AGERE SYSTEMS INC, S-1, 2000-12-11

AGERE SYSTEMS INC
S-1, 2000-12-11

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 11, 2000

REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

AGERE SYSTEMS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3674 22-3746606
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

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

555 UNION BOULEVARD
ALLENTOWN, PENNSYLVANIA 18109
(610) 712-4323
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

JEAN F. RANKIN
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
AGERE SYSTEMS INC.
555 UNION BOULEVARD
ALLENTOWN, PENNSYLVANIA 18109
(610) 712-4323
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------

COPIES TO:

<TABLE>
<S> <C>
JULIE T. SPELLMAN SARAH JONES BESHAR
CRAVATH, SWAINE & MOORE DAVIS POLK & WARDWELL
WORLDWIDE PLAZA 450 LEXINGTON AVENUE
825 EIGHTH AVENUE NEW YORK, NEW YORK 10017
NEW YORK, NEW YORK 10019 (212) 450-4000
(212) 474-1000
</TABLE>

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ] ------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per share (including
Preferred Stock Purchase Rights(2))..................... $100,000,000 $26,400
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933. The proposed
maximum offering price includes amounts attributable to shares that the
underwriters may purchase to cover over-allotments, if any.

(2) Rights initially will trade together with the Common Stock. The value
attributable to the Rights, if any, is reflected in the market price of the
Common Stock.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2

The information in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell securities and we are not soliciting
offers to buy these securities in any jurisdiction where the offer or
sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued , 2001
Shares

[AGERE SYSTEMS LOGO]
COMMON STOCK
------------------------

AGERE SYSTEMS INC. IS OFFERING SHARES OF ITS COMMON STOCK. THE SELLING
STOCKHOLDER NAMED IN THIS PROSPECTUS IS OFFERING UP TO SHARES OF OUR
COMMON STOCK, IF AND TO THE EXTENT THE SHARES ARE ACQUIRED BY THE SELLING
STOCKHOLDER IN THE EXCHANGE DESCRIBED IN "UNDERWRITERS -- THE EXCHANGE." WE WILL
NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES OF OUR COMMON STOCK BY THE
SELLING STOCKHOLDER. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET
CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING
PRICE WILL BE BETWEEN $ AND $ PER SHARE.
------------------------

WE WILL APPLY TO HAVE OUR COMMON STOCK APPROVED FOR LISTING ON THE NEW YORK
STOCK EXCHANGE UNDER THE SYMBOL "AGR."
------------------------

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
------------------------

PRICE $ A SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO THE SELLING
PUBLIC COMMISSIONS AGERE SYSTEMS STOCKHOLDER
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total................. $ $ $ $
</TABLE>

Agere Systems has granted the underwriters the right to purchase up to an
additional shares of common stock to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2001.
------------------------
MORGAN STANLEY DEAN WITTER

, 2001
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 9
Forward-Looking Statements............ 25
Our Separation from Lucent............ 26
Use of Proceeds....................... 28
Dividend Policy....................... 29
Capitalization........................ 30
Dilution.............................. 31
Selected Financial Information........ 33
Unaudited Pro Forma Condensed
Financial Statements................ 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 38
Business.............................. 55
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................ 86
Arrangements Between Lucent and Our
Company............................. 98
Ownership of Our Common Stock......... 109
Description of Capital Stock.......... 110
Shares Eligible for Future Sale....... 118
Material United States Federal Tax
Consequences to Non-United States
Holders............................. 119
Underwriters.......................... 122
Legal Matters......................... 125
Experts............................... 125
Where You Can Find More Information... 126
Index to Financial Statements......... F-1
</TABLE>

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

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.

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

UNTIL , 2001, 25 DAYS AFTER THE DATE OF THIS PROSPECTUS, ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

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

This prospectus contains trademarks, service marks and registered marks of
Agere Systems Inc., Lucent Technologies Inc. and other companies, as indicated.

i
<PAGE> 4

PROSPECTUS SUMMARY

The following is a summary of some of the information contained in this
prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" and our combined financial statements and notes
thereto included elsewhere in this prospectus.

We describe in this prospectus the businesses to be contributed to us by
Lucent Technologies Inc. as part of our separation from Lucent as if they were
our businesses for all historical periods described. Please see "Our Separation
from Lucent" for a description of this separation. Our historical financial
results as part of Lucent contained herein may not reflect our financial results
in the future as a stand-alone company or what our financial results would have
been had we been a stand-alone company during the periods presented.

AGERE SYSTEMS

OUR COMPANY

We are the world leader in sales of communications semiconductors, which
include both optoelectronic components and integrated circuits, as described
below. Communications semiconductors are basic building blocks of electronic and
photonic products and systems for terrestrial and submarine, or undersea,
communications networks and for communications equipment. We had revenue of $4.7
billion and a net loss of $76 million in fiscal 2000. As of September 30, 2000,
we employed approximately 16,500 people worldwide and had sales, research and
development or manufacturing sites in 22 countries, including the United States.

OPTOELECTRONIC COMPONENTS

-- lasers, which are devices that produce light suitable for optical
networks;

-- modulators, which are devices that turn optical signals on and off to
encode information that travels through a network;

-- transmitters, which are devices that convert electronic signals into
optical signals for transmission;

-- receivers, which are devices that convert optical signals back into
electronic form on the receiving end of a communications network;

-- amplifiers, which are devices that regenerate optical signals after
they suffer loss as a result of traveling long distances within the
network;

-- transponders, which are devices that combine both optoelectronic
components and integrated circuits in one unit that transmits and
receives optical signals; and

-- micro electro-mechanical systems, or MEMS, which are small mechanical
products that perform a variety of optical functions without
converting an optical signal into electronic form. These MEMS
products are being sampled by some customers but further design and
manufacturing process development is required before they will be
available for sale in commercial quantities.

In addition to our broad portfolio of active optoelectronic components, we have
started to sell passive optical filters and silicon waveguides. Passive optical
filters are devices used in conjunction with active optoelectronic components in
products such as amplifiers. Silicon waveguides are passive optical components
that manipulate optical signals to perform a variety of functions.

1
<PAGE> 5

In fiscal 2000, we derived $1.2 billion, or 25.5% of our revenue, and
incurred an operating loss of $127 million, from sales of our optoelectronic
components.

INTEGRATED CIRCUITS

We offer integrated circuits for use in a broad range of communications
networks and computer equipment. Integrated circuits, or chips, are made using
semiconductor wafers imprinted with a network of electronic components. They are
designed to perform various functions such as processing electronic signals,
controlling electronic system functions and processing and storing data. Our
integrated circuits are used primarily in the following types of equipment:

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

-- client access and network connectivity devices, such as modems and
analog line cards, which allow computers, servers and other equipment
to connect to communications networks;

-- wireless terminals and infrastructure, such as mobile telephones and
cellular base stations, which transmit and receive data and voice
communications through radio waves; and

-- hard disk drives, which store data and are found in products such as
personal computers, servers and new consumer devices.

We also sell wireless local area networking products, which facilitate the
transmission of data and voice signals within a localized area without cables or
wires.

In fiscal 2000, we derived $3.5 billion, or 74.5% of our revenue, and
generated operating income of $283 million, from sales of our integrated
circuits and our wireless local area networking products.

OUR STRATEGY

We intend to maintain and enhance our position as the leading global
provider of communications semiconductors. To accomplish this goal, we are
pursuing the major strategies described below.

-- Focus on High Growth Opportunities within the Communications
Semiconductor Industry. We are focusing resources on optical
components and integrated circuits for network communications
equipment and wireless local area networking products because of the
high growth we believe these product areas will experience in the
future. Based on various industry reports, from 1999 to 2003, we
expect these segments of the semiconductor industry to grow at
compounded annual growth rates of 36.6%, 26.0% and 31.4%,
respectively. Some of our other integrated circuit product areas are
expected to grow more slowly and will be less of a focus.

-- Maintain Product and Technology Leadership. We intend to build on
our product and technology leadership by continuing to make
significant investments in research and development and continuing to
work closely with our customers.

-- Expand Existing and Develop New Customer Relationships. We will seek
to capitalize on our status as a stand-alone company to increase our
sales to existing customers and develop new customers.

-- Develop Combined Optoelectronic and Integrated Circuit Solutions. We
believe that customers will increasingly demand combined
optoelectronic and integrated circuit solutions in order to reduce
the time and expense necessary to develop communications equipment.
We will continue to devote appropriate resources to capitalize on
this market opportunity.

-- Improve Operational Efficiencies. We will continue to manage our
portfolio of manufacturing resources, seeking to improve
manufacturing asset utilization, order fulfillment and customer
responsiveness.

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<PAGE> 6

-- Selectively Pursue Strategic Acquisitions and Investments. We will
pursue strategic acquisitions and investments to improve our ability
to offer integrated solutions and our operational efficiencies and to
provide us with additional design capabilities, processes,
technologies and products.

BENEFITS OF OUR SEPARATION FROM LUCENT

We have historically operated as part of Lucent. We will have no material
assets or activities as a separate corporate entity until the contribution to us
by Lucent, prior to the completion of this offering, of the businesses described
in this prospectus. We believe that our separation from Lucent will provide us
with the opportunity to expand our business prospects and improve our
operations. The key benefits of the separation are described below.

-- Better Incentives for Employees and Greater Accountability. We will
seek to motivate our employees and strengthen the focus of our
management by implementing incentive compensation programs tied to
the market performance of our common stock.

-- Greater Strategic Focus. As a result of having our own board of
directors and separate management team, we expect to focus more
sharply on our business and strategic opportunities.

-- Increased Speed and Responsiveness. As a stand-alone company, we
expect to be able to make decisions more quickly, deploy resources
more rapidly and efficiently and operate with more agility than when
we were a part of Lucent.

-- Direct Access to Capital Markets. As a stand-alone company, we will
have direct access to the capital markets to issue debt or equity
securities. We believe our equity will provide us with the capability
to grow more readily through acquisitions.

OUR RELATIONSHIP WITH LUCENT

We are currently a wholly owned subsidiary of Lucent. After completion of
this offering Lucent will own approximately % of the outstanding shares of
our common stock, or approximately % if the underwriters exercise their
over-allotment option in full, in each case assuming that the exchange described
in "Underwriters--The Exchange" occurs. If the exchange does not occur, after
the completion of this offering Lucent will own approximately % of the
outstanding shares of our common stock or approximately % if the
underwriters exercise their over-allotment option in full. Lucent has announced
that it currently plans to distribute all of the shares of our common stock it
then owns to the holders of Lucent's common stock by the end of Lucent's current
fiscal year, which will occur on September 30, 2001.

Lucent's agreement to complete the distribution on or before September 30,
2001 is contingent on the satisfaction or waiver of a variety of conditions, and
the distribution may not occur by the contemplated time or at all. As one of the
conditions to the distribution, Lucent will not complete the distribution if its
board of directors, in its sole discretion, determines that events or
developments have occurred, following this offering, that would result in the
distribution having a material adverse effect on Lucent or its stockholders.
Lucent has applied for a private letter ruling from the Internal Revenue Service
that, among other things, the distribution of its shares of our common stock to
the holders of Lucent's common stock will be tax-free to Lucent and its
stockholders for United States federal income tax purposes. Receipt of the
private letter ruling also is a condition to the distribution. If Lucent does
not receive this ruling, Lucent is unlikely to complete the distribution.

Prior to the completion of this offering, we will enter into agreements
with Lucent that will govern the separation of our businesses from Lucent. These
agreements will not be conditioned on the distribution. They

3
<PAGE> 7

will provide for, among other things, the transfer from Lucent to us of assets
and the assumption by us of liabilities relating to our businesses. For more
information regarding the assets and liabilities to be transferred to us, see
our combined financial statements and notes thereto included elsewhere in this
prospectus. We also will enter into agreements with Lucent regarding the
transfer and licensing to us of intellectual property related to our businesses.
Substantially all of these transfers will be completed prior to the completion
of this offering. In addition, we will enter into a three year product purchase
agreement with Lucent that generally requires Lucent to purchase at least $1
billion of our products each year. Some of the agreements between Lucent and us
will also govern our various interim and ongoing relationships. Lucent is our
largest customer with purchases in fiscal 1998, 1999 and 2000 representing
22.3%, 25.7% and 21.3%, respectively, of our revenue. Please see "Arrangements
Between Lucent and Our Company" for a more detailed discussion of these
agreements.

4
<PAGE> 8

THE OFFERING

Common stock offered:

By us....................... shares

By the selling
stockholder............... ------- shares if, and to the extent, the
selling stockholder acquires the
shares of our common stock from
Lucent in the exchange described
in "Underwriters--The Exchange"

Total............... ======= shares

Selling stockholder........... An affiliate of , one of the
underwriters

Common stock to be outstanding
immediately after this
offering.................... shares

Common stock to be held by
Lucent immediately after this
offering, assuming the
exchange occurs............. shares

Use of proceeds............... Our net proceeds from the offering will be
approximately $ million, assuming an
initial public offering price of $ per
share, the midpoint of the range set forth on
the cover page of this prospectus. We will
use the net proceeds from the offering for
general corporate purposes, including working
capital, capital expenditures, debt service
and potential acquisitions, joint ventures
and investments. We will not receive any
proceeds from the sale of our common stock by
the selling stockholder.

