LUCENT TECHNOLOGIES INC, 10-Q, 1999-08-12

LUCENT TECHNOLOGIES INC
10-Q, 1999-08-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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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, 1999

---- 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 30, 1999, 3,063,978,906 common shares were outstanding.

<PAGE>
2 Form 10-Q - Part I
PART 1 - Financial Information

Item 1. Financial Statements

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Millions Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>

For the Three For the Nine
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998

<S> <C> <C> <C> <C>
Revenues .................................. $ 9,315 $ 7,642 $27,728 $23,232

Costs ..................................... 4,834 4,087 13,910 12,272

Gross margin .............................. 4,481 3,555 13,818 10,960

Operating Expenses:
Selling, general and
administrative expenses ................. 2,063 1,673 5,994 4,895
Research and development expenses ......... 1,141 1,002 3 365 2,853
In-process research
and development expenses ................. -- 668 282 1,252
Total operating expenses .................. 3,204 3,343 9,641 9,000

Operating income .......................... 1,277 212 4,177 1,960
Other income (expense) - net .............. 19 (17) 77 171
Interest expense .......................... 119 63 292 183
Income before income taxes ................ 1,177 132 3,962 1,948
Provision for income taxes ................ 427 282 1,452 1,133

Income (loss) before cumulative effect
of accounting change ..................... 750 (150) 2,510 815

Cumulative effect of accounting change
(net of income taxes of $842) ............ -- -- 1,308 --

Net income (loss) ......................... $ 750 $ (150) $ 3,818 $ 815

Earnings (loss) per common share - basic:
Income (loss)before cumulative effect
of accounting change .................... $ 0.25 $ (0.05) $ 0.83 $ 0.28
Cumulative effect of accounting
change .................................. -- -- 0.43 --
Net income (loss) ......................... $ 0.25 $ (0.05) $ 1.26 $ 0.28

Earnings (loss) per common share - diluted:
Income (loss) before cumulative effect
of accounting change .................... $ 0.24 $ (0.05) $ 0.80 $ 0.27
Cumulative effect of accounting
change .................................. -- -- 0.42 --
Net income (loss) ......................... $ 0.24 $ (0.05) $ 1.22 $ 0.27

Dividends declared
per common share ........................ $ 0.02 $ 0.02 $ 0.06 $ 0.06
</TABLE>

See Notes to Consolidated Financial Statements.

<PAGE>
3 Form 10-Q - Part I

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

June 30, September 30,
1999 1998
ASSETS

Cash and cash equivalents.............. $ 1,495 $ 1,154

Accounts receivable less
allowances of $393 at
June 30, 1999 and $416 at
September 30, 1998 ................... 9,486 7,405

Inventories............................ 5,179 3,279

Contracts in process, net of contract
billings of $4,756 at
June 30, 1999 and $3,036 at
September 30, 1998.................... 1,338 1,259

Deferred income taxes - net............ 1,784 1,775

Other current assets................... 1,528 912

Total current assets................... 20,810 15,784

Property, plant and equipment, net
of accumulated depreciation of
$7,274 at June 30, 1999 and
$6,638 at September 30, 1998......... 6,257 5,693

Prepaid pension costs.................. 6,337 3,754

Deferred income taxes - net............ - 761

Capitalized software development costs. 412 298

Other assets........................... 3,340 3,073

TOTAL ASSETS........................... $37,156 $29,363

See Notes to Consolidated Financial Statements.

(CONT'D)

<PAGE>
4 Form 10-Q - Part I

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONT'D)
(Dollars in Millions Except Per Share Amounts)
(Unaudited)

June 30, September 30,
1999 1998
LIABILITIES

Accounts payable....................... $ 2,705 $ 2,157
Payroll and benefit-related
liabilities.......................... 2,001 2,592
Postretirement and postemployment
benefit liabilities.................. 169 187
Debt maturing within one year.......... 3,080 2,231
Other current liabilities.............. 4,001 3,718

Total current liabilities.............. 11,956 10,885

Postretirement and postemployment
benefit liabilities.................. 6,533 6,380
Long-term debt ........................ 3,712 2,409
Other liabilities...................... 2,552 1,980

Total liabilities ..................... 24,753 21,654

Commitments and contingencies

SHAREOWNERS' EQUITY

Preferred stock-par value $1.00 per share
Authorized shares: 250,000,000
Issued and outstanding shares: none... - -
Common stock-par value $.01 per share
Authorized shares: 6,000,000,000
Issued and outstanding shares:
3,048,987,417 at June 30, 1999
3,022,369,264 at September 30, 1998... 30 30
Additional paid-in capital............. 7,339 6,589
Guaranteed ESOP obligation............. (34) (49)
Retained earnings...................... 5,240 1,422
Accumulated other comprehensive
income (loss)......................... (172) (283)

Total shareowners' equity............... 12,403 7,709

TOTAL LIABILITIES AND
SHAREOWNERS' EQUITY................... $37,156 $29,363

See Notes to Consolidated Financial Statements.

<PAGE>
5 Form 10-Q - Part I

LUCENT TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
For the Nine Months
Ended June 30,
1999 1998
Operating Activities
Net income............................... $ 3,818 $ 815
Adjustments to reconcile net income
to net cash (used in)provided by
operating activities:
Cumulative effect of accounting change (1,308) -
Business restructuring reversal....... (87) (83)
Depreciation and amortization......... 1,349 1,035
Provision for uncollectibles.......... 45 118
Deferred income taxes................. 781 75
Purchased in-process research and
development......................... 15 1,252
Adjustment to conform Ascend and
Kenan's fiscal years................. 169 -
Increase in accounts receivable ...... (2,238) (937)
Increase in inventories
and contracts in process............ (1,960) (487)
Increase(decrease) in accounts
payable............................. 504 (102)
Changes in other operating assets
and liabilities..................... (1,860) 307
Other adjustments for noncash
items - net......................... (500) (379)
Net cash (used in)provided by
operating activities.................... (1,272) 1,614

Investing Activities
Capital expenditures .................... (1,432) (1,115)
Proceeds from the sale or disposal of
property, plant and equipment.......... 82 44
Purchases of equity investments.......... (205) (187)
Sales of equity investments.............. 1 27
Purchase of investment securities........ (450) (742)
Sales or maturity of
investment securities................... 1,132 480
Acquisitions of businesses,
net of cash acquired.................... (244) (1,068)
Dispositions of businesses............... 57 276
Other investing activities - net......... (78) (63)
Net cash used in investing activities.... (1,137) (2,348)

Financing Activities
Repayments of long-term debt ............ (8) (85)
Issuance of long-term debt............... 1,825 337
Proceeds of issuance of common stock..... 756 524
Dividends paid........................... (160) (150)
S-Corp distribution to stockholder - (26)
Increase (decrease) in short-term
borrowings - net....................... 344 (124)
Net cash provided by
financing activities................... 2,757 476

See Notes to Consolidated Financial Statements.

(CONT'D)

<PAGE>
6 Form 10-Q - Part I

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

For the Nine Months
Ended June 30,
1999 1998

Effect of exchange rate
changes on cash........................ (7) (63)

Net increase(decrease) in cash and
cash equivalents....................... 341 (321)

Cash and cash equivalents
at beginning of year................... 1,154 1,606

Cash and cash equivalents
at end of period....................... $ 1,495 $ 1,285

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. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared
by Lucent Technologies Inc. ("Lucent" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission 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.

On June 24, 1999, Lucent merged with Ascend Communications, Inc. Each share of
Ascend common stock was converted into 1.65 shares of Lucent common stock.
Lucent issued approximately 371 million shares in exchange for all of the
outstanding shares of Ascend. The transaction was accounted for as a
pooling-of-interests. On February 26, 1999, under the terms of the Kenan Systems
Corporation merger agreement, Lucent issued approximately 26 million shares
(post April 1, 1999 stock split) of Lucent common stock in exchange for all the
outstanding shares of Kenan.

Before merging with Lucent, both Ascend and Kenan had December 31 fiscal year
ends. Restated Lucent financial information for fiscal 1998 and earlier years
was computed by adding financial information for corresponding quarters of
Ascend's and Kenan's fiscal year. Thus, the unaudited consolidated statements of
income for the three and nine month periods ended June 30, 1998 were derived by
combining the results of operations of Lucent for the three and nine months
ended June 30, 1998, respectively, with the results of operations of Ascend and
Kenan for the three and nine months ended September 30, 1998, respectively. The
unaudited consolidated balance sheet at September 30, 1998 was derived by
combining the financial position of Lucent at September 30, 1998 with the
financial position of Ascend and Kenan at December 31, 1998. The unaudited
consolidated statement of cash flows for the nine months ended June 30, 1998 was
derived by combining the cash flows of Lucent for the nine months ended June 30,
1998 with the cash flows of Ascend and Kenan for the nine months ended September
30, 1998.

