LUCENT TECHNOLOGIES INC
10-Q, 1996-08-09
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<PAGE> 1


                                  UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549

                                    FORM 10-Q



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

                         SECURITIES EXCHANGE ACT OF 1934

                 For the quarterly period ended June 30, 1996

                                       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 - Area Code 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 ....

At July 31, 1996 636,662,634 common shares were outstanding.



<PAGE> 2                                             Form 10-Q - Part I

                         PART I - FINANCIAL INFORMATION
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

                                           For the Three    For the Six
                                            Months Ended    Months Ended
                                             June 30,         June 30,
                                           1996     1995    1996     1995

Revenues.............................   $ 5,364  $ 5,083 $ 9,941  $ 9,242

Costs................................     3,194    2,832   5,947    5,141

Gross margin.........................     2,170    2,251   3,994    4,101

Operating Expenses
Selling, general and
  administrative expenses ...........     1,469    1,356   2,810    2,611
Research and development expenses ...       573      560   1,156    1,132
Total operating expenses.............     2,042    1,916   3,966    3,743

Operating income ....................       128      335      28      358
Other income - net ..................        52        -      59       21
Interest expense.....................        62       69     138      150
Income (loss) before income taxes....       118      266     (51)     229
Provision (benefit)for income taxes..        46      107     (20)      92

Net income(loss).....................   $    72   $  159 $   (31) $   137

Weighted average common shares
  outstanding (millions).............       625.6            575.1

Net income(loss)
  per common share (Note 1)..........   $   .11          $  (.05)

Dividends declared
  per common share...................   $   .075         $  .075


See Notes to Consolidated Financial Statements.



<PAGE> 3                                              Form 10-Q - Part I


                           CONSOLIDATED BALANCE SHEETS
                 (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

                                         June 30,   December 31,
                                           1996          1995
ASSETS

Cash and cash equivalents.............. $ 2,151      $    448

Accounts receivable less
  allowances of $259 in 1996 and
  $248 in 1995 ........................   4,707         5,354

Inventories (Notes 2 and 3)............   3,431         2,851

Contracts in process (net of contract
 billings of $518 in 1996 and
 $355 in 1995) (Note 2)................     533           371

Deferred income taxes - net............   1,513         1,482

Other current assets...................     186           173

Total current assets...................  12,521        10,679

Property, plant and equipment, net
  of accumulated depreciation of
  $6,541 in 1996 and $6,699 in 1995....   4,563         4,338

Prepaid pension costs..................   2,723         2,522

Deferred income taxes - net............     811           872

Capitalized software...................     352           387

Other assets...........................     962           924

TOTAL ASSETS........................... $21,932       $19,722


See Notes to Consolidated Financial Statements.



                                    (CONT'D)



<PAGE> 4                                            Form 10-Q - Part I


                      CONSOLIDATED BALANCE SHEETS (CONT'D)
                 (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

                                         June 30,   December 31,
                                           1996          1995
LIABILITIES

Accounts payable....................... $ 1,473       $ 1,229
Payroll and benefit-related
  liabilities..........................   2,514         3,026
Postretirement and postemployment
  benefit liabilities..................     200           227
Debt sharing amount in anticipation of
 the assumption of the Commercial
 Paper Program (Note 4)................       -         3,842
Debt maturing within one year (Note 4).   2,450            49
Other current liabilities..............   3,554         2,690

Total current liabilities..............  10,191        11,063

Postretirement and postemployment
  benefit liabilities..................   5,851         5,569
Long-term debt (Note 4)................   1,594           123
Other liabilities......................   1,885         1,533

Total liabilities .....................  19,521        18,288

STOCKHOLDERS' EQUITY

Common stock - par value $.01 per share
 Authorized shares: 3,000,000,000
 Outstanding shares:
 636,662,634 at June 30, 1996..........       6             -
Additional paid-in capital.............   2,438         1,406
Foreign currency translation...........     (33)           28
Retained earnings......................       -             -

Total stockholders' equity
(Note 5 )..............................   2,411         1,434

TOTAL LIABILITIES AND
 STOCKHOLDERS' EQUITY.................. $21,932       $19,722


See Notes to Consolidated Financial Statements.



<PAGE> 5                                            Form 10-Q - Part I
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (Dollars in Millions)
                                   (Unaudited)
                                                    For the Six
                                               Months Ended June 30,
                                                  1996      1995
Operating Activities
Net income(loss).........................      $   (31) $    137
Adjustments to reconcile net income (loss)
  to net cash provided by (used in)
  operating activities:
   Depreciation and amortization.........          602       730
   Provision for uncollectibles..........           34        36
   Deferred income taxes.................           28        35
   (Increase) decrease in
     accounts receivable (Note 3)........       (1,248)      547
   (Increase) in inventories.............         (628)     (760)
   Increase (decrease) in
     accounts payable....................          164      (148)
   Changes in other operating assets
     and liabilities.....................          594      (468)
   Other adjustments for noncash
     items - net.........................         (134)     (119)
Net cash used in operating activities....         (619)      (10)

Investing Activities
Capital expenditures ....................         (562)     (449)
Proceeds from the sale or disposal of
  property, plant and equipment..........           22        10
Purchases of equity investments..........          (36)      (23)
Sales of equity investments..............           79         -
Acquisitions, net of cash acquired.......         (234)        -
Other investing activities - net.........          (91)       15
Net cash used in investing activities....         (822)     (447)

Financing Activities
Repayments of long-term debt ............          (34)      (37)
Issuance of long-term debt...............           22         8
Proceeds of Issuance of Common Stock.....        2,887         -
Proceeds of debt sharing
  agreement - net........................            -       475
Transfers from (to) AT&T (Note 3)........          232      (238)
Increase in short-term
  borrowings - net.......................           47        57
Net cash provided by
  financing activities...................        3,154       265

See Notes to Consolidated Financial Statements.
                                    (CONT'D)



<PAGE> 6                                         Form 10-Q - Part I

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
                              (Dollars in Millions)
                                   (Unaudited)

                                                   For the Six
                                                  Months Ended
                                                     June 30,
                                                  1996      1995

Effect of exchange rate
  changes on cash........................          (10)       13

Net increase (decrease) in cash and
  cash equivalents.......................        1,703      (179)

Cash and cash equivalents
  at beginning of year...................          448       580

Cash and cash equivalents
  at end of period.......................      $ 2,151   $   401


















See Notes to Consolidated Financial Statements.



