,722  
|Liability
      to subsidiary trust issuing preferred securities                                                   |                      |  |                          | 1,152  
|Other liabilities                                                                                                  |                      |  |                          | 1,055  
|                                                                                                                   |                      |  |                          |        
|Total
      liabilities                                                                                            |                      |  |                          | 16,896 
|Commitments
      and contingencies                                                                                |                      | 
|                                                                                                                   |                      | 
|SHAREOWNERS'
        DEFICIT                                                                                       |                      | 
|Preferred
         stockpar value $1.00 per share; authorized shares: 250; issued
         and outstanding:  none |                      |  |                          |       
|Common stockpar
      value $.01 per share;                                                                       |                      | 
|Authorized
      shares: 10,000; 4,437 issued and 4,427 outstanding shares as of                                   |                      | 
|March
      31, 2005, and 4,396 issued and 4,395 outstanding shares as of September                                |                      | 
|30,
      2004                                                                                                     |                      |  |                          | 44     
|Additional
      paid-in capital                                                                                   |                      |  |                          | 23,433 
|Accumulated
      deficit                                                                                          |                      |  |                          | (20,352
|Accumulated
      other comprehensive loss                                                                         |                      |  |                          | (3,604 
|                                                                                                                   |                      |  |                          |        
|Total
      shareowners' deficit                                                                                   |                      |  |                          | (479   
|                                                                                                                   |                      |  |                          |        
|Total
      liabilities and shareowners' deficit                                                                   |                      |  | $                        | 16,417 
|                                                                                                                   |                      |  |                          |        

See Notes to Unaudited
Consolidated Financial Statements.

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|         |                   
|-------- | ------------------
|<PAGE> 5 | Form 10-Q - Part I

LUCENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT
OF CHANGES IN SHAREOWNERS DEFICIT
(Amounts in Millions)
(Unaudited)

|                                                           | Shares of
      Common
      Stock |  | Common
      Stock |       | Additional
      Paid-In
      Capital |   | Accumulated
      Deficit |  | Accumulated
      Other
      Comprehensive
      Loss |        | Total
      Shareowners'
      Deficit |  
|---------------------------------------------------------- | ---------------------------------- |  | ------------------ | ----- | -------------------------------------- | - | ------------------------- |  | ------------------------------------------------------ | ------ | -------------------------------------- | -
|Balance
      as of September 30, 2004                     |                                    |  |                    | 4,395 |                                        | $ | 44                        |  | $                                                      | 23,005 |                                        | $
|Net income                                                 |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|Minimum
      pension liability adjustment                 |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|Foreign currency
      translation adjustments             |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|Unrealized
      holding losses on investments             |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|Issuance of
      warrants to purchase common stock in     |                                    | 
|connection
      with settlement of shareowner lawsuits    |                                    |  |                    |       |                                        |   |                           |  |                                                        | 323    |                                        |  
|Issuance
      of common stock related to employee benefit |                                    | 
|plans                                                      |                                    |  |                    | 28    |                                        |   |                           |  |                                                        | 89     |                                        |  
|Issuance of
      common stock related to Telica           |                                    | 
|acquisition                                                |                                    |  |                    | 3     |                                        |   |                           |  |                                                        | 8      |                                        |  
|Other                                                      |                                    |  |                    | 1     |                                        |   |                           |  |                                                        | 8      |                                        |  
|                                                           |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|Balance
      as of March 31, 2005                         |                                    |  |                    | 4,427 |                                        | $ | 44                        |  | $                                                      | 23,433 |                                        | $
|                                                           |                                    |  |                    |       |                                        |   |                           |  |                                                        |        |                                        |  
|                                                           |                                    |  |                    |       |                                        |  

See Notes to Unaudited Consolidated
Financial Statements.

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|         |                   
|-------- | ------------------
|<PAGE> 6 | Form 10-Q - Part I

LUCENT TECHNOLOGIES INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
(Dollars in Millions)
(Unaudited)

|                                                                                                  | Six months
      ended
      March 31, | 
|------------------------------------------------------------------------------------------------- | -------------------------------------- | 
|                                                                                                  | 2005                                   | 
|Operating
      activities:                                                                       |                                        | 
|Net
      income                                                                                  |                                        | 
|Adjustments
      to reconcile net income to net cash (used in) provided by operating activities: |                                        | 
|Depreciation
      and amortization                                                               |                                        | 
|Recovery
      of bad debts and customer financings                                               |                                        | 
|Deferred income taxes                                                                             |                                        | 
|Pension
      credit                                                                              |                                        | 
|Other
      adjustments for non-cash items                                                        |                                        | 
|Changes in
      operating assets and liabilities:                                                |                                        | 
|Receivables                                                                                       |                                        | 
|Inventories
      and contracts in process                                                        |                                        | 
|Accounts
      payable                                                                            |                                        | 
|Deferred
      revenue                                                                            |                                        | 
|Other
      operating assets and liabilities                                                      |                                        | 
|                                                                                                  |                                        | 
|Net cash
      (used in) provided by operating activities                                         |                                        | 
|                                                                                                  |                                        | 
|Investing
      activities:                                                                       |                                        | 
|Capital
      expenditures                                                                        |                                        | 
|Net
      purchases of marketable securities                                                      |                                        | 
|Other
      investing activities                                                                  |                                        | 
|                                                                                                  |                                        | 
|Net cash used
      in investing activities                                                       |                                        | 
|                                                                                                  |                                        | 
|Financing
      activities:                                                                       |                                        | 
|Repayments
      of long-term debt                                                                |                                        | 
|Issuance
      of common stock                                                                    |                                        | 
|Repayments
      of preferred stock                                                               |                                        | 
|Other
      financing activities                                                                  |                                        | 
|                                                                                                  |                                        | 
|Net cash used
      in financing activities                                                       |                                        | 
|Effect of
      exchange rate changes on cash and cash equivalents                                |                                        | 
|                                                                                                  |                                        | 
|Net decrease
      in cash and cash equivalents                                                   |                                        | 
|Cash and cash
      equivalents at beginning of year                                              |                                        | 
|                                                                                                  |                                        | 
|                                                                                                  |                                        | 
|Cash and
      cash equivalents at end of period                                                  |                                        | 
|                                                                                                  |                                        | 
|Income tax
      refunds (payments), net                                                          |                                        | 
|Interest
      payments                                                                           |                                        | 

See Notes to Unaudited
Consolidated Financial Statements.

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|         |                   
|-------- | ------------------
|<PAGE> 7 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

# 1. BASIS OF PRESENTATION

Lucent Technologies Inc.s
(referred to in this report as the Company, we, us,
our or Lucent) unaudited consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) that are considered necessary
for a fair presentation of consolidated results of operations, financial position and cash
flows as of and for the periods presented.

We settled two pending lawsuits
subsequent to our second quarter of fiscal 2005 earnings release. The impact of these
settlements reduced our previously released net income by $15 million during the three and
six months ended March 31, 2005. The previously released diluted earnings per share was
also reduced from 10 cents per share to nine cents per share during the six months ended
March 31, 2005.

We are required to make estimates and
assumptions that affect the amounts reported in the unaudited consolidated financial
statements and footnotes. Actual results could differ from those estimates. We believe
that some of the more critical accounting estimates and related assumptions that affect
our financial condition and results of operations are in the areas of revenue recognition,
pension and postretirement benefits, income taxes, legal contingencies, receivables and
customer financings, inventories, business restructuring and intangible assets. Estimates
and assumptions are periodically reviewed and the effects of any material revisions are
reflected in the period that they are determined to be necessary.

A $40 million reversal of payroll and
benefit-related liabilities was included in our results of operations during the first
quarter of fiscal 2005. This reversal included $24 million related to the fiscal 2004
annual employee incentive awards, as those incentive payments were less than expected, and
$16 million of out-of-period adjustments in connection with certain non-U.S. benefit
plans.

The results for the periods presented
are not necessarily indicative of the results for the full year and should be read in
conjunction with the audited consolidated financial statements for the year ended
September 30, 2004 included in our Annual Report on Form 10-K, filed on December 3, 2004.
Certain reclassifications were made to conform to the current period presentation.

# 2. PENSION AND
POSTRETIREMENT BENEFITS

The following tables summarize the
components of the pension and postretirement benefits:

|                                         | Pension
        benefits           | 
|---------------------------------------- | ---------------------------------- | 
|                                         | Three months
      ended March 31, | 
|(in
      millions)                      | 2005                               | 
|Service
      cost                       |                                    | 
|Interest cost                            |                                    | 
|Expected
      return on plan assets     |                                    | 
|Amortization
      of prior service cost |                                    | 
|Amortization
      of actuarial losses   |                                    | 
|Termination
      benefits               |                                    | 
|Curtailments                             |                                    | 
|Settlements                              |                                    | 
|                                         |                                    | 
|Benefit
      credit                     |                                    | 
|                                         |                                    | 

|                                         | Postretirement
        benefits    | 
|---------------------------------------- | ---------------------------------- | 
|                                         | Three months
      ended March 31, | 
|(in
      millions)                      | 2005                               | 
|Service
      cost                       |                                    | 
|Interest
      cost                      |                                    | 
|Expected
      return on plan assets     |                                    | 
|Amortization
      of prior service cost |                                    | 
|Amortization
      of actuarial losses   |                                    | 
|                                         |                                    | 
|Benefit
      cost                       |                                    | 
|                                         |                                    | 

---



|         |                   
|-------- | ------------------
|<PAGE> 8 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

# 3. STOCK-BASED COMPENSATION

We follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, for our stock-based
compensation plans and do not recognize expense for stock option grants if the exercise
price is at least equal to the market value of the common stock at the date of grant.
Stock-based compensation expense reflected in the as reported net income includes expense
for restricted stock unit awards and option modifications and the amortization of certain
acquisition-related deferred compensation expense.

In accordance with Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS 148, the following table summarizes the
pro forma effect of stock-based compensation as if the fair value method of accounting for
stock options had been applied in measuring compensation cost. No tax benefits were
attributed to the stock-based employee compensation expense during the periods presented
below, because valuation allowances were maintained on substantially all of our net
deferred tax assets.

|                                                             | Three months
      ended March 31, |  | Six months
      ended March 31, |     
|------------------------------------------------------------ | ---------------------------------- |  | -------------------------------- | ----
|(in
      millions, except per share amounts)                | 2005                               |  | 2004                             |     
|Net
      income                                             |                                    |  | $                                | 267 
|Add:
      Stock-based employee compensation expense         |                                    | 
|included
      in as reported net income                     |                                    |  |                                  | 2   
|Deduct:
      Total stock-based employee compensation        |                                    | 
|expense
      determined under the fair value based method   |                                    |  |                                  | (77 
|                                                             |                                    |  |                                  |     
|Pro forma
      net income                                   |                                    |  | $                                | 192 
|                                                             |                                    |  |                                  |     
|Net
      income per share applicable to common shareowners: |                                    | 
|As reported:                                                 |                                    | 
|Basic                                                        |                                    |  | $                                | 0.06
|Diluted                                                      |                                    |  | $                                | 0.06
|Pro
      forma:                                             |                                    | 
|Basic                                                        |                                    |  | $                                | 0.04
|Basic                                                        |                                    |  | $                                | 0.04

During December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment,
requiring all share-based payments to employees, including grants of employee stock
options, to be recognized as compensation expense in the consolidated financial statements
based on their fair values. As amended by the SEC on April 14, 2005, this standard is
effective for annual periods beginning after June 15, 2005, (our first quarter of fiscal
2006) and includes two transition methods. Upon adoption, we will be required to use
either the modified prospective or the modified retrospective transition method. Under the
modified retrospective approach, the previously reported amounts are restated for all
periods presented to reflect the SFAS 123 amounts in the income statement. Under the
modified prospective method, awards that are granted, modified, or settled after the date
of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested
equity-classified awards that were granted prior to the effective date should continue to
be accounted for in accordance with SFAS 123 except that amounts must be recognized in the
income statement. The unrecognized compensation expense associated with these unvested
awards is expected to be approximately $100 million as of September 30, 2005 that would be
amortized over a weighted-average period of approximately 1.5 years. We are currently
evaluating the impact of this standard and its transitional alternatives.