The results of operations, financial position and cash flows as of and for the
three months ended December 31, 1998 for Ascend and Kenan were included in
Lucent's financial statements as of and for the year ended September 30, 1998.
The results of operations for the three months ended December 31, 1998 were also
included in Lucent's financial statements for the nine months ended June 30,
1999. As a result, the consolidated balance sheet of Lucent at June 30, 1999
includes an adjustment to retained earnings to eliminate the income recognized
from both Ascend and Kenan for the three months ended December 31, 1998. In
addition, information from the statement of cash flows for Ascend and Kenan for
the three months ended December 31, 1998 has been eliminated from the unaudited
consolidated statement of cash flows for the nine months ended June 30, 1999,
since Ascend's and Kenan's activity for this period has been included in the
consolidated statement of cash flows for year ended September 30, 1998.

The preparation of financial statements during interim periods requires
management to make numerous estimates and assumptions that impact the reported
amounts of assets, liabilities, revenues and expenses. Estimates and assumptions
are reviewed periodically and the effect of revisions is reflected in the
results of operations of the interim periods in which changes are determined to
be necessary. Improved performance on multi-year contracts and the resolution of
certain contingencies had a positive impact on fiscal year 1999 reported results
of 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

<PAGE>
8 Form 10-Q - Part I

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

financial statements and notes thereto included in Lucent's Form 10-K for the
year ended September 30, 1998, the audited restated consolidated financial
statements and notes thereto included in Exhibit 99.1 of the Company's Form 8-K
(dated August 2, 1999)for the year ended September 30, 1998 and the unaudited
restated consolidated financial statements and notes thereto included in Exhibit
99.2 of the Company's Form 8-K (dated August 2, 1999) for the three and six
month periods ended March 31, 1999.

The financial statements presented have been restated to reflect the two-for-one
splits of Lucent's common stock which became effective on April 1, 1998 and
April 1, 1999. Certain prior period amounts have been reclassified to conform to
the current period presentation.

2. MERGER WITH ASCEND COMMUNICATIONS, INC.

On June 24, 1999, Lucent merged with Ascend. As a result, the outstanding Ascend
common stock was converted into approximately 371 million shares of Lucent
common stock, based on an exchange ratio of 1.65 shares of Lucent common stock
for each share of Ascend common stock. In addition, Lucent assumed Ascend stock
options equivalent to approximately 65 million shares of Lucent common stock.
The merger was accounted for as a pooling-of-interests under Accounting
Principles Board Opinion No. 16, and accordingly, Lucent's consolidated
financial statements have been restated for all periods prior to the merger to
include the results of operations, financial position and cash flows of Ascend
as though it has always been a part of Lucent. Intercompany transactions for
fiscal 1999 have been eliminated. Intercompany transactions prior to 1999 were
immaterial. In connection with the merger, Lucent recorded a third fiscal
quarter charge to operating expenses of approximately $79 (non-tax deductible)
for merger-related costs. The merger-related costs consisted primarily of fees
for investment bankers, attorneys, accountants and financial printing. Certain
reclassifications were made to Ascend's accounts to conform to Lucent's
presentation. The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements are as
follows:

Nine Nine
Months Ended Months Ended
June 30, 1999 June 30,1998

REVENUES
Lucent $26,256 $22,230
Ascend 1,610 1,002
Eliminations (138) -
Combined $27,728 $23,232

NET INCOME
Lucent $ 3,838(a) $ 638(c)
Ascend 66(b) 177
Eliminations (86) -
Combined $ 3,818 $ 815

(a) Includes one-time charges related to Lucent's acquisitions of Quadritek
Systems, Inc., WaveAccess Ltd., Sybarus Technologies, the Ethernet LAN business
of Enable Semiconductor ("Enable Ethernet"), the merger-related costs for Ascend
and the cumulative effect of the accounting change. (b) Includes one-time
charges related to Ascend's acquisition of Stratus Computer, Inc. (c) Includes
one-time charges related to Lucent's acquisitions of Livingston Enterprises,
Inc., Prominet Corporation, Yurie Systems, Inc. and Optimay GmbH as well as the
gain on the sale of Advanced Technology Systems (ATS) business.

<PAGE>
9 Form 10-Q - Part I

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

3. ACCOUNTING CHANGE - EMPLOYEE BENEFIT PLANS

Effective October 1, 1998, Lucent changed its method for calculating the market-
related value of plan assets used in determining the expected return-on-asset
component of annual net pension and postretirement benefit costs. Under the
previous accounting method, the calculation of the market-related value of plan
assets included only interest and dividends immediately, while all other
realized and unrealized gains and losses were amortized on a straight-line basis
over a five-year period. The new method used to calculate market-related value
includes immediately an amount based on Lucent's historical asset returns and
amortizes the difference between that amount and the actual return on a
straight-line basis over a five-year period. The new method is preferable under
Statement of Financial Accounting Standards No. 87 because it results in
calculated plan asset values that are closer to current fair value, thereby
lessening the accumulation of unrecognized gains and losses, while still
mitigating the effects of annual market value fluctuations.

The cumulative effect of this accounting change related to periods prior to
fiscal year 1999 of $2,150 ($1,308 after-tax, or $0.43 and $0.42 per basic and
diluted share, respectively) is a one-time, non-cash credit to fiscal 1999
earnings. This accounting change also resulted in a reduction in benefit costs
as a result of the change in Lucent's pension and postretirement accounting in
the three and nine months ended June 30, 1999 that increased income by $106 ($65
after-tax, or $0.02 per basic and diluted share) and $321 ($195 after-tax, or
$0.06 per basic and diluted share), respectively as compared with the previous
accounting method. A comparison of pro forma amounts is presented below showing
the effects if the accounting change were applied retroactively:

Three Months Nine Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Net income (loss) $ 750 $ (89) $ 3,818 $ 995
Earnings (loss) per share-basic $ 0.25 $ (0.03) $ 1.26 $ 0.34
Earnings (loss) per share-diluted $ 0.24 $ (0.03) $ 1.22 $ 0.33

4. COMPREHENSIVE INCOME

Lucent has adopted Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" as of October 1, 1998 which requires new
standards for reporting and display of comprehensive income and its components
in the financial statements. However, it does not affect net income or total
shareowners' equity. The components of comprehensive income, net of tax, are as
follows:

Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------- -------------------
Net income (loss).................... $ 750 $(150) $ 3,818 $ 815

Other comprehensive income(loss):
Foreign currency translation
adjustment....................... (38) (3) (83) (116)
Unrealized holding gains(losses)
arising during the period........ 189 (13) 187 (31)
Minimum pension liability adjustment - - 7 -
------- ------ -------- -------
Comprehensive income (loss).......... $ 901 $(166) $ 3,929 $ 668
------- ------ -------- -------

<PAGE>
10 Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions Except Per Share Amounts)
(Unaudited)

The after-tax components of accumulated other comprehensive income(loss) are as
follows:
<TABLE>
<CAPTION>
Total
Accumulated
Foreign Unrealized Minimum Other
Currency Holding Pension Comprehensive
Translation Gains/ Liability Income/
Adjustment (Losses) Adjustment (Loss)
<S> <C> <C> <C> <C>
Accumulated other comprehensive
income(loss) at
September 30, 1998............ $ (280) $ 18 $ (21) $ (283)
Other comprehensive income(loss)
for the period................ (83) 187 7 111
Accumulated other comprehensive
income(loss) at June 30, 1999. $ (363) $ 205 $ (14) $ (172)

</TABLE>

The foreign currency translation adjustments are not currently adjusted for
income taxes since they relate to indefinite investments in non-United States
subsidiaries.

5. ACQUISITIONS

There were no material acquisitions in the quarter ended June 30, 1999. In the
quarter ended March 31, 1999, Lucent completed the purchases of WaveAccess,
Enable Ethernet, and Sybarus. In the quarter ended December 31, 1998, Lucent
completed the purchases of Quadritek and Stratus.

The following table presents the aggregate information related to these
acquisitions:
Three Months Ended Three Months Ended
12/31/98 3/31/99
--------------------- -------------------------
Stratus Quadritek WaveAccess/Enable/Sybarus
------- --------- -------------------------
Purchase price................ $917 $50 $137
Goodwill...................... - 24 109
Existing technology........... 130 5 12
Purchased in-process research
and development(after-tax)... 267* 14 15
Goodwill amortization
period (years).............. - 8 4-7
Existing technology
amortization period (years). 10 6 7

* Amount reflects the original purchased in-process research and development
charge recorded in the quarter ended December 31, 1998. Prior to the
consummation of the acquisition of Stratus, Lucent announced its intention to
divest the non- telecommunication business units of Stratus. In early 1999,
Lucent divested each of these business units. As the sales proceeds from the
disposition of these business units exceeded the carrying value of the assets
held for sale, Lucent reduced its original charge for purchased in-process
research and development and reduced the amount of the purchase price allocated
to non-current assets on a pro-rata basis. This resulted in a credit to
purchased in-process research and development in the amount of $24 during the
quarter ended March 31, 1999.

All of the above acquisitions were accounted for under the purchase method of
accounting.

<PAGE>
11 Form 10-Q - Part I

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

Included in the purchase price for the above acquisitions was purchased
in-process research and development, which was a noncash charge to earnings as
the related technology had not reached technological feasibility and had no
future alternative use. The remaining purchase price, less liabilities assumed,
was allocated to tangible assets and intangible assets, including goodwill and
existing technology.