<PAGE> 7                                           Form 10-Q - Part I

               NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

1.    BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

On September 20, 1995, AT&T Corp.  ("AT&T")  announced its intention to create a
separate  company  comprised  of the AT&T  businesses  and  operations  that now
comprise Lucent Technologies Inc. ("Lucent" or the "Company") and the associated
assets and  liabilities  of those  businesses  and  operations,  including  Bell
Laboratories  (the  "Separation").  Lucent was incorporated on November 29, 1995
with 1,000  shares of Lucent  common  stock  ("Common  Stock"),  authorized  and
outstanding, all of which were owned by AT&T. On April 2, 1996, AT&T obtained an
additional  524,623,894  shares of Common Stock,  and on April 10, 1996,  Lucent
issued  112,037,037  shares in the Initial Public  Offering  ("IPO") for $27 per
share less  underwriting  discounts  and  commissions  of $1.05 per  share.  The
consolidated  financial  statements for 1996 reflect the assets and  liabilities
related to Lucent's  operations,  including  the IPO  proceeds and the impact of
AT&T's retention of approximately  $2,000 in customer  accounts  receivable.  In
addition,  employee  benefit  assets are being held by AT&T or employee  benefit
trusts,  subject to  agreements  to  transfer  these  assets to Lucent or trusts
established  by Lucent  following  the  distribution  of  Lucent  shares to AT&T
stockholders.

In July 1996,  AT&T announced that on September 30, 1996, it will distribute the
Lucent shares it owns to AT&T stockholders of record as of September 17, 1996.

BASIS OF PRESENTATION

The accompanying  unaudited consolidated financial statements have been prepared
by Lucent  pursuant to the rules and  regulations of the Securities and Exchange
Commission  ("SEC") and, in the opinion of management,  include all  adjustments
necessary  for a fair  presentation  of the  results  of  operations,  financial
position and cash flows for each period shown.

The  consolidated  financial  statements  presented  for the three and six month
periods  ending June 30, 1995 reflect the results of  operations  and changes in
cash  flows of the  businesses  transferred  to  Lucent  in 1996 from AT&T as if
Lucent were a separate entity.  The consolidated  financial  statements for 1995
have been prepared  using the  historical  results of operations  and historical
basis of the assets  and  liabilities  of these  businesses.  Additionally,  the
consolidated  financial  statements of Lucent  include the allocation of certain
AT&T



<PAGE> 8                                           Form 10-Q - Part I

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

corporate  headquarters assets,  liabilities and expenses relating to the Lucent
businesses that were transferred to Lucent from AT&T.  Management believes these
allocations are reasonable.  All intercompany  transactions and balances between
the Lucent businesses have been eliminated.

Lucent began  accumulating  retained  earnings on February 1, 1996,  the date on
which AT&T began  transferring to Lucent the assets and liabilities  relating to
Lucent's operations.

The  financial  statement  results  for  interim  periods  are  not  necessarily
indicative of financial results for the full year. These unaudited  consolidated
financial statements should be read in conjunction with the audited consolidated
financial  statements and notes thereto included in the Company's Current Report
on Form 8-K  dated  April 4,  1996,  and the  unaudited  consolidated  financial
statements and notes thereto included in the Company's  Quarterly Report on Form
10-Q for the period ending March 31, 1996.

EARNINGS(LOSS) PER COMMON SHARE

For the three and six month periods ending June 30, 1996, net earnings(loss) per
common  share were  calculated  by  dividing  the three  month net income of $72
million and six month net loss of $31  million by the  weighted  average  shares
that were outstanding during the respective periods. Included in the calculation
of the weighted  average shares  outstanding is the  retroactive  recognition to
January 1, 1996 of the 524,623,894 shares obtained by AT&T on April 2, 1996.

Replacement  stock  options and awards will be  effective as of October 1, 1996.
The number of replacement stock options and awards are unavailable at this time,
but their  impact may be dilutive in  calculating  earnings  per share in future
periods.



<PAGE> 9                                          Form 10-Q - Part I

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVENTORIES

Inventories are stated at the lower of cost or market (i.e. net realizable value
or replacement cost). Cost includes material,  labor and manufacturing overhead.
Cost is determined principally on a first-in, first-out ("FIFO") basis.

CONTRACTS IN PROCESS

Contracts in process is composed of unbilled costs and  recognized  earnings and
losses on  long-term  construction  type  contracts,  net of contract  billings.
Estimated  earnings  are  accumulated  in  contracts  in  process  by using  the
percentage of completion method of accounting  (either using a units of delivery
or a cost to cost methodology) for revenue recognition.  Revisions of profit and
loss  estimates  are reflected in the period in which the facts that require the
revision to the estimate become known.

3.   SUPPLEMENTARY BALANCE SHEET AND CASH FLOW INFORMATION

Inventories at June 30, 1996 and December 31, 1995 were as follows:
                                       June 30,   December 31,
                                         1996          1995

     Completed goods ...............   $2,047        $1,673
     Work in process and
       raw materials................    1,384         1,178
     Total inventories .............   $3,431        $2,851

The statement of cash flows for the period ending June 30, 1996 excludes  $2,000
of customer accounts  receivable retained by AT&T. This transaction has not been
reflected  on the  statement  of  cash  flows  because  it was a  noncash  event
resulting in a reduction to both accounts receivable and transfers from/to AT&T.



<PAGE> 10                                          Form 10-Q - Part I

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

4.   DEBT SHARING AGREEMENT

Lucent's 1995 consolidated  financial statements include an allocation of AT&T's
consolidated debt and related interest expense.  The allocation was based on the
capital  structure  of Lucent  anticipated  at the IPO closing date of April 10,
1996 ("Closing Date").  For 1995, an allocation  methodology was used to reflect
the capital structure through each historic period presented based on cash flows
for those periods.