# 4. BUSINESS RESTRUCTURING

|                                                    
|----------------------------------------------------
|(in
      millions)                                 
|Restructuring
      reserve as of September 30, 2004
|Revisions
      to prior year plans                 
|Utilization
      of reserves                       
|                                                    
|Restructuring
      reserve as of March 31, 2005    
|                                                    

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|         |                   
|-------- | ------------------
|<PAGE> 9 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Facility closing charges were
recognized under the restructuring program for the expected remaining future cash outlays
associated with trailing lease liabilities, lease termination payments and expected
restoration costs in connection with plans to reduce a significant number of leased
facilities. The remaining liability is expected to be paid over the remaining lease terms
and is reflected net of expected sublease income of $137 million. Additional charges may
be required in the future if the expected sublease income is not realized.

# 5. SUPPLEMENTARY BALANCE
SHEET INFORMATION

|                                                                    | March 31, |  | September
      30, |      
|------------------------------------------------------------------- | --------- |  | ------------------- | -----
|(in
      millions)                                                 | 2005      |  | 2004                |      
|Completed
      goods                                               |           |  | $                   | 617  
|Work in
      process                                               |           |  |                     | 45   
|Raw materials                                                       |           |  |                     | 220  
|                                                                    |           |  |                     |      
|Inventories,
      net of reserves of $716 as of March 31, 2005 and |           | 
|$710
      as of September 30, 2004                                 |           |  | $                   | 882  
|                                                                    |           |  |                     |      
|Costs and
      recognized income not yet billed                    |           |  | $                   | 80   
|Billings
      in excess of costs and recognized income             |           |  |                     | (178 
|                                                                    |           |  |                     |      
|Contracts
      in process reflected in other current liabilities   |           |  | $                   | (98  
|                                                                    |           |  |                     |      
|Income tax
      receivables, including related interest            |           |  | $                   | 928  
|Non-trade
      receivables                                         |           |  |                     | 123  
|Deferred
      income taxes                                         |           |  |                     | 286  
|Prepaid
      expenses                                              |           |  |                     | 218  
|Restricted
      cash                                               |           |  |                     | 40   
|Forward
      contracts receivable                                  |           |  |                     | 4    
|Other                                                               |           |  |                     | 16   
|                                                                    |           |  |                     |      
|Other current
      assets                                          |           |  | $                   | 1,615
|                                                                    |           |  |                     |      
|Marketed
      software                                             |           |  | $                   | 264  
|Internal
      use software                                         |           |  |                     | 129  
|Restricted
      cash                                               |           |  |                     | 119  
|Non-trade
      receivables                                         |           |  |                     | 20   
|Investments                                                         |           |  |                     | 68   
|Retainage
      receivables                                         |           |  |                     | 18   
|Other                                                               |           |  |                     | 238  
|                                                                    |           |  |                     |      
|Other assets                                                        |           |  | $                   | 856  
|                                                                    |           |  |                     |      
|Deferred
      revenue                                              |           |  | $                   | 708  
|Shareholder
      lawsuit settlement                                |           |  |                     |     
|Warranty                                                            |           |  |                     | 210  
|Contracts
      in process                                          |           |  |                     | 98   
|Business
      restructuring                                        |           |  |                     | 61   
|Other                                                               |           |  |                     | 778  
|                                                                    |           |  |                     |      
|Other current
      liabilities                                     |           |  | $                   | 1,855
|                                                                    |           |  |                     |      
|Deferred
      income taxes                                         |           |  | $                   | 244  
|Deferred
      compensation                                         |           |  |                     | 109  
|Business
      restructuring                                        |           |  |                     | 109  
|Environmental                                                       |           |  |                     | 72   
|Warranty                                                            |           |  |                     | 71   
|Minority
      interests                                            |           |  |                     | 50   
|Other, including
      contingencies                                |           |  |                     | 400  
|                                                                    |           |  |                     |      
|Other liabilities                                                   |           |  | $                   | 1,055
|                                                                    |           |  |                     |      

---



|          |                   
|--------- | ------------------
|<PAGE> 10 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

# 6. GOODWILL AND OTHER
ACQUIRED INTANGIBLE ASSETS

The following table summarizes the
changes in the carrying value of goodwill and other acquired intangible assets from
September 30, 2004 to March 31, 2005 by reportable segment. Goodwill relating to messaging
products was reclassified from the INS segment to the Mobility segment as a result of
changes in our segment reporting structure effective October 1, 2004.

|                              
|------------------------------
|acquired                      
|intangible                    
|(in
      millions)           
|As
      of September 30, 2004
|Amortization                  
|Reclassification/Other        
|                              
|As of March
      31, 2005    
|                              

# 7. COMPREHENSIVE INCOME

The components of other comprehensive
income are summarized below. Foreign currency translation adjustments are generally not
adjusted for income taxes, as they relate to indefinite investments in non-U.S.
subsidiaries.

|                                                                   
|-------------------------------------------------------------------
|March 31,                                                          
|(in
      millions)                                                
|Net
      income                                                   
|Minimum pension
      liability adjustment                         
|Foreign
      currency translation adjustments                     
|Unrealized
      holding (losses) gains on investments             
|Reclassification
      adjustment for realized gains on investments
|                                                                   
|Comprehensive
      income                                         
|                                                                   

# 8. EARNINGS PER COMMON
SHARE (EPS)

Basic EPS is calculated by dividing
the net income applicable to common shareowners by the weighted average number of common
shares outstanding during the period. Diluted EPS is calculated by dividing net income
applicable to common shareowners, adjusted to exclude preferred dividends and accretion,
conversion costs, redemption costs and interest expense related to the potentially
dilutive securities, by the weighted average number of common shares outstanding during
the period, plus any additional common shares that would have been outstanding if
potentially dilutive common shares had been issued during the period.

---



|          |                   
|--------- | ------------------
|<PAGE> 11 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the
computation of basic and diluted EPS:

|                                                                   
|-------------------------------------------------------------------
|                                                                   
|(in
      millions, except per share amounts)                      
|Net
      income                                                   
|Conversion
      and redemption cost - 8.00% convertible securities
|Preferred
      stock dividends and accretion                      
|                                                                   
|Net income
      applicable to common shareowners - basic          
|Adjustment
      for dilutive securities on net income:            
|Interest
      expense related to 2.75% convertible securities     
|                                                                   
|Net income
      applicable to common shareowners - diluted        
|                                                                   
|Weighted
      average shares outstanding - basic                  
|Effect of
      dilutive securities:                               
|Stock options                                                      
|Warrants                                                           
|2.75% convertible
      securities                                 
|                                                                   
|Weighted
      average shares outstanding - diluted                
|                                                                   
|EPS:                                                               
|Basic                                                              
|Diluted                                                            

The following table summarizes the potential
shares of common stock that were excluded from the diluted per share calculation, because
the effect of including these potential shares would be antidilutive.

|                                                                                   
|-----------------------------------------------------------------------------------
|March 31,                                                                          
|(in
      millions)                                                                
|8%
      convertible securities                                                    
|7.75% convertible
      securities                                                 
|2.75% convertible
      securities                                                 
|                                                                                   
|Total potentially
      dilutive shares                                            
|                                                                                   
|Stock
      options excluded from the diluted per share because the exercise       
|price
      was greater than the average market price of the common 
        shares
|                                                                                   

# 9. OPERATING SEGMENTS

The accounting policies of the
reportable segments are the same as those applied in the unaudited consolidated financial
statements. The reportable segments are Mobility Solutions (Mobility),
Integrated Network Solutions (INS) and Lucent Worldwide Services
(Services).  Mobility provides software and wireless equipment to support
radio access and core networks. INS provides a broad range of software and wireline
equipment related to voice networking (primarily consisting of switching products, which
we sometimes refer to as convergence solutions), data and network management (primarily
consisting of access and related data networking equipment and operations support
software) and optical networking. Services is a worldwide organization that provides
deployment, maintenance, professional and managed services in support of both
our product offerings as well as multivendor networks.

---



|          |                   
|--------- | ------------------
|<PAGE> 12 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Beginning October 1, 2004,
  results for messaging products are reflected in the Mobility segment rather
  than the INS segment. We reclassified our segment results prior to fiscal 2005
  to conform to our current segment structure.

Recent organizational changes
  related to combining our mobility and wireline businesses into a single unit,
  called the Network Solutions Group, were announced April 19, 2005. These changes
  are in the process of being implemented and may impact our current reportable
  segment structure in the future.

Performance measurement and
  resource allocation for the reportable segments are based on many factors. The
  primary financial measures include the revenues, costs and expenses directly
  controlled by each reportable segment and exclude the following:

| |  | Global sales organization expenses.
| | - | -----------------------------------

| |  | Certain costs related to shared services, such as general corporate functions, which are
managed on a common basis in order to realize economies of scale and efficient use of
resources.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Certain personnel compensation and benefits, including most of the impacts related to
pension, postretirement and postemployment benefits, differences between the actual and
budgeted benefit rates and differences between actual and budgeted employee incentive
awards.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Bad debt and customer financing expenses and recoveries.
| | - | --------------------------------------------------------

| |  | Business restructuring.
| | - | -----------------------

| |  | Revenues and expenses associated
with licensing and protecting intellectual property rights.
| | - | --------------------------------------------------------------------------------------------

| |  | Certain other general and miscellaneous costs and expenses not directly used in assessing
the performance of the operating segments, including impairment or amortization of
goodwill and other acquired intangible assets related to acquisitions completed prior to
fiscal 2004.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                         
|---------------------------------------------------------
|March 31,                                                
|(in
      millions)                                      
|Revenues                                                 
|Mobility                                                 
|INS                                                      
|Services                                                 
|                                                         
|Reportable
      segments                                
|Other                                                    
|                                                         
|Revenues                                                 
|                                                         
|Operating
      income                                   
|Mobility                                                 
|INS                                                      
|Services                                                 
|                                                         
|Reportable
      segments                                
|Global sales
      organization                          
|Shared services
      such as general corporate functions
|Unallocated
      personnel costs and benefits           
|Recovery
      of bad debts and customer financings      
|Business restructuring                                   
|Other                                                    
|                                                         
|Operating
      income                                   
|                                                         

Two customers accounted for 33% and
10% of consolidated revenues during the three months ended March 31, 2005 and 28% and 13%
of consolidated revenues during the six months ended March 31, 2005. Two customers
accounted for 29% and 8% of consolidated revenues during the three months ended March 31,
2004 and 25% and 11% of consolidated revenues during the six months ended March 31, 2004.

---



|          |                   
|--------- | ------------------
|<PAGE> 13 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

# 10. COMMITMENTS AND
CONTINGENCIES

# Legal Proceedings

We are subject to legal proceedings,
  lawsuits, and other claims, including proceedings by government authorities.
  In addition, we may be subject to liabilities of some of our former affiliates
  under separation agreements with them. Legal proceedings are subject to uncertainties,
  and the outcomes are difficult to predict. Consequently, unless otherwise indicated,
  we are unable to estimate the ultimate aggregate amounts of monetary liability
  or ranges of possible losses with respect to our pending litigation matters
  as of March 31, 2005. The resolution of these matters could have a material
  impact on our consolidated results of operations, financial position and cash
  flows. Although no individual item was material to our consolidated results
  of operations, charges of $43 million were recognized during the three months
  ended March 31, 2005, primarily due to changes in estimates related to the settlement
  of various litigation matters.

Securities and Related
Cases

We settled the majority of our
assorted securities, ERISA and derivative class action and other related lawsuits against
us and certain of our current and former directors, officers and employees. The settlement
covers all claims generally relating to the purchase of Lucent securities during different
class periods and is a global settlement of 53 separate lawsuits, including a consolidated
shareowner class action lawsuit in the U.S. District Court of New Jersey, and related
ERISA, bondholder, derivative, and other state securities cases. Under the settlement
agreement, we paid $315 million, consisting of $100 million in common stock (approximately
33 million shares) that was deposited in escrow in December 2003, and $215 million in
cash, that was paid in January 2005. We also issued warrants to purchase 200 million
shares of our common stock in December 2004. The warrants have an exercise price of $2.75
per share and expire on December 10, 2007. The warrants were valued at $323 million upon
issuance. A charge of $71 million was recognized due to changes in the estimated fair
value of the warrants during the first quarter of fiscal 2005. We also paid $5 million for
the cost of settlement administration plus certain other costs involved in the issuance of
securities. We continue to pursue our claim against one of our fiduciary insurance
carriers that provided coverage up to $20 million.