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

Revenues were estimated based on relevant market size and growth factors,
expected industry trends, individual product sales cycles and the estimated life
of each product's underlying technology. Estimated operating expenses, income
taxes and charges for the use of contributory assets were deducted from
estimated revenues to determine estimated after-tax cash flows for each project.
Estimated operating expenses include cost of goods sold, selling, general and
administrative expenses and research and development expenses. The research and
development expenses include estimated costs to maintain the products once they
have been introduced into the market and generate revenues and costs to complete
the in-process research and development.

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

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

6. SUPPLEMENTARY BALANCE SHEET INFORMATION

Inventories at June 30, 1999 and September 30, 1998 were as follows:

June 30, September 30,
1999 1998
-------------- ---------------
Completed goods ............... $ 2,917 $ 1,644
Work in process and
raw materials................ 2,262 1,635
Total inventories ............. $ 5,179 $ 3,279

<PAGE>
12 Form 10-Q - Part I

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

7. BUSINESS RESTRUCTURING AND OTHER CHARGES

For the three months ended June 30, 1999 and 1998, $119 and $116, respectively,
were applied to the 1995 business restructuring reserve. For the nine months
ended June 30, 1999 and 1998, $151 and $253, respectively, were applied to the
1995 business restructuring reserve. Included in the three and nine months ended
June 30, 1999 operating results was an $87 reversal of business restructuring
reserves recorded as $8 to costs, $72 to selling, general and administrative
expenses and $7 to research and development expenses. This reversal was
primarily related to lower than expected facility closing costs and other costs
associated with the sale or consolidation of certain leased and owned
facilities. The remaining reserve for business restructuring as of June 30, 1999
was $100. The year-ago three month period included a $50 reversal recorded as
$19 to costs, $23 to selling, general and administrative expenses and $8 to
research and development expenses. The year-ago nine month period included an
$83 reversal recorded as $19 to costs, $56 to selling, general and
administrative expenses and $8 to research and development expenses. In
addition, Ascend recorded a $18 reversal of merger-related costs which were
included in selling, general and administrative expenses for the three and nine
month periods ended June 30, 1998.

8. EARNINGS PER COMMON SHARE

Basic earnings per common share was calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share was calculated by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive common shares
had been issued.

<PAGE>
13 Form 10-Q - Part I

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

Earnings per share amounts for the periods presented have been restated to
reflect the two-for-one splits of Lucent's common stock, which became effective
on April 1, 1998 and April 1, 1999. The following table reconciles the number of
shares utilized in the earnings per share calculations for the three and nine
month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>

Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
-------------------------------------------

<S> <C> <C> <C> <C>
Net income (loss) ........................ $ 750 $ (150) $3,818 $ 815

Earnings(loss) per common share - basic:
Income(loss) before cumulative effect
of accounting change ................... $ 0.25 $(0.05) $ 0.83 $ 0.28
Cumulative effect of accounting
change ................................ - - 0.43 -
Net income (loss) ....................... $ 0.25 $(0.05) $ 1.26 $ 0.28

Earnings(loss) per common share - diluted:
Income(loss) before cumulative effect
of accounting change .................. $ 0.24 $(0.05) $ 0.80 $ 0.27
Cumulative effect of accounting
change ................................ - - 0.42 -
Net income (loss) ....................... $ 0.24 $(0.05) $ 1.22 $ 0.27

Number of Shares (in millions)

Common shares - basic .................... 3,041.4 2,975.7 3,028.0 2,949.3

Effect of dilutive securities:
Stock options ........................... 106.5 0.0 99.4 68.2
Other ................................... 5.8 0.0 5.8 3.2

Common shares - diluted .................. 3,153.7 2,975.7 3,133.2 3,020.7

Options excluded from the computation
of earnings per share - diluted since
option exercise price was greater than
the average market price of the
common shares for the period ............. 1.5 12.7 3.7 11.3

</TABLE>

9. PHILIPS CONSUMER COMMUNICATIONS ("PCC")

On October 1, 1997, Lucent contributed its Consumer Products business to a new
venture formed by Lucent and Philips Electronics N.V. ("Philips") in exchange
for 40% ownership of PCC. On October 22, 1998, Lucent and Philips announced
their intention to end the PCC venture and agreed to regain control of their
original businesses. The results of operations and net assets of the remaining
businesses Lucent previously contributed to PCC have been consolidated as of
October 1, 1998. The revenues are included in Other Systems and Products. In
December 1998, Lucent sold certain assets of the wireless handset portion of the
remaining businesses to Motorola, Inc. Lucent is continuing to look for
opportunities to sell the remaining consumer products businesses.

<PAGE>
14 Form 10-Q - Part I

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

10. COMMITMENTS AND CONTINGENCIES

In the normal course of business, Lucent is subject to proceedings, lawsuits and
other claims, including proceedings under government laws and regulations
related to environmental and other matters. Such matters are subject to many
uncertainties, and outcomes are not predictable with assurance. Consequently,
the ultimate aggregate amount of monetary liability or financial impact with
respect to these matters at June 30, 1999 cannot be ascertained. While these
matters could affect the operating results of any one quarter when resolved in
future periods and while there can be no assurance with respect thereto,
management believes that after final disposition, any monetary liability or
financial impact to Lucent beyond that provided for at June 30, 1999 would not
be material to the annual consolidated financial statements.

Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T Corp. as a potentially
responsible party ("PRP") at numerous "Superfund" sites pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA") or comparable state statutes. Under the Separation and Distribution
Agreement ("Separation and Distribution Agreement"), among Lucent, AT&T and NCR
Corporation, dated as of February 1, 1996 as amended and restated, Lucent is
responsible for all liabilities primarily resulting from or relating to the
operation of Lucent's business as conducted at any time prior to or after the
separation from AT&T of the businesses and operations transferred to form Lucent
(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. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.

It is often difficult to estimate the future impact of environmental matters,
including potential liabilities. Lucent records an environmental reserve when it
is probable that a liability has been incurred and the amount of the liability
is reasonably estimable. This practice is followed whether the claims are
asserted or unasserted. Management expects that the amounts reserved will be
paid out over the periods of remediation for the applicable sites which range
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, estimates as to the number, participation level and
financial viability of any other PRPs, the extent of the contamination and the
nature of required remedial actions. Accruals are adjusted as further
information develops or circumstances change. The amounts provided for in
Lucent's consolidated financial statements for environmental reserves are the
gross undiscounted 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 Lucent's financial condition, results of operations or cash flows. Any
possible loss or range of possible loss that may be incurred in excess of that
provided for at June 30, 1999 cannot be estimated.

<PAGE>
15 Form 10-Q - Part I

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

11. SUBSEQUENT EVENTS

Mosaix, Inc.
- ------------
On July 15, 1999, Lucent merged with Mosaix Inc., a Redmond, Washington-based
provider of software that links companies' front and back offices and helps them
deliver more responsive and efficient customer service. Under the terms of the
agreement, the outstanding common stock of Mosaix was converted into the right
to receive approximately 2.6 million shares of Lucent common stock. In addition,
Lucent assumed options to purchase approximately 400,000 shares of Lucent common
stock. The transaction was accounted for as a pooling-of-interests.

Nexabit Networks, Inc.
- ----------------------
On July 19, 1999, Lucent merged with Nexabit Networks, Inc. a Marlborough,
Massachusetts-based developer of high-speed switching equipment and software
that directs traffic along telecommunications networks. Under the terms of the
agreement, the outstanding stock of Nexabit was converted into the right to
receive approximately 13.7 million shares of Lucent common stock. In addition,
Lucent assumed options to purchase approximately 400,000 shares of Lucent common
stock. The transaction was accounted for as a pooling-of-interests.

SpecTran Corporation
- --------------------
On July 21, 1999, Lucent commenced an all-cash tender offer for the outstanding
common stock of SpecTran Corporation, a Sturbridge, Massachusetts-based designer
and manufacturer of specialty optical fibers and fiber optic products, for $9.00
per share (in the aggregate, about $64). Lucent would also assume $35 of
SpecTran debt. Lucent currently anticipates that the acquisition will be
completed in the quarter ended September 30, 1999 and will be accounted for
using the purchase method of accounting.

International Network Services
- ------------------------------
On August 10, 1999, Lucent announced its intention to merge with International
Network Services (INS), a Sunnyvale, California-based provider of network
consulting, design and integration. Under the terms of the agreement, each share
of INS will be converted into the right to receive 0.8473 shares of Lucent
common stock. Based on Lucent's closing price on August 9, 1999, the value of
the transaction would be approximately $3,700 in stock and options. Lucent
currently anticipates that the merger will be completed in the quarter ended
December 31, 1999 and will be accounted for as a pooling-of-interests.
<PAGE>

16 Form 10-Q - Part I

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

HIGHLIGHTS

Lucent reported net income of $750 million, or $0.24 per share(diluted) for the
quarter ended June 30, 1999. This compares with the year-ago quarterly net loss
of $150 million, or a loss of $0.05 per share(diluted). For the current nine
month period, Lucent reported net income of $3,818 million, or $1.22 per
share(diluted) compared with net income of $815 million, or $0.27 per
share(diluted) in the same prior period. Included in the current nine month
results is a $1,308 million (or $0.42 per share-diluted) cumulative effect of
accounting change related to Lucent's pension and postretirement benefits (see
Note 3). Lucent's income before the cumulative effect of the accounting change
was $2,510 million for the nine month period ended June 30, 1999.