At  December  31,  1995,  there was $3,842  outstanding  under the Debt  Sharing
Agreement  between  Lucent and AT&T.  This amount was  classified  as short-term
since Lucent replaced  substantially all the outstanding amounts under such Debt
Sharing Agreements with commercial paper issued by AT&T and assumed by Lucent on
the IPO Closing Date. On July 22, 1996,  Lucent issued $1,500 of long-term  debt
to pay down a portion of its commercial paper which was reflected on the balance
sheet as of June 30, 1996.  The amount of the  commercial  paper repaid with the
net proceeds from this  issuance has been  reflected as long-term  debt.  Lucent
expects  that,  over  time,  it may  replace  all  or  part  of the  outstanding
commercial  paper  with  short-or  long-term  borrowings,  as market  conditions
permit. The amount, timing and pricing of such debt issues are uncertain.

5.   STOCKHOLDERS' EQUITY
      Changes in total  stockholders'  equity  reflect the  retention by AT&T of
$2,000 in customer accounts receivable, the IPO proceeds,  Lucent's year-to-date
net loss,  net  transfers  from AT&T,  dividends  declared and  adjustments  for
foreign currency translation.
6.   TRANSACTIONS WITH AT&T

For the quarters  ending June 30, 1996 and 1995,  Lucent recorded $561 and $424,
respectively, of revenues from AT&T. For the six months ending June 30, 1996 and
1995, Lucent recorded $1,172 and $792, respectively, of revenues from AT&T.

At June 30, 1996 and December 31, 1995,  receivables  from AT&T amounted to $616
and $291, respectively.

At June 30, 1996 and December 31,  1995,  payables to AT&T  amounted to $358 and
$25, respectively.



<PAGE> 11                                          Form 10-Q - Part I

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

At June 30, 1996,  other  current  liabilities  included a prepayment by AT&T of
$500  million to be applied to AT&T's  purchases  that are due and payable on or
after January 1, 1997 for products, licensed materials and services from Lucent.

7.   COMMITMENTS AND CONTINGENCIES

Lucent's  current  and  historical  operations  are  subject  to a wide range of
environmental  protection laws. Lucent has remedial and investigatory activities
underway at 46 current and former facilities.  In addition, Lucent has succeeded
to being named a potentially  responsible party ("PRP") at numerous  "Superfund"
sites pursuant to the  Comprehensive  Environmental  Response,  Compensation and
Liability  Act of 1980  ("CERCLA")  or  comparable  state  statutes.  Under  the
Separation and Distribution  Agreement,  among AT&T,  Lucent and NCR Corporation
dated as of February 1, 1996,  and  amended and  restated as of March 29,  1996,
("Separation  and  Distribution  Agreement"),  Lucent  is  responsible  for  all
liabilities  primarily  resulting  from or related to the  operation of Lucent's
business as  conducted  at any time prior to or after the  Separation  including
related  businesses  discontinued  or disposed of prior to the  Separation,  and
Lucent's  assets  including,  without  limitation,  those  associated with these
sites.

It is often  difficult to estimate the future impact of  environmental  matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable  that a liability  has been incurred and the amount of the liability
is  reasonably  estimable.  This  practice  is  followed  whether the claims are
asserted or  unasserted.  Management  expects that the amounts  reserved will be
paid out over the period of  remediation  for the  applicable  site which ranges
from 5 to 30 years. Reserves for estimated losses from environmental remediation
are,  depending  on the site,  based  primarily  upon  internal  or third  party
environmental  studies, and estimates as to the number,  participation level and
financial  viability of any other PRPs, the extent of the  contamination and the
nature  of  required  remedial   actions.   Accruals  are  adjusted  as  further
information develops or circumstances change. The amounts provided for in



<PAGE> 12                                          Form 10-Q - Part I

                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (Dollars in Millions Except Per Share Amounts)
                                   (Unaudited)

Lucent's consolidated  financial statements in respect to environmental reserves
are the gross  undiscounted  amount of such  reserves,  without  deductions  for
insurance  or third party  indemnity  claims.  In those  cases  where  insurance
carriers  or  third  party  indemnitors  have  agreed  to pay  any  amounts  and
management believes that collectibility of such amounts is probable, the amounts
are  reflected as  receivables  in the  financial  statements.  Although  Lucent
believes  that its reserves  are  adequate,  there can be no assurance  that the
amount  of  capital  expenditures  and other  expenses  which  will be  required
relating to remedial actions and compliance with applicable  environmental  laws
will not exceed the amounts  reflected  in Lucent's  reserves or will not have a
material adverse effect on the financial condition of Lucent or Lucent's results
of  operations  or cash flows.  Any amounts of  environmental  costs that may be
incurred in excess of those provided for at June 30, 1996 cannot be determined.

One of Lucent's multi-year contracts is with Pacific Bell for the provision of a
broadband network based on hybrid fiber-coaxial cable technology.  In July 1996,
Lucent and  Pacific  Bell  agreed to modify the terms of the  contract  so as to
resolve  outstanding  issues and  potential  claims which may have arisen due to
implementation  difficulties  and cost  overruns  under the  contract.  Lucent's
financial  statements include reserves to reflect these agreed to modifications.
Lucent will continue to assess the adequacy of these reserves.

8.   SUBSEQUENT EVENTS

On July 17,  1996,  Lucent's  board of directors  voted to change the  Company's
fiscal  accounting  year to begin October 1 and end September 30. As a result of
the action, Lucent's 1996 fiscal year will end on September 30, 1996.



<PAGE> 13                                        Form 10-Q - Part I

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW

Prior to February 1, 1996,  AT&T  conducted  the  Company's  businesses  through
various divisions and subsidiaries. On February 1, 1996, AT&T began effectuating
the Separation by transferring to the Company the assets and liabilities related
to such businesses,  except that AT&T retained accounts receivable having a face
amount  of  approximately  $2,000  million.  The  Separation  was  substantially
completed,   including  the  transfer  of  substantially   all  the  assets  and
liabilities,  by the IPO Closing  Date.  The  transfer of certain  international
assets which are not material to Lucent in the  aggregate is pending  subject to
receipt of consents or approvals or  satisfaction  of other  applicable  foreign
requirements. Lucent's financial statements reflect the consummation of all such
transactions.  In addition,  employee  benefit  assets are being held by AT&T or
AT&T employee benefit trusts,  subject to agreements to transfer these assets to
Lucent or trusts  established by Lucent  following the  Distribution.  After the
completion of the IPO, AT&T owned  approximately 82.4% of the outstanding shares
of Common Stock.