Dividend policy............... We do not anticipate paying any dividends on
our common stock in the foreseeable future.

Proposed New York Stock
Exchange symbol............... "AGR"

Unless otherwise indicated, all information contained in this prospectus:

-- assumes no exercise of the underwriters' option to purchase up to
additional shares of our common stock to cover
over-allotments, if any;

-- does not take into account approximately shares of our
common stock reserved for issuance under our employee benefit plans,
including approximately shares of our common stock issuable upon
exercise by our employees of stock options expected to be granted to
them in connection with this offering; and

-- does not take into account approximately shares of our
common stock issuable in connection with Lucent stock-based awards
held by our employees that will be converted into our stock-based
awards. The actual number of substituted awards will be determined at
the time of the conversion.

5
<PAGE> 9

Neither the selling stockholder nor Lucent is obligated to participate in
the exchange described in "Underwriters--The Exchange." Accordingly, the number
of shares of our common stock being offered by the selling stockholder will be
reduced to the extent the selling stockholder does not acquire the shares in the
exchange.

If the selling stockholder does not complete the exchange, no shares of our
common stock will be sold by the selling stockholder. In this event, only
the shares of our common stock being offered by us will be sold in this
offering. Whether or not all or part of the exchange is completed, the shares of
common stock outstanding after this offering will remain the same. The number of
shares of our common stock to be held by Lucent after this offering, however,
will increase to the extent the selling stockholder does not acquire shares of
our common stock in the exchange. After completion of this offering Lucent will
own approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option in
full, in each case assuming that the exchange described in "Underwriters--The
Exchange" occurs. If the exchange does not occur, after the completion of this
offering Lucent will own approximately % of the outstanding shares of our
common stock or approximately % if the underwriters exercise their
over-allotment option in full.

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

We were incorporated in Delaware on August 1, 2000 as Lucent ME Corp., and
we changed our name to Agere Systems Inc. on December 5, 2000. Our principal
executive offices are located at 555 Union Boulevard, Allentown, Pennsylvania
18109. Our telephone number is (610) 712-4323. Our World Wide Web site address
is www.agere.com. Information contained in our website is not incorporated by
reference in this prospectus. You should not consider information contained in
our website part of this prospectus.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following table sets forth our summary historical and pro forma
financial information derived from our audited combined statements of income for
the fiscal years ended September 30, 1998, 1999 and 2000, our audited balance
sheet as of September 30, 2000, and our unaudited pro forma condensed financial
statements included elsewhere in this prospectus. The unaudited pro forma
financial information does not purport to represent what our financial position
and our results of operations actually would have been had the separation and
related transactions described below and our acquisition of Ortel Corporation
occurred on the dates indicated. This summary financial information may not be
indicative of our future performances as a stand-alone company. Our fiscal year
ends on September 30.

The unaudited pro forma statement of income information was prepared as if
our separation from Lucent and the related transactions described below,
including this offering, and our acquisition of Ortel had occurred as of October
1, 1999. The unaudited pro forma balance sheet information was prepared as if
our separation from Lucent and the related transactions had occurred as of
September 30, 2000. The pro forma condensed financial statements give pro forma
effect to:

-- the assumption by us from Lucent upon completion of this offering of
$2.5 billion of short-term debt in the form of commercial paper or
other short-term notes, including the associated interest expense and
the related tax effect;

-- the financial results of Ortel, which we acquired on April 27, 2000,
for the period from October 1, 1999, to April 27, 2000, the
elimination of related purchased in-process research and development
and the impact of a full year of related amortization of goodwill and
other acquired intangibles; and

-- our receipt from the sale of our common stock by us of the estimated
net proceeds of $ , assuming an estimated initial public
offering price of $ per share, the midpoint of the range set
forth on the cover page of this prospectus.

Lucent intends to issue approximately $2.5 billion of short-term debt,
which we will assume upon completion of this offering. We will not receive any
of the proceeds of this short-term debt. The $2.5 billion of debt we will assume
from Lucent represents the portion of Lucent's debt that Lucent has determined
should be attributed to our businesses. Upon completion of this offering, Lucent
will be relieved of all obligations related to this short-term debt. We may
refinance all or a portion of the short-term debt we are assuming with long-term
or other short-term debt. We are currently evaluating our capital structure and
examining other costs and expenses we may incur as a stand-alone company and
have not yet determined the amount of financing we will have in the future. We
may from time to time incur additional debt.

The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable. We have not made adjustments for the
balance sheet impact of the net assets we will receive in connection with the
assets and liabilities of Lucent's pension and postretirement benefit plans that
will be transferred to us at the time of the distribution in connection with our
employees. We have not included the balance sheet impact of our future net
assets in connection with pension and postretirement benefits because we and
Lucent have not yet finalized the amount of the assets and liabilities to be
transferred. Please see the notes to the unaudited pro forma condensed financial
statements for a more detailed discussion of how the adjustments described above
are presented in the pro forma condensed financial statements.

You should read the summary financial information in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the unaudited pro forma condensed financial statements and notes
thereto and the combined financial statements and notes thereto included
elsewhere in this prospectus.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

<TABLE>
<CAPTION>
HISTORICAL
YEAR ENDED PRO FORMA
SEPTEMBER 30, YEAR ENDED
-------------------------- SEPTEMBER 30,
1998 1999 2000 2000
------ ------ ------ -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Revenue
Optoelectronics................................ $ 374 $ 659 $1,201 $1,253
Integrated circuits............................ 2,727 3,055 3,507 3,507
Total revenue.................................. 3,101 3,714 4,708 4,760
Costs............................................ 1,592 1,949 2,555 2,588
Gross profit..................................... 1,509 1,765 2,153 2,172
Operating expenses:
Selling, general and administrative............ 525 573 535 547
Research and development....................... 466 683 827 837
Purchased in-process research and
development................................. 48 17 446 139
Amortization of goodwill and other acquired
intangibles................................. 3 13 189 370
Total operating expenses....................... 1,042 1,286 1,997 1,893
Operating income................................. 467 479 156 279
Cumulative effect of accounting change (net of
provision for income taxes).................... -- 32 -- --
Net income (loss)................................ 303 351 (76) (17)
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-----------------------
HISTORICAL PRO FORMA
---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET INFORMATION:
Cash........................................................ $ -- $
Total assets................................................ 7,067
Short-term debt............................................. -- 2,500
Capitalized lease obligation................................ 60 60
Total invested equity/stockholders' equity.................. 5,781
</TABLE>

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<PAGE> 12

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors and all the other information
contained in this prospectus before investing in our common stock. The trading
price of our common stock could decline due to any of these risks, and you may
lose all or part of your investment.

RISKS RELATED TO OUR SEPARATION FROM LUCENT

OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS
AS A STAND-ALONE COMPANY AND, THEREFORE, MAY NOT BE RELIABLE AS AN INDICATOR OF
OUR HISTORICAL OR FUTURE RESULTS.

The historical financial information we have included in this prospectus
may not reflect what our results of operations, financial position and cash
flows would have been had we been a stand-alone company during the periods
presented or what our results of operations, financial position and cash flows
will be in the future. Therefore, our historical combined financial statements
may not be indicative of our future performance as a stand-alone company. This
is primarily a result of the three factors described below.

-- First, our historical combined financial statements reflect
allocations, primarily with respect to general corporate expenses,
research expense and interest expense. These allocations may be less
than the general corporate expenses, research expense and interest
expense we will incur in the future as a stand-alone company.

-- Second, the information does not reflect significant changes that we
expect to occur in the future as a result of our separation from
Lucent, including changes in how we fund our operations, conduct
research and handle tax and employee matters.

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

In addition, we have not made adjustments to our historical financial
information to reflect many significant changes that will occur in our cost
structure, financing and operations as a result of our separation from Lucent.
These changes include potentially increased costs associated with reduced
economies of scale and greater marketing expenses related to building a company
brand identity separate from Lucent. We also will be responsible for our own
financing, which historically was done by Lucent at the parent level.
Furthermore, we expect to have lower licensing revenue in the future as compared
to the amounts reflected in our historical combined financial statements. One of
the reasons for the potentially lower licensing revenue is that licensing
revenue derived from our separate intellectual property portfolio is likely to
be lower than our share of licensing revenue from a more complete portfolio that
includes Lucent's other intellectual property. Another reason is that many of
our licensees and potential licensees are increasing their own patent portfolios
or already have been granted licenses by Lucent, which may reduce, in the
future, the amount of patent licensing fees they will pay to us. Given the
generally high gross margins we derive from our licensing revenue, if our
licensing revenue decreases, our gross margins may be adversely affected. For
additional information about our past financial performance and the basis of
presentation of our historical combined financial statements, please see
"Selected Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our combined financial
statements and notes thereto included elsewhere in this prospectus.

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WE HAVE NO HISTORY OPERATING AS A STAND-ALONE COMPANY, AND WE MAY BE UNABLE TO
MAKE THE CHANGES NECESSARY TO OPERATE AS A STAND-ALONE COMPANY, OR WE MAY INCUR
GREATER COSTS AS A STAND-ALONE COMPANY THAT MAY CAUSE OUR PROFITABILITY TO
DECLINE.

Prior to our separation, Lucent has conducted our businesses through
various divisions and subsidiaries rather than as a stand-alone company. Lucent
performed various corporate functions for us, including the following:

-- public relations;

-- employee relations;

-- investor relations;

-- financing; and

-- legal and tax functions.

Following the separation, Lucent will have no obligation to provide these
functions to us other than the interim services which will be provided by Lucent
and which are described in "Arrangements Between Lucent and Our Company." If we
do not have in place our own systems and business functions or if we do not have
agreements with other providers of these services once our interim services
agreement with Lucent expires, we may not be able to effectively operate our
business and our profitability may decline. We are in the process of creating
our own, or engaging third parties to provide, systems and business functions to
replace many of the systems and business functions Lucent provides us. We may
not be successful in implementing these systems and business functions or in
transitioning data from Lucent's systems to ours. In addition, we may incur
higher costs for these functions than the amounts we were allocated as a part of
Lucent.

UPON COMPLETION OF THIS OFFERING, WE WILL ASSUME A SIGNIFICANT AMOUNT OF DEBT,
AND WE MAY SUBSTANTIALLY INCREASE OUR DEBT IN THE FUTURE, WHICH COULD SUBJECT
US TO VARIOUS RESTRICTIONS AND HIGHER INTEREST COSTS AND DECREASE OUR
PROFITABILITY.

Because Lucent historically provided financing to us and incurred debt at
the parent level, our historical combined balance sheets do not include debt.
Lucent intends to issue approximately $2.5 billion of short-term debt, which we
will assume upon completion of this offering. We will not receive any of the
proceeds of this short-term debt. Upon completion of this offering, Lucent will
be relieved of all obligations related to this short-term debt. The short-term
debt we assume from Lucent and future indebtedness may impose various
restrictions and covenants on us which could limit our ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. Our historical combined statements of
income contain an allocation of Lucent's interest expense. Please see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" for details about this allocation of interest expense. Our
interest expense as a stand-alone company may be higher or lower than that
reflected in our combined statements of income.

We may substantially increase our debt in the future. We are currently
evaluating our capital structure and have not yet determined the amount of
financing we will have in the future. If our cash flow from operations is less
than we expect, we may require more financing. We may from time to time issue
additional debt, borrow funds under revolving credit facilities or issue other
long- or short-term debt.

WE WILL BE CONTROLLED BY LUCENT AS LONG AS IT OWNS A MAJORITY OF OUR COMMON
STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING DURING THAT TIME.

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<PAGE> 14

Because Lucent's interests may differ from ours, actions Lucent takes with
respect to us, as our controlling stockholder, may not be favorable to us.

We will agree with Lucent that a majority of our directors prior to the
distribution will be employees of Lucent who will resign as directors at the
time of the distribution, if any. As long as Lucent owns a majority of our
outstanding common stock, however, Lucent will be able to elect our entire board
of directors and to remove any director, with or without cause, without calling
a special meeting.

Lucent's interests may not be the same as, or may conflict with, the
interests of our other stockholders. Investors in this offering will not be able
to affect the outcome of any stockholder vote prior to the distribution of our
stock to the Lucent stockholders. As a result, Lucent will control, subject to
applicable law, all matters affecting us, including:

-- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;

-- any determinations with respect to mergers or other business
combinations;

-- our acquisition or disposition of assets;

-- our financing;

-- compensation, option programs and other human resources policy
decisions;

-- changes to the agreements relating to our separation from Lucent;

-- changes to other agreements, including Lucent's existing collective
bargaining agreements, that may adversely affect us;

-- the payment of dividends on our common stock; and

-- determinations with respect to our tax returns.

Lucent is generally not prohibited from selling a controlling interest in us to
a third party.

WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH LUCENT WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF LUCENT'S CONTROLLING
OWNERSHIP, THE RESOLUTION OF THESE CONFLICTS MAY NOT BE ON THE MOST FAVORABLE
TERMS TO US.

Prior to the distribution, a resolution of any potential conflicts of
interest between Lucent and us may be less favorable to us than if we were
dealing with an unaffiliated party. Conflicts of interest may arise between
Lucent and us in a number of areas relating to our past and ongoing
relationships, including:

-- labor, tax, employee benefit, indemnification and other matters
arising from our separation from Lucent;

-- intellectual property matters;

-- employee recruiting and retention;

-- sales or distributions by Lucent of all or any portion of its
ownership interest in us, which could be to one of our competitors;

-- the nature, quantity, quality, time of delivery and pricing of
products we supply to each other under our product purchase
agreements with Lucent; and

-- business opportunities that may be attractive to both Lucent and us.

In addition, nothing restricts Lucent from competing with us in any area. In
particular, Lucent could choose to reestablish an optoelectronic component
manufacturing capability, or work with a third party to establish a competitive
capability, subject to the intellectual property rights limitations contained in
our agreements with Lucent which are described under "Arrangements Between
Lucent and Our Company."

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<PAGE> 15

We and Lucent are entering into several agreements in connection with our
separation, including the product purchase agreements. While we are controlled
by Lucent, it is possible for Lucent to cause us to amend these agreements,
including the product purchase agreements, on terms that may be less favorable
to us than the current terms of the agreements. Further, until the distribution,
Lucent can agree with its unions to amend their collective bargaining
agreements, which cover our unionized employees. We will be bound by any such
amendments until the agreements expire or the parties agree to further amend the
terms. Any of those amendments may not be favorable to us. For example, Lucent
is currently subject to an ongoing proceeding with one of its unions, and Lucent
could choose to settle the proceeding in a way which may not be favorable to us.
Any such settlement may raise our costs or limit our flexibility in allocating
our manufacturing resources.

BECAUSE LUCENT'S BELL LABORATORIES' CENTRAL RESEARCH ORGANIZATION HISTORICALLY
PERFORMED IMPORTANT RESEARCH FOR US, WE WILL NEED TO DEVELOP OUR OWN CORE
RESEARCH CAPABILITY. WE MAY NOT BE SUCCESSFUL, WHICH COULD MATERIALLY HARM OUR
PROSPECTS AND PROFITABILITY.

If our separate research efforts are not as successful as when we were part
of Lucent, we may not be able to keep pace with the rapid technological change
in our industry and our prospects may be harmed. If our prospects are harmed,
the price of our common stock may decline because it may be less attractive to
investors. The risks of rapid technological change are described below under
"--Risks Relating to Our Business." Many of our products use technology and
manufacturing processes derived from innovations developed by Lucent's Bell
Laboratories' central research organization. After the separation, Lucent will
have no obligation to provide research and development for us except as agreed
to in the development project agreement and joint design center operating
agreement described under "Arrangements Between Lucent and Our Company." We
cannot assure you that our independent research efforts will be as successful as
the efforts of Bell Laboratories have been historically or that our efforts will
not require us to increase our expenditures for the same services over the
amounts in our historical combined financial statements. A significant increase
in our expenditures for the same services may cause our profitability to
decline. We may not be able to recruit engineers and other research and
development employees as effectively as Bell Laboratories was able to because of
its history, name recognition and size.

IF LUCENT DOES NOT COMPLETE ITS DISTRIBUTION OF OUR COMMON STOCK, WE MAY NOT
ACHIEVE MANY OF THE EXPECTED BENEFITS OF OUR SEPARATION, WE MAY LOSE MANY OF
OUR EMPLOYEES AND OUR BUSINESS MAY SUFFER.

Lucent has announced that it intends to distribute all of our common stock
that it owns by the end of its 2001 fiscal year, which will occur on September
30, 2001. This distribution may not occur by that time or at all. We believe
that the announcement of our separation from Lucent has led to an increased
interest in doing business with us from some of our existing and potential
customers. If the distribution does not occur, then these customers may not
increase or commence purchases of our products. Many of our existing employees
are anticipating our spin off from Lucent and may be more susceptible to
competitive job offers if the distribution does not occur or is delayed. We also
may not obtain some of the other benefits we expect as a result of this
distribution, including greater strategic focus, increased agility and speed and
the other benefits described in "Our Separation From Lucent." Further, even if
the distribution occurs, we may not achieve the benefits of our separation. In
addition, until this distribution occurs, the risks relating to Lucent's control
of us and the potential business conflicts of interest between Lucent and us
will continue to be relevant to our stockholders.

MANY OF OUR EXECUTIVE OFFICERS AND SOME OF OUR DIRECTORS MAY HAVE CONFLICTS OF
INTEREST BECAUSE OF THEIR OWNERSHIP OF LUCENT COMMON STOCK AND OTHER TIES TO
LUCENT.

Many of our executive officers and some of our directors, including the
Lucent-appointed directors who we expect will resign at the time of the
distribution, have a substantial amount of their personal financial portfolios
in Lucent common stock and options to purchase Lucent common stock. Ownership of
Lucent common stock or options to purchase Lucent common stock by our directors
and officers could create, or

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<PAGE> 16

appear to create, potential conflicts of interest when directors and officers
are faced with decisions that could have different implications for Lucent and
us.

WE COULD INCUR SIGNIFICANT TAX LIABILITY IF THE SEPARATION OR THE DISTRIBUTION
DOES NOT QUALIFY FOR TAX-FREE TREATMENT, WHICH COULD REQUIRE US TO PAY LUCENT
A SUBSTANTIAL AMOUNT OF MONEY.

Lucent and the Lucent stockholders could incur significant tax liability if
the distribution described in this prospectus does not qualify for tax-free
treatment. In addition, Lucent could incur significant tax liability if the
separation described in this prospectus does not qualify for tax-free treatment.
Should this occur, we could be liable for, and could be required to indemnify
and pay Lucent for, taxes imposed upon Lucent with respect to the separation or
the distribution.

Although any U.S. federal income taxes imposed in connection with the
distribution generally would be imposed on Lucent and its stockholders, we would
be liable for all or a portion of such taxes in the circumstances described
below. First, as part of the separation, Lucent and we will enter into a tax
sharing agreement. This agreement will generally allocate, between Lucent and
us, the taxes and liabilities relating to the failure of the separation or the
distribution to be tax-free. In addition, under the tax sharing agreement, if
the distribution fails to qualify as a tax-free distribution under Section 355
of the Internal Revenue Code because of an acquisition of our stock or assets,
or some other actions of ours, then we will be solely liable for any resulting
corporate taxes. Second, aside from the tax sharing agreement, under U.S.
federal income tax laws, we and Lucent both would be liable for Lucent's federal
income taxes resulting from the distribution being taxable. This means that even
if we do not have to indemnify Lucent for any tax liabilities if the separation
or the distribution fails to be tax-free, we may still be liable for any part
of, including the whole amount of, these liabilities and expenses if Lucent
fails to pay them.

RISKS RELATING TO OUR BUSINESS

BECAUSE SALES OF OUR OPTOELECTRONIC COMPONENTS AND INTEGRATED CIRCUITS ARE
DEPENDENT ON THE GROWTH OF COMMUNICATIONS NETWORKS, IF MARKET DEMAND FOR THESE
NETWORKS DECLINES, PARTICULARLY FOR OPTICAL NETWORKS, OUR REVENUE AND
PROFITABILITY MAY DECLINE.

We derive, and expect to continue to derive, a significant amount of
revenue from the sale of optoelectronic components and integrated circuits used
in optical networks. If the growth in demand for optical networks does not occur
as we expect, the demand for many of our components and integrated circuits may
decline or grow more slowly than we expect. As a result, we may not be able to
grow our business and our revenue and profitability may decline from current
levels. In fiscal 2000, we derived $1.2 billion or 25.5% of our revenue from
sales of our optoelectronic components. The demand for our integrated circuits
used in network communications equipment, another high-growth product area on
which we are focusing, is also dependent on the demand for optical networks.

In addition, many of our integrated circuits are used in wireless and
wireline communications networks. The demand for communications networks and the
products used in these networks as well as optical networks is affected by
various factors, many of which are beyond our control. For example, general
economic conditions may deteriorate and affect the overall rate of capital
spending by network services providers. If this were to happen, orders for our
products could decline. Also, new network services providers are finding it
increasingly difficult to raise capital to finish building their communications
networks and therefore may place fewer orders with our customers. Further,
increased competition among optoelectronic component makers may lead to
overcapacity and falling prices. In addition, wireless networks may not adopt
new cellular standards that are better able to transmit and receive data, which
would cause the investment in wireless networks to be lower than we expect and
may lead to lower sales of our integrated circuits and our wireless local area
networking equipment.

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IF WE FAIL TO KEEP PACE WITH TECHNOLOGICAL ADVANCES IN OUR INDUSTRY OR IF WE
PURSUE TECHNOLOGIES THAT DO NOT BECOME COMMERCIALLY ACCEPTED, CUSTOMERS MAY
NOT BUY OUR PRODUCTS AND OUR REVENUE AND PROFITABILITY MAY DECLINE.

The demand for our products can change quickly and in ways we may not
anticipate because our industry is generally characterized by:

-- rapid, and sometimes disruptive, technological developments;

-- evolving industry standards;

-- changes in customer requirements;

-- limited ability to accurately forecast future customer orders;

-- frequent new product introductions and enhancements; and

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

We must continue to make substantial investments in research and
development to develop new and enhanced products and solutions. If we fail to
make sufficient investments in research and development programs or we focus on
technologies that do not become widely adopted, new technologies could render
our current and planned products obsolete, resulting in the need to change the
focus of our research and development and product strategies and disrupting our
business significantly. For example, we invested in a version of digital
subscriber line technology that was not adopted by the industry. Digital
subscriber line technology substantially increases the capacity of ordinary
telephone lines into the home or enterprise. We focused our research and
development efforts on G.Lite, which was a version of digital subscriber line
technology that was not adopted by customers. Instead, a different version
called full-rate asymmetric digital subscriber line technology became the
standard for the industry. As a result, we stopped selling our G.Lite products
and did not recover our investment through the sale of G.Lite products. Even if
we develop the appropriate technology, we may not introduce the products on a
timely basis. Being one of the first to make products available is important to
the success of a new product. We have experienced delays in the past in
introducing new products that we believe limited the success of these products.
Further, if we are unable to allocate our managerial and operational resources
effectively, we may not be able to keep pace with current technological
developments.

A faster than anticipated change in one or more of the technologies related
to our products or in market demand for products based on a type of technology
could result in a faster than anticipated obsolescence of our products. Sales of
our products may decline rapidly if a new technology is introduced by one of our
competitors that represents a substantial advance over our technology. For
example, the speed capabilities of optoelectronic components have risen greatly
in the last few years. While the industry is installing complete optical
networks capable of transmitting 2.5 gigabits of data per second today, network
services providers also are installing equipment that operates at 10 gigabits
per second. Equipment transmitting at 40 gigabits per second is expected to be
commercially significant in the near future, and higher speed components are
also in development.

BECAUSE OUR SALES ARE CONCENTRATED ON LUCENT AND A FEW OTHER CUSTOMERS, OUR
REVENUE AND PROFITABILITY MAY MATERIALLY DECLINE IF ONE OR MORE OF OUR KEY
CUSTOMERS DO NOT CONTINUE TO PURCHASE OUR EXISTING AND NEW PRODUCTS IN
SIGNIFICANT QUANTITIES.

Our customer base is highly concentrated. Our top ten end customers
accounted for approximately 52% of our revenue in fiscal 2000. If any one of our
key customers decides to purchase significantly less from us or to terminate its
relationship with us, our revenue and profitability may materially decline.
Because our strategy has generally been to develop long-term relationships with
a few key customers in the product areas in which we focus and, as described
below, we have a long product design and development cycle for most of our
products, we may be unable to replace these customers quickly or at all. We
could lose our key customers because of factors beyond our control, such as a
significant disruption in our customers' businesses generally or in a specific
product line.
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<PAGE> 18

In particular, we depend on Lucent as a key customer. We derived 22.3%,
25.7% and 21.3% of our revenue from sales to Lucent in fiscal 1998, 1999 and
2000, respectively. We expect to continue to be dependent on Lucent for a
significant percentage of our revenue. In addition to Lucent, we expect that,
for the foreseeable future, sales to a limited number of customers will continue
to account for a high percentage of our revenue. These customers may stop
incorporating our products into their products with limited notice to us and
suffer little or no penalty for doing so. In addition, if any of our customers
merge, we may experience lower overall sales. We have experienced lower sales in
the past for some period of time following mergers of our customers.

IF WE FAIL TO ATTRACT, HIRE AND RETAIN QUALIFIED PERSONNEL, WE MAY NOT BE ABLE
TO DEVELOP, MARKET OR SELL OUR PRODUCTS OR SUCCESSFULLY MANAGE OUR BUSINESS.