Net income for the three months ended June 30, 1999 includes an $87 million,
pre-tax ($57 million, after-tax) reversal of business restructuring charges and
a $79 million (non-tax deductible) charge to operating expenses for
merger-related costs in connection with the Ascend merger. Net income for the
three months ended June 30, 1998 includes a $68 million, pre-tax ($44 million,
after-tax) reversal of business restructuring charges (including an $18 million
(pre-tax) reversal of merger-related costs by Ascend) and $668 million,
after-tax purchased in-process research and development expenses related to the
acquisitions of Yurie and Optimay.

Net income for the nine months ended June 30, 1999 includes an $87 million,
pre-tax ($57 million, after-tax) reversal of business restructuring charges, the
$79 million (non-tax deductible) charge to operating expenses for merger-related
costs in connection with the Ascend merger and $282 million ($272 million
after-tax) purchased in-process research and development expenses related to the
acquisitions of Stratus, Quadritek, Sybarus, WaveAccess and Enable Ethernet.
Included in the 1999 expense is a $24 million after-tax reversal of in-process
research and development charges related to the acquisition of Stratus. Net
income for the nine month period ended June 30, 1998 includes a $101 million
pre-tax (including an $18 million (pre-tax) reversal of merger-related costs by
Ascend), ($65 million, after-tax) reversal of business restructuring charges and
$1,252 million, after-tax purchased in-process research and development expenses
related to the acquisitions of Livingston, Prominet, Yurie and Optimay.

Gross margin increased $926 million and $2,858 million for the quarter and nine
month periods ended June 30, 1999, respectively, compared with the year-ago
periods. These increases in gross margin were primarily due to higher sales
volume and a more favorable mix of products compared with the same periods of
the prior year.

Operating income of $1,277 million reflects an increase of $1,065 million in the
quarter compared with the same quarter in 1998 and was 13.7% of revenues. For
the nine months ended June 30, 1999, operating income of $4,177 million reflects
an increase of $2,217 million. Both of these increases were largely due to
increased sales levels in 1999 and higher purchased in-process research and
development expenses in the 1998 periods.

On April 5, 1999, Lucent announced that it has agreed to acquire Mosaix, a
provider of software that links companies' front and back offices and helps them
deliver more responsive and efficient customer service. The merger was completed
on July 15, 1999 and was accounted for as a pooling-of-interests. Under the
terms of the agreement, the outstanding common stock of Mosaix was converted
into the right to receive approximately 2.6 million shares of Lucent common
stock.

<PAGE>
17 Form 10-Q - Part I

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

On June 24, 1999, Lucent merged with Ascend. The merger was accounted for as a
pooling-of-interests. Accordingly, Lucent's consolidated financial statements
and schedules, and the following discussion have been restated for all periods
prior to the merger to include the results of Ascend as though it has always
been a part of Lucent. In connection with the merger, Lucent recorded a third
quarter charge to operating expenses of approximately $79 million (non-tax
deductible) for merger- related costs.

On July 19, 1999, Lucent completed its merger with Nexabit, a developer of
high-speed switching equipment and software that directs traffic along
telecommunications networks. Under the terms of the agreement, the outstanding
stock of Nexabit was converted into the right to receive approximately 13.7
million shares of Lucent common stock. The transaction was accounted for as a
pooling-of-interests.

On July 21, 1999, Lucent commenced an all-cash tender offer for the outstanding
stock of SpecTran Corporation, a designer and manufacturer of specialty optical
fibers and fiber optic products, for $9.00 per share (in the aggregate, about
$64 million). Lucent would also assume $35 million of SpecTran debt. Lucent
currently anticipates that the acquisition will be completed in the quarter
ended September 30, 1999 and will be accounted for using the purchase method of
accounting.

On August 10, 1999, Lucent announced its intention to merge with International
Network Services (INS), a Sunnyvale, California-based provider of network
consulting, design and integration. Under the terms of the agreement, each share
of INS will be converted into the right to receive 0.8473 shares of Lucent
common stock. Based on Lucent's closing price on August 9, 1999, the value of
the transaction would be approximately $3,700 million in stock and options.
Lucent currently anticipates that the merger will be completed in the quarter
ended December 31, 1999 and will be accounted for as a pooling-of-interests.
<PAGE>

18 Form 10-Q - Part I

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

KEY BUSINESS CHALLENGES

Lucent continues to face significant competition and expects that the level of
competition on pricing and product offerings will intensify. Lucent expects that
new competitors will enter its markets as a result of the trend toward global
expansion by foreign and domestic competitors as well as continued changes in
technology and public policy. These competitors may include entrants from the
telecommunications, software, data networking, cable television and
semiconductor industries. Existing competitors have, and new competitors may
have, strong financial capability, technological expertise, well-recognized
brand names and a global presence. As a result, Lucent's management periodically
assesses market conditions and redirects the Company's resources to meet the
challenges of competition. Steps Lucent may take include acquiring or investing
in new businesses and ventures, partnering with existing businesses, delivering
new technologies, closing and consolidating facilities, disposing of assets,
reducing work force levels or withdrawing from markets.

Lucent has taken measures to manage the seasonality of its business by changing
the date on which its fiscal year ends and its compensation programs for
employees. As a result, Lucent has achieved a more uniform distribution of
revenues -- accompanied by a related redistribution of earnings -- throughout
the year. Revenues and earnings still remain higher in the first fiscal quarter
primarily because many of Lucent's large customers historically delay a
disproportionate percentage of their capital expenditures until the fourth
quarter of the calendar year (Lucent's first fiscal quarter).

The purchasing behavior of Lucent's largest customers has increasingly been
characterized by the use of fewer, larger contracts. These contracts typically
involve longer negotiating cycles, require the dedication of substantial amounts
of working capital and other resources, and in general require costs that 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.
Lucent has increasingly provided or arranged long-term financing for customers
as a condition to obtain or bid on infrastructure projects. Certain multi-year
contracts involve new technologies that may not have been previously deployed on
a large-scale commercial basis. On its multi-year contracts, Lucent may incur
significant initial cost overruns and losses that are recognized in the quarter
in which they become 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.

Historically, a limited number of customers have provided a substantial portion
of Lucent's total revenues. The loss of any of these customers, or any
substantial reduction in orders by any of these customers, could materially
adversely affect Lucent's operating results.

Lucent has been successful in diversifying its customer base and seeking out new
types of customers globally. These new types of customers include competitive
access providers, competitive local exchange carriers, wireless service
providers, cable television network operators and computer manufacturers.

<PAGE>
19 Form 10-Q - Part I

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

REVENUES - THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED
JUNE 30, 1998

Total revenues increased 21.9% to $9,315 million in the quarter compared with
the same quarter of 1998, due to increases in sales from Systems for Network
Operators, Business Communications Systems, Microelectronic Products and Other
Systems and Products. For the quarter, sales within the United States increased
by 13.4% compared with the same quarter in 1998 and sales outside the United
States increased 48.0% compared with the same quarter last year. Sales outside
of the United States were 29.8% of revenues for the current quarter as compared
to 24.6% of revenues for the year-ago quarter.

The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the three months ended June 30,
1999 and 1998:

Three Months
Ended
June 30,
Dollars in Millions ---------------------------------
1999 1998
------- -------
Systems for Network Operators........ $6,090 65% $4,795 63%
Business Communications Systems...... 2,100 23 2,022 26
Microelectronic Products............. 902 10 736 10
Other Systems and Products........... 223 2 89 1
Total................................ 9,315 100% $7,642 100%

Revenues from SYSTEMS FOR NETWORK OPERATORS increased $1,295 million, or 27.0%
in 1999 compared with the same quarter in 1998. Revenues increases were led by
sales of wireless systems, data networking systems for service providers,
optical networking systems, and communications software, and services. Continued
demand for voice, data and wireless services, as well as the need for increased
network capacity contributed to the group's quarterly revenues.

Revenues from Systems for Network Operators in the United States increased by
14.8% over the year-ago quarter. Revenues generated outside the United States
increased 66.5% compared with the same quarter in 1998 due to revenue growth in
all major international regions. Revenues generated outside the United States
represented 30.9% of revenues for the quarter compared with 23.6% for the same
quarter of 1998.

Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $78 million, or 3.9%
compared with the year-ago quarter. Increased sales of Definity(R) enterprise
communication servers, including those with Call Center applications, messaging
systems, and NetCare(R) services contributed to the increased revenue for the
quarter. The revenue gains were partially offset by decreased sales of
Systimax(R) structured cabling systems. Sales within the United States increased
2.0% for the quarter compared with the same quarter of 1998. Revenues generated
outside the United States increased by 12.0%, with revenue growth in all major
international regions and across virtually all product groups. Revenues
generated outside the United States represented 20.0% of revenues for the
quarter compared with 18.5% in the same quarter in 1998.