In July 1996,  AT&T announced that on September 30, 1996, it will distribute the
Lucent shares it owns to AT&T stockholders of record as of September 17, 1996.

The 1995  consolidated  financial  statements  of Lucent  reflect the results of
operations,  financial position and cash flows of the businesses  transferred to
Lucent from AT&T in the Separation. As a result, the 1995 consolidated financial
statements of Lucent have been carved out from the financial  statements of AT&T
using the historical  results of operations  and historical  basis of the assets
and liabilities of such businesses.  Additionally,  the  consolidated  financial
statements of Lucent include certain assets, liabilities,  revenues and expenses
which  were  not  historically  recorded  at the  level  of,  but are  primarily
associated with, such businesses. Management believes the assumptions underlying
Lucent's financial statements are reasonable.



<PAGE> 14                                         Form 10-Q - Part I

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

There are a number  of  factors  that  contribute  to  variability  in  Lucent's
business.  This  variability  can produce  wide  fluctuations  in  revenues  and
earnings quarter to quarter, and in some cases year to year.  Variability is not
a  new  trend  and  Lucent  expects  it to  continue,  and  possibly  intensify.
Notwithstanding  this  variability,  Lucent  has  increased  both  revenues  and
earnings  (absent  restructuring  and other  charges) on an annual basis through
1995. The factors  contributing to variability include  seasonality,  multi-year
contracts and  associated  revenue  recognition.  See also RESULTS OF OPERATIONS
below with respect to the three and six month periods ending June 30, 1996.

Lucent's sales are highly  seasonal.  Most of Lucent's large  customers  delay a
large and growing  percentage  of their  capital  expenditures  until the fourth
quarter  of the  calendar  year.  Lucent has  placed an  increased  focus on the
completion of software releases by mid-year to allow for commercial availability
and delivery in the fourth quarter.  These software releases require significant
research and development expenditures early in the year, with minimal offsetting
revenues,  but are key  contributors  to  Lucent's  profits  during  the  fourth
quarter.  Additionally,  sales of consumer  products  in the retail  markets are
generally stronger in the fourth quarter, corresponding to holiday buying.

As a result of growing competitive pressures among network operators (which have
led to an  increasing  emphasis  on  return  on  investment  and  the  budgeting
process),  along with the  increasing  prominence of software as a percentage of
Lucent's revenues, the trend toward seasonality has been increasing.

Lucent's  revenues  and net income have been  strongest  in the fourth  calendar
quarter of each year,  representing 34.7% and 31.7% of consolidated revenues and
84.7% (before  restructuring  and other charges) and 83.6% of net income in 1995
and 1994,  respectively.  Consequently,  Lucent's  results of operations for the
first three quarters of each year have in the aggregate been  significantly less
profitable  than the fourth  quarter and Lucent has frequently  experienced  net
losses in the first quarter.

On July 17,  1996,  Lucent's  board of directors  voted to change the  Company's
fiscal  accounting  year to begin October 1 and end September 30. As a result of
the action,  Lucent's  1996 fiscal year will end on September 30, 1996. As noted
above, historically Lucent's business



<PAGE> 15                                         Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

has been highly seasonal, with revenue and net income concentrated in the fourth
quarter of the calendar year. This change will position  Lucent's  traditionally
highest revenue quarter at the beginning of its fiscal year rather than the end.

In recent  years,  the  purchasing  behavior of  Lucent's  large  customers  has
increasingly  been  characterized by the use of fewer,  larger  contracts.  This
trend is expected to intensify,  and  contributes to the variability of Lucent's
results.  Such larger purchase  contracts  typically involve longer  negotiating
cycles,  require the  dedication of substantial  amounts of working  capital and
other  Lucent   resources,   and  in  general  require   investments  which  may
substantially  precede recognition of associated revenues.  Moreover,  in return
for  larger,  longer-term  purchase  commitments,  customers  often  demand more
stringent acceptance criteria,  which can also cause revenue recognition delays.
Certain  multi-year  contracts may relate to new technologies which may not have
been previously  deployed on a large-scale  commercial  basis.  Lucent may incur
significant  initial cost overruns and losses on such  contracts  which would be
recognized in the quarter in which they became  ascertainable.  Further,  profit
estimates  on such  contracts  are  revised  periodically  over the lives of the
contracts, and such revisions can have a significant impact on reported earnings
in any one quarter.

Revenue recognition for work on multi-year  contracts is based upon the specific
terms and conditions of each contract which may vary  markedly.  Therefore,  the
amount of purchases  actually  contracted for or deployed in a period may differ
substantially from the revenues realized for the same period.

Lucent  reported  second quarter net income of $72 million,  or $0.11 per share.
The year-ago quarterly net income was $159 million,  or $0.25 per share on a pro
forma  basis.  For the  six-month  period,  Lucent  reported  a net  loss of $31
million,  or $0.05 per share compared with net income of $137 million,  or $0.22
per share on a pro forma basis in 1995. The  calculations of the  earnings(loss)
per share on a pro forma basis  assumed that all  636,661,931  of common  shares
were outstanding since January 1, 1995.

Operating income decreased $207 million and 4.2% as a percent of revenues in the
quarter  compared  with the same  quarter  in 1995.  For the  six-month  period,
operating  income  decreased  $330  million  and 3.6% as a percent  of  revenues
compared with the same period in 1995.  The decreases  were largely due to lower
gross  margins  and   increases  in  operating   expenses  in  the  quarter  and
year-to-date periods of 1996.



<PAGE> 16                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION


RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE
MONTHS ENDED JUNE 30, 1995

Total  revenues  increased to $5,364  million,  or 5.5% in the second quarter of
1996 compared with the second  quarter of 1995,  primarily due to gains in sales
from  Systems for  Network  Operators,  Microelectronic  Products  and  Business
Communications  Systems.  The overall revenue growth was partially offset by the
continued decline in revenue from Consumer Products. Revenue growth continued to
be generated both from sales in the United States and internationally (including
exports).