Competition for personnel in our industry is intense. The number of
technology companies in our geographic area is greater than it has been
historically, and we expect competition for qualified personnel to intensify.
There are only a limited number of people in the job market with the requisite
skills, particularly people with optoelectronic technology expertise. We are
currently experiencing difficulty in identifying and hiring qualified engineers
in many areas of our business as well as in retaining our current employees. We
may not be successful in attracting and retaining qualified personnel. The loss
of the services of any key personnel or our inability to hire new personnel with
the requisite skills could restrict our ability to develop new products or
enhance existing products in a timely manner, sell products to our customers or
manage our business effectively.

In the last 18 months, we have experienced a significant increase in
employee turnover, which refers to the number of employees leaving their
employment with us. We historically have had employee turnover rates which we
believe were below the industry average. Accordingly, our recent rates, which we
believe are similar to the industry average, may adversely affect our technology
and product development cycles and our revenue and profitability in a manner we
have not previously experienced. Further, many start-up optoelectronic companies
are located in the vicinity of our main offices. Many of these companies have
employees, including former Lucent employees, who know our personnel and may try
to hire them.

We may not be able to hire or retain qualified personnel if we are unable
to offer competitive salaries and benefits, or if our stock does not perform
well. In addition, as a stand-alone company, separate from Lucent and Bell
Laboratories, we may find it more difficult to attract personnel. In particular,
because our association with Bell Laboratories has been an important recruiting
tool, our separation from Bell Laboratories may adversely affect our recruiting.
We may have to increase our salaries and benefits which would increase our
expenses and reduce our profitability. We are also dependent on the continued
contributions of our principal sales, engineering and management personnel, many
of whom would be difficult to replace.

OUR PRODUCTS AND TECHNOLOGIES TYPICALLY HAVE LENGTHY DESIGN AND DEVELOPMENT
CYCLES. A CUSTOMER MAY DECIDE TO CANCEL OR CHANGE ITS PRODUCT PLANS, WHICH
COULD CAUSE US TO GENERATE NO REVENUE FROM A PRODUCT AND RESULT IN A DECLINE
IN OUR PROFITABILITY.

We may never generate any revenue from our products after incurring
significant design and development expenditures. A delay or cancellation of a
customer's plans could significantly adversely affect our financial results.
Unlike some of our competitors, we primarily focus on winning competitive
selection processes to develop products for use in our customers' equipment, as
described in "Business--Customers, Sales and Distribution." These selection
processes can be lengthy. After winning and beginning a product design for one
of our customers, that customer may not begin volume production of their
equipment for a period of up to two years, if at all. Due to this lengthy design
and development cycle, we may experience delays from the time we begin incurring
expenses until the time we generate revenue from our products. We have no
assurances that our customers will ultimately market and sell their equipment or
that such efforts by our customers will be successful.

We have frequently incurred costs for the design and development of a
product for which we have achieved a design win that does not ultimately result
in sales. If we invest resources in a competitive bidding

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<PAGE> 19

process and do not achieve a design win, or we achieve a design win but our
customer's product is ultimately not introduced or is not well received, we will
have difficulties in quickly finding other customers to offset this lost
potential revenue. Other potential customers may be engaged with one of our
competitors to develop components specifically for their end products, and we
might not be able to generate any sales to these customers. Because we typically
focus on only a few customers in a product area, the loss of a design win can
sometimes result in our failure to offer a generation of a product. This can
result in lost revenue and can hurt our position in future competitive selection
processes because we may be perceived as not being a technology leader. For
example, because of a missed design win with a large customer in 1999, we have
not generated sales from a generation of that customer's mobile telephones. This
loss caused us to have lower revenue with that customer and may have harmed our
reputation with respect to our ability to provide integrated circuits for mobile
telephones. Further, given our long development and design cycle, there may be
significant delays in recognizing revenue from any new customer relationships we
develop to replace any customers we lose. Because of our long development and
design cycle, we also are not likely to recognize revenue from any new or
expanded customer relationships that may result from our separation from Lucent
for at least 18 months.

BECAUSE WE ARE SUBJECT TO ORDER AND SHIPMENT UNCERTAINTIES, ANY SIGNIFICANT
CANCELLATIONS OR DEFERRALS COULD CAUSE OUR REVENUE AND PROFITABILITY TO
DECLINE OR FLUCTUATE.

We generally sell products pursuant to purchase orders that customers may
cancel or defer on short notice without incurring a significant penalty.
Cancellations or deferrals could cause us to hold excess inventory, which could
reduce our profitability and restrict our ability to fund our operations. If a
customer cancels or defers product shipments, we may incur unanticipated
reductions or delays in our revenue. Our customers often change their orders two
or three times between initial order and delivery. Our customers' frequent
changes usually relate to quantities or delivery dates, but sometimes relate to
the specifications of the products we are supplying. These changes may cause
delays or additional costs which may reduce or delay our revenue and
profitability for a particular fiscal quarter or overall. If a customer refuses
to accept shipped products or does not timely pay for these products, we could
incur significant charges against our income. These charges could cause our
profitability to decline and result in unanticipated fluctuations in revenue.
The risks of revenue fluctuations are described below under "--Risks Related to
the Offering."

WE DEPEND ON SOME SINGLE SOURCES OF SUPPLY, PARTICULARLY FOR OUR
OPTOELECTRONIC COMPONENTS, AND INTERRUPTIONS AFFECTING THESE AND OTHER
SUPPLIERS COULD DISRUPT OUR PRODUCTION, COMPROMISE OUR PRODUCT QUALITY AND
CAUSE OUR REVENUE AND PROFITABILITY TO DECLINE.

We depend on a single source supplier for several different parts used to
make some of our material optoelectronic components. We also depend on a single
source of supply for some of the parts and processes used for some of our
integrated circuit products. We have described these single sources of supply in
more detail under "Business--Manufacturing and Supplies." Some of these single
source suppliers also are competitors of ours. In some of these cases, there is
no qualified alternative supplier for these parts or processes and qualifying
new suppliers could require a substantial lead time. The loss of any of these or
other significant suppliers or the inability of a supplier to meet performance
and quality specifications or delivery schedules could cause our revenue and
profitability to significantly decline. Because the optoelectronic components
industry is generally supply constrained, we routinely experience shortages in
supplies. If a problem with one or more suppliers disrupts our ability to timely
deliver our products, our relationships with our customers may be harmed.
Because we believe one of the primary considerations for customers purchasing
optoelectronic components is our manufacturing capacity, a disruption in our
ability to deliver our products may be particularly harmful to us. Further, a
significant price increase from our suppliers could cause our profitability to
decline if we cannot increase our prices to our customers. Any of these events
may hurt our customer relationships and cause revenue to decline.

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BECAUSE WE EXPECT TO CONTINUE TO DERIVE A MAJORITY OF OUR REVENUE FROM
INTEGRATED CIRCUITS AND THE INTEGRATED CIRCUITS INDUSTRY IS HIGHLY CYCLICAL,
OUR REVENUE AND PROFITABILITY MAY FLUCTUATE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.

We derived 74.5% of our revenue from sales of our integrated circuits and
wireless local area networking equipment in fiscal 2000. We expect to continue
to derive a majority of our revenue from these products. Because the integrated
circuits market segment is highly cyclical, we may have declines in our revenue
and profitability that are primarily related to industry conditions and not our
products. This market segment has experienced significant downturns, often in
connection with, or in anticipation of, excess manufacturing capacity worldwide,
maturing product cycles and declines in general economic conditions. These
downturns have been characterized by diminished product demand and production
overcapacity, as well as high inventory levels and accelerated erosion of
average selling prices. The risks of revenue fluctuations are described below
under "--Risks Related to the Offering."

IF WE DO NOT ACHIEVE ADEQUATE MANUFACTURING VOLUMES, YIELDS OR SUFFICIENT
PRODUCT RELIABILITY, OUR GROSS MARGINS AND PROFITABILITY MAY DECLINE.

A failure to increase our manufacturing volumes to meet our customers'
increasing needs and satisfy customer demand will have a significant effect on
our gross margins and profitability. In some cases, existing manufacturing
capacity may be insufficient to achieve the volume or cost targets of our
customers. In particular, we have experienced difficulty in our optoelectronic
component manufacturing due to restricted capacity. Accordingly, we will need
access to additional manufacturing capacity and to develop new manufacturing
processes and techniques, which are anticipated to involve higher levels of
automation, to achieve our targeted volume and cost levels. In addition, it is
frequently difficult to purchase necessary manufacturing equipment, or otherwise
increase manufacturing capacity, in a timely fashion when customer demands
increase in ways that we did not anticipate. Also, it may be difficult to hire
qualified manufacturing personnel in a timely fashion, if at all, when customer
demands increase over short time periods. While we continue to devote research
and development efforts to improve our manufacturing techniques and processes,
we may not achieve manufacturing volumes and cost levels that will fully satisfy
customer demands. Further, these improvements require substantial investments in
manufacturing processes and equipment, and we cannot assure you that we will
have sufficient capital resources to make these necessary investments.

The manufacture of our products involves highly complex and precise
processes, requiring production in highly controlled and clean environments.
Changes in our manufacturing processes or those of our suppliers or contractors,
or their inadvertent use of defective or contaminated materials, could
significantly reduce our manufacturing yields and product reliability. Because
the majority of our manufacturing costs are relatively fixed, manufacturing
yields are critical to our profitability. Some of our manufacturing facilities
have in the past experienced lower than expected production yields, which could
delay product shipments and impair gross margins. Our manufacturing facilities
may not maintain acceptable yields in the future.

IF WE ARE UNABLE TO COMMIT SUFFICIENT RESOURCES TO MAKE THE NECESSARY CAPITAL
EXPENDITURES FOR MANUFACTURING EQUIPMENT OR FACILITIES, OUR GROSS MARGINS AND
PROFITABILITY MAY DECLINE.

In the semiconductor industry, ongoing manufacturing cost and productivity
improvements are essential to remaining competitive. This requires significant
engineering and capital investments. For example, the diameter of the
semiconductor wafers used for both optoelectronic components and integrated
circuits continues to increase. Over the next several years more integrated
circuits will be made using 300-millimeter, or 12-inch, diameter wafers. We are
not currently using 300-millimeter wafers in our manufacture of integrated
circuits. We believe that the cost of a high-volume integrated circuit
manufacturing facility that uses 300-millimeter wafers is likely to be in excess
of $3 billion. If we do not have the resources to invest in competitive
manufacturing facilities or cannot obtain access to competitive facilities
through relationships with third parties, our manufacturing costs will be higher
and our gross margins and profitability will be adversely affected. Because we
currently manufacture most of our products in our wholly-owned manufacturing
facilities, we may have to make larger engineering and capital investments than
our competitors. This may adversely affect our profitability.
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WE DEPEND ON JOINT VENTURES OR OTHER THIRD-PARTY STRATEGIC RELATIONSHIPS FOR
THE MANUFACTURE OF SOME OF OUR PRODUCTS. IF THESE MANUFACTURERS ARE UNABLE TO
FILL OUR ORDERS ON A TIMELY AND RELIABLE BASIS, OUR REVENUE AND PROFITABILITY
MAY DECLINE.

We currently manufacture our optoelectronic components and integrated
circuits through a combination of internal capability, joint ventures and
external sourcing with contract manufacturers. Currently, a portion of our
integrated circuits are manufactured by joint ventures or contract
manufacturers. Only a small portion of our optoelectronic components is
manufactured using joint ventures or contract manufacturing for any part of the
process. We continually assess our manufacturing strategy. The mix of internal,
joint venture and third-party manufacturing relationships may change over time.
To the extent we rely on joint ventures and third-party manufacturing
relationships, we face the following risks:

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

-- that the manufacturing costs will be higher than planned;

-- that the reliability of our products will decline;

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

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

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

If any of these risks is realized, we could experience an interruption in supply
or an increase in costs, which could delay or decrease our revenue or reduce our
profitability. We have experienced problems in the past. For example, in 1999,
we terminated a joint venture for integrated circuits manufacturing because our
partner no longer needed the joint venture to supply their manufacturing
requirements. As a result, we were no longer able to share with our partner the
manufacturing overhead and other costs of the joint venture.

IF OUR CUSTOMERS DO NOT QUALIFY OUR MANUFACTURING LINES FOR VOLUME SHIPMENTS,
OUR REVENUE MAY BE DELAYED OR REDUCED.

Customers will not purchase any of our products, other than limited numbers
of evaluation units, prior to qualification of the manufacturing line for the
product. Each new manufacturing line must go through varying levels of
qualification with our customers. This qualification process determines whether
the manufacturing line achieves the customers' quality, performance and
reliability standards. Further, as we increase the number of our products
manufactured in facilities that we do not own, we may need to make multiple
qualifications for our products. We may not always be able to satisfy the
qualifications. We also may not be able to shift the production of our products
to other facilities that may have available capacity because doing so would
require requalification for that product. Delays in qualification can cause a
customer to discontinue use of the product and result in a significant loss of
revenue.