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

<PAGE>
20 Form 10-Q - Part I

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

Revenues from MICROELECTRONIC PRODUCTS increased $166 million, or 22.6% compared
with the year-ago quarter driven by sales of optoelectronic components,
customized chips for high speed communications, data networking, wireless, and
computing systems, as well as increased revenues from power systems. Sales
within the United States increased 19.2% compared to the same quarter in 1998.
Revenues generated outside the United States increased 25.8%. The growth in
revenues outside the United States was driven by sales in the Asia/Pacific
region, including China, and the Europe/Middle-East/Africa region. Revenues
generated outside the United States represented 52.4% of sales for the quarter
compared with 51.1% for the same quarter of 1998.

Revenues from OTHER SYSTEMS AND PRODUCTS increased $134 million compared with
the year-ago quarter primarily due to the consolidation of the businesses
regained from the PCC venture (see Note 9).

COSTS AND GROSS MARGIN - THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS
ENDED JUNE 30, 1998

Total costs increased by $747 million, or 18.3% in 1999 compared with the same
quarter in 1998 primarily due to higher sales volume. As a percentage of
revenue, gross margin increased to 48.1% from 46.5% in the year-ago quarter. The
increase this quarter compared with the same quarter in 1998 reflects a more
favorable mix of products.

OPERATING EXPENSES - THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED
JUNE 30, 1998

Selling, general and administrative expenses as a percentage of revenues were
22.1% for the quarter, an increase of 0.2 percentage points compared with 21.9%
for the same quarter in 1998.

Selling, general and administrative expenses increased $390 million, or 23.3%
compared with the same year-ago quarter. This increase was primarily associated
with higher sales levels. Included in the current quarter expense is $79 million
(non-tax deductible) for merger-related costs in connection with the merger of
Ascend (See Note 2). In addition, the current quarter includes a $72 million
reversal of business restructuring charges compared with a $41 million reversal
in the year-ago quarter.

Research and development expenses represented 12.2% of revenues for the quarter
compared with 13.1% of revenues for the same quarter of 1998.

Research and development expenses increased $139 million during the quarter
compared with the same year-ago quarter. This was primarily due to increased
expenditures in support of wireless, data networking, optical networking and
switching, and microelectronic products.

There were no purchased in-process research and development expenses for the
1999 quarter compared with $668 million related to the acquisitions of Yurie and
Optimay for the same quarter of 1998.

<PAGE>
21 Form 10-Q - Part I

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

OTHER INCOME(EXPENSE), INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - THREE
MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED JUNE 30, 1998

Other income(expense) - net was $19 million as compared to an expense of $17
million for the year-ago quarter. The increase reflects lower net equity losses
in 1999.

Interest expense for the quarter increased $56 million to $119 million compared
with the same quarter in 1998. The increase in interest expense is due to higher
debt levels for the quarter ended June 30, 1999 compared with the same quarter
in 1998.

The effective income tax rate for the quarter was 36.3%, a decrease from 213.6%
in the same quarter of 1998. This decrease was due to the 1998 non-tax
deductible purchased in-process research and development expenses associated
with the acquisitions of Yurie and Optimay. Excluding the impact of the non-tax
deductible merger related expenses related to the Ascend merger in 1999 and the
non-tax deductible purchased in-process research and development expenses
associated with the acquisition of Yurie and Optimay in 1998, the effective tax
rate was 34.0% for the 1999 quarter as compared with 35.3% for the same quarter
in 1998. This decrease is primarily due to the tax impact of foreign activity.

REVENUES - NINE MONTHS ENDED JUNE 30, 1999 VERSUS NINE MONTHS ENDED JUNE 30,
1998

Total revenues increased to $27,728 million, or 19.4% compared with the same
nine month period in 1998, due to increases in sales from Systems for Network
Operators, Business Communications Systems, Microelectronic Products and Other
Systems and Products. Revenue growth was due to sales increases globally. Total
revenue growth for the nine month period was driven by sales within the United
States which grew 8.8% compared with the same period in 1998, and sales outside
the United States which increased 50.6% compared with the same period in 1998.

The following table presents Lucent's revenues by product line, and the
approximate percentage of total revenues for the nine months ended June 30, 1999
and 1998:

Nine Months
Ended
June 30,
Dollars in Millions --------------------------------
1999 1998
------- -------
Systems for Network Operators........ $ 18,291 66% $ 15,050 65%
Business Communications Systems...... 6,114 22 5,733 25
Microelectronic Products............. 2,574 9 2,216 9
Other Systems and Products........... 749 3 233 1
Total................................ $ 27,728 100% $ 23,232 100%

<PAGE>
22 Form 10-Q - Part I

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

Revenues from SYSTEMS FOR NETWORK OPERATORS increased $3,241 million, or 21.5%
compared with the same nine month period in 1998. The increase resulted from
higher sales of data networking systems for service providers, wireless systems,
optical networking systems, switching and access systems, communications
software, and services. Demand for those products was driven in part by second
line subscriber growth in businesses and residences for Internet services and
data traffic as well as the need for increased network capacity.

Revenues from Systems for Network Operators in the United States increased 6.6%
compared to the year-ago nine month period. Revenues generated outside the
United States for 1999 increased 67.9% compared with the same nine month period
in 1998 due to revenue growth in the Europe/Middle-East/Africa and
Caribbean/Latin America regions. Revenues generated outside the United States
represented 33.7% of revenues for 1999 compared with 24.4% in same nine month
period of 1998.

Revenues from BUSINESS COMMUNICATIONS SYSTEMS increased $381 million, or 6.6%
compared with the same nine month period in 1998. This increase was led by sales
of DEFINITY(R) enterprise communication servers, NetCare(R) services and
messaging systems. Revenue gains were partially offset by decreased sales of
Systimax(R) structured cabling systems. Revenues generated outside the United
States increased by 14.9%. Revenues generated outside the United States
represented 20.6% of the revenue for 1999 compared with 19.2% in the same nine
month period of 1998. For 1999, sales within the United States increased 4.7%
compared with the same nine month period of 1998.

Revenues from MICROELECTRONIC PRODUCTS increased $358 million, or 16.2% for 1999
compared with the same nine month period in 1998 due to higher sales of
optoelectronic components and customized chips for high performance
communications, data networking and computing. Increased sales of power systems
also contributed to the increase. Sales within the United States increased 6.4%
compared with the same period in 1998. Revenues generated outside the United
States increased 26.0% compared with the same period in 1998. The growth in
revenues generated outside the United States was driven by sales in the
Asia/Pacific region, including China and the Europe/Middle-East/Africa region.
Revenues generated outside the United States represented 54.0% of sales compared
with 49.8% for the same nine month period of 1998.

Revenues from OTHER SYSTEMS AND PRODUCTS increased $516 million compared with
the same nine-month period in 1998 primarily due to the consolidation of the
businesses regained from the PCC venture (see Note 9).

COSTS AND GROSS MARGIN - NINE MONTHS ENDED JUNE 30, 1999 VERSUS NINE MONTHS
ENDED JUNE 30, 1998

Total costs increased $1,638 million, or 13.3% compared with the same nine month
period in 1998 due to the increase in sales volume. Gross margin percentage
increased to 49.8% from 47.2% in the year-ago period. The increase in gross
margin percentage for the current nine months was due to a more favorable mix of
products and improved performance on multi-year contracts.

OPERATING EXPENSES - NINE MONTHS ENDED JUNE 30, 1999 VERSUS NINE MONTHS ENDED
JUNE 30, 1998

Selling, general and administrative expenses as a percentage of revenues were
21.6% for 1999, an increase of 0.5 percentage points from the same period in
1998.

<PAGE>
23 Form 10-Q - Part I

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

Selling, general and administrative expenses increased $1,099 million, or 22.5%
compared with the same period in 1998. This increase is attributed to the higher
sales volume, investment in growth initiatives and increased amortization of
goodwill and existing technology. The current nine month period includes a $72
million reversal of business restructuring charges compared with a $74 million
reversal in the year-ago quarter.

Research and development expenses represented 12.1% of revenues for the period,
a decrease of 0.2 percentage points from the year-ago nine-month period.

Research and development expenses increased $512 million compared with the same
period in 1998. This was primarily due to increased expenditures in support of
wireless, data networking, optical networking, switching and microelectronic
products.

The purchased in-process research and development expenses for 1999 were $282
million reflecting the charges associated with the acquisition of Stratus,
Quadritek, Sybarus, WaveAccess and Enable, compared with $1,252 million related
to the acquisitions of Livingston, Prominet, Yurie and Optimay for the same
period in 1998. In the 1999 period, $24 million of in-process research and
development charges related to the acquisition of Stratus were reversed. Since
the proceeds received by Lucent in the divestiture of the non-telecommunications
business units of Stratus exceeded the carrying value of the assets held for
sale, Lucent reversed a portion of its original charge for purchased in-process
research and development and reduced the amount of the purchase price allocated
to non-current assets on a pro-rata basis.