We will defend any lawsuits that may
be brought by parties that have opted out or that were not part of the settlement. We and
certain of our current and former officers and directors were defendants in two such
actions in the U.S. District Court in New Jersey, Staro Asset Management, LLC v. Lucent
Technologies Inc. et al., and Florida State Board of Administration v. Lucent Technologies
Inc. et al.,alleging violations of federal securities laws. These two cases were
settled. Other cases have been and may continue to be brought by individual investors who
opted out of the settlement.

Government Investigations

During August 2003, the U.S.
Department of Justice (the DOJ) and the SEC informed us that they had each
commenced an investigation into possible violations of the Foreign Corrupt Practices Act
(FCPA) with respect to our Saudi Arabian operations. These investigations
followed allegations made by National Group for Communications and Computers Ltd.
(NGC) in an action filed against us on August 8, 2003, which is described
below. In April 2004, we reported to the DOJ and the SEC that an internal FCPA compliance
audit and an outside counsel investigation found incidents and internal control
deficiencies in our operations in China that potentially involve FCPA violations. We are
cooperating with those agencies. We believe these incidents and deficiencies did not have
a material effect on our results of operations. However, we cannot determine whether this
continuing investigation will affect our future business operations in China.

---



|          |                   
|--------- | ------------------
|<PAGE> 14 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

As disclosed in a Form 8-K filing on
November 8, 2004, our former Chairman and Chief Executive Officer, the former head of our
Saudi Arabian operations and a third former employee received Wells notices
from the SEC. These Wells notices state that the staff of the SEC is considering
recommending that civil actions be taken against these three former employees for FCPA
violations. The allegations against these individuals include violations of the
anti-bribery provisions of the FCPA and aiding and abetting the Companys alleged
violations of the FCPA requirements to keep accurate books and records and to maintain a
proper system of internal accounting controls. We have not received a Wells notice at this
time, but the investigation is continuing with respect to both China and Saudi Arabia.

Employment and Benefits
Related Cases

We have implemented various actions to
address the rising costs of providing retiree health care benefits and the funding of our
pension plans. These actions have led to the filing of cases against us and may lead to
the filing of additional cases. Purported class action lawsuits have been filed against us
in connection with the elimination of the death benefit from our U.S. management pension
plan in early 2003. Three such cases have been consolidated into a single action pending
in the US. District Court in New Jersey, captioned In Re Lucent Death Benefits ERISA
Litigation. The elimination of this benefit reduced our future pension obligations by
approximately $400 million. The benefit was paid out of the pension plan assets to certain
qualified surviving dependents, such as spouses or dependent children of management
retirees. The case alleges that we wrongfully terminated this death benefit and requests
that it be reinstated, along with other remedies. Another such case, Chastain, et al.
v. AT&T, wasfiled in the U.S. District Court in the Western District of
Oklahoma. The Chastain case also involves claims related to changes to retiree
health care benefits.

The Equal Employment Opportunity
Commission (EEOC) filed a purported class action lawsuit against us, EEOC
v. Lucent Technologies Inc., in the U.S. District Court in California. The case
alleges gender discrimination in connection with the provision of service credit to a
class of present and former Lucent employees who were out of work because of maternity
prior to 1980 and seeks the restoration of lost service credit prior to April 29, 1979,
together with retroactive pension payment adjustments, corrections of service records,
back pay, other damages and attorneys fees and costs.

Intellectual Property Cases

We are defendants in various cases in
which third parties claim infringement of their patents, including certain cases where
infringement claims have been made against our customers in connection with products we
have provided to them. In the case of Tantivy Communications, Inc. v. Lucent
Technologies, pending in the U.S. District Court in Texas, the plaintiff filed suit in
connection with nine of their U.S. patents. The plaintiff has identified several of our
products as potentially infringing their patents, including our 3G CDMA2000 1xEV-DO and 3G
CDMA2000 1xRTT systems. This case is scheduled for trial in September 2005.

Other Matters

We are involved in commercial disputes
with customers, suppliers, subcontractors and other parties. These matters generally
involve claims for monetary damages for breach of contract or breach of warranty or
similar claims in the normal course of business. While many of these disputes are settled
amicably without litigation, some of these matters have resulted in lawsuits being filed
against us. The condition of the telecommunications market in the past several years and
the insolvency or failure of numerous service providers has led to more claims and
disputes resulting in litigation. The following is a description of significant pending
litigation related to these matters.

---



|          |                   
|--------- | ------------------
|<PAGE> 15 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

A lawsuit involving investors in Actel
Integrated Communications was filed against us seeking $60 million in damages and punitive
damages, claiming we misled these investors as to certain technology which influenced
their decision to invest in Actel. This case, Sandler Capital Partners IV, L.P. et al.
v. Lucent Technologies, filed in New York State Court, is in the discovery phase.
During fiscal 2004, we settled cases filed against us by Actel. In addition, two other
cases were filed against us alleging that we failed to deliver working products related to
this technology: Maxcess, Inc. v. Lucent Technologies Inc. et al., filed in
the U.S. District Court for the Middle District of Florida, and Official Plan Committee
of Omniplex, Inc. v. Lucent Technologies Inc., filed in Missouri State Court. The
claims against us in the Maxcess case have been dismissed, and the plaintiff has
appealed this decision. The complaint in the Omniplex case seeks damages in excess
of $80 million and punitive damages. The Omniplex case is in the discovery phase.

We are a defendant in an
    adversary proceeding filed in U.S. Bankruptcy Court in Delaware by Winstar
    and Winstar Wireless,
Inc. in connection with the bankruptcy of Winstar and various related entities.
    The complaint asserts claims for breach of contract and other claims against
    us and seeks
compensatory damages of approximately $60 million, as well as costs and expenses
associated with litigation. Many of the claims against us have been dismissed but others are still pending. The complaint also seeks recovery of a payment to us of approximately $190
    million in December
2000, plus interest. The trial for the case is currently in progress.

On August 8, 2003, NGC filed an action
in the U.S. District Court for the Southern District of New York against us, our
subsidiary Lucent Technologies International Inc. and an unaffiliated company, alleging
violations of the Racketeer Influenced Corrupt Organizations Act (RICO) and
other improper activities. These allegations relate to activities in Saudi Arabia in
connection with certain telecommunications contracts between us, the Kingdom of Saudi
Arabia and other entities. The complaint seeks damages in excess of $63 million, which
could be tripled under RICO. The allegations in this complaint appear to arise out of
certain contractual disputes between NGC and Lucent that are the subject of a separate
case that NGC previously filed against us in U.S. District Court in New Jersey. Some of
the claims against us have been dismissed, but the case and other claims are still
pending.

In the case of Pf.Net Supply Corp.
v. Lucent Technologies, pending in the U.S. District Court in New Jersey, the
plaintiff claims that we breached an alleged $100 million purchase commitment and seeks to
compel us to meet this purchase commitment or pay damages. Both parties have filed motions
for summary judgment, which are currently pending.

# Separation Agreements

We are party to various agreements
that were entered into in connection with the separation of Lucent and former affiliates,
including AT&T, Avaya, Agere Systems and NCR Corporation. Pursuant to these
agreements, we and the former affiliates have agreed to allocate certain liabilities
related to each others business, and have agreed to share liabilities based on
certain allocations and thresholds. For example, AT&T, Avaya and NCR each assumed a
portion of the settlement liability related to our former consumer products leasing
business, which settled in August 2002. The plaintiffs counsel in this case has
filed a motion to reconsider the disposition of certain settlement proceeds, so this
matter may not be completely resolved. We are not aware of any material liabilities to our
former affiliates as a result of the separation agreements that are not otherwise
reflected in our unaudited consolidated financial statements. Nevertheless, it is possible
that potential liabilities for which the former affiliates bear primary responsibility may
lead to contributions by us.

# Guarantees and
Indemnification Agreements

We divested certain businesses and
assets through sales to third-party purchasers and spin-offs to our common shareowners. In
connection with these transactions, certain direct or indirect indemnifications are
provided to the buyers or other third parties doing business with the divested entities.
These indemnifications include secondary liability for certain leases of real property and
equipment assigned to the divested entity and certain specific indemnifications for
certain legal and environmental contingencies, as well as vendor supply commitments. The
time durations of such indemnifications vary but are standard for transactions of this
nature.

---



|          |                   
|--------- | ------------------
|<PAGE> 16 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

We remain secondarily liable for
approximately $234 million of lease obligations as of March 31, 2005, that were assigned
to Avaya, Agere and purchasers of our other businesses. The remaining terms of these
assigned leases and our corresponding guarantees range from one month to 15 years. The
primary obligor under assigned leases may terminate or restructure the lease obligation
before its original maturity and thereby relieve us of our secondary liability. We
generally have the right to receive indemnity or reimbursement from the assignees and have
not reserved for losses on this form of guarantee.

We are party to a tax-sharing
agreement to indemnify AT&T and are liable for tax adjustments that are attributable
to our lines of business, as well as a portion of certain other shared tax adjustments
during the years prior to our separation from AT&T. We have similar agreements with
Avaya and Agere. In addition to the fiscal year 2001 federal net operating loss carryback
claim discussed in Note 7 to our September 30, 2004 consolidated financial statements,
certain tax adjustments have been proposed or assessed subject to these tax-sharing
agreements. The outcome of these other matters is not expected to have a material adverse
effect on our consolidated results of operations, consolidated financial position or
near-term liquidity.

We license to our customers software
and rights to use intellectual property that might provide the licensees with an
indemnification against any liability arising from third-party claims of patent, copyright
or trademark infringement. We cannot determine the maximum amount of losses that we could
incur under this type of indemnification, because we often may not have enough information
about the nature and scope of an infringement claim until it has been submitted to us.

We indemnify our directors and certain
of our current and former officers for third-party claims alleging certain breaches of
their fiduciary duties as directors or officers. Certain costs incurred for providing such
indemnification may be recovered under various insurance policies. We are unable to
reasonably estimate the maximum amount that could be payable under these arrangements
since these exposures are not capped and due to the conditional nature of our obligations
and the unique facts and circumstances involved in each agreement. Historically, payments
made under these agreements have not had a material effect on our business, financial
condition or results of operations.

Warranty reserves are established for
costs that are expected to be incurred after the sale and delivery of a product or service
under specific product or service warranty provisions. These reserves are established when
it is probable that customers will make claims and when a reasonable estimate of costs can
be made. The reserves are determined as a percentage of revenues based on the actual trend
of historical charges incurred over various periods. In addition, any significant or
infrequent issues are specifically identified and reserved. The following table summarizes
the activity related to warranty reserves.

|(in
      millions)              | 2005 |  | 2004 |    
|-------------------------------- | ---- |  | ---- | ---
|Reserve
      as of September 30 |      |  | $    | 297
|Accruals
      for warranties    |      |  |      | 21 
|Payments                         |      |  |      | (37
|                                 |      |  |      |    
|Reserve
      as of March 31     |      |  | $    | 281
|                                 |      |  |      |    

---



|          |                   
|--------- | ------------------
|<PAGE> 17 | Form 10-Q - Part I

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

# Environmental Matters

Our current and historical operations
are subject to a wide range of environmental laws. In the United States, these laws often
require parties to fund remedial action regardless of fault. We have remedial and
investigatory activities underway at numerous current and former facilities.

Environmental reserves of $108 million
have been established for environmental liabilities that can be reasonably estimated as of
March 31, 2005. These reserves are not discounted to present value. We have receivables of
$26 million with respect to environmental matters due from third-party indemnitors as of
March 31, 2005. Receivables are recorded only if the indemnitors have agreed to pay the
claims and management believes collection of the receivables is reasonably assured.
Environmental matters did not have a significant impact on our consolidated results of
operations, financial position and cash flows for all periods presented.