The  following  table  presents  Lucent's  revenues  by  product  line,  and the
approximate  percentage  of total  revenues  for the three months ended June 30,
1996 and 1995:

                                                      Three Months
                                                          Ended
                                                         June 30,
  Dollars in Millions                       --------------------------------
                                                 1996          1995
                                               -------       -------
Systems for Network Operators........          $2,969   55%   $2,565   50%
Business Communications Systems......           1,340   25     1,245   25
Microelectronic Products.............             605   11       451    9
Consumer Products....................             274    5       400    8
Other Systems and Products...........             176    4       422    8
Total................................          $5,364  100%   $5,083  100%

Revenues from Systems for Network Operators  increased $404 million, or 15.8% in
1996 compared  with the same quarter in 1995.  The increase was driven by higher
sales of switching,  transmission,  fiber-optic  cable products and professional
services.  Demand for those products was driven by second line subscriber growth
and customer  demand for  continued  network  upgrades.  The revenue  growth was
partially  offset by  decreased  sales of  traditional  cellular  infrastructure
systems.   While   shipments   of  personal   communications   service   ("PCS")
infrastructure systems rose over the year-ago quarter, revenues from digital PCS
contracts   often  cannot  be  recognized   until   substantial   completion  of
installation and system turnup.  Lucent expects to recognize  revenue related to
its PCS contracts in subsequent quarters.



<PAGE> 17                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Sales from  Systems for Network  Operators  in the United  States  increased  by
approximately 9% and international revenues increased approximately 38% compared
with the same quarter in 1995. The revenue increase in the United States was led
by sales to AT&T and the Regional Bell Operating Companies,  partially offset by
a revenue  decrease of  approximately  $100 million as a result of Lucent's exit
from the copper cable  business in 1995.  The  international  revenue growth was
driven  by  increased  sales  of  infrastructure  systems  and  services  in all
international regions. In addition, this revenue increase includes approximately
$140 million in revenue resulting from the acquisition of Philips Electronics NV
("Philips").  International  revenues  represented  about 29% of  revenues  from
Systems for Network Operators in the second quarter of 1996 compared with 24% in
same quarter in 1995.

During the first  quarter of 1996,  Lucent was  awarded a contract  from  Sprint
Spectrum Holdings LP ("SSLP") to supply equipment and services for approximately
60% of SSLP's  market  areas for its  nationwide  PCS  wireless  network  over a
five-year  period.  This  contract is subject to,  among  other  things,  Lucent
providing  (or  guaranteeing)  long-term  financing  to SSLP for its purchase of
equipment and services from Lucent.  Lucent and SSLP are negotiating final terms
and  conditions  under  which  Lucent  would  provide (or  guarantee)  long-term
financing of up to  approximately  $1,800 million in principal  amount available
over  the  five-year   period,   subject  to  a  final  contract  with  mutually
satisfactory terms.

Revenues from Business  Communications  Systems  increased $95 million,  or 7.6%
compared  with the same  quarter in 1995.  This  increase was  primarily  due to
higher sales in the United States and  internationally,  partially offset by the
continued  erosion of the rental base.  The revenue  growth in the United States
was led by sales of DEFINITY(R)  products,  SYSTIMAX(R)structured  wiring system
and  INTUITY(TM)  voice  messaging  products as well as higher revenue from Call
Centers and maintenance  contracts.  International  revenues increased by 17.1%,
largely due to growth in the Europe/Middle East/Africa and Asia/Pacific regions.

- --------------------------------------
(R)  Registered trademark of Lucent
(TM) Trademark of Lucent



<PAGE> 18                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Sales of Microelectronic Products increased $154 million, or 34.1% compared with
the same  quarter  in 1995 due to  higher  sales of  digital  signal  processors
("DSPs") and  application  specific  integrated  circuits  ("ASICs") to original
equipment manufacturers ("OEMs"), both internationally and in the United States.
Domestic  revenues  increased  approximately 32% compared to the same quarter in
1995, led by sales to OEMs.  International revenues increased approximately 36%.
The growth in  international  revenues was driven by continued  strength of DSPs
and ASICs sales in the Asia/Pacific region.  International  revenues represented
approximately 48% of the Microelectronic Products sales in the second quarter of
1996.

Revenues from Consumer Products sales decreased $126 million,  or 31.5% compared
with the same quarter in 1995.  The decline in revenues was primarily due to the
decrease in product sales related to the closing of the Phone Center Stores, the
discontinuance of unprofitable  product lines and the decrease in phone rentals.
Consumer  Products  will  continue to  distribute  its products  through  retail
outlets of resellers.

Revenues from sales of Other  Systems and Products  decreased  $246 million,  or
58.3% compared with the same quarter in 1995.  These revenues include sales from
the data communications unit as well as custom manufacturing systems.

Additionally,  Lucent  recorded  higher  second  quarter 1995  revenues in Other
Systems and  Products  category  due, in part,  to a  reclassification  of first
quarter 1995  intellectual  property  revenue  into the second  quarter of 1995.
Previously, intellectual property revenue was classified as Other Income.

Total costs  increased  $362  million,  or 12.8% in 1996  compared with the same
quarter  in 1995 due,  in part,  to the  integration  and  consolidation  of the
Philips  businesses  acquired  and  changes in the mix of  products  sold.  As a
percentage of revenue, gross margin declined to 40.5% from 44.3% in the year-ago
quarter.  This gross  margin  decline was due to changes in the mix of revenues,
erosion of high margin rental revenues and the Philips acquisition.  The revenue
mix reflected a higher proportion of hardware sales and a higher



<PAGE> 19                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

proportion  of  revenues  from  contracts  accounted  for  on  a  percentage  of
completion basis ("POC").  Under POC accounting,  direct contract  expenditures,
including research and development, are accounted for as costs and not operating
expenses.

OPERATING EXPENSES - THREE MONTHS ENDED JUNE 30, 1996 VERSUS THREE
MONTHS ENDED JUNE 30, 1995

Selling,  general and administrative  expenses  increased $113 million,  or 8.3%
compared  with the same  quarter in 1995.  The  increase  in the second  quarter
includes approximately $55 million due to continued expenditures associated with
the  start-up  of a  new  company  including  advertising  and  creating  a  new
information  systems  infrastructure.  In addition,  a significant amount of the
remainder of the increase was associated with the acquisition of Philips.

Selling,  general and  administrative  expenses  were 27.4% as a  percentage  of
revenues in the second  quarter of 1996  compared  with 26.7% as a percentage of
revenues in the second quarter of 1995.