OTHER INCOME, INTEREST EXPENSE AND PROVISION FOR INCOME TAXES - NINE MONTHS
ENDED JUNE 30, 1999 VERSUS NINE MONTHS ENDED JUNE 30, 1998

Other income -- net decreased $94 million for 1999 compared with the same period
in 1998. This decrease was largely due to the $149 million gain on the sale of
the Company's ATS business in the year-ago period partially offset by lower net
equity losses in 1999.

Interest expense was $292 million for the first nine months of 1999, an increase
of $109 million due to higher debt levels in 1999.

The effective income tax rate was 36.6% for the nine months ended June 30, 1999,
a decrease from the effective tax rate of 58.2% in the year-ago period. This
decrease was due to the 1998 non-tax deductible purchased in-process research
and development expenses associated with the acquisition of Livingston,
Prominet, Yurie and Optimay. Excluding the effect of non-tax deductible
purchased in-process research and development expenses and certain non-tax
deductible merger related costs, the effective income tax rate was 33.8% in 1999
and 35.4% in 1998. The lower effective tax rate for 1999 is primarily
attributable to the tax impact of foreign activity.

CASH FLOWS - NINE MONTHS ENDED JUNE 30, 1999 VERSUS NINE MONTHS ENDED JUNE 30,
1998

Cash used in operating activities for the nine months ended June 30, 1999 was
$1,272 million compared with cash provided by operating activities of $1,614
million in the same year-ago period. This reduction in cash was primarily due to
increases in accounts receivable and inventories as well as a decrease in
payroll and benefit- related liabilities.

Cash payments of $49 million were made for the nine-month period ended June 30,
1999, for the 1995 business restructuring charge. Of the 23,000 positions that
Lucent announced it would eliminate in connection with the restructuring
charges, approximately 20,200 positions have been eliminated as of June 30,
1999.
<PAGE>
24 Form 10-Q - Part I

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

Comparing the nine months ended June 30, 1999 and 1998, cash used in investing
activities decreased to $1,137 million from $2,348 million primarily due to
increased sales of investment securities and a reduction in cash used for
acquisitions, partially offset by increased capital expenditures.

Capital expenditures were $1,432 million and $1,115 million for the nine-month
periods ended June 30, 1999 and 1998, respectively. Capital expenditures 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.

Cash provided by financing activities for the nine months ended June 30, 1999
was $2,757 million compared with $476 million in the same year-ago period. This
increase in cash provided by financing activities was primarily due to increased
issuances of both short- and long-term debt.

The ratio of total debt to total capital (debt plus equity) was 35.4% at June
30, 1999 compared to 37.6% at September 30, 1998.

TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY

Total assets increased $7,793 million, or 26.5%, from fiscal year-end 1998. This
increase was largely due to increases in prepaid pension costs, accounts
receivable, and inventories of $2,583 million, $2,081 million, and $1,900
million, respectively. Prepaid pension costs increased due to the change in
accounting for pensions. The increase in accounts receivable was primarily
related to higher sales volume. The increase in inventories resulted from the
need to meet current and anticipated sales commitments to customers.

Total liabilities increased $3,099 million, or 14.3% from fiscal year-end 1998.
This increase was due primarily to higher short- and long-term debt levels.

Working capital, defined as current assets less current liabilities, increased
$3,955 million from September 30, 1998, primarily resulting from the increase in
accounts receivable and inventories, partially offset by higher short-term debt.

At June 30, 1999, Lucent maintained approximately $4,800 million in credit
facilities of which a portion is used to support Lucent's commercial paper
program.
At June 30, 1999, approximately $4,400 million was unused.

Future financings will be arranged to meet Lucent's requirements with the
timing, amount and form of issue depending on the prevailing market and general
economic conditions. Lucent anticipates that borrowings under its bank credit
facilities, the issuance of additional commercial paper, cash generated from
operations and short- and long-term debt financings will be adequate to satisfy
its future cash requirements, although there can be no assurance that this will
be the case.

Network operators world-wide are requiring their suppliers to arrange or provide
long-term financing for them as a condition to obtaining or bidding on
infrastructure projects. These projects may require financing in amounts ranging
from modest sums to over a billion dollars. Lucent has increasingly provided or
arranged long-term financing for customers. As market conditions permit,
Lucent's intention is to lay off these long-term financing arrangements, which
may include both commitments and drawn down borrowings, to financial
institutions and investors. This enables Lucent to reduce the amount of its
commitments and free up additional financing capacity.

<PAGE>
25 Form 10-Q - Part I

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

As of June 30, 1999, Lucent had made commitments or entered into agreements to
extend credit to certain network operators, including PCS and wireless
operators, for an aggregate of approximately $4,100 million. As of June 30,
1999, approximately $700 million had been advanced and was outstanding. Included
in the $4,100 million is approximately $2,700 million to twelve network
operators. As of June 30, 1999, approximately $200 million had been advanced and
was outstanding under seven of these arrangements.

As part of the revenue recognition process, Lucent assesses the collectibility
of its receivables relating to contracts with customers for which Lucent
provides financing.

In addition to the above arrangements, Lucent will continue to provide or commit
to financing where appropriate for its business. The ability of Lucent to
arrange or provide financing for its customers will depend on a number of
factors, including Lucent's capital structure and level of available credit, and
its continued ability to lay off commitments and drawn down borrowings on
acceptable terms. Lucent believes that it will be able to access the capital
markets on terms and in amounts that will be satisfactory to Lucent and that it
will be able to obtain bid and performance bonds, to arrange or provide customer
financing as necessary, and to engage in hedging transactions on commercially
acceptable terms, although there can be no assurance that this will be the case.

RISK MANAGEMENT

Lucent is exposed to market risk from changes in foreign currency exchange rates
and interest rates, which could impact its results of operations, financial
condition and cash flow. Lucent manages its exposure to these market risks
through its regular operating and financing activities and, when deemed
appropriate, through the use of derivative financial instruments. Derivative
financial instruments are viewed as risk management tools and are not used for
speculative or trading purposes. In addition, derivative financial instruments
are entered into with a diversified group of major financial institutions in
order to manage Lucent's exposure to nonperformance by the counterparties on
such instruments.

Lucent manages its ratio of fixed to floating rate debt with the objective of
achieving a mix that management believes is appropriate. To manage this mix in a
cost effective manner, Lucent, from time to time, enters into interest rate swap
agreements, in which it agrees to exchange various combinations of fixed and/or
variable interest rates based on agreed upon notional amounts. Lucent had no
material interest rate swap agreements in effect as of June 30, 1999 and
September 30, 1998. Management does not foresee or expect any significant
changes in its exposure to interest rate fluctuations or in how such exposure is
managed in the near future.

IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the acquisition of Quadritek and Stratus in the quarter ended
December 31, 1998, Lucent allocated $14 million (after-tax) and $267 million
(non-tax deductible), respectively, of the purchase price to purchased
in-process research and development. In connection with the acquisitions of
WaveAccess, Enable and Sybarus, in the quarter ended March 31, 1999, Lucent
allocated $15 million (after-tax) of the purchase prices to purchased in-process
research and development. As part of the process of analyzing each of these
acquisitions, Lucent made a decision to buy technology that had not yet been
commercialized rather than develop the technology internally. Lucent based this
decision on factors such as the amount of time it would take to bring the
technology to market. Lucent also considered Bell Labs' resource allocation and
its progress on comparable technology. Lucent expects to use the same decision
process in the future.
<PAGE>
26 Form 10-Q - Part I

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

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

Where appropriate, Lucent deducted an amount reflecting the contribution of core
technology from the anticipated cash flows from an in-process research and
development project. At the date of each acquisition, the in-process research
and development projects had not yet reached technological feasibility and had
no alternative future uses. Accordingly, the value allocated to these projects
was capitalized and immediately expensed at acquisition. If the projects are not
successful or completed timely, management's product pricing and growth rates
may not be achieved and Lucent may not realize the financial benefits expected
from the projects.

Stratus Computer, Inc.
- ----------------------
On October 20, 1998, Lucent completed the acquisition of Stratus. Stratus was
involved in the development of products which will enable carriers and network
service providers to more effectively integrate their existing voice and data
networks. At the acquisition date, Stratus was conducting development,
engineering, and testing activities associated with the next generation of
Stratus' fault- tolerant computer systems.

Prior to the consummation of the acquisition of Stratus, Lucent announced its
intention to divest the non-telecommunication business units of Stratus, which
consisted of the Enterprise computer business unit, two business units comprised
of financial and enterprise software (TCAM and S2), and a software joint venture
interest (Astria). Accordingly, these business units were recorded at their
estimated fair value upon acquisition and were classified as assets held for
sale at December 31, 1998. The estimated fair value was based on discussions
with independent third parties that expressed interest in acquiring these
business units.

In early 1999, Lucent divested each of these business units. Because the sales
proceeds from the disposition of the business units exceeded the carrying value
of the assets held for sale, Lucent reduced its original charge for purchased
in- process research and development and the amount of the purchase price
allocated to non-current assets on a pro-rata basis. This resulted in a $24
million credit to purchased in-process research and development during the
quarter ended March 31, 1999.