BECAUSE OPTOELECTRONIC COMPONENT AND INTEGRATED CIRCUIT AVERAGE SELLING PRICES
IN PARTICULAR PRODUCT AREAS ARE DECLINING AND SOME OF OUR OLDER PRODUCTS ARE
BECOMING OBSOLETE, OUR PROFITABILITY MAY DECLINE.

In the optoelectronics and integrated circuits market segments, prices paid
for a specific capability or functionality are expected to decline over time. We
must continue timely development and introduction of new products that
incorporate new or additional features that can be sold at higher prices and to
reduce our manufacturing costs. If we cannot achieve these goals, our revenue
and gross margins will decline, which will have a material adverse effect on our
profitability. We have in the past, and will in the future, experience declines
in the average selling prices for some of our optoelectronic components and
integrated circuits. For optoelectronic components, the declines are due to,
among other things, increased competition and greater unit volumes as network
services providers continue to deploy optical networks. For integrated circuits,
the declines are due to, among other things, downturns in the integrated circuit
industry, increased competition, lower costs of producing integrated circuits
and greater unit volumes. We anticipate that average selling prices for some of
our products will decrease in the future in response to product introductions by
competitors and us or to other factors, including price pressures from
significant customers.
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If we do not offset these decreases by increases in our sales of other
products, including new products, our revenue and profitability will decline. In
addition, if we do not grow our revenue overall, our prospects may be harmed. If
our prospects are harmed, the price of our common stock may decline because we
may be less attractive to investors. Because our industry is characterized by
rapid technological change and short product life cycles, in any given year we
may have a substantial amount of revenue from products that are becoming
obsolete. We may experience substantial decreases in sales of these products in
subsequent years. For example, in fiscal 2000, we derived $43 million from sales
of some of our older integrated circuit products used in traditional voice
telephone networks and integrated services digital network systems. We expect
sales of these products to decrease by over 60% in fiscal 2001.

WE CONDUCT A SIGNIFICANT AMOUNT OF OUR SALES ACTIVITY AND MANUFACTURING EFFORTS
OUTSIDE THE UNITED STATES, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS AND
MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.

In fiscal 2000, we derived $2.3 billion or 48.9% of our revenue from sales
of our products shipped to locations outside the United States. We also
manufacture a significant portion of our products outside the United States and
are dependent on international suppliers for many of our parts. We intend to
continue to pursue growth opportunities in both sales and manufacturing
internationally. International operations are subject to a number of risks and
potential costs, including:

-- our new brand will not be locally recognized, which will cause us to
spend significant amounts of time and money to build a brand
identity;

-- unexpected changes in regulatory requirements;

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

-- currency exchange rate fluctuations; and

-- political and economic instability.

In the past, we have incurred costs or experienced disruptions due to the
factors described above and expect to do so in the future. For example, we have
incurred significant expenditures in Asia to build the Lucent brand name, which
was relatively unfamiliar there. Because we have significant manufacturing
facilities outside the United States, including in Singapore and Thailand, a
portion of our manufacturing costs are tied to local currencies. We must manage
the risk that fluctuations in currency may increase our costs.

As we expand our international operations, we may encounter new risks. For
example, as we begin selling our wireless local area network equipment
internationally, we will have to develop relationships with qualified local
distributors and trading companies. If we are not successful in developing these
relationships, we may not be able to grow sales in this product area. These or
other similar risks could adversely affect our revenue and profitability.

WE ARE SUBJECT TO ENVIRONMENTAL, HEALTH AND SAFETY LAWS, WHICH COULD INCREASE
OUR COSTS AND RESTRICT OUR OPERATIONS IN THE FUTURE.

We are subject to a variety of laws relating to the use, disposal, clean-up
of, and human exposure to, hazardous chemicals. Any failure by us to comply with
present and future environmental, health and safety requirements could subject
us to future liabilities or the suspension of production. In addition,
compliance with these or future laws could restrict our ability to expand our
facilities or require us to acquire costly pollution control equipment, incur
other significant expenses or modify our manufacturing processes. For example,
we were required to eliminate the use of chloro-fluorocarbons, or CFCs, in all
of our manufacturing operations by 1993. This required us to modify our
manufacturing processes, buy alternate equipment or make modifications to
existing equipment and requalify products with our customers. In addition, we
are currently involved in remediation activities at various Superfund and other
sites. In the event of the discovery of additional contaminants or the
imposition of additional cleanup obligations at these or other sites, we could
be adversely affected.

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BECAUSE MANY OF OUR CURRENT AND PLANNED PRODUCTS ARE HIGHLY COMPLEX, THEY MAY
CONTAIN DEFECTS OR ERRORS THAT ARE DETECTED ONLY AFTER DEPLOYMENT IN COMMERCIAL
COMMUNICATIONS NETWORKS AND IF THIS OCCURS, THEN IT COULD HARM OUR REPUTATION
AND RESULT IN A DECREASE IN OUR REVENUE.

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

-- cancellation of orders;

-- product returns;

-- diversion of our resources;

-- legal actions by our customers or our customers' end-users;

-- increased insurance costs; and

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

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

THE COMMUNICATIONS SEMICONDUCTOR INDUSTRY IS INTENSELY COMPETITIVE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD HURT OUR REVENUE AND REDUCE OUR GROSS
MARGINS AND PROFITABILITY.

The market segments for optoelectronic components and integrated circuits
are intensely competitive and subject to rapid and disruptive technological
change. In the past few years, the number of competitors has risen. We expect
the intensity of competition to continue to increase in the future as existing
competitors enhance and expand their product offerings and as new participants
enter the market. Many of these competitors will compete with us in product
areas where gross margins may be higher. Some competitors may introduce
technology that results in products at lower costs or improved performance,
compared to our products. Increased competition may result in price reductions,
reduced gross margins and loss of market share. Some of our customers and
companies with which we have strategic relationships are or may be in the future
competitors of ours. For example, Motorola, Inc. is a direct competitor in some
of our market segments, as well as being one of our ten largest end customers
and party to our joint design effort relating to the development of digital
signal processor technology as described under "Business--Strategic
Relationships."

We cannot assure you that we will be able to compete successfully against
existing or future competitors. The size and number of our competitors vary
across our product areas, as do the resources we have allocated to the segments
we target. Therefore, many of our competitors have greater financial, personnel,
capacity and other resources than we have in each of our market segments or
overall. Competitors with greater financial resources may be able to offer lower
prices, additional products or services or other incentives that we cannot match
or do not offer. These competitors may be in a stronger position to respond
quickly to new or emerging technologies and may be able to undertake more
extensive marketing campaigns, adopt more aggressive pricing policies and make
more attractive offers to potential customers, employees and strategic partners.
These competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to gain market share. Because we have a unionized workforce and many of our main
competitors are not unionized to the same extent, or at all, our product costs
may be higher and our gross margins may be lower. As a result, our competitors
may be more profitable or may be able to compete for customers more effectively
based on price. In the event of a union work stoppage at our facilities, we
could be adversely affected.

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IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESSES
AND PROSPECTS MAY BE HARMED.

The failure to protect our intellectual property could seriously harm our
businesses and prospects because we believe that developing new products and
technology that are unique to us is critical to our success. If our prospects
are harmed, the price of our common stock may decline because we may be less
attractive to investors. Our efforts to protect our intellectual property
through patents, trademarks, trade secrets, copyrights, confidentiality and
nondisclosure agreements and other measures may not be adequate to protect our
proprietary rights. Patent filings by third parties, whether made before or
after the date of our filings, could render our intellectual property less
valuable. Competitors may misappropriate our intellectual property and disputes
as to ownership of intellectual property may arise. If we do not obtain
sufficient international protection for our intellectual property, our
competitiveness in international markets could be significantly impaired, which
would limit our growth and future revenue.

WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT CLAIMS,
WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING
OUR PRODUCTS.

A successful claim of patent or other intellectual property infringement
against us could materially adversely affect our business and profitability. We
cannot assure you that others will not claim that our proprietary or licensed
products, systems and software are infringing their intellectual property rights
or that we do not in fact infringe those intellectual property rights. From time
to time, we receive notices from third parties of potential infringement and
receive claims of potential infringement when we attempt to license our
intellectual property to others. We may be unaware of intellectual property
rights of others that may cover some of our technology. If someone claims that
our products, systems or software infringed their intellectual property rights,
any resulting litigation, including the litigation we expect to become a party
to that is described under "Business--Legal Proceedings," could be costly and
time consuming and would divert the attention of management and key personnel
from other business issues. The complexity of the technology involved and the
uncertainty of intellectual property litigation increase these risks. Claims of
intellectual property infringement also might require us to enter into costly
royalty or license agreements. However, we may be unable to obtain royalty or
license agreements on terms acceptable to us or at all. We also may be subject
to significant damages or an injunction in the event of a successful claim of
patent or other intellectual property infringement.

IF WE CANNOT MAINTAIN OUR STRATEGIC RELATIONSHIPS OR IF OUR STRATEGIC
RELATIONSHIPS FAIL TO MEET THEIR GOALS OF DEVELOPING TECHNOLOGIES OR
PROCESSES, WE WILL LOSE OUR INVESTMENT AND MAY FAIL TO KEEP PACE WITH THE
RAPID TECHNOLOGICAL DEVELOPMENTS IN OUR INDUSTRY.

In the past, we have entered into strategic relationships to develop
technologies and manufacturing processes. If any of our strategic relationships
do not accomplish our intended goals or do not develop the technology or
processes sought, we will not realize a return on our investment and our
profitability may decline. We intend to pursue and continue to form these
strategic relationships in the future. These relationships often require us to
commit both money and our employees to work on these joint projects. For
example, in July 2000 we entered into a strategic relationship with Chartered
Semiconductor Manufacturing Ltd. in which we have agreed to contribute
significant financial, personnel and intellectual property resources. These
resources will include an investment by us of up to $350 million over a five
year period which will help create a 600-person research and development team to
develop new manufacturing technologies and processes. If this strategic
relationship fails, then we may not achieve a return on our investment or
develop the anticipated manufacturing technologies and processes. Our failure to
develop these technologies or processes may affect our ability to keep pace with
the rapid technological developments of our industry.

WE MAY NOT HAVE FINANCING FOR FUTURE STRATEGIC ACQUISITIONS OR BE SUCCESSFUL
IN COMPLETING ACQUISITIONS, WHICH MAY PREVENT US FROM ADDRESSING GAPS IN OUR
PRODUCT OFFERINGS, IMPROVING OUR TECHNOLOGY OR INCREASING OUR MANUFACTURING
CAPACITY.

If we are unable to incur additional debt or issue equity to make
acquisitions or fail to identify and complete acquisitions, we may fail to
address gaps in our product offerings, improve our technology or increase
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our manufacturing capacity. We may need to incur additional debt or issue equity
in order to make strategic acquisitions or investments. We cannot assure you
that such financing will be available to us on acceptable terms or at all. In
particular, we expect to fund future acquisitions in part by issuing additional
equity. If the price of our equity is low or volatile, we may not be able to
acquire other companies. Also, we are limited in the amount of our stock that we
can issue to make acquisitions because the issuance of our stock may cause the
distribution to be taxable under Section 355(e) of the Internal Revenue Code,
and under the tax sharing agreement we would be required to indemnify Lucent
against that tax.

Our ability to make payments on and to refinance our indebtedness,
including the short-term debt program we will assume from Lucent prior to the
completion of this offering and future indebtedness, and to fund working
capital, capital expenditures and strategic acquisitions and investments will
depend on our ability to generate cash in the future. Our ability to generate
cash is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

WE MAY ACQUIRE OTHER BUSINESSES OR FORM JOINT VENTURES THAT COULD NEGATIVELY
AFFECT OUR PROFITABILITY, INCREASE OUR DEBT AND DILUTE YOUR OWNERSHIP OF OUR
COMPANY.

As part of our business strategy, we expect to pursue additional technology
or manufacturing capacity through acquisitions or joint ventures. As a result,
we may enter markets in which we have no or limited prior experience. If we were
to make any acquisitions, we may not be able to integrate these acquisitions
successfully into our existing business and we could assume unknown or
contingent liabilities or experience negative effects on our reported results of
operations from acquisition-related charges and of amortization of acquired
technology, goodwill and other intangibles. Furthermore, if we raise funds
through the issuance of debt or equity securities, any debt securities issued
may have rights and preferences and privileges senior to those of holders of our
common stock in the event of a liquidation. The terms of the debt securities may
impose restrictions on our operations. Further, any equity issued would dilute
your ownership of us. We may not identify or complete these transactions in a
timely manner, on a cost effective basis or at all, and we may not realize the
benefits of any acquisition or joint venture.

BECAUSE WE HAVE CHANGED OUR NAME, OUR POTENTIAL CUSTOMERS MAY NOT RECOGNIZE
OUR NEW BRAND, WHICH MAY CAUSE OUR REVENUE AND PROFITABILITY TO DECLINE.