Research and development  expenses increased $13 million,  or 2.3% compared with
the same quarter in 1995. Research and development expenses represented 10.7% as
a percentage of revenues in the second  quarter of 1996 compared with 11.0% as a
percentage of revenues in the second quarter of 1995.

OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED JUNE 30, 1996 VERSUS THREE MONTHS ENDED JUNE 30, 1995

Other income -- net increased $52 million in the second quarter of 1996 compared
with the same quarter in 1995.

Interest  expense in the second  quarter of 1996  decreased $7 million  compared
with the same quarter in 1995, primarily as a result of lower interest rates due
to the change in debt structure.

The effective  income tax rate of 39.0% in the second  quarter of 1996 decreased
from  40.2%  in the  same  quarter  of  1995,  primarily  due to the tax  impact
resulting from foreign earnings.



<PAGE> 20                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX
MONTHS ENDED JUNE 30, 1995

Total revenues  increased to $9,941 million,  or 7.6% in the six-month period of
1996 compared with the same period in 1995, primarily due to gains in sales from
Systems  for  Network   Operators,   Microelectronic   Products   and   Business
Communications  Systems.  The overall revenue growth was partially offset by the
continued decline in revenue from Consumer Products. Revenue growth continued to
be generated both from sales in the United States and internationally (including
exports).

The  following  table  presents  Lucent's  revenues  by  product  line,  and the
approximate  percentage of total revenues for the six months ended June 30, 1996
and 1995:

                                                        Six Months
                                                          Ended
                                                         June 30,
Dollars in Millions                            ------------------------------
                                                   1996              1995
                                                ---------         ----------
Systems for Network Operators........           $5,345    54%    $4,597    50%
Business Communications Systems......            2,486    25      2,373    26
Microelectronic Products.............            1,125    11        865     9
Consumer Products....................              569     6        754     8
Other Systems and Products...........              416     4        653     7
Total................................           $9,941   100%    $9,242   100%

Revenues from Systems for Network Operators  increased $748 million, or 16.3% in
1996 compared with the same six-month period in 1995. The increase was driven by
higher  sales  of  switching,  transmission,   fiber-optic  cable  products  and
professional  services.  The revenue  growth was  partially  offset by decreased
sales of traditional  cellular  infrastructure  systems.  While shipments of PCS
infrastructure systems rose over the year-ago period,  revenues from digital PCS
contracts   often  cannot  be  recognized   until   substantial   completion  of
installation and system turnup.

Sales from  Systems for Network  Operators  in the United  States  increased  by
approximately  11%  and  international  revenues  increased   approximately  35%
compared with the same  six-month  period in 1995.  The revenue  increase in the
United  States  was  led by  sales  to  AT&T  and the  Regional  Bell  Operating
Companies,  partially offset by a revenue decrease of approximately $190 million
as a result of Lucent's exit from the copper cable business in 1995.



<PAGE> 21                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

International  revenues  represented  about 26% of  revenues  from  Systems  for
Network  Operators  for the first six months of 1996  compared with about 23% in
same period of 1995.  International  revenue  growth  continues  to be driven by
sales of infrastructure  systems and services and the revenue resulting from the
acquisition of Philips.

Revenues from Business  Communications  Systems increased $113 million,  or 4.8%
compared with the same six-month  period in 1995,  primarily due to higher sales
in the United  States and  internationally,  partially  offset by the  continued
erosion of the rental base.  The revenue  growth in the United States was driven
by  increased  service  revenue  due to  higher  product  sales  and  growth  in
maintenance  contracts.  International  revenues increased by about 15%, largely
due to growth in the Europe/Middle East/Africa and Asia/Pacific regions.

Sales of Microelectronic Products increased $260 million, or 30.1% compared with
the same  six-month  period  in 1995 due to  higher  sales of DSPs and  ASICs to
original equipment  manufacturers both internationally and in the United States.
International revenues increased  approximately 42%. The growth in international
revenues was driven by continued  strength of sales in the Asia/Pacific  market.
International  revenues  represented  approximately  50% of the  Microelectronic
Products sales in the first six months of 1996.

Revenues from Consumer Products sales decreased $185 million,  or 24.5% compared
with the same  six-month  period in 1995.  The decline in revenues was primarily
due to the expected  continuing decline in the customer base for rental revenues
for telephones and declines in product sales related to the closing of the Phone
Center  Stores.  Consumer  Products  will  continue to  distribute  its products
through retail outlets of resellers.

Revenues from sales of Other  Systems and Products  decreased  $237 million,  or
36.3% compared with the same  six-month  period in 1995. The decrease was due in
part to lower  revenues  from the data  communications  unit as well as customer
manufacturing systems.



<PAGE> 22                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Total costs  increased  $806  million,  or 15.7% in 1996  compared with the same
six-month  period  in  1995  due to  higher  sales  volumes  and in  part to the
integration  and  consolidation  of  the  Philips  businesses  acquired.   As  a
percentage of revenue, gross margin declined to 40.2% from 44.4% in the year-ago
period.  This gross  margin  decline was due to changes in the mix of  revenues,
erosion of high margin rental revenues and the Philips acquisition.  The revenue
mix  continued  to reflect a higher  proportion  of hardware  sales and a higher
proportion of revenues from contracts accounted for on a POC basis.

OPERATING EXPENSES - SIX MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS
ENDED JUNE 30, 1995

Selling,  general and administrative  expenses  increased $199 million,  or 7.6%
compared with the same period in 1995.  The increase for the first six months of
1996 includes approximately $95 million due to continued expenditures associated
with the  start-up of a new company  including  advertising  and  creating a new
information  systems  infrastructure.  In addition,  a significant amount of the
remainder  of the  increase  was  associated  with the  acquisition  of Philips.
Selling,  general and  administrative  expenses  were 28.3% as a  percentage  of
revenues in the first six months of 1996 and 1995.

Research and development  expenses increased $24 million,  or 2.1% compared with
the same six-month period in 1995. Research and development expenses represented
11.6% as a percentage  of revenues in the first six months of 1996 compared with
12.2% as a percentage of revenues in the same year-ago period.

OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - SIX
MONTHS ENDED JUNE 30, 1996 VERSUS SIX MONTHS ENDED JUNE 30, 1995

Other income -- net increased $38 million compared with the same period in 1995.