Quadritek
- ---------
On October 1, 1998, Lucent completed the acquisition of Quadritek. Quadritek was
involved in the development of Internet Protocol ("IP") network administration
software solutions. At the acquisition date, Quadritek was conducting
development, engineering, and testing activities associated with new product
offerings that will address IP name and address automation and the
synchronization of the delivery of network services for IP infrastructure.
<PAGE>
27 Form 10-Q - Part I

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

WaveAccess
- ----------
On January 22, 1999, Lucent completed the acquisition of WaveAccess. WaveAccess
was involved in the development of packet radio technology for wireless Internet
access and metropolitan area networks. At the acquisition date, WaveAccess was
conducting development, engineering, and testing activities associated with the
next generations of WaveAccess' point-to-point Ethernet bridges, point-to-point
modems, and point-to-multipoint systems.

Sybarus
- -------
On February 22, 1999, Lucent completed the purchase of Sybarus. Sybarus was a
start-up company involved in semiconductor design. At the acquisition date,
Sybarus was developing integrated circuit technology for use in Synchronous
Optical Network and Synchronous Digital Hierarchy high-speed fiber optic
transmission systems.

Enable
- ------
During the quarter ended March 31, 1999, Lucent acquired the Ethernet LAN
component business of Enable. Enable was involved in the development of Ethernet
local area network components. At the acquisition date, Enable was conducting
development, engineering, and testing activities associated with Fast Ethernet
and Gigabit Ethernet components for networking systems.

OTHER

Lucent's current and historical operations are subject to a wide range of
environmental protection laws. In the United States, these laws often require
parties to fund remedial action regardless of fault. Lucent has remedial and
investigatory activities underway at numerous current and former facilities. In
addition, Lucent was named a successor to AT&T as a potentially responsible
party ("PRP") at numerous "Superfund" sites pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") or
comparable state statutes. Under the Separation and Distribution Agreement,
among AT&T, Lucent and NCR Corporation dated as of February 1, 1996, as amended
and restated, 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. In addition, under the Separation and
Distribution Agreement, Lucent is required to pay a portion of contingent
liabilities paid out in excess of certain amounts by AT&T and NCR, including
environmental liabilities.

<PAGE>
28 Form 10-Q - Part I

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

The amounts provided for in Lucent's consolidated financial statements for
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 and other expenditures that will be required relating to
remedial actions and compliance with applicable environmental laws will not
exceed the amounts reflected in Lucent's reserves or will not have a material
adverse effect on Lucent's financial condition, results of operations or cash
flows. Any possible loss or range of possible loss that may be incurred in
excess of that provided for at June 30, 1999 cannot be estimated.

FORWARD-LOOKING STATEMENTS

This Management's Discussion and Analysis of Results of Operations and Financial
Condition and other sections of this report contain forward-looking statements
that are based on current expectations, estimates, forecasts and projections
about the industries in which Lucent operates, management's beliefs and
assumptions made by management. In addition, other written or oral statements
which constitute forward- looking statements may be made by or on behalf of
Lucent. Words such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are not
guarantees of future performance and involve certain risks, uncertainties and
assumptions ("Future Factors") which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. Lucent undertakes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

Future Factors include increasing price and product/services competition by
foreign and domestic competitors, including new entrants; rapid technological
developments and changes and Lucent's ability to continue to introduce
competitive new products and services on a timely, cost-effective basis; the mix
of products/services; the achievement of lower costs and expenses; the ability
to successfully integrate the operations and businesses of Ascend, Kenan and
other acquired companies; readiness for Year 2000; the impact of Year 2000 on
customer spending habits; domestic and foreign governmental and public policy
changes which may affect the level of new investments and purchases made by
customers; changes in environmental and other domestic and foreign governmental
regulations; protection and validity of patent and other intellectual property
rights; reliance on large customers; customer demand for Lucent's products and
services; technological, implementation and cost/financial risks in the
increasing use of large, multi-year contracts; the cyclical nature of Lucent
business; the outcome of pending and future litigation and governmental
proceedings; and continued availability of financing, financial instruments and
financial resources in the amounts, at the times and on the terms required to
support Lucent's future business. These are representative of the Future Factors
that could affect the outcome of the forward-looking statements. In addition,
such statements could be affected by general industry and market conditions and
growth rates, general domestic and international economic conditions including
interest rate and currency exchange rate fluctuations and other Future Factors.

For a further description of Future Factors that could cause actual results to
differ materially from such forward-looking statements, see below in this report
including the other sections referred to and also see the discussion in Lucent's
Form 10-K for the year ended September 30, 1998 in Item 1 in the section
entitled "OUTLOOK-Forward Looking Statements" and the remainder of the OUTLOOK
section.
<PAGE>
29 Form 10-Q - Part I

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

Competition:
See discussion above under KEY BUSINESS CHALLENGES.

Dependence On New Product Development:
The markets for Lucent's principal products are characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and evolving methods of building and operating communications
systems for network operators and business customers. Lucent's operating results
will depend to a significant extent on its ability to continue to introduce new
systems, products, software and services successfully on a timely basis and to
reduce costs of existing systems, products, software and services. The success
of these and other new offerings is dependent on several factors, including
proper identification of customer needs, cost, timely completion and
introduction, differentiation from offerings of Lucent's competitors and market
acceptance. In addition, new technological innovations generally require a
substantial investment before any assurance is available as to their commercial
viability, including, in some cases, certification by international and domestic
standards-setting bodies.

Reliance on Major Customers:
See discussion above under KEY BUSINESS CHALLENGES.

Readiness for Year 2000:
Lucent is engaged in a major effort to minimize the impact of the Year 2000 date
change on Lucent's products, information technology systems, facilities and
production infrastructure. With minor exceptions, Lucent met its internal June
30, 1999 target for completion of these activities.

The Year 2000 challenge is a priority within Lucent at every level of the
Company. Primary Year 2000 preparedness responsibility rests with program
offices which have been established within each of Lucent's product groups and
corporate centers. A corporate-wide Lucent Year 2000 Program Office ("LYPO")
monitors and reports on the progress of these offices. Each program office has a
core of full-time individuals augmented by a much larger group who have been
assigned specific Year 2000 responsibilities in addition to their regular
assignments. Further, Lucent has engaged third parties to assist in its
readiness efforts in certain cases. LYPO has established a methodology to
measure, track and report Year 2000 readiness status consisting of five steps:
inventory; assessment; remediation; testing; and deployment. In addition, LYPO
tracks and reports on the development and deployment of Year 2000 contingency
plans.

Lucent is completing programs to make its new commercially available products
Year 2000 ready and has developed evolution strategies for customers who own
non-Year 2000 ready Lucent products. With one minor exception, all of the
upgrades and new products needed to support customer migration are already
generally available.

Lucent has launched extensive efforts to alert customers who have non-Year 2000
ready products, including direct mailings, phone contacts and participation in
user and industry groups. Lucent also has a Year 2000 website www.lucent.com/y2k
that provides Year 2000 product information. Lucent continues to cooperate in
the Year 2000 information sharing efforts of the Federal Communications
Commission and other governmental bodies.

Lucent believes it has sufficient resources to provide timely support to its
customers that require product migrations or upgrades. However, because this
effort is heavily dependent on customer cooperation, Lucent monitors customer
response and takes steps to encourage customer responsiveness, as necessary.

<PAGE>
30 Form 10-Q - Part I

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

With minor exceptions, Lucent has completed the five steps of its Y2K readiness
program with respect to its factories, information systems and facilities. LYPO
has developed a formal "exceptions" tracking process to approve and track a
small number of individual cases in which factors such as third party
dependencies prevent project completion by the corporate target date. Completion
of required activities in these cases is anticipated well in advance of any
adverse Year 2000 impact. In addition, Lucent has implemented various change
management mechanisms to allow the Company to maintain Year 2000 readiness even
as systems are modified or replaced to address non-Year 2000 business needs.

To ensure the continued delivery of third party products and services, Lucent's
procurement organization has analyzed Lucent's supplier base and has sent
surveys to approximately 5,000 suppliers. To supplement this effort, Lucent is
conducting more detailed readiness reviews of the Year 2000 status of the
suppliers ranked as most critical based on the nature of their relationship with
Lucent, the product/service provided and/or the content of their survey
responses. The majority of Lucent's critical suppliers have reported completion
of their Year 2000 readiness efforts. However, Lucent continues to monitor the
Year 2000 status of all of its critical suppliers to minimize its Year 2000
supply chain risk and is developing appropriate contingency responses as the
risks become clearer.

Lucent has committed considerable resources to Year 2000 contingency planning
throughout the enterprise. These plans focus on risks posed by the Year 2000
date change, as well as other sensitive dates such as September 9, 1999 and
February 29, 2000. Lucent's plans are designed both to mitigate the impact of
Year 2000 failures, as well as providing for emergency response mechanisms and
supporting the prompt resumption of regular operations. Lucent has largely
completed the first working drafts of its Year 2000 contingency plans for
customer support and facilities. As Lucent completes the balance of its
contingency plans over the next several months, the plans will be continuously
enhanced as updated information is obtained, the risks posed by external
dependencies become clearer and customer support needs become more focused.