On December 5, 2000, we changed our name to Agere Systems Inc. We will
change the trademarks and trade names under which we conduct our business to
reflect our new company name. We plan to incur significant marketing expenses to
build a new strong brand identity. If we fail to build this brand recognition,
our revenue and profitability may decline. We will only have use of the Lucent
name for a transitional period after the distribution. Because we have
previously marketed our products under the Lucent name, our existing customers
and business partners and investors generally may not recognize our new brand.
Our name change also may cause difficulties in recruiting qualified personnel.
We cannot predict the impact of the change in trademarks and trade names.

BECAUSE WE HAVE MANUFACTURING FACILITIES LOCATED IN CALIFORNIA, WE FACE THE
RISK THAT AN EARTHQUAKE COULD DAMAGE THESE FACILITIES, WHICH WOULD CAUSE A
REDUCTION IN OUR REVENUE AND PROFITABILITY.

Any disruption in our product development capability or our manufacturing
capability arising from earthquakes could cause significant delays in the
production or shipment of our products until we are able to shift development or
production to different facilities or arrange for third parties to manufacture
our products. We may not be able to obtain alternate capacity on favorable terms
or at all. Some of our products are manufactured at our facilities in Alhambra,
California. The risk of earthquakes to our manufacturing facilities in
California is significant due to the proximity of major earthquake fault lines
to these manufacturing facilities. In addition, some of our product development
facilities and some of our suppliers are located in regions where there is a
risk of earthquakes.

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RISKS RELATED TO THE OFFERING

BECAUSE THERE HAS NOT BEEN ANY PUBLIC MARKET FOR OUR COMMON STOCK AND OUR
STOCK MAY BE CONSIDERED A TECHNOLOGY STOCK, THE MARKET PRICE AND TRADING
VOLUME OF OUR COMMON STOCK MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL
YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

Prior to the consummation of this offering, there has been no trading
market for our common stock. We cannot predict the extent to which investors'
interest will lead to a liquid trading market or whether the market price of our
common stock will be volatile. The market price of our common stock could
fluctuate significantly for many reasons, including in response to the risk
factors listed in this prospectus or for reasons unrelated to our specific
performance, such as reports by industry analysts forecasting reduced build-outs
of optical networks or negative announcements by our customers, competitors or
suppliers regarding their own performance. For example, to the extent that one
of our larger customers, or other large companies within our industry,
experience declines in their stock price, our stock price may decline as well.
Furthermore, our common stock may be considered a technology stock by investors.
Technology stocks have recently experienced extreme price and volume
fluctuations. Therefore, the market price and trading volume of our common stock
also may be extremely volatile. In addition, when the market price of a
company's common stock drops significantly, stockholders often institute
securities class action lawsuits against the company. A lawsuit against us could
cause us to incur substantial costs and could divert the time and attention of
our management and other resources.

BECAUSE OUR QUARTERLY REVENUE AND OPERATING RESULTS ARE LIKELY TO VARY
SIGNIFICANTLY IN FUTURE PERIODS, OUR STOCK PRICE MAY DECLINE.

Our quarterly revenue and income from operations have varied and are likely
to continue to fluctuate significantly from quarter to quarter because of the
nature of our revenue and planned product introductions. For the last four
quarters, our quarterly revenue varied from $966 million for the fiscal quarter
ended December 31, 1999, to $1.5 billion for the fiscal quarter ended September
30, 2000. If our quarterly revenue or operating results fall below the
expectations of securities analysts or investors, the price of our common stock
may fall substantially. For example, because of our lengthy sales and design
processes described above, the effects of failing to be selected by a customer
to provide a product may result in significantly lower revenue later, as
compared to prior periods with more revenue from earlier design wins. We have
experienced fluctuations in quarterly revenue for this reason in the past. In
addition, sales of our products for specific customer projects often begin and
end abruptly, so revenue may increase rapidly and later decrease just as
quickly. The relative timing of the beginning and end of such sales can make our
revenues less predictable. We also experience limited seasonal variations in our
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations" for a discussion of
these limited seasonal variations and other factors that may cause our quarterly
revenue and financial results to fluctuate.

A NUMBER OF OUR SHARES ARE OR WILL BE ELIGIBLE FOR FUTURE SALE OR
DISTRIBUTION, INCLUDING AS A RESULT OF THE PLANNED DISTRIBUTION BY LUCENT,
WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE.

Any sales of substantial amounts of our common stock in the public market,
or the perception that such sales might occur, whether as a result of the
planned distribution or otherwise, may cause the market price of our common
stock to decline. Upon completion of this offering, we will have outstanding an
aggregate of shares of our common stock, including shares which will be
owned by Lucent. All of these shares, other than the shares owned by Lucent,
will be freely tradeable without restriction or further registration under the
Securities Act, unless the shares are owned by one of our "affiliates," as that
term is defined in Rule 405 under the Securities Act. Many of our employees have
options to purchase Lucent common stock that will convert into options to
purchase our common stock. From time to time, we will issue additional options
to our employees under our existing and future employee benefits plans.

Lucent has announced that it intends to distribute the shares of common
stock it will own upon completion of this offering to Lucent stockholders by
September 30, 2001, the end of its 2001 fiscal year.

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Substantially all of these shares would be eligible for immediate resale in the
public market. We are unable to predict whether significant amounts of common
stock will be sold in the open market in anticipation of, or following, this
distribution. We are also unable to predict whether a sufficient number of
buyers would be in the market at that time. A portion of Lucent's common stock
is held by index funds tied to the Standard & Poor's 500 Index, the Dow Jones
Industrial Average or other stock indices. If we are not included in these
indices at the time of Lucent's distribution of our common stock, these index
funds will be required to sell our stock. Similarly, other institutional
stockholders are not allowed by their charters to hold the stock of companies
that do not pay dividends. Because we currently do not intend to pay dividends,
we expect that these stockholders will sell the shares of our common stock
distributed to them.

THE TERMS OF OUR SEPARATION FROM LUCENT, ANTI-TAKEOVER PROVISIONS OF OUR
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS, OUR RIGHTS
AGREEMENT AND PROVISIONS OF DELAWARE LAW COULD DELAY OR PREVENT A CHANGE OF
CONTROL THAT YOU MAY FAVOR.

An acquisition of our common stock could trigger the application of Section
355(e) of the Internal Revenue Code. Under the tax sharing agreement we would be
required to indemnify Lucent for the resulting tax and this indemnity obligation
might discourage, delay or prevent a change of control that stockholders may
consider favorable.

Provisions of our amended and restated certificate of incorporation and
by-laws, our rights agreement and provisions of applicable Delaware law, which
will be in effect after the separation, also may discourage, delay or prevent a
merger or other change of control that stockholders may consider favorable or
may impede the ability of the holders of our common stock to change our
management. The provisions of our amended and restated certificate of
incorporation and by-laws, among other things, will:

-- divide our board of directors into three classes, with members of
each class to be elected for staggered three-year terms;

-- limit the right of stockholders to remove directors;

-- regulate how stockholders may present proposals or nominate directors
for election at annual meetings of stockholders; and

-- authorize our board of directors to issue preferred stock in one or
more series, without stockholder approval.

Please see "Arrangements Between Lucent and Our Company--Separation and
Distribution Agreement" and "Description of Capital Stock" for a more detailed
description of these agreements and provisions.

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on
current expectations, estimates, forecasts and projections about the industry in
which we operate, management's beliefs and assumptions made by management. Such
statements include, in particular, statements about our plans, strategies and
prospects under the headings "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." 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 risks,
uncertainties and assumptions which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward-looking statements. Except as required under the federal
securities laws and the rules and regulations of the Securities and Exchange
Commission, we do not have any intention or obligation to update publicly any
forward-looking statements after we distribute this prospectus, whether as a
result of new information, future events or otherwise.

This prospectus contains information concerning our market segments and
product areas generally which is forward-looking in nature and is based on a
variety of assumptions regarding the ways in which these market segments and
product areas will develop. These assumptions have been derived from information
currently available to us and to market research and industry reports referred
to in this prospectus. They include the following general underlying
assumptions:

-- investment in optical and wireless networks will grow significantly
over the next five years;

-- new technologies and applications through which people can access
networks will continue to be developed; and

-- manufacturers of communications and computer equipment will
increasingly look to parts suppliers for integrated solutions.

If any one or more of the foregoing assumptions are incorrect, actual
market results may differ from those predicted. While we do not know what impact
any such differences may have on our businesses, our future results of
operations and financial condition and the market price of our shares of common
stock may be materially adversely affected.

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OUR SEPARATION FROM LUCENT

On July 20, 2000, Lucent announced its plan to spin off the businesses
described in this prospectus into a separate company. We were incorporated in
Delaware on August 1, 2000, in preparation for our separation from Lucent. We
are currently a wholly owned subsidiary of Lucent. Prior to the separation,
Lucent has conducted our businesses through various divisions and subsidiaries.
We expect the separation of our businesses from those of Lucent, which will be
accomplished by the transfer of the assets and liabilities of our businesses, to
be substantially completed at the time of the offering.

BENEFITS OF THE SEPARATION

We believe that our separation from Lucent will provide us with the
opportunity to expand our business prospects and improve our operations. The key
benefits of the separation are described below.

-- Improved Relationships with Our Customers Which are Lucent's
Competitors. We believe that Lucent's competitors in its
communications equipment businesses may be reluctant to purchase
components from one of Lucent's other divisions. We believe that
these current and potential customers of ours are concerned that we
will disclose their proprietary technical information to Lucent and
that we will not provide them equal access to our new technologies or
our manufacturing capacity. They also may be reluctant to take
actions they view as strengthening one of their competitors. We
believe that this conflict, which impedes our ability to sell to many
of our largest current and potential customers, would be
significantly resolved by separating our businesses from Lucent's
other businesses.

-- Better Incentives for Employees and Greater Accountability. We
expect the motivation of our employees and the focus of our
management to be strengthened by incentive compensation programs tied
to our businesses' financial results and the market performance of
our common stock. The separation will enable us to offer our
employees compensation directly linked to the performance of our
businesses. We expect this to enhance our ability to attract and
retain qualified personnel.

-- Greater Strategic Focus. We expect to have a sharper focus on our
businesses and strategic opportunities as a result of our board of
directors and management team focusing only on our businesses. We
also will have greater ability to modify business processes to better
fit the needs of our customers, businesses and employees.

-- Increased Speed and Responsiveness. We believe we will be able to
make decisions more quickly, deploy resources more rapidly and
efficiently and operate with more agility than when we were a part of
a larger organization. In addition, we expect to enhance our
responsiveness to customers and companies with whom we have strategic
relationships.

-- Direct Access to Capital Markets. As a separate company, we will be
able to directly access the capital markets to issue debt or equity
securities. We believe our equity will provide us with the capability
to grow more readily through acquisitions.

SEPARATION AND TRANSITIONAL ARRANGEMENTS

We and Lucent and, in some cases, our respective subsidiaries, will enter
into agreements providing for the separation of our businesses from Lucent,
including a separation and distribution agreement to which we and Lucent will be
parties. These agreements will generally provide for the transfer from Lucent to
us of assets and the assumption by us of liabilities relating to our businesses,
in each case to the extent agreed to by Lucent and us. We will enter into
agreements with Lucent regarding the transfer and licensing to us of
intellectual property relating to our businesses. We also will enter into
agreements governing various interim and ongoing relationships between the
parties including transitional services Lucent will provide to us.

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The agreements relating to our separation from Lucent will be made in the
context of a parent-subsidiary relationship and will be negotiated in the
overall context of our separation from Lucent. The terms of these agreements may
be more or less favorable to us than those we could have negotiated with
unaffiliated third parties. For more information regarding the separation
arrangements, see "Arrangements Between Lucent and Our Company."

THE DISTRIBUTION BY LUCENT OF OUR COMMON STOCK

After completion of this offering Lucent will own approximately % of
the outstanding shares of our common stock, or approximately % if the
underwriters exercise their over-allotment option in full, in each case assuming
that the exchange described in "Underwriters--The Exchange" occurs. If the
exchange does not occur, after the completion of this offering Lucent will own
approximately % of the outstanding shares of our common stock or
approximately % if the underwriters exercise their over-allotment option in
full. Lucent has announced that it currently plans to complete the distribution
by September 30, 2001. At that time, we expect Lucent to distribute all of the
shares of our common stock it then owns to the holders of Lucent's common stock.
Lucent's agreement to consummate the distribution on or before September 30,
2001, will be subject to the satisfaction or waiver by the Lucent board of
directors, in its sole discretion, of a number of conditions which are discussed
under "Arrangements Between Lucent and Our Company--Separation and Distribution
Agreement--The Distribution." We cannot assure you that the distribution will
occur by that date or at all.