Interest  expense in the second quarter of 1996  decreased $12 million  compared
with the same  period in 1995,  primarily  as a result of lower  interest  rates
associated with the change in debt structure.

The  effective  income  tax  rate of  39.2%  for the  six-month  period  of 1996
decreased from 40.2% in the same period of 1995, primarily due to the tax impact
resulting from foreign earnings.



<PAGE> 23                                          Form 10-Q - Part I

              MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY

Total assets  increased  $2,210  million,  or 11.2%,  from  year-end  1995.  The
increase was primarily due to the increase of cash and cash equivalents, largely
as a result from the cash  generated from Lucent's  initial public  offering and
higher  inventories.  These  increases  were  partially  offset by a decline  in
accounts   receivable.   In  comparison,   year-end   accounts   receivable  are
historically  at their highest levels and inventory  levels are  historically at
their lowest.

Working capital,  defined as current assets less current liabilities,  increased
$2,714  million from year-end  primarily  resulting from the cash generated from
the initial public  offering and the repayment of commercial  paper with the net
proceeds from the issuance of long-term debt. The increase was partially  offset
by the retention of $2,000 million of customer accounts receivable by AT&T. (See
also Note 3.)

Prepaid  pension  costs are  increasing as returns on pension plan assets exceed
pension  benefits  earned  and  the  interest  cost  on  the  projected  benefit
obligation during the period.

The  decrease in payroll and  benefit-related  liabilities  reflects  the annual
payment of year-end bonuses in the first quarter of 1996.

The  increase  in  stockholders'  equity  was  primarily  due to the  receipt of
proceeds  from the IPO  offset by the  retention  by AT&T of $2,000  million  of
customer accounts receivables. (See also Notes 3 and 5.)

Lucent filed a  registration  statement on Form S-3,  which became  effective on
April 3, 1996 to register the offering from time to time of up to $3,500 million
of long-term  debt. On July 22, 1996,  Lucent issued $1,500 million of long-term
debt to pay down a portion of its commercial  paper.  Lucent expects that,  over
time,  it may  replace  all or part of the  outstanding  commercial  paper  with
short-or long-term borrowings,  as market conditions permit. Future financing is
contemplated to be arranged as necessary to meet Lucent's  requirements with the
timing,  amount and form of issue  depending  on Lucent's  needs and  prevailing
market and general economic conditions. Lucent anticipates that borrowings under
its working capital facility,  the issuance of additional commercial paper, cash
generated  from  operations  and short- and long-term  debt  financings  will be
available  to satisfy its future  cash  requirements,  although  there can be no
assurance.



<PAGE> 24                                          Form 10-Q - Part I

                  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

In the normal  course of business,  Lucent uses various  financial  instruments,
including  derivative  financial  instruments,  for purposes other than trading.
Derivative financial  instruments are not entered into for speculative purposes.
These  instruments  include  commitments  to extend  credit,  letters of credit,
guarantees of debt, and foreign currency  exchange  contracts.  Unless otherwise
noted,  Lucent generally does not require  collateral to support these financial
instruments.

By their nature all such  instruments  involve risk including the credit risk of
nonperformance by counterparties, and Lucent's maximum potential loss may exceed
the amount recognized in Lucent's balance sheet.  However,  at June 30, 1996, in
management's  opinion,  there  was no  significant  risk of loss in the event of
nonperformance  of the  counterparties  to these financial  instruments.  Lucent
controls its exposure to credit risk through credit approvals, credit limits and
monitoring  procedures.  Lucent  does not have any  significant  exposure to any
individual   customer   or   counterparty,   nor  does  Lucent  have  any  major
concentration of credit risk related to any financial instrument.

CASH FLOWS

Cash flows used in operating  activities increased compared with the same period
in 1995 due to AT&T's retention of customer accounts receivable partially offset
by the effect of a prepayment by AT&T.
(See also Note 3.)

Cash payments of $312 million were made for the first six months of 1996 related
to the fourth quarter of 1995  restructuring  and other charges of $2,801 before
taxes. Of such total charges, $1,788 million, less the $312 million, will result
in future cash payments.  Of the 23,000 positions that Lucent announced it would
downsize  and that are  included  in the fourth  quarter  of 1995  restructuring
charges, approximately 6,000 people have left the payroll as of June 30, 1996.

The growth in cash flow used in investing  activities  was largely the result of
the Philips acquisition and higher capital  expenditures  compared with the same
period in 1995. Capital expenditures,  the largest component,  were $562 million
and $449  million  for the  six-month  periods  ending  June 30,  1996 and 1995,
respectively.   Capital  expenditures   generally  relate  to  expenditures  for
equipment and facilities  used in  manufacturing  and research and  development,
including  expansion  of  manufacturing  capacity,  and  expenditures  for  cost
reduction efforts and international growth.



<PAGE> 25                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Cash flows  provided by  financing  activities  increased  primarily  due to the
proceeds from the IPO in 1996 compared with the same period in 1995.

In 1995, Lucent relied on AT&T to provide financing for its operations. The cash
flows from  financing  activities  in 1995  principally  reflect  changes in the
Company's  assumed  capital  structure.  These  cash  flows are not  necessarily
indicative  of the cash flows that would have  resulted  if the  Company  were a
stand-alone entity.

The ratio of total debt to total  capital  (debt plus  equity) was 62.7% at June
30, 1996 compared to 63.3% on a pro forma basis at December 31, 1995.

OTHER

On July 26, 1996, Lucent signed a long-term  contract turning over a significant
portion  of  the  day-to-day   operations  and  management  of  its  information
technology  and  production   application  work  to  ISSC,  an  IBM  subsidiary.
Implementation of the multi-year  contract became financially  effective July 1,
1996.  This  outsourcing  contract  covers  work such as  operation  of Lucent's
mainframe data centers, computer maintenance and installation,  desktop computer
support  (including help desk functions),  most production  system  applications
maintenance and some applications development.

Lucent's  current  and  historical  operations  are  subject  to a wide range of
environmental  protection laws. Lucent has remedial and investigatory activities
underway at 46 current and former facilities.  In addition, Lucent has succeeded
to being  named a PRP at  numerous  "Superfund"  sites  pursuant  to  CERCLA  or
comparable  state statutes.  The amounts  provided for in Lucent's  consolidated
financial  statements  in  respect  of  environmental  reserves  are  the  gross
undiscounted amount of such reserves,  without deductions for insurance or third
party indemnity claims.