The risk to Lucent resulting from the failure of third parties in the public and
private sector to attain Year 2000 readiness is the same as other firms in
Lucent's industry and other business enterprises generally. The following are
representative of the types of risks that could result in the event of one or
more major failures of Lucent's information systems, factories or facilities to
be Year 2000 ready, or similar major failures by one or more major third party
suppliers to Lucent: (1) information systems--could include interruptions or
disruptions of business and transaction processing such as customer billing,
payroll, accounts payable and other operating and information processes, until
systems can be remedied or replaced; (2) factories and facilities--could include
interruptions or disruptions of manufacturing processes and facilities with
delays in delivery of products, until non-compliant conditions or components can
be remedied or replaced; and (3) major suppliers to Lucent--could include
interruptions or disruptions of the supply of raw materials, supplies and Year
2000 ready components which could cause interruptions or disruptions of
manufacturing and delays in delivery of products, until the third party supplier
remedied the problem or contingency measures were implemented. Risks of major
failures of Lucent's principal products could include adverse functional impacts
experienced by customers, the costs and resources for Lucent to remedy problems
or replace products where Lucent is obligated or undertakes to take such action,
and delays in delivery of new products.

<PAGE>
31 Form 10-Q - Part I

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

Lucent believes it is taking the necessary steps to resolve Year 2000 issues;
however, given the possible consequences of failure to resolve significant Year
2000 issues, there can be no assurance that any one or more such failures would
not have a material adverse effect on Lucent. Lucent estimates that the costs of
efforts to prepare for Year 2000 from calendar year 1997 through 2000 is about
$560 million, of which an estimated $465 million has been spent as of June 30,
1999. The increase in Lucent's overall Year 2000 budget reflects the
incorporation of the Year 2000 budgetary numbers of recently acquired entities.
Lucent has been able to reprioritize work projects to largely address Year 2000
readiness needs within its existing organizations. As a result, most of these
costs represent costs that would have been incurred in any event. These amounts
cover costs of the Year 2000 readiness work for inventory, assessment,
remediation, testing, deployment and contingency planning, including fees and
charges of contractors for outsourced work and consultant fees. Costs for
previously contemplated updates and replacements of Lucent's internal systems
and information systems infrastructure have been excluded without attempting to
establish whether the timing of non-Year 2000 replacement or upgrading was
accelerated.

While the Year 2000 cost estimates above include additional costs, Lucent
believes, based on available information, that it will be able to manage its
total Year 2000 transition without any material adverse effect on its business
operations, products or financial prospects.

The actual outcomes and results could be affected by Future Factors including,
but not limited to, the continued availability of skilled personnel, cost
control, the ability to locate and remediate software code problems, critical
suppliers and subcontractors meeting their commitments to be Year 2000 ready and
provide Year 2000 ready products, and timely actions by customers.

<PAGE>
32 Form 10-Q - Part I

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

European Monetary Union - Euro:
On January 1, 1999, eleven member countries of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new common legal currency. The Euro is currently trading on
currency exchanges and the legacy currencies will remain legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, cash-less payments can be made in
the Euro, and parties can elect to pay for goods and services and transact
business using either the Euro or a legacy currency. Between January 1, 2002 and
July 1, 2002, the participating countries will introduce Euro notes and coins
and withdraw all legacy currencies so that they will no longer be available.

Lucent has in place a joint European-United States team representing affected
functions within the Company. This team is evaluating Euro related issues
affecting the Company that include its pricing/marketing strategy, conversion of
information technology systems, existing contracts and currency risk and risk
management in the participating countries. The Euro conversion may affect
cross-border competition by creating cross-border price transparency.

Lucent will continue to evaluate issues involving introduction of the Euro as
further accounting, tax and governmental legal and regulatory guidance is
available. Based on current information and Lucent's current assessment, Lucent
does not expect that the Euro conversion will have a material adverse effect on
its business or financial condition.

Employee Relations:
On June 30, 1999, Lucent employed approximately 153,000 persons, of whom 76.9%
were located in the United States. Of these domestic employees, 38.4% are
represented by unions, primarily the Communications Workers of America
("CWA")and the International Brotherhood of Electrical Workers ("IBEW"). Lucent
has agreements with the CWA and IBEW expiring May 31, 2003.

Multi-Year Contracts:
Lucent has significant contracts for the sale of infrastructure systems to
network operators which extend over a multi-year period, and expects to enter
into similar contracts in the future, with uncertainties affecting recognition
of revenues, stringent acceptance criteria, implementation of new technologies
and possible significant initial cost overruns and losses. See also discussion
above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY, and KEY BUSINESS
CHALLENGES.

Seasonality:
See discussion above under KEY BUSINESS CHALLENGES.

Future Capital Requirements:
See discussion above under TOTAL ASSETS, WORKING CAPITAL AND LIQUIDITY.

Growth Outside the U.S., Foreign Exchange and Interest Rates: Lucent intends to
continue to pursue growth opportunities in markets outside the U.S. In many
markets outside the U.S., long-standing relationships between potential
customers of Lucent and their local providers, and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such growth opportunities outside the U.S. may
require significant investments for an extended period before returns on such
investments, if any, are realized. Such projects and investments could be
adversely affected by reversals or delays in the opening of foreign markets to
new competitors, exchange controls, currency fluctuations, investment policies,
repatriation of cash, nationalization, social and political risks, taxation, and
other factors, depending on the country in which such opportunity arises.
Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.

<PAGE>
33 Form 10-Q - Part I

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

See discussion above under RISK MANAGEMENT with respect to foreign exchange and
interest rates. A significant change in the value of the dollar against the
currency of one or more countries where Lucent sells products to local customers
or makes purchases from local suppliers may materially adversely affect Lucent's
results. Lucent attempts to mitigate any such effects through the use of foreign
currency contracts, although there can be no assurances that such attempts will
be successful.

Lucent hedges certain foreign currency transactions. The decline in value of
non- U.S. dollar currencies, may, if not reversed, adversely affect Lucent's
ability to contract for product sales in U.S. dollars because Lucent's products
may become more expensive to purchase in U.S. dollars for local customers doing
business in the countries of the affected currencies.

Legal Proceedings and Environmental:
See discussion above in Note 10 - COMMITMENTS AND CONTINGENCIES and OTHER.

<PAGE>
34 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:

Current Report on Form 8-K/A #1 dated February 26, 1999 was filed on May
18, 1999 pursuant to Item 5 (Other Events) and Item 7 (Financial
Statements, Pro Forma Financial Information and Exhibits).

Current Report on Form 8-K dated June 24, 1999 was filed on June 28, 1999
pursuant to Item 2 (Acquisition or Disposition of Assets) and Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits).

<PAGE>
35 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 12, 1999
/s/ James S. Lusk
------------------------------
James S. Lusk
Vice President and Controller
(Principal Accounting Officer)

<PAGE>
36 Form 10-Q

Exhibit Index

Exhibit
Number

(12) Computation of Ratio of Earnings to Fixed Charges

(27) Financial Data Schedule

<PAGE>

EX-12
Statement re: Computation of Ratios

Exhibit 12
Form 10-Q
For the Nine
Months Ended
June 30, 1999

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

(Dollars in Millions)
(Unaudited)

For the Nine
Months Ended
June 30, 1999

Income Before Income Taxes........................... $ 3,962

Less Interest Capitalized during
the Period........................................... 16
Less Undistributed Earnings of Less than 50%
Owned Affiliates..................................... 2

Add Fixed Charges...................................... 473

Total Earnings ........................................ $ 4,417

Fixed Charges

Total Interest Expense Including Capitalized Interest.. $ 340

Interest Portion of Rental Expense..................... 133

Total Fixed Charges................................ $ 473

Ratio of Earnings to Fixed Charges..................... 9.3

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited balance sheet of Lucent at June 30, 1999 and the unaudited
consolidated statement of income for the nine month period ended June 30, 1999
and is qualified in its entirety by reference to such financial statements. The
financial data schedule reflects the two-for-one split of Lucent's common stock
which became effective on April 1, 1999.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-1-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,495
<SECURITIES> 0
<RECEIVABLES> 9,879
<ALLOWANCES> 393
<INVENTORY> 5,179
<CURRENT-ASSETS> 20,810
<PP&E> 13,531
<DEPRECIATION> 7,274
<TOTAL-ASSETS> 37,156
<CURRENT-LIABILITIES> 11,956
<BONDS> 3,712
0
0
<COMMON> 30
<OTHER-SE> 12,373
<TOTAL-LIABILITY-AND-EQUITY> 37,156
<SALES> 27,728
<TOTAL-REVENUES> 27,728
<CGS> 13,910
<TOTAL-COSTS> 13,910
<OTHER-EXPENSES> 3,647
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 292
<INCOME-PRETAX> 3,962
<INCOME-TAX> 1,452
<INCOME-CONTINUING> 2,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,308
<NET-INCOME> 3,818
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.22

</TABLE>