Reserves for estimated losses from
environmental remediation are, depending on the site, based on analyses of many
interrelated factors, including:

| |  | The extent and degree of
contamination and the nature of required remedial actions.
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    

| |  | The timing and various types of environmental expenditures, such as investigatory,
remedial, capital and operations, and maintenance costs.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                            

| |  | Applicable legal requirements
defining remedial goals and methods.
| | - | ------------------------------------------------------------------
| |   |                                                                   

| |  | Progress and stage of existing remedial programs in
achieving remedial goals.
| | - | -----------------------------------------------------------------------------
| |   |                                                                              

| |  | Innovations in remedial technology and expected trends in
environmental costs and legal requirements.
| | - | -----------------------------------------------------------------------------------------------------
| |   |                                                                                                      

| |  | The number, participation level and
financial viability of other potentially responsible parties.
| | - | -------------------------------------------------------------------------------------------------
| |   |                                                                                                  

| |  | The timing and likelihood
of potential recoveries or contributions from other third parties.
| | - | --------------------------------------------------------------------------------------------
| |   |                                                                                             

| |  | Historical experience.
| | - | ----------------------
| |   |                       

| |  | The degree of certainty and
reliability of all the factors considered.
| | - | ----------------------------------------------------------------------

It is often difficult to estimate the
future impact of environmental matters, including potential liabilities, due to the above
factors and the lengthy time periods involved in resolving them, which may be up to 30
years or longer. Although we believe that our reserves are currently adequate, there can
be no assurance that the amount of capital expenditures and other expenses that will be
required for remedial actions and compliance with applicable environmental laws will not
exceed the amounts reflected in reserves 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 possible loss that may be incurred in excess of amounts provided for as of
March 31, 2005 cannot be reasonably estimated.

---



|          |                   
|--------- | ------------------
|<PAGE> 18 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

# FORWARD-LOOKING STATEMENTS

This Managements Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) contains
forward-looking statements that are based on current expectations, estimates, forecasts
and projections about us, our future performance, the industries in which we operate, our
beliefs and our managements assumptions. In addition, other written or oral
statements that constitute forward-looking statements may be made by us or on our behalf.
Words such as expects, anticipates, targets,
goals, projects, intends, plans,
believes, seeks, estimates, variations of such words
and similar expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions that are difficult to assess. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such forward-looking
statements. These risks and uncertainties include: fluctuations in the telecommunications
market; our ability to compete effectively; our product portfolio and ability to keep pace
with technological advances in our industry; our reliance on a limited number of key
customers; our exposure to the credit risk of our customers; the pricing, cost and other
risks inherent in our long-term sales agreements; the costs and risks associated with our
pension and postretirement benefit obligations; the social, political and economic risks
of our foreign operations; our reliance on third parties to manufacture most of our
products; our ability to generate positive cash flow; existing and future litigation; our
ability to protect our intellectual property rights and the expenses we may incur in
defending such rights; the complexity of our products; changes to existing regulations or
technical standards; compliance with environmental health and safety laws; and our ability
to retain and recruit key personnel. For a more complete list and description of such
risks and uncertainties, refer to our Form 10-K for the year ended September 30, 2004.
Except as required under the federal securities laws and the rules and regulations of the
SEC, we do not have any intention or obligation to update publicly any forward-looking
statements after the distribution of this MD&A, whether as a result of new
information, future events, changes in assumptions or otherwise.

# EXECUTIVE SUMMARY

We design and deliver the
    systems, software and services that drive next generation communications networks.
    Supported by
Bell Labs research and development, we use our strengths in mobility, optical,
    access, data and voice networking technologies, as well as services, to create
    new
revenue-generating opportunities for our customers, while enabling them to quickly
    deploy and better manage their networks. Our customer base includes communications
    service
providers, governments and enterprises worldwide.

There has been some consolidation
among service providers as they look to expand their scope and scale while improving cost
efficiencies. This industry dynamic presents both challenges and opportunities for
equipment vendors. One potential challenge may come in the form of rationalized capital
spending in the future. However, there will also be opportunities, as carriers will
require assistance integrating these large, complex networks. Also, depending on the
service providers involved, some of the consolidation will enable certain vendors to
extend their reach into customers that were previously focused on different technologies
or areas.

The telecom market remains rather
dynamic. We are at the beginning of a fundamental shift not only in the way networks
operate, but also in the way end users are accessing and using those networks. As this
transformation progresses, our customers are increasingly focused on deploying new
IP-based, revenue generating services that will differentiate their businesses and build
customer loyalty. However, the actual trialing, testing and deployment of these new
technologies will take some time. This is a long-term technology transition, which creates
opportunities for us and our customers in growth areas such as mobile high-speed data,
broadband access, metro optical networking and Voice over Internet Protocol (or VoIP)
solutions, as well as professional and managed services. We are working to turn these
technologies and opportunities into cost-effective offers for our customers.

Within this environment, service
providers are working to implement new technologies within their networks and meet
end-user demand for new and broader converged services. As a result, the market is already
presenting both opportunities and challenges for the near-term. To effectively compete, we
have to continue our work to expand our customer base, continue to improve overall
productivity and efficiency and be innovative in delivering new solutions to customers.

---



|          |                   
|--------- | ------------------
|<PAGE> 19 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We have been adapting our product
portfolio around a common IP Multi-Media Subsystem (IMS) based platform that
gives our customers the flexibility to build the types of networks and offer the types of
services to best meet the demand for converged broadband services. We are also combining
our mobility and wireline businesses into a single unit called the Network Solutions
Group. We expect this change to:

| |  | More efficiently deliver a common
set of IMS-based solutions to our customers that will help them expand their revenue
bases.
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                              

| |  | Improve our speed and time to market by streamlining supply and design chains and
shortening our product development cycles.
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             

| |  | Further simplify our operations through
increased standardization of processes and platforms.
| | - | ---------------------------------------------------------------------------------------------
| |   |                                                                                              

| |  | Further reduce our cost and
expense structure by eliminating redundancies across all parts of the company, including
support functions
and other areas.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                        

| |  | And lastly, assure that we maximize the leverage of our complete breadth of offers, for
example, providing optical back-haul solutions to our mobile customers.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

These changes will allow us to more
effectively focus our efforts and resources on pursuing high-growth areas where we have
strong technology, market or customer advantages. We believe that focusing on these areas
will allow us to better serve our customers and provide us with the best opportunity to
profitably grow the business.

Capital spending in our target markets
can change rapidly and can vary over short periods of time. As a result of this
uncertainty, it is difficult to make accurate forecasts of near- and long-term results and
cash flow. In addition, because a limited number of customers account for a significant
amount of our revenue, our results are subject to fluctuation due to changes in spending
by one or more of these customers. This exposure to fluctuation is most prevalent in our
Mobility segment.

|                                  | Three months
      ended March 31, |  | Six months
      ended March 31, |      
|--------------------------------- | ---------------------------------- |  | -------------------------------- | -----
|(in
      millions)               | 2005                               |  | 2004                             |      
|Mobility                          |                                    |  | $                                | 1,202
|INS                               |                                    |  |                                  | 589  
|Services                          |                                    |  |                                  | 499  
|Patent Licensing                  |                                    |  |                                  | 34   
|Other                             |                                    |  |                                  | 11   
|                                  |                                    |  |                                  |      
|Revenues                          |                                    |  | $                                | 2,335
|                                  |                                    |  |                                  |      
|Gross margin                      |                                    |  | $                                | 975  
|Gross margin
      rate           |                                    |  |                                  | 42   
|                                  |                                    |  |                                  |      
|Operating
      expenses          |                                    |  | $                                | 707  
|Percentage
      of revenue       |                                    |  |                                  | 30   
|                                  |                                    |  |                                  |      
|Operating
      income            |                                    |  | $                                | 268  
|Other income
      (expense), net |                                    |  |                                  | 43   
|Interest
      expense            |                                    |  |                                  | 85   
|Income taxes                      |                                    |  |                                  | (41  
|                                  |                                    |  |                                  |      
|Net income                        |                                    |  | $                                | 267  
|                                  |                                    |  |                                  |      

---



|          |                   
|--------- | ------------------
|<PAGE> 20 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As discussed in more detail throughout
our MD&A:

| |  | Mobility revenues increased due to continued deployment of EVDO and CDMA network expansion
in the U.S., as certain of our large customers increase network investment for high-speed
mobile data services and deploy additional capacity to support subscriber growth. INS
revenues decreased due to lower sales of legacy circuit switching, Personal Handyphone
Systems (PHS) and mature optical products, as declines in these product sales
continue to outpace growth in spending on next generation technologies. Services revenues
increased due to higher professional services and government contracts.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Gross margin rates were fairly consistent in all periods presented. Mobilitys gross
margin rates increased from the six months ended March 31, 2004 period but decreased from
the three months ended March 31, 2004 period due to the impact and timing of revised
estimates related to certain long-term contracts. Although the net impact of these
revisions was not significant in the aggregate, they were unfavorable in the first quarter
of fiscal 2004 and favorable in the second quarter of fiscal 2004. INS gross margin rates
decreased from the comparable prior year periods due to the impact of lower sales volume,
unfavorable product mix and higher inventory related charges. Services gross margin rates
were fairly consistent with the comparable prior year periods.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Operating expenses increased primarily due to higher recoveries of bad debt and customer
financing in the prior year periods.
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | Except for the three months ended March 31, 2005, other expense includes charges that were
recognized due to changes in the estimated fair value of the warrants issued as part of
the global settlement of our shareowner litigation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Federal and certain state and non-U.S. income taxes attributable to pre-tax income were
not provided for during the periods presented as a result of maintaining a full valuation
allowance on substantially all of our net deferred tax assets. However, income tax
benefits and interest income were recognized due to the resolution of certain prior period
tax matters.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cash and cash equivalents and marketable securities decreased $766 million to $4.1 billion
during the six months ended March 31, 2005, primarily due to higher working capital
requirements, the timing of annual employee incentive payments and cash paid in connection
with the shareowner litigation settlement.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
continue to expect our market and our business to grow as customers invest in
revenue-generating services and more efficient network operations. Mobility should remain
a strong growth sector as service providers continue their transition to 3G networks for
mobile high-speed data services. We will continue to invest in the key areas of
convergence, manage the product cycle of declining mature technologies and focus on growth
in next-generation areas like VoIP, broadband access and metro optical. We will continue
to manage our cost and expense profile as we work on expanding our revenue base in each of
our segments, as well as government and emerging markets outside of the United States. We
continue to expect fiscal 2005 annual revenues to grow on a percentage basis in the
mid-single digits, which we believe is at or above the market growth rate; our annual
gross margin rate on a percentage basis to be in the low 40s; and annual operating
expenses as a percentage of revenue to be about 30%. Actual results could be different
from these expectations.

# APPLICATION OF CRITICAL
ACCOUNTING ESTIMATES

Our unaudited consolidated
  financial statements are based on the selection of accounting policies and the
  application of significant accounting estimates, some of which require management
  to make significant assumptions. Actual results could differ materially from
  the estimated amounts. We believe that some of the more critical estimates and
  related assumptions that affect our financial condition and results of operations
  are in the areas of revenue recognition, pension and postretirement benefits,
  income taxes, legal contingencies, receivables and customer financing, inventories,
  business restructuring and intangible assets. Our critical accounting estimates
  were discussed with our Audit and Finance Committee of the Board of Directors.
  For more information on critical accounting estimates, refer to the MD&A
  included in our Form 10-K for the year ended September 30, 2004.

---



|          |                   
|--------- | ------------------
|<PAGE> 21 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

There were no accounting policies that
were adopted during the six months ended March 31, 2005 that had a material effect on our
financial condition and results of operations.