In those cases where insurance carriers or third party indemnitors have
agreed to pay any amounts and management believes that collectibility
of such amounts is probable, the amounts are reflected as receivables
in the financial statements.  Although Lucent believes



<PAGE> 26                                          Form 10-Q - Part I

                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
             RESULTS OF OPERATIONS AND FINANCIAL CONDITION

that its reserves  are  adequate,  there can be no assurance  that the amount of
capital  expenditures  and other  expenses  which will be  required  relating to
remedial  actions and compliance  with  applicable  environmental  laws will not
exceed the amounts  reflected  in Lucent's  reserves or will not have a material
adverse  effect on the  financial  condition  of Lucent or  Lucent's  results of
operations or cash flows.

RECENT PRONOUNCEMENTS

In 1996, Lucent adopted Statement of Financial  Accounting Standard ("SFAS") No.
123, "Accounting for Stock-Based Compensation". This standard establishes a fair
value method for accounting for  stock-based  compensation  plans either through
recognition  or disclosure.  The standard is effective for financial  statements
for fiscal years beginning  after December 15, 1995. For Lucent,  this means the
standard is effective for 1996.  Lucent adopted the disclosure method under this
standard  and will  disclose  in its  financial  statements  for the fiscal year
ending  September  30,  1996,  the pro forma net income and  earnings  per share
amounts  assuming  the fair value  method was  effective.  The  adoption of this
standard will not impact Lucent's consolidated results of operations,  financial
position or cash flows.

In June 1996,  the  Financial  Accounting  Standards  Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and  Extinguishments
of Liabilities".  This standard provides consistent standards for distinguishing
transfers of  financial  assets that are sales from  transfers  that are secured
borrowings.  This standard is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996. For
Lucent,  this standard will be effective in the second quarter of the new fiscal
year 1997. The adoption of this standard will not impact  Lucent's  consolidated
results of operations, financial position or cash flows.



<PAGE> 27                                          Form 10-Q - Part II

                      Part II - Other Information

Item 6. Exhibits and Reports on Form 8-K.

(a)  Exhibits:

     Exhibit Number

     12   Computation of Ratio of Earnings to Fixed Charges

     27   Financial Data Schedule

(b)  Reports on Form 8-K:

     Form 8-K dated July 18, 1996 was filed  pursuant to Item 5 (Other  Events),
     Item 7 (Financial  Statements  and  Exhibits)  and Item 8 (Change in Fiscal
     Year).



<PAGE> 28                                      Form 10-Q

                             


                              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.









Date August 8, 1996                     James S. Lusk
                                  Vice President and Controller
                                 (Principal Accounting Officer)


                              
<PAGE> 29                                                  Form 10-Q
  
                                   
                                Exhibit Index

Exhibit
Number

 12                             Computation of Ratio of Earnings to
                                Fixed Charges

 27                             Financial Data Schedule





<PAGE> 1
                                                    Exhibit 12
                                                    Form 10-Q
                                                    For the Six
                                                    Months Ended
                                                    June 30, 1996



                             Lucent Technologies Inc.
                Computation of Ratio of Earnings to Fixed Charges

                              (Dollars in Millions)
                                   (Unaudited)


                                                           For the Six
                                                          Months Ended
                                                         June 30, 1996

Loss Before Income Taxes...............................     $ (51)

Less Interest Capitalized during
  the Period...........................................        11
Less Undistributed Earnings of Less than 50%
  Owned Affiliates.....................................         1

Add Fixed Charges......................................       197

Total Earnings ........................................     $ 134



Fixed Charges

Total Interest Expense Including Capitalized Interest..     $ 163

Interest Portion of Rental Expense.....................        34

    Total Fixed Charges................................     $ 197

Ratio of Earnings to Fixed Charges.....................         *

* For the six month  period  ending  June 30,  1996,  the ratio  computation
  indicates that the earnings were inadequate to cover fixed charges by $63.




<TABLE> <S> <C>


<ARTICLE>                     5
<LEGEND>
                     LUCENT TECHNOLOGIES, INC.
                     FINANCIAL DATA SCHEDULE
                      (Dollars in Millions)

This  schedule  contains  summary  financial   information  extracted  from  the
unaudited  balance  sheet  of  Lucent  at  June  30,  1996,  and  the  unaudited
consolidated  statement of operations  for the six-month  period ending June 30,
1996,  and  is  qualified  in  its  entirety  by  reference  to  such  financial
statements.
</LEGEND>

<MULTIPLIER>                                   1,000,000
       
<S>                             <C>
<PERIOD-TYPE>                   6-MOS
<FISCAL-YEAR-END>                              SEP-30-1996
<PERIOD-START>                                 JAN-01-1996
<PERIOD-END>                                   JUN-30-1996

<CASH>                                         2,151
<SECURITIES>                                      66
<RECEIVABLES>                                  4,966
<ALLOWANCES>                                     259
<INVENTORY>                                    3,431
<CURRENT-ASSETS>                              12,521
<PP&E>                                        11,104
<DEPRECIATION>                                 6,541
<TOTAL-ASSETS>                                21,932
<CURRENT-LIABILITIES>                         10,191
<BONDS>                                        1,594
                              0
                                        0
<COMMON>                                           6
<OTHER-SE>                                     2,405
<TOTAL-LIABILITY-AND-EQUITY>                  21,932
<SALES>                                        9,941
<TOTAL-REVENUES>                               9,941
<CGS>                                          5,947
<TOTAL-COSTS>                                  5,947
<OTHER-EXPENSES>                               3,966
<LOSS-PROVISION>                                  34
<INTEREST-EXPENSE>                               138
<INCOME-PRETAX>                                  (51)
<INCOME-TAX>                                     (20)
<INCOME-CONTINUING>                              (31)
<DISCONTINUED>                                     0
<EXTRAORDINARY>                                    0
<CHANGES>                                          0
<NET-INCOME>                                     (31)
<EPS-PRIMARY>                                  (0.05)
<EPS-DILUTED>                                      0
        




</TABLE>


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