One of the conditions to the distribution is that Lucent does not have to
complete the distribution if its board of directors determines that events or
developments have occurred, following this offering, that would result in the
distribution having a material adverse effect on Lucent or its stockholders.
Lucent has applied for a private letter ruling from the Internal Revenue Service
that, among other things, the distribution of its shares of our common stock to
the holders of Lucent's common stock will be tax-free to Lucent and its
stockholders for United States federal income tax purposes. Receipt of the
private letter ruling also is a condition to the distribution. If Lucent does
not receive this ruling, Lucent is unlikely to complete the distribution. In the
event that any condition is not satisfied or waived on or before September 30,
2001, Lucent has agreed to complete the distribution as promptly as practicable
following the satisfaction or waiver of all conditions. Lucent may terminate its
obligation to complete the distribution if the distribution has not occurred by
September 30, 2002. If the Lucent board waives a material condition to the
distribution after the date of this prospectus, decides to delay or cancel the
distribution or does not receive the private letter ruling it seeks, we intend
to issue a press release and file a report on Form 8-K with the Securities and
Exchange Commission.

27
<PAGE> 31

USE OF PROCEEDS

We estimate that we will receive approximately $ in net proceeds
from this offering from the sale by us of shares of common stock, or
approximately $ from the sale by us of additional shares of our
common stock if the underwriters exercise their over-allotment option in full.
These estimates reflect an initial public offering price of $ per
share, the midpoint of the range set forth on the cover page of this prospectus,
and the deduction of the estimated underwriting discounts and estimated offering
expenses payable by us. We will not receive any proceeds from the sale of our
common stock by the selling stockholder.

We do not have a specific plan for the net proceeds from this offering to
be received by us. The principal reason for our offering is to raise funds for
working capital, capital expenditures, debt service, potential acquisitions,
joint ventures and investments and other general corporate purposes. We have no
current agreements or commitments with respect to any potential acquisitions,
joint ventures or investments. Accordingly, management will retain broad
discretion in the allocation of the net proceeds of this offering. To the extent
we do not use proceeds from this offering for one of the purposes outlined
above, we anticipate that we will allocate such funds to one of the other
purposes outlined above. You will not have the opportunity to evaluate the
economic, financial or other information on which we base our decisions on how
to use the proceeds. Pending such uses, we intend to invest the estimated net
proceeds of this offering to be received by us in interest-bearing,
investment-grade securities.

28
<PAGE> 32

DIVIDEND POLICY

We do not anticipate paying any dividends on our common stock in the
foreseeable future. We currently intend to retain our future earnings for use in
the operation and expansion of our business. As a result, you will need to sell
your shares of common stock to realize a return on your investment. You may not
be able to sell your shares at or above the price you paid for them. Any future
determination to pay dividends will be at the discretion of our board of
directors and will depend upon our results of operations, financial condition,
cash requirements, prospects and other factors our board of directors deems
relevant.

29
<PAGE> 33

CAPITALIZATION

The following table sets forth our combined capitalization as of September
30, 2000, on an actual and pro forma basis.

-- The "Historical" column reflects our capitalization as of September
30, 2000, on a historical basis.

-- The "Pro Forma" column reflects our capitalization as of September
30, 2000, and gives effect to the pro forma adjustments to our
combined financial statements for the separation from Lucent and
related transactions, including this offering, and our acquisition of
Ortel described under "Unaudited Pro Forma Condensed Financial
Statements." The table below reflects our receipt from the sale of
our common stock by us of the estimated net proceeds of $ ,
assuming an estimated initial public offering price of $ per
share, the midpoint of the range set forth on the cover page of this
prospectus. We will not receive any of the net proceeds from the sale
of our common stock by the selling stockholder.

The table below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operation," the unaudited pro
forma condensed financial statements and notes thereto and our combined
financial statements and notes thereto included elsewhere in this prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
---------------------------
PRO FORMA
HISTORICAL (UNAUDITED)
----------- ------------
(DOLLARS IN MILLIONS EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Cash........................................................ $ -- $
====== ======
Short-term debt............................................. $ -- $2,500
Capitalized lease obligation................................ 60 60
Invested equity/stockholders' equity
Common stock, par value $0.01 per share, shares
authorized and shares issued and outstanding pro
forma.................................................. --
Additional paid in capital................................ --
Owner's net investment.................................... 5,833 3,333
Accumulated other comprehensive income (loss)............... (52) (52)
------ ------
Total invested equity/stockholders' equity............. 5,781
------ ------
Total capitalization................................... $5,841 $
====== ======
</TABLE>

Pro forma short-term debt reflects the assumption by us from Lucent of
approximately $2.5 billion of short-term debt in the form of commercial paper or
other short-term notes, which we will assume upon completion of this offering.
We will not receive any of the proceeds of this short-term debt. Upon completion
of this offering, Lucent will be relieved of all obligations related to this
short-term debt. We may refinance all or a portion of the short-term debt we are
assuming with long-term or other short-term debt. We are currently evaluating
our capital structure and have not yet determined the amount of financing we
will have in the future. We may from time to time incur additional debt.

Our ability to issue additional equity is constrained because our issuance
of additional common stock may cause the distribution to be taxable under
Section 355(e) of the Internal Revenue Code, and under the tax sharing agreement
we would be required to indemnify Lucent against that tax.

On a historical basis, the amount of Lucent's net investment in us was
recorded in invested equity as owner's net investment in our combined financial
statements.

30
<PAGE> 34

DILUTION

The net tangible book value per share of our common stock, adjusted to
reflect the net proceeds we receive from the offering, will be substantially
below the initial public offering price. You will therefore incur immediate and
substantial dilution of $ per share, based on the assumed initial public
offering price of $ per share. As a result, if we are liquidated, you may
not receive the full amount of your investment.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the pro forma net tangible book value per
share of our common stock immediately afterwards. Our pro forma net tangible
book value at September 30, 2000, prior to giving effect to this offering, was
approximately $ , or approximately $
per share. Pro forma net tangible book value per share represents the amount of
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding, after giving effect to the pro forma adjustments
described under "Capitalization" above.

After giving effect to this offering and the receipt by us of an assumed
$ of net proceeds from this offering, based on an assumed initial public
offering price of $ per share, our pro forma net tangible book value at
September 30, 2000, would have been approximately $ , or $ per share.
This amount represents an immediate increase in pro forma net tangible book
value of $ per share to Lucent, our existing stockholder, and an immediate
dilution in pro forma net tangible book value of $ per share to new
investors purchasing shares of common stock in this offering. The following
table illustrates this dilution per share:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of
September 30, 2000..................................... $
Increase in pro forma book value per share attributable to
new investors.......................................... $
Pro forma net tangible book value per share after this
offering.................................................. $
------
Dilution per share to new investors......................... $
======
</TABLE>

As of September 30, 2000, there were no options outstanding to purchase
shares of our common stock. Lucent stock-based awards held by our employees will
be converted into our stock-based awards. As of September 30, 2000, our
employees held stock options exercisable for shares of Lucent common
stock and restricted stock units convertible into shares of Lucent
common stock. We expect to issue options for our common stock in connection with
the offering. To the extent that any options are granted and exercised, there
will be further dilution to new investors.

The following table, which assumes that the exchange described in
"Underwriters--The Exchange" occurs, sets forth, as of September 30, 2000, on
the pro forma basis described above, the differences between the number of
shares of common stock purchased from us, the total price paid and average price
per share paid by Lucent and by the new investors in this offering at an assumed
initial public offering price of $ per share, before deducting the estimated
underwriting discounts and commissions and offering expenses payable by us.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
-------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Lucent.......................... % $ % $
New investors...................
-------- -------- -------- -------- --------
Total...................... % $ % $
======== ======== ======== ======== ========
</TABLE>

31
<PAGE> 35

If the exchange occurs and the underwriters' over-allotment option is
exercised in full, the following will occur:

-- the number of shares of common stock held by Lucent will decrease to
shares, or approximately % of the total number of
shares of our common stock outstanding after this offering; and

-- the number of shares held by new investors will increase to
shares, or approximately % of the total number of shares of our
common stock outstanding after this offering.

The following table, which assumes that the exchange described in
"Underwriters--The Exchange" does not occur, sets forth, as of September 30,
2000 on the pro forma basis described above, the differences between the number
of shares of common stock purchased from us, the total price paid and average
price per share paid by Lucent and by the new investors in this offering at an
assumed initial public offering price of $ per share, before deducting the
estimated underwriting discounts and commissions and offering expenses payable
by us.

If the exchange does not occur and the underwriters' over-allotment option
is exercised in full, the following will occur:

-- the number of shares of common stock held by Lucent will decrease to
shares, or approximately % of the total number of
shares of our common stock outstanding after this offering; and

-- the number of shares held by new investors will increase to
shares, or approximately % of the total number of shares of our
common stock outstanding after this offering.

32
<PAGE> 36

SELECTED FINANCIAL INFORMATION

The following table sets forth our selected financial information derived
from our unaudited combined financial statements for the nine months ended and
as of September 30, 1996, for the fiscal year ended and as of September 30,
1997, and as of September 30, 1998, which are not included in this prospectus,
and the audited combined financial statements for each of the three fiscal years
in the period ended September 30, 2000, and as of September 30, 1999, and 2000
included elsewhere in this prospectus. Per share data for net income and
dividends have not been presented because we were operated through divisions and
subsidiaries of Lucent for the periods presented. The historical selected
financial information may not be indicative of our future performance as a
stand-alone company. The historical selected financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements and
notes thereto included elsewhere in this prospectus.

In reviewing the selected financial information, please note the items set
forth below:

-- Effective October 1, 1996, we changed our fiscal year end from
December 31 to September 30.

-- Effective October 1, 1998, we changed our 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.

-- Effective October 1, 1999, we changed our accounting method for
computer software developed or obtained for internal use.

-- Purchased in-process research and development and amortization of
goodwill and other acquired intangibles reflect our acquisitions of
Agere, Inc., Herrmann Technology, Inc., Ortel Corporation and
substantially all the assets of VTC Inc. in fiscal 2000, Enable
Semiconductor, Inc. and Sybarus Technologies ULC in fiscal 1999 and
Optimay Corporation in fiscal 1998.

<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, ---------------------------------
1996 1997 1998 1999 2000
------------- ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME INFORMATION:
Revenue......................................... $1,855 $2,769 $3,101 $3,714 $4,708
Purchased in-process research and development... -- -- 48 17 446
Amortization of goodwill and other acquired
intangibles................................... -- 1 3 13 189
Income (loss) before cumulative effect of
accounting change............................. 180 275 303 319 (76)
Cumulative effect of accounting change (net of
$21 provision for income taxes)............... -- -- -- 32 --
Net income (loss)............................... 180 275 303 351 (76)
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET INFORMATION:
Total assets.......................................... $1,835 $2,197 $2,481 $3,020 $7,067
Capitalized lease obligation.......................... -- -- -- 78 60
</TABLE>

33
<PAGE> 37

UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS

The unaudited pro forma condensed financial statements reported below
should be read in conjunction with our "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the combined financial
statements and the notes thereto included elsewhere in this prospectus. The
unaudited pro forma condensed statement of income was prepared as if our
separation from Lucent and the related transactions described below, including
this offering, and our acquisition of Ortel Corporation had occurred as of
October 1, 1999. The unaudited pro forma condensed balance sheet was prepared as
if our separation from Lucent and related transactions described below had
occurred as of September 30, 2000. The following unaudited pro forma condensed
financial statements give pro forma effect to:

-- the financial results of Ortel, which we acquired on April 27, 2000,
for the period from October 1, 1999, to April 27, 2000, the
elimination of related purchased in-process research and development
and the effect of a full year of related amortization of goodwill and
other acquired intangibles; and

-- our receipt from the sale of our common stock by us of the estimated
net proceeds of $ , assuming an estimated initial public offering
price of $ per share, the midpoint of the range set forth on the
cover page of this prospectus.

Lucent intends to issue approximately $2.5 billion of short-term debt,
which we will assume upon completion of this offering. We will not receive any
of the proceeds of this short-term debt. Upon completion of this offering,
Lucent will be relieved of all obligations related to this short-term debt. We
may refinance all or a portion of the short-term debt we are assuming with
long-term or other short-term debt. We are currently evaluating our capital
structure and examining other costs and expenses we may incur as a stand-alone
company and have not yet determined the amount of financing we will have in the
future. We may from time to time incur additional debt.

The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable. We have not made adjustments for the
balance sheet impact of the net assets we will receive in connection with the
assets and liabilities of Lucent's pension and postretirement benefit plans that
will be transferred to us at the time of the distribution in connection with our
employees. We have not included the balance sheet impact of our future net
assets in connection with the pension and postretirement benefits because we and
Lucent have not yet finalized the amount of the assets and liabilities to be
transferred. Please see the notes to unaudited pro forma condensed financial
statements for a more detailed discussion of how the adjustments described above
are presented in the pro forma condensed financial statements.

The following unaudited pro forma condensed financial statements have been
derived from the combined financial statements included elsewhere in this
prospectus and do not purport to represent what our financial position and
results of operations actually would have been had the separation and related
transactions and our acquisition of Ortel occurred on the dates indicated or to
project our financial performance for any future period.