# CONSOLIDATED RESULTS OF OPERATIONS - THREE AND SIX MONTHS
ENDED MARCH 31, 2005 VERSUS THREE AND SIX MONTHS ENDED MARCH 31, 2004

# Revenues

|                                          | Three months
      ended March 31, |  |   | Six months
      ended March 31, |  | 
|----------------------------------------- | ---------------------------------- |  | - | -------------------------------- |  | 
|(in
      millions)                       | 2005                               |  |   | 2004                             |  | 
|Mobility                                  |                                    |  | $ | 1,202                            |  | 
|INS                                       |                                    |  |   | 589                              |  | 
|Services                                  |                                    |  |   | 499                              |  | 
|Patent Licensing                          |                                    |  |   | 34                               |  | 
|Other                                     |                                    |  |   | 11                               |  | 
|                                          |                                    |  |   |                                  |  | 
|Revenues                                  |                                    |  | $ | 2,335                            |  | 
|                                          |                                    |  |   |                                  |  | 
|U.S                                       |                                    |  | $ | 1,449                            |  | 
|Other
      Americas (Canada, Caribbean & |                                    | 
|Latin
      America)                      |                                    |  |   | 169                              |  | 
|EMEA
      (Europe, Middle East & Africa) |                                    |  |   | 334                              |  | 
|APaC
      (Asia Pacific & China)         |                                    |  |   | 383                              |  | 
|                                          |                                    |  |   |                                  |  | 
|Revenues                                  |                                    |  | $ | 2,335                            |  | 
|                                          |                                    |  |   |                                  |  | 

Revenues increased by 6% and 5% during
the three and six months ended March 31, 2005. The increases were driven by significantly
higher Mobility revenues, particularly in the U.S., and to a lesser extent, higher
Services revenues. INS revenues continued to decline. Refer to the segment discussion
later in this MD&A for information on changes in revenues by segment and product.

The increases in the U.S.
  were due to higher spending by certain large service providers in 3G network
  investment and in general capacity growth. The increases in Other Americas were
  due to higher CDMA sales in Venezuela and Brazil. The changes in EMEA were primarily
  due to higher sales of UMTS data cards and favorable foreign currency impacts
  in Europe, offset by lower optical revenues. The declines in APaC were primarily
  due to lower voice networking sales in China, primarily PHS, and the timing
  of CDMA network deployments in Korea and India. Revenues from customers located
  in China represented approximately 9% of consolidated revenues during the three
  and six months ended March 31, 2005.

Our revenues are subject to
fluctuation as a result of changes in customer spending patterns and short-term capital
requirements, as well as the timing of customer acceptances. Changes in foreign currency
rates favorably impacted our consolidated revenues by approximately 1% during the interim
fiscal 2005 periods.

# Gross Margin

|                        | Three months
      ended March 31, |  | Six months
      ended March 31, |          
|----------------------- | ---------------------------------- |  | -------------------------------- | ---------
|(in
      millions)     | 2005                               |  | 2004                             |          
|Gross
      margin      |                                    |  |                                  | $     975
|Gross margin
      rate |                                    |  |                                  | 42       

The following factors impacted our
consolidated gross margin rates:

| |  | The net impact of higher provisions for slow moving and obsolete inventories, customer and
supplier contract settlements, warranty expenses, and certain customer obligations reduced
the consolidated gross margin rate by one percentage point from the comparable prior
periods.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



|          |                   
|--------- | ------------------
|<PAGE> 22 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

| |  | The net impact
      of lower accruals for employee incentive awards and the net pension and
      postretirement benefit credit increased the consolidated gross margin rate
      by one percentage point from the comparable prior year periods.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Higher patent licensing revenues increased the consolidated gross margin rate by one
percentage point from the comparable prior year quarterly period.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Historically, our gross margin rates are generally higher in Mobility compared to INS and
Services, and higher in the U.S. compared to non-U.S. regions. The favorable impact of the
higher percentage of Mobility and U.S. revenues to the consolidated revenues was offset by
other factors including pricing, product mix and revised estimates related to long-term
contracts in certain prior periods. These items reduced the consolidated gross margin rate
by approximately two percentage points from the comparable prior year quarterly period.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our gross margin rate is subject to
fluctuation due to changes in volume, geographic and product or service mix, the impact of
significant inventory-related charges and revisions to estimates related to long-term
contracts. In addition, our gross margin rate may be impacted by other factors, such as
competitive pricing pressures, the initial impact of sales of next generation products,
our efforts in entering emerging markets and our ability to continue to realize cost
reductions.

# Operating Expenses

|                                                                                                      | Three months
      ended March 31, |  | Six months
      ended March 31, |    
|----------------------------------------------------------------------------------------------------- | ---------------------------------- |  | -------------------------------- | ---
|(in
      millions)                                                                                   | 2005                               |  | 2004                             |    
|Marketing
      and sales ("M&S")                                                                     |                                    |  | $                                | 249
|General
      and administration ("G&A")                                                              |                                    |  |                                  | 181
|                                                                                                      |                                    |  |                                  |    
|Selling,
      general and administrative ("SG&A") expenses, excluding the following
      two items: |                                    |  |                                  | 430
|Recovery
      of bad debts and customer financings                                                   |                                    |  |                                  | (11
|Amortization
      of other acquired intangibles assets                                               |                                    |  |                                  | 4  
|                                                                                                      |                                    |  |                                  |    
|SG&A                                                                                                  |                                    |  |                                  | 423
|Research
      and development ("R&D")                                                                |                                    |  |                                  | 292
|Business
      restructuring                                                                          |                                    |  |                                  | (8 
|                                                                                                      |                                    |  |                                  |    
|Operating
      expenses                                                                              |                                    |  | $                                | 707
|                                                                                                      |                                    |  |                                  |    

Operating expenses increased primarily
due to higher recoveries of bad debts and customer financing in the prior year periods.

The impact of lower accruals for
employee incentive awards due to higher than targeted performance in the prior period and
payroll and benefit-related liability reversals discussed below reduced operating
expenses. However, these impacts were partially offset by the impact of annual salary
increases and a lower net pension and postretirement benefit credit. The net effect of
these compensation and benefit matters impacted M&S, G&A and R&D trends, but
did not impact our reportable segments except for annual salary increases.

Payroll and benefit-related
liabilities of $40 million were reversed during the first quarter of fiscal 2005. This
reversal included $24 million related to the fiscal 2004 annual employee incentive awards,
as those incentive payments were less than expected, and $16 million of out-of-period
adjustments in connection with certain non-U.S. benefit plans. These reversals reduced
operating expenses by $28 million and the remainder favorably impacted gross margin. A
similar reversal of $12 million occurred during the first quarter of fiscal 2004. The
reversal was related to the fiscal 2003 annual employee incentive awards and reduced
operating expenses by $8 million and the remainder favorably impacted gross margin. The
net impact of these reversals reduced the increase in SG&A by $9 million and accounted
for $11 million of the reduction in R&D.

---



|          |                   
|--------- | ------------------
|<PAGE> 23 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

SG&A expenses

SG&A changes included the impact
of the compensation and benefit matters discussed above and higher selling expenses to
support the global sales organization and Services growth initiatives, including the
government market. Reserve reversals related to the expiration of a customer obligation
and supplier settlement also reduced SG&A by approximately $15 million during the
first quarter of fiscal 2004. SG&A charges related to various litigation matters were
$17 million and $22 million during the three months ended March 31, 2005 and 2004,
respectively.

Recovery of bad debts and
customer financings

Net recoveries were due to the favorable
settlement of certain fully-reserved notes receivable and accounts receivable and
significantly lower bad debt and customer financing exposure. These settlements generally
occur as a result of the resolution of work-outs and consummation of bankruptcy
proceedings. Further recoveries or charges may occur in the future.

# Goodwill impairment and
amortization of other acquired intangibles

Goodwill of $374 million as of March
31, 2005 is not amortized but is tested for impairment annually during the fourth quarter
or more often if an event or circumstance indicates that an impairment loss has been
incurred. Changes in our reporting units that may result from recent organizational
changes and INSs market conditions could lead to additional impairment tests and
possible future charges. The goodwill and other acquired intangible assets assigned to all
of INSs reporting units was $303 million as of March 31, 2005. Amortization of other
acquired intangible assets was related to the acquisition of Telica in the fourth quarter
of fiscal 2004.

R&D

Our continuing R&D investment
    is focused on enhancing and expanding our broad portfolio of leading edge
    technologies. In
Mobility, our R&D investment is focused primarily on CDMA and UMTS next generation
technologies and includes expenses associated with UMTS product trials with certain
customers. This investment continues to support our leadership position in spread-spectrum
technology and our development of high-speed mobile data solutions. Our INS R&D
investment supports a broad array of current and next generation technologies,
including VoIP, metro optical and broadband networking solutions. Together, Mobility
and INS share
R&D investment in a unified softswitch platform to support both wireless
and wireline
applications. Our R&D investment also supports reshaping our product portfolio
to capture convergence opportunities and Bell Labs long-term research programs
in such areas
as computer science, materials science and bioengineering. We believe our current
R&D
spending levels and plans are aligned with current and expected market opportunities.

R&D decreased primarily due to
changes in compensation and benefit matters discussed above. R&D expenses increased by
$6 million and $25 million in INS during the three and six months ended March 31, 2005 to
support next generation product development. R&D expenses were essentially consistent
in Mobility.

---



|          |                   
|--------- | ------------------
|<PAGE> 24 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

R&D costs are charged to expense
as incurred. However, the costs incurred for the development of computer software that
will be sold, leased or otherwise marketed are capitalized when technological feasibility
has been established. The amortization of these costs was reflected as a cost component in
determining our gross margin. Unamortized software development costs determined to be in
excess of the net realizable value of the product are expensed immediately and reflected
in R&D if such determination is made prior to when the product is available for
general release to the customer.

|(in
      millions)     | Three months
      ended March 31, |  | Six months
      ended March 31, |   
|----------------------- | ---------------------------------- |  | -------------------------------- | --
|                        | 2005                               |  | 2004                             |   
|Costs
      capitalized |                                    |  | $                                | 56
|                       
|Amortization            |                                    |  |                                  | 62

Business
restructuring

|(in millions)              | Three months
      ended March 31, |  | Six months
      ended March 31, |   
|-------------------------- | ---------------------------------- |  | -------------------------------- | --
|                           | 2005                               |  | 2004                             |   
|Employee
      separations |                                    |  | $                                | (3
|Contract settlements       |                                    |  |                                  | (1
|Facility
      closings    |                                    |  |                                  | (4
|Other                      |                                    |  |                                  |  
|                           |                                    |  |                                  |   
|Restructuring
      costs  |                                    |  |                                  | (8
|Asset write-downs          |                                    |  |                                  |  
|                           |                                    |  |                                  |   
|Net charge/(reversal)      |                                    |  | $                                | (8
|                           |                                    |  |                                  |   

Charges or reversals related to
facility closings were primarily due to changes in estimates of costs and reductions in
expected sublease rental income on certain properties resulting from changes in the
commercial real estate market. Reversals of employee separation charges were due to
differences in the actual versus assumed demographics of separated employees, including
the age, length of service and salaries. The net contract settlement reversals were the
result of settlements of certain contractual obligations and purchase commitments for
amounts lower than originally estimated.

We have essentially completed the
restructuring actions but continue to evaluate the remaining restructuring reserves at the
end of each reporting period. There may be additional charges or reversals, primarily
related to estimates of facility closing costs, including sublease income. Actual costs
have differed from estimated amounts in the past.

Refer to Note 4 to our unaudited
consolidated financial statements for details on our business restructuring.