34
<PAGE> 38

AGERE SYSTEMS INC. & SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 2000
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
ORTEL CORP.
OCTOBER 1, 1999 TO
HISTORICAL APRIL 27, 2000 (A) ADJUSTMENTS PRO FORMA
---------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUE........................... $4,708 $ 52 $4,760
COSTS............................. 2,555 33 2,588
------ ------ ------ ------
GROSS PROFIT...................... 2,153 19 2,172
------ ------ ------ ------
OPERATING EXPENSES
Selling, general and
administrative............... 535 12 547
Research and development........ 827 10 837
Purchased in-process research
and development.............. 446 -- (307)(B) 139
Amortization of goodwill and
other acquired intangibles... 189 -- 181(C) 370
------ ------ ------ ------
TOTAL OPERATING EXPENSES..... 1,997 22 (126) 1,893
------ ------ ------ ------
OPERATING INCOME.................. 156 (3) 126 279
Other income, net................. 33 -- 33
Interest expense.................. 58 -- (52)(D) 164
158(E)
------ ------ ------ ------
Income before income taxes........ 131 (3) 20 148
Provision (benefit) for income
taxes........................... 207 (1) (41)(F) 165
------ ------ ------ ------
NET INCOME (LOSS)................. $ (76) $ (2) $ 61 $ (17)
====== ====== ====== ======
Pro forma loss per share(G):
Basic and diluted (based
on shares
outstanding)................. $
======
</TABLE>

See accompanying notes to unaudited pro forma condensed financial statements.
35
<PAGE> 39

AGERE SYSTEMS INC. & SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............................ $ -- (H) $
Trade receivables, less allowances................... 699 699
Receivables due from Lucent Technologies Inc. ....... 122 122
Inventories.......................................... 380 380
Other current assets................................. 203 203
------ ------
Total current assets....................... 1,404
Plant, property and equipment, net................... 1,883 1,883
Goodwill and other acquired intangibles, net......... 3,491 3,491
Prepaid pension costs................................ -- --
Other assets......................................... 289 289
------ ------- ------
TOTAL ASSETS............................... $7,067 $
====== ======= ======
LIABILITIES:
Current liabilities.................................. $ 976 $ 976
Short-term debt...................................... -- 2,500(I) 2,500
------ ------- ------
Total current liabilities.................. 976 2,500 3,476
Post-employment benefit liabilities.................. 95 95
Other liabilities.................................... 215 215
------ ------- ------
TOTAL LIABILITIES.......................... $1,286 2,500 3,786
------ ------- ------
INVESTED EQUITY/STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share,
shares authorized and no shares issued and
outstanding pro forma.............................. -- --
Common stock, par value $0.01 per share,
shares authorized and shares issued and
outstanding pro forma.............................. -- (H)
Additional paid in capital........................... -- (H)
Owner's net investment(J)............................ 5,833 (2,500)(I) 3,333
Accumulated other comprehensive income............... (52) (52)
------ ------- ------
TOTAL INVESTED EQUITY/STOCKHOLDERS'
EQUITY................................... 5,781 (2,500)
------ ------- ------
TOTAL LIABILITIES AND INVESTED
EQUITY/STOCKHOLDERS' EQUITY.............. $7,067 --
====== ======= ======
</TABLE>

See accompanying notes to unaudited pro forma condensed financial statements.
36
<PAGE> 40

NOTES TO THE PRO FORMA CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)

(A) Reflects pro forma adjustments for the financial results of Ortel from
October 1, 1999, to April 27, 2000. We acquired Ortel on April 27, 2000,
and thereafter our combined financial statements included the financial
results of Ortel.

(B) Reflects the elimination of purchased in-process research and development
related to the Ortel acquisition.

(C) Reflects the full year impact of amortization of goodwill and other
acquired intangibles related to our Ortel acquisition. In addition to
Ortel, we also acquired Agere, Inc., Herrmann and substantially all the
assets of VTC in fiscal 2000. If we had made these four acquisitions,
including Ortel, as of October 1, 1999, the full year amortization of
goodwill and other acquired intangibles would have been $445.

(D) Reflects the elimination of interest expense allocated to our historical
combined statement of income by Lucent for fiscal 2000. This allocation was
based on the ratio of our net assets, excluding debt, to Lucent's net
assets, excluding debt.

(E) Reflects the interest expense related to the assumption by us from Lucent
of $2,500 of short-term debt upon completion of this offering. This
short-term debt will be in the form of commercial paper or other short-term
notes. Interest expense was calculated using an interest rate of 6.3%,
which represents Lucent's weighted average interest rate on its short-term
debt for the fiscal year ended September 30, 2000. Our interest expense as
a stand-alone company may be higher or lower than this rate. A variation of
1.0 percentage point in the interest rate charged on the short-term debt
would result in a change of approximately $25 in the interest expense for
the fiscal year ended September 30, 2000.

(F) Reflects the tax effect of the pro forma adjustment to interest expense
using the statutory rate of 39.0%.

(G) The computation of pro forma basic and diluted loss per share is based upon
the anticipated number of common shares outstanding upon completion of this
offering.

(H) Reflects the receipt by us of the estimated net proceeds from the sale of
shares of our common stock by us in this offering. We will not
receive any of the net proceeds from the sale of our common stock by the
selling stockholder.

(I) Reflects the assumption by us of $2,500 of short-term debt upon completion
of this offering. This short-term debt will be in the form of commercial
paper or other short-term notes.

(J) On a historical basis, the amount of Lucent's net investment in us was
recorded in invested equity as owner's net investment in our combined
financial statements.

37
<PAGE> 41

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

You should read the following discussion in conjunction with the combined
financial statements and the notes thereto included elsewhere in this
prospectus. Our fiscal year ends on September 30. This Management's Discussion
and Analysis of Financial Condition and Results of Operations contains
forward-looking statements. Please see "Forward-Looking Statements" for a
discussion of the uncertainties, risks and assumptions associated with these
statements.

OVERVIEW

We are the world leader in sales of communications semiconductors, which
include both our optoelectronic components and integrated circuits.
Communications semiconductors are the basic building blocks of electronic and
photonic products and systems for terrestrial and submarine, or undersea,
communications networks and for communications equipment. We sell our
optoelectronic components and integrated circuits globally to manufacturers of
communications and computer equipment.

We report our operations in two segments: Optoelectronics and Integrated
Circuits. The Optoelectronics segment represents our optoelectronic components
operations, including both our active optoelectronic and our passive optical
components. Optoelectronic components transmit, process, change, amplify and
receive light that carries data and voice traffic over optical networks. The
Integrated Circuits segment represents our integrated circuits operations.
Integrated circuits, or chips, are made using semiconductor wafers imprinted
with a network of electronic components. They are designed to perform various
functions such as processing electronic signals, controlling electronic system
functions and processing and storing data. The Integrated Circuits segment also
includes our wireless local area networking products, which facilitate the
transmission of data and voice signals within a localized area without cables or
wires. Each of the Optoelectronics and Integrated Circuits segments include
revenue from the licensing of intellectual property related to that segment.

The following table sets forth the allocation of our revenue between our
operating segments, expressed as a percentage of revenue.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
OPERATING SEGMENT
Optoelectronics................................... 12.1% 17.7% 25.5%
Integrated Circuits............................... 87.9 82.3 74.5
----- ----- -----
Total..................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>

SEPARATION FROM LUCENT

We were incorporated under the laws of the State of Delaware on August 1,
2000, as a wholly owned subsidiary of Lucent. We will have no material assets or
activities as a separate corporate entity until the contribution to us by
Lucent, prior to the completion of this offering, of the businesses described in
this prospectus. Lucent conducted such businesses through various divisions and
subsidiaries. After completion of this offering, Lucent will own approximately
% of the outstanding shares of our common stock, or approximately % if
the underwriters exercise their over-allotment option in full, in each case
assuming that the exchange described in "Underwriters -- The Exchange" occurs.
If the exchange does not occur, after the completion of this offering Lucent
will own approximately % of the outstanding shares of our common stock or
approximately % if the underwriters exercise their over-allotment option in
full. Lucent has announced its intention to distribute all of the shares of our
common stock that it then owns to its stockholders in a tax-free spin off by the
end of Lucent's current fiscal year, which will occur on September 30, 2001.

38
<PAGE> 42

Prior to the completion of this offering, we will enter into several
agreements with Lucent in connection with, among other things, intellectual
property, interim services and product supply. The interim services agreement
sets forth charges generally intended to allow the providing company to fully
recover the allocated direct costs of providing the services, plus all
out-of-pocket costs and expenses. With limited exceptions, these interim
services are not expected to extend beyond September 30, 2001.

Lucent is our largest customer with purchases in fiscal 1998, 1999 and
2000, representing 22.3%, 25.7% and 21.3%, respectively, of our revenue. We
expect that our revenue from sales to Lucent will decrease as a percentage of
our total revenue. We will enter into a three year product purchase agreement
with Lucent that will begin on February 1, 2001 to supply Lucent with
optoelectronic components and integrated circuits. Under this agreement, Lucent
has committed that payments made to us for purchases of our products will total
at least $1 billion annually during each one year period ending January 31,
2002, January 31, 2003 and January 31, 2004, subject to customary terms and
conditions with respect to availability and acceptability of our products. Any
purchases by Lucent in excess of $1 billion during the first or second year of
the agreement will result in a reduction of the purchase commitment by Lucent
during the third year of the agreement by the amount of any such excess. In
limited instances, Lucent's purchase commitment for each year may be reduced in
the event we fail to, or choose not to, fulfill some orders. In addition, to the
extent Lucent does not meet its minimum yearly purchase commitments for either
of the first two years of this agreement, Lucent may carry over a portion of the
yearly purchase commitments to the following year of the agreement. Lucent will
also enter into a three year supply agreement with us that will begin on
February 1, 2001. Under that supply agreement, we will have an obligation to
purchase all of our requirements of specified specialty fiber, fiber apparatus
and premises cable products from Lucent. Please see "Arrangements Between Lucent
and Our Company" for a more detailed discussion of this agreement and the other
agreements to be entered into with Lucent prior to this offering.

Our combined financial statements, which are discussed below, reflect the
historical financial position, results of operations and cash flows of the
businesses to be transferred to us from Lucent as part of the separation. The
financial information included herein, however, may not necessarily reflect our
financial position, results of operations and cash flows in the future or what
our financial position, results of operations and cash flows would have been had
we been a stand-alone company during the periods presented. Because a direct
ownership relationship did not exist among all of our various units, Lucent's
net investment in us is shown in lieu of stockholders' equity in the combined
financial statements.

The combined financial statements include allocations of Lucent's expenses,
assets and liabilities, including the items described below.

General Corporate Expenses. Lucent allocates general corporate expenses
for each fiscal year based on revenue for that fiscal year. These allocations
are reflected in the selling, general and administrative, cost of revenue and
research and development line items in our combined statements of income. The
general corporate expenses allocation is primarily for cash management, legal,
accounting, tax, insurance, public relations, advertising, human resources and
data services and amounted to $185 million, $194 million and $178 million in
fiscal 1998, 1999 and 2000, respectively. We believe the costs of these services
charged to us are a reasonable representation of the costs that would have been
incurred if we had performed these functions as a stand-alone company. Following
the separation, we will perform these functions using our own resources or
through purchased services.

Basic Research. Research and development expenses in our combined
statements of income include an allocation from Lucent to fund a portion of the
costs of basic research conducted by Lucent's Bell Laboratories. This allocation
was based on the number of individuals conducting basic research who will be
transferred from Lucent's Bell Laboratories to us as part of the separation.
This allocation amounted to $60 million, $64 million and $66 million for fiscal
1998, 1999 and 2000, respectively. We believe the costs of this research charged
to us are a reasonable representation of the costs that would have been incurred
if we had performed this research as a stand-alone company. Following the
separation, we will satisfy our basic research requirements using our own
resources or through purchased services.

39
<PAGE> 43

Interest Expense. Because Lucent historically provided financing to us and
incurred debt at the parent level, our combined balance sheets do not include
debt other than our capitalized lease obligation. Our combined statements of
income, however, include an allocation of interest expense totaling $21 million,
$38 million and $52 million in fiscal 1998, 1999 and 2000, respectively. This
allocation was based on the ratio of our net assets, excluding debt, to Lucent's
total net assets, excluding debt. Our interest expense as a stand-alone company
may be higher or lower than that reflected in our combined statements of income.
Interest expense also includes interest expense related to our capitalized lease
obligation.

Benefit Obligations. At the distribution, we will become responsible for
pension and postretirement benefits for our active U.S. employees. Obligations
related to retired and terminated vested U.S. employees as of this offering will
remain the responsibility of Lucent. Until the distribution, our U.S. employees
will be participants in most of the Lucent employee benefit plans. At the
distribution, we will become responsible for pension and postretirement benefits
for our U.S. employees who retire or terminate after this offering, and Lucent
will transfer to us the pension and postretirement assets related to those
employees. Lucent has managed its employee benefit plans on a consolidated basis
and separate information relating to us is not readily available. Therefore