# Pension, Postretirement
and Postemployment Benefits

We maintain defined benefit pension
plans covering the majority of employees and retirees, as well as postretirement benefit
plans for retirees that include health care, dental benefits and life insurance coverage.
Additionally, we offer various postemployment benefits to certain employees after
employment but before retirement, including disability benefits, severance pay and
workers compensation. Refer to Note 2 to our unaudited consolidated financial
statements for further information.

| | 
| | 

|(in
      millions)                                                        | Three months
      ended
      March 31, |  | Six months
      ended
      March 31, |     
|-------------------------------------------------------------------------- | ---------------------------------------- |  | -------------------------------------- | ----
|                                                                           | 2005                                     |  | 2004                                   |     
|Pension
      benefit credit                                               |                                          |  | $                                      | (244
|Postretirement
      benefit cost                                          |                                          |  |                                        | 64  
|                                                                           |                                          |  |                                        |     
|Net pension
      and postretirement benefit credit                        |                                          |  |                                        | (180
|Postemployment
      benefit cost                                          |                                          |  |                                        | 16  
|                                                                           |                                          |  |                                        |     
|Net pension,
      postretirement and postemployment
       benefit credit |                                          |  | $                                      | (164
|                                                                           |                                          |  |                                        |     

---



|          | 
|--------- | 
|<PAGE> 25 | 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Approximately two-thirds of these
amounts are reflected in operating expenses, with the balance in costs used to determine
gross margin. The changes from the interim fiscal 2004 periods were primarily due to:

| |  | Reduction in the discount rate from 5.75% to 5.50% (5.25% for postretirement benefits).
| | - | ---------------------------------------------------------------------------------------

| |  | Reduction in the market-related value of plan assets.
| | - | -----------------------------------------------------

| |  | Reduction in the expected rate of
return on pension plan assets from 8.75% to 8.5% (5.72% for postretirement benefits).
| | - | -----------------------------------------------------------------------------------------------------------------------

| |  | Recognition of the prescription drug benefit under Medicare Part D of the Medicare
Prescription Drug Improvement and Modernization
Act of 2003 (the Act) and expected reduction in plan participation rates as a
result of recent experience and the Act.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Impact of the recent collective
bargaining agreements that were ratified during December 2004.
| | - | ----------------------------------------------------------------------------------------------

Our annual net pension and
postretirement benefit credit is expected to decline by approximately $150 million
    from the fiscal 2004 period. Assuming no additional changes in actuarial
    assumptions, the
annual net pension and postretirement benefit credit is expected to continue
    to decrease by an additional $200 million during fiscal 2006, primarily due
    to amortization of differences between the market-related value and fair
    value
    of pension
    and postretirement plan assets. The market-related value is projected to
    be closely aligned with the fair value of the pension and postretirement
    plan assets as of September 30, 2005. Changes in actuarial assumptions
could also significantly impact the net credit in the future.

On January 21, 2005, the Centers for
Medicare and Medicaid Services (CMS) issued a Final Rule in the Federal Register for
implementing the Medicare Prescription Drug Benefit that clarified the methodology for
determining actuarial equivalence and the amount of the federal subsidy. The impact of the
Final Rule is not expected to materially affect our postretirement benefit cost and
related obligation.

# Other Income (Expense),
net and Interest Expense

|(in
      millions)                                             | Three months
      ended
      March 31, |  | Six months
      ended
      March 31, |    
|--------------------------------------------------------------- | ---------------------------------------- |  | -------------------------------------- | ---
|                                                                | 2005                                     |  | 2004                                   |    
|Legal
      settlements                                         |                                          |  | $                                      | (14
|SEC settlement                                                  |                                          |  |                                        |   
|Interest
      on tax settlements                               |                                          |  |                                        | 54 
|Interest
      income                                           |                                          |  |                                        | 29 
|Minority
      interests                                        |                                          |  |                                        | (13
|Other-than-temporary
      write-downs of investments           |                                          |  |                                        | (5 
|Gain on
      sale of investments                               |                                          |  |                                        |   
|Loss on
      extinguishment of convertible securities and debt |                                          |  |                                        | (3 
|Miscellaneous,
      net                                        |                                          |  |                                        | (5 
|                                                                |                                          |  |                                        |    
|Other
      income (expense), net                               |                                          |  | $                                      | 43 
|                                                                |                                          |  |                                        |    
|Interest
      expense                                          |                                          |  | $                                      | 85 
|                                                                |                                          |  |                                        |    

The legal settlement charges were
primarily related to the increase in fair market value of warrants issued in connection
with the global settlement of our shareowner lawsuit in all periods except the three
months ended March 31, 2005. Refer to Note 10 to our unaudited consolidated financial
statements for more information on legal settlements.

---



|          |                   
|--------- | ------------------
|<PAGE> 26 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

We reached an agreement with the SEC
and paid a $25 million fine in connection with the SECs investigation into our
revenue recognition issues previously identified in November and December of 2000. The
final judgment and consent decree to settle the investigation with the SEC was entered
into during May 2004.

Interest on tax settlements was
related to our favorable resolution of income tax audits, including the favorable
resolution of certain tax issues under tax sharing agreements with AT&T, Avaya and
Agere that were recognized during the interim prior periods.

The gain on sale of investments was
primarily related to the maturity of the forward contract on the sale of Corning common
stock. We obtained the shares of Corning in connection with the sale of certain joint
ventures associated with our optical fiber business in fiscal 2002.

The decrease in interest expense was
primarily due to the extinguishment of debt during fiscal 2004 and the six months ended
fiscal 2005.

# Income Taxes

|(in
      millions)                                                | Three months
      ended
      March 31, |  | Six months
      ended
      March 31, |    
|------------------------------------------------------------------ | ---------------------------------------- |  | -------------------------------------- | ---
|                                                                   | 2005                                     |  | 2004                                   |    
|Favorable
      resolution of prior period tax audits              |                                          |  | $                                      | (55
|Reversal
      of non-U.S. valuation allowances                    |                                          |  |                                        |   
|Non-U.S.
      and state income taxes attributed to pre-tax income |                                          |  |                                        | 14 
|                                                                   |                                          |  |                                        |    
|Income
      taxes                                                 |                                          |  | $                                      | (41
|                                                                   |                                          |  |                                        |    

The income tax benefit included the
impact of maintaining a valuation allowance on substantially all of our net deferred tax
assets. As a result, federal and certain state and non-U.S. income taxes attributable to
pre-tax income were not provided.

Certain income tax benefits were
recognized due to the favorable settlement of audit matters related to the years 1990
through 2002, including matters with a previously merged company and the settlement of
certain matters under tax sharing agreements with AT&T, Avaya and Agere. We also
recognized other income for interest related to these settlements.

Valuation allowances related to two
non-U.S. tax jurisdictions were also reversed during the prior year interim periods based
on our assessment that it was more likely than not that those deferred tax assets will be
realizable based on the income projections and certain other factors for those
jurisdictions.

We expect to continue to maintain a
full valuation allowance on our remaining net deferred tax assets until an appropriate
level of profitability is sustained or until we are able to develop tax strategies that
would enable us to conclude that it is more likely than not that a portion of our deferred
tax assets will be realizable.

We were profitable for seven
consecutive quarters beginning with the fourth quarter of fiscal 2003. If we continue to
generate comparable profits, we will no longer be in a U.S. cumulative loss position by
the fourth quarter of fiscal 2005. We determine cumulative losses on a rolling
twelve-quarter basis. If this occurs, we will consider the extent to which we can rely on
income forecasts to support the realization of our net U.S. deferred tax assets. These
income forecasts will be considered in conjunction with other positive and negative
evidence, including our forecasts of taxable income over the applicable carryforward
periods, our current financial performance, our market environment, and other factors, in
evaluating the need for a full or partial valuation allowance. Similar analysis will
continue to be performed in other jurisdictions where we are no longer in a cumulative
loss position.

---



|          |                   
|--------- | ------------------
|<PAGE> 27 | Form 10-Q - Part I

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As a result, we may determine in
fiscal 2005 that it is more likely than not that a portion of our net deferred tax assets
is realizable and a portion of the valuation allowance should be reversed. Any reversal of
valuation allowances will favorably impact our results of operations in the period of the
reversal. In addition, federal and certain state and non-U.S. income taxes attributable to
the fiscal years pre-tax income will be provided for in the period of the reversal
and in subsequent periods, which will reduce net income.

# Results of Operations by
Segment

# Mobility

|               | Three months ended March 31, | Six months ended March 31,
|-------------- | ---------------------------- | --------------------------
|(in millions)  | 2005                         |                           
|U.S.           |                              |                           
|Non-U.S        |                              |                           
|               |                              |                           
|Total revenues |                              |                           
|               |                              |                           
|Segment income |                              |                           
|               |                              |                           

Three months ended March
31, 2005 versus March 31, 2004

Mobility revenues increased by $235
million. U.S revenues increased primarily due to higher CDMA sales to Verizon Wireless and
Sprint as they increased their EVDO deployment and CDMA network investment for high-speed
mobile data services and additional subscriber capacity. These two customers accounted for
67% and 62% of total Mobility revenues during the second quarter of fiscal 2005 and 2004,
respectively. Including these two customers, five customers accounted for 84% of
Mobilitys revenues during the second quarter of fiscal 2005 and 2004. Non-U.S.
revenues increased primarily in Other Americas due to higher sales related to CDMA
projects in Brazil and Venezuela.

Substantially all of Mobility revenues
are currently generated from CDMA technology. UMTS revenues to date have been limited to
the sale of data cards. Revenues related to a UMTS contract with Cingular are not expected
to be significant during fiscal 2005. We are conducting third-generation UMTS / W-CDMA
trials in China and Japan. We expect customers to continue to increase investments in
mobile high-speed data equipment.

Consolidation has occurred with
several large U.S. wireless service providers. These events may impact our future revenue
trends as these service providers assess potential technology migrations to common
platforms or leverage excess capacity. These events may present opportunities for us to
assist in integration efforts or to expand our products/services or technologies in
certain networks where they were not previously utilized. Our future quarterly revenue
trends may be volatile as a result of the high concentration of revenue among a limited
number of customers and the resulting exposure to their spending patterns, as well as the
timing of revenue recognition related to long-term contracts.

Segment income increased due to a $45
million increase in gross margin that was partially offset by an $11 million increase in
operating expenses. The gross margin impact from higher sales volume was partially offset
by a lower gross margin rate resulting from revised estimates related to long-term
contracts and a supplier settlement in the prior year period.

Six months ended March 31,
2005 versus March 31, 2004

Mobility revenues increased $421
million. Revenues increased in all regions except APaC. U.S. revenues increased primarily
due to higher sales to Verizon Wireless and Sprint. These two customers accounted for 66%
and 60% of Mobility revenues during the six months ended March 31, 2005 and 2004,
respectively. Including these two customers, five customers accounted for 81% and 84% of
Mobilitys revenues during the six months ended March 31, 2005 and 2004,
respectively. Non-U.S. revenues increased primarily in Other Americas due to higher CDMA
sales in Brazil and Venezuela. These increases were partially offset by lower revenues in
APaC resulting from the timing of obtaining customer acceptance for a CDMA project in
India in the prior period.

---



|          | 
|--------- | 
|<PAGE> 28 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

Segment income increased due to a $275
million increase in gross margin that was partially offset by a $9 million increase in
operating expenses. The increase in gross margin was primarily due to higher sales volume.

# INS

|                                  | Three months
      ended March 31, |  | Six months
      ended March 31, |    
|--------------------------------- | ---------------------------------- |  | -------------------------------- | ---
|(in
      millions)               | 2005                               |  | 2004                             |    
|Voice
      networking            |                                    |  | $                                | 203
|Data and network
      management |                                    |  |                                  | 221
|Optical
      networking          |                                    |  |                                  | 165
|                                  |                                    |  |                                  |    
|Total
      revenues              |                                    |  | $                                | 589
|                                  |                                    |  |                                  |    
|U.S.                              |                                    |  | $                                | 258
|Non-U.S                           |                                    |  |                                  | 331
|                                  |                                    |  |                                  |    
|Total
      revenues              |                                    |  | $                                | 589
|                                  |                                    |  |                                  |    
|Segment income
      (loss)       |                                    |  | $                                | (12
|                                  |                                    |  |                                  |    

Three months ended March
31, 2005 versus March 31, 2004

INS revenues declined by $132 million.
The decline in U.S. revenues was attributed to reductions in mature technology products,
primarily circuit switching products within voice networking and certain optical
networking products. Lower non-U.S. sales primarily resulted from lower PHS sales in China
and lower optical sales in Europe. Five customers accounted for 40% and 43% of INS
revenues during the second quarter of fiscal 2005 and 2004, respectively.

The $73 million decline in voice
networking revenues was attributed to lower sales of circuit switching products ($43
million) and PHS ($17 million). Traditional circuit switching product sales are currently
declining at a faster rate than the growth in next generation technologies. The decline is
also more prevalent in the U.S., where certain customers are shifting their spending to
other areas, such as broadband access. Circuit switching represented approximately 50% of
voice networking revenues during the second quarter of fiscal 2005. PHS sales declined as
service providers in China curtailed their spending in preparation for transitioning to 3G
networks. PHS products accounted for 28% of voice networking revenues during the second
quarter of fiscal 2005. Optical networking revenues decreased by $62 million due to a
decline in mature SONET/SDH optical products.

Although customer-spending
    levels for INS products may not change significantly in the aggregate, the
    mix of what is purchased
is likely to continue to change or fluctuate. Our future revenues will be impacted
    by our success in offering a product portfolio that effectively addresses
    customer needs.
Although we believe quarterly INS revenues are stabilizing near the current
period level, they remain volatile and may continue to decline as customers carefully
consider alternatives in transitioning to next generation networks.

Segment income declined due to an $87
million decrease in gross margin and $2 million decrease in operating expenses. The lower
gross margin was due to lower sales and a decrease in the gross margin rate. The gross
margin rate decreased due to fixed costs being spread over lower revenue levels, higher
inventory charges and unfavorable product mix resulting from declines of mature products
with higher gross margin rates.

---



|          | 
|--------- | 
|<PAGE> 29 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

Six months ended March 31,
2005 versus March 31, 2004

INS revenues declined by $271 million.
The $219 million decline in the U.S. and $52 million decline in non-U.S. regions were due
to the similar reasons discussed above. Five customers accounted for 38% and 40% of
INSs revenues during the six months ended March 31, 2005 and 2004, respectively.

Voice networking revenues declined by
$178 million, data and network management revenues declined by $26 million, and optical
networking revenues declined by $67 million. Reasons for changes in voice and optical
networking revenue levels were similar to those described in the three-month discussion
above. Data and network management revenues declined primarily due to lower revenues from
Asynchronous Transfer Mode switching products and network operations software solutions.

Segment income decreased due to a $246
million decrease in gross margin and a $26 million increase in operating expenses. The
changes in gross margin were attributable to similar reasons described in the three-month
discussion above as well as certain reserve reversals and settlements recognized during
the prior period. Operating expenses increased due to additional expenses related to
Telica and R&D related to next generation products.

# Services

|                     | Three months
      ended March 31, |  | Six months
      ended March 31, |    
|-------------------- | ---------------------------------- |  | -------------------------------- | ---
|(in
      millions)  | 2005                               |  | 2004                             |    
|U.S.                 |                                    |  | $                                | 267
|Non-U.S              |                                    |  |                                  | 232
|                     |                                    |  |                                  |    
|Total
      revenues |                                    |  | $                                | 499
|                     |                                    |  |                                  |    
|Segment income       |                                    |  | $                                | 57 
|                     |                                    |  |                                  |    

Three months ended March 31, 2005 versus March 31, 2004

Services  revenues  increased by $20 million.  Revenues  increased in the U.S.  and in the non-U.S.  regions,  primarily in EMEA.  Five
customers accounted for 42% and 38% of Services revenues during the second quarter of fiscal 2005 and 2004, respectively.

Professional services revenues
increased by $52 million primarily due to government contracts and services for wireless
customers. Deployment services declined by $27 million due to a decrease in sales of
wireline products that required installation, as well as a decline in services related to
preparing sites for placement of customers wireless equipment.

Segment income decreased due to a $16
million increase in operating expenses, that was offset by a $14 million increase in gross
margin. The higher gross margin resulted from an increase in the gross margin rate and
higher revenues. The gross margin rate increased as a result of lower average employee
workforce levels. Operating expenses increased due to higher sales and marketing
expenses in order to expand worldwide service offerings.

Six months ended March 31, 2005 versus March 31, 2004

Services revenues increased by $74
million. Revenues increased in the U.S. and in the non-U.S. regions, primarily in Other
Americas and EMEA. Five customers accounted for 43% and 38% of Services revenues during
the six months ended March 31, 2005 and 2004, respectively.

Professional services increased by $97
million and deployment services decreased by $19 million due to similar reasons described
in the three-month discussion above.

Segment income increased due to a $37
million increase in gross margin that was partially offset by a $26 million increase in
operating expenses due to similar reasons described in the three-month discussion above.

---



|          | 
|--------- | 
|<PAGE> 30 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

# LIQUIDITY AND CAPITAL RESOURCES

# Cash flow from operating activities

|                                                      | Six months
      ended March 31, | 
|----------------------------------------------------- | -------------------------------- | 
|(in
      millions)                                   | 2005                             | 
|Net
      income                                      |                                  | 
|Non-cash items                                        |                                  | 
|Changes
      in working capital                      |                                  | 
|Other changes                                         |                                  | 
|                                                      |                                  | 
|Cash provided
      by (used in) operating activities |                                  | 
|                                                      |                                  | 

The additional $829 million of cash
used during the six months ended March 31, 2005 compared to the prior year period was
primarily due to the additional working capital requirements that are discussed below,
higher employee incentive awards payments of approximately $300 million and certain
customer settlements and customer financing recoveries of approximately $300 million
during the prior interim period.

Non-cash items include items that are
not expected to generate or require the use of cash such as the pension credit,
depreciation and amortization and charges or credits related to the changes in the fair
value of warrants issued in connection with the global settlement of our shareowner
lawsuit.

Changes in working capital
requirements include changes in receivables, inventories and contracts in process,
accounts payable and deferred revenue. These changes used $212 million of cash during the
six months ended March 31, 2005, despite a slight decline in the current quarterly revenue
levels compared with the fourth quarter of fiscal 2004. The changes in working capital
were primarily due to the timing of customer billings and accounts payable disbursements.
We periodically sell certain non-U.S. receivables with extended payment terms where it is
cost effective to do so. We sold $147 million of receivables during the six months ended
March 31, 2005. This impact is reflected in the change in receivables. We also committed
to extended billing terms on a limited basis, of which $310 million was outstanding as of
March 31, 2005, an increase of $78 million during the six months ended March 31, 2005. Our
days sales outstanding was 60 days and 51 days and inventory turnover was 6.2 and 6.9 as
of March 31, 2005 and September 30, 2004, respectively. Our days sales outstanding in
working capital were 34 days and 23 days as of March 31, 2005 and September 30, 2004,
respectively.

Generally, working capital
requirements will increase or decrease with changes in quarterly revenue levels. In
addition, working capital requirements might be impacted by changes in billing terms, the
timing of attaining billing milestones and collections. In addition to changes in working
capital requirements, the timing of certain payments will also impact our quarterly cash
flow. For example, while employee incentive awards are accrued throughout the fiscal year,
they are usually paid during the first quarter of the subsequent fiscal year.

Changes in other operating assets and
liabilities during the six months ended March 31, 2005, included the payment of fiscal
2004 incentive awards of approximately $600 million, the final payment related to our
shareowner lawsuit settlement of $215 million, cash outlays for our restructuring program
of $40 million and capitalized software of $115 million. These cash outlays were partially
offset by $201 million of proceeds from our welfare benefits trust as a reimbursement for
management health care contributions that were made during fiscal 2004. Cash flow from
operating activities also included net tax payments of $63 million (including related
interest).

---



|          | 
|--------- | 
|<PAGE> 31 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

# Cash flow from investing
activities

Investing activities used $739 million
of cash during the six months ended March 31, 2005. These activities included net
purchases of marketable securities of $662 million and capital expenditures of $77
million, of which $29 million was for internal use software. We may continue to purchase
marketable securities in an attempt to improve our investment returns. Investing
activities used $594 million of cash during the six months ended March 31, 2004, primarily
due to net purchases of marketable securities.

# Cash flow from financing
activities

Financing activities used $12 million
of cash during the six months ended March 31, 2005.  We used $101 million of cash in
connection with the early extinguishment of certain debt obligations. We also generated
proceeds of $85 million primarily from the issuance of approximately 27 million common
shares for certain employee benefit plans. Financing activities used $79 million of cash
during the six months ended March 31, 2004 primarily due to the repayment of certain debt
obligations and convertible securities, offset in part by proceeds from the issuance of
common stock for certain employee benefit plans.

# Recapitalization program

We are currently authorized by our
board of directors to issue shares of our common stock or use cash in exchange for certain
of our convertible securities and other debt obligations. From the fourth quarter of
fiscal 2002 through March 31, 2005, we retired approximately $2.6 billion of our
convertible securities and certain other debt obligations in exchange for approximately
643 million shares of our common stock and $837 million in cash, in separate, multiple and
privately-negotiated transactions. Most of these transactions reduced future obligations
at a discount and reduced annual interest and dividend requirements. We may use cash or
issue more of our common shares in similar transactions in the future. If our common stock
is issued, it would result in additional dilution to our common shareowners. Subsequent to
March 31, 2005, and through May 3, 2005, we retired $201 million of convertible securities
for approximately $207 million of cash.

# Future capital
requirements and funding sources

We do not expect our operations will
generate cash on a sustainable basis until our pre-tax income exceeds the amount of net
non-cash income items, which have been driven primarily by our pension credit. Our pension
credit was $486 million during the six months ended March 31, 2005 and $1.1 billion during
fiscal 2004. Our cash requirements during the next few years are primarily related to
funding our operations, capital expenditures, debt obligations and related interest and
other matters discussed below. Our 7.25% notes of $379 million mature during the fourth
quarter of fiscal 2006 and our 8% convertible securities of $817 million are redeemable at
the option of the holder on August 2, 2007. We believe our cash and cash equivalents of
$2.0 billion and marketable securities of $2.1 billion as of March 31, 2005, are
sufficient to fund our cash requirements for fiscal 2005 as well as the following few
years. However, we cannot provide assurance that our actual cash requirements will not be
greater than we currently expect. If sources of liquidity are not available or if we
cannot generate sufficient cash flow from operations, we might be required to obtain
additional sources of funds through additional operating improvements, capital market
transactions, asset sales or financing from third parties, or a combination thereof. We
cannot provide assurance that these additional sources of funds will be available or, if
available, would have reasonable terms.

---



|          | 
|--------- | 
|<PAGE> 32 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

On November 8, 2004, we received
written confirmation from the IRS that the Congressional Joint Committee on Taxation
(Joint Committee) approved our tentative agreement with the IRS that allowed
for a tax refund of approximately $816 million (plus statutory interest to the date of
payment). We expect to receive the refund during fiscal 2005, following completion of the
Joint Committees review of our 2001 federal income tax return audit. This review is
currently in process. The refund will be paid by the IRS to AT&T and, under our tax
sharing agreements with AT&T, would then be payable by AT&T to us. We do not
believe there are any other matters that would impact the refund claim.

The cash requirements of our
restructuring program are $2.6 billion, of which $2.4 billion had been paid through March
31, 2005. The expected remaining cash requirements are primarily for lease obligations
over the remaining lease terms, net of sublease rental income of $137 million. The cash
requirements could increase in the future if we do not receive this expected sublease
income.

We currently do not expect
    to make contributions to our qualified U.S. pension plans in fiscal 2005,
    fiscal 2006 and fiscal
2007. We are unable to provide an estimate of future funding requirements beyond
    fiscal 2007 for our U.S. pension plans. Based on our actuarial projections,
    we believe it is
unlikely that any required contributions would have a material effect on our
    liquidity during fiscal 2008 through fiscal 2010 based upon current law.
    Legislative changes were
recently proposed that would impact U.S. pension plans, if adopted. These proposals
    would alter the manner in which liabilities are determined for the purpose
    of calculating
required pension contributions and the timing and manner in which required contributions
to underfunded pension plans would be made. The proposals are still in the early
    stages and many details will need to be specified, and then approved by Congress.
    However, the
funding requirements for our U.S. pension plans could be significantly affected
    by these proposed changes, if adopted. Annual contributions to our non-qualified
    and non-U.S.
pension plans are expected to be approximately $50 million in each of the next
    five fiscal
years.

We currently provide retiree health
care benefits for our retirees in the United States. These benefits are provided under a
single plan covering 48,000 management retirees and 71,000 formerly represented retirees
as well as an additional 81,000 dependents of retirees. The plans for management and
formerly represented retirees are accounted for separately. Historically, retiree health
care benefits were funded through plan assets set aside in trusts and transfers of excess
pension assets. There are currently no plan assets available in these trusts to fund the
obligations of the management retirees. There are approximately $800 million of assets in
trusts that is available to fund the obligations of the formerly represented retirees as
of March 31, 2005, including approximately $400 million of plan assets that were set aside
in a welfare benefits trust during fiscal 2005.

We are permitted to transfer pension
plan assets that are in excess of 125% of pension plan obligations under Section 420 of
the Internal Revenue Code to fund annual retiree health care benefits. Our cumulative
Section 420 transfers during the past several years were $1.9 billion, although no
transfers were made within the management retiree plan since fiscal 2002 or within the
formerly represented retiree plan since fiscal 2003. If a Section 420 transfer is made, we
are required to maintain a certain level of cost per participant for a period of five
years beginning with the year of transfer. As a result, although these excess pension
asset transfers can help fund retiree health care benefits, they limit the ability to
implement cost reductions in the future.

Together with our unions, we are
seeking legislative changes to allow an employer to fund more than one years retiree
health care benefits through a Section 420 transfer and permit the terms of an enforceable
collective bargaining agreement to serve as an alternative to the maintenance of cost
requirements described above. There was approximately $1.6 billion of pension plan assets
that would be eligible for Section 420 transfers in our formerly represented retiree plan
as of the January 1, 2005 valuation date. The funding levels for our management retiree
pension plans were below the required thresholds that would allow for Section 420
transfers. If we are successful in obtaining the legislative changes, we believe that a
majority of our funding requirements for formerly represented retirees could be addressed
through Section 420 transfers based on current actuarial assumptions. However, no
assurances can be given that we will be successful in these efforts.

---



|          | 
|--------- | 
|<PAGE> 33 | 

Item 2.   Management's Discussion
and Analysis of Financial Condition and Results of Operations

If the legislative changes are not
obtained by September 1, 2006, our obligation to fund a $400 million trust for represented
retiree health care by 2012 terminates, and we can change the level of the subsidy for
represented retiree health care at our sole discretion beginning January 1, 2007, subject
to the maintenance of cost requirements.

Our expected funding requirements for
retiree health care benefits are expected to be $226 million, $243 million, $438 million,
$563 million and $533 million during fiscal 2005 and the next four consecutive fiscal
years, respectively. These amounts exclude potential Section 420 transfers, but include
the expected impact from the recently ratified collective bargaining agreements and
expected annual Medicare Part D subsidies of approximately $60 million beginning in fiscal
2007. These expected funding requirements are subject to change.

We have effective shelf registration
statements with the SEC for the issuance of up to approximately $1.9 billion of
securities, including shares of common stock and preferred stock, debt securities,
warrants, stock purchase contracts and stock purchase units.

# Customer financing
commitments

We may provide or commit to additional
customer financings on a limited basis. We are focusing on the larger service providers
that typically have less demand for such financing. We carefully review requests for
customer financing on a case-by-case basis. Such review assesses the credit quality of the
individual borrowers, their respective business plans and market conditions.  We also
assess our ability to sell or transfer the undrawn commitments and drawn borrowings to
unrelated third parties.  Our net exposure for customer financing commitments was not
material as of March 31, 2005.

---



|          | 
|--------- | 
|<PAGE> 34 | 

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

# RISK MANAGEMENT

We are exposed to market risk from
changes in foreign currency exchange rates, interest rates and equity prices. We manage
our exposure to risk from changing exchange rates and interest rates through the use of
derivative financial instruments, coupled with other strategies. Our risk management
objective is to minimize the effects of volatility on our cash flows by identifying the
assets, liabilities or forecasted transactions exposed to these risks and hedging them.
Hedges may be achieved either by forward or option contracts, swap derivatives, or terms
embedded into certain contracts that affect the ultimate amount of cash flows under the
contract. The gains and losses on these exposures are generally offset by reciprocal
changes in the value of the hedging instruments when used because there is a high
correlation between the hedging instruments and the underlying exposures. We use
derivative financial instruments as risk management tools and not for trading or
speculative purposes. Generally, price risk on equity holdings is not hedged.

# Foreign currency risk

As a multinational company, we conduct
our business in a wide variety of currencies and are therefore subject to market risk for
changes in foreign exchange rates. We use foreign exchange forward and option contracts to
minimize exposure to the risk of the eventual net cash inflows and outflows resulting from
foreign currency denominated transactions with customers, suppliers and non-U.S.
subsidiaries. Our objective is to hedge all types of foreign currency risk to preserve our
cash flows, but we generally do not expect to designate these derivative instruments as
hedges under current accounting standards unless the benefits of doing so are material.
Cash inflows and outflows denominated in the same foreign currency are netted on a legal
entity basis or at the corporate level. The corresponding net cash flow exposure is
appropriately hedged. To the extent that the forecasted cash flow exposures are overstated
or understated or if there is a shift in the timing of the anticipated cash flows during
periods of currency volatility, we may experience unanticipated currency gains or losses.
We do not hedge our net investment in non-U.S. entities because we view those investments
as long-term in nature.

# Interest rate risk

We are exposed to various forms of
interest rate risk. The fair value of our fixed-rate available-for-sale marketable
securities and the interest income earned on our cash and cash equivalents may fluctuate
as interest rates change. In addition, if interest rates are low, we may forgo the
opportunity to obtain more favorable interest rates on borrowings due to our fixed rate
debt obligations. Our objective is to mitigate the variability of cash inflows and
outflows resulting from interest rate fluctuations by maintaining a balanced mix of fixed
and floating-rate debt and investments. We mitigate our interest rate risk by entering
into interest rate swaps on a portion of our debt obligations to make them variable-rate
debt instruments and by including fixed-rate assets in our investment portfolio. We also
expect that these transactions will reduce our overall cost of borrowing and increase
investment returns.

As of March 31, 2005, we had interest
rate swaps where we received fixed interest rates (5.5% and 7.25%) and paid floating rates
based upon the three-month LIBOR rate plus agreed upon spreads (ranging from 1.72% to
2.89%) on notional amounts aggregating $400 million. As of March 31, 2005, the three-month
LIBOR rate was 3.12%. We do not foresee any significant changes in our interest rate risk
management strategy or in our exposure to interest rate fluctuations.

# Equity price risk

Our investment portfolio includes
equity investments in publicly held companies that are classified as available-for-sale
and other strategic equity holdings in privately held companies and venture funds. These
securities are exposed to price fluctuations and are generally concentrated in
high-technology industries. The carrying values of our available-for-sale equity
securities and privately held securities were $2 million and $66 million as of March 31,
2005, respectively. We generally do not hedge our equity price risk due to hedging
restrictions imposed by the issuers, illiquid capital markets or our inability to hedge
non-marketable equity securities in privately held companies.

---



|          | 
|--------- | 
|<PAGE> 35 | 

Item 4. Controls and
Procedures

We periodically review the design and
effectiveness of our disclosure controls and internal control over financial reporting
worldwide, including compliance with various laws and regulations that apply to our
operations both inside and outside the United States. We make modifications to improve the
design and effectiveness of our disclosure controls and internal control structure, and
may take other corrective action, if our reviews identify a need for such modifications or
actions. In designing and evaluating the disclosure controls and procedures and internal
control of financial reporting, we recognize that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.

An evaluation was carried out under
the supervision and with the participation of our management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the
effectiveness of our disclosure controls and procedures.  Based on that evaluation,
the CEO and CFO have concluded that as of the end of the period covered by this report,
our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and timely reported as
provided in the Securities and Exchange Commission rules and forms. No changes occurred
during the three months ended March 31, 2005 in our internal controls over financial
reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.

---



|          | 
|--------- | 
|<PAGE> 36 | 

Part II  Other
Information

Item 1. Legal Proceedings

Information about legal proceedings is
set forth in Note 10 to the unaudited consolidated financial statements included in this
report.

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

We held our 2005 Annual Meeting of Shareowners
on February 16, 2005. At that meeting, shareowners elected Robert E. Denham, Daniel S.
Goldin, Edward E. Hagenlocker, Carla A. Hills, Karl J. Krapek, Richard C. Levin, Patricia
F. Russo, Henry B. Schacht, Franklin A. Thomas and Ronald A. Williams as Directors of the
company. The terms of these directors will expire at the 2006 Annual Meeting. In addition,
shareowners approved one company proposal and rejected four shareowner proposals. The
persons elected and the results of the voting are as follows:

|                            | Votes For |  | Votes Withheld |               |  | 
|--------------------------- | --------- |  | -------------- | ------------- |  | 
|Robert
      E. Denham      |           |  |                | 3,660,798,267 |  | 
|Daniel
      S. Goldin      |           |  |                | 3,666,159,785 |  | 
|Edward
      E. Hagenlocker |           |  |                | 3,664,026,751 |  | 
|Carla
      A. Hills        |           |  |                | 3,652,697,402 |  | 
|Karl
      J. Krapek        |           |  |                | 3,660,659,328 |  | 
|Richard
      C. Levin      |           |  |                | 3,655,153,520 |  | 
|Patricia
      F. Russo     |           |  |                | 3,617,217,783 |  | 
|Henry
      B. Schacht      |           |  |                | 3,638,745,278 |  | 
|Franklin
      A. Thomas    |           |  |                | 3,649,681,788 |  | 
|Ronald
      A. Williams    |           |  |                | 3,655,272,741 |  | 

|                                                | Votes For |  | Votes Against |               | Abstain |  | Broker Non-Vote | 
|----------------------------------------------- | --------- |  | ------------- | ------------- | ------- |  | --------------- | 
|Company
      proposal to authorize the Board   |           |  |               |               |         |  |                 | 
|of Directors
      to effect a reverse stock    |           | 
|split at
      1 of 4 ratios                    |           |  |               | 3,360,799,131 |         |  | 421,089,490     | 
|                                               
|Shareowner
      proposal regarding publication |           | 
|of political
      action contributions         |           |  |               | 335,768,349   |         |  | 1,098,566,036   | 
|                                               
|Shareowner
      proposal regarding             |           | 
|performance-based
      compensation            |           |  |               | 781,290,362   |         |  | 775,740,057     | 
|                                                |           | 
|Shareowner
      proposal to amend company's    |           | 
|audit services
      pre-approval policy        |           |  |               | 501,274,523   |         |  | 1,035,643,041   | 
|                                               
|Shareowner
      proposal to approve a bylaw    |           | 
|amendment
      to require shareowner approval  |           | 
|of future
      golden parachutes               |           |  |               | 964,416,128   |         |  | 612,099,642     | 

Item
    6. Exhibits

See Exhibit Index on page 38 for a
description of the documents that are filed as Exhibits to this report on Form 10-Q or
incorporated by reference herein.

---



|          | 
|--------- | 
|<PAGE> 37 | 

SIGNATURES

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

|                  |  | Lucent Technologies Inc.Registrant                                                                                                                                                                                                                                                                    
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 
|                 
|Date: May 4, 2005 |  |                                                                                                                                                                                                                                                                                                       
|                 
|                  |  | /s/ John A. Kritzmacher
                                                             John A. Kritzmacher
                                                             Senior Vice President and Controller
                                                             (Principal Accounting Officer)

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|<PAGE> 38 | 

Exhibit Index

|10.1 |  | First
 Amendment,  dated as of April 8, 2005 to (i) the Amended  and  Restated  Letter of
Credit  Issuance  and  Reimbursement          Agreement,  dated as of October 1, 2004,
among Lucent  Technologies  Inc., the several banks and other financial  institutions
         or entities from time to time parties  thereto and JPMorgan  Chase Bank,  N.A.,
as  Administrative  Agent and (ii) the Amended          and Restated  External  Sharing
Debt  Agreement,  dated as of October 1, 2004,  among Lucent  Technologies  Inc. the
several          banks and other  financial  institutions  or entities  from time to time
parties  thereto and JPMorgan  Chase Bank,  N.A.,  as          Administrative Agent.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.1 |  | Certification
of Patricia F. Russo required by Rule 13a-14(a) (17 C.F.R. 240.13a-14(a)).
|---- |  | ----------------------------------------------------------------------------------------

|31.2 |  | Certification
of Frank A. D'Amelio required by Rule 13a-14(a) (17 C.F.R. 240.13a-14(a)).
|---- |  | ----------------------------------------------------------------------------------------

|32 |  | Certification
of Patricia F. Russo and Frank A. D'Amelio pursuant to 18 U.S.C. Section 1350,
         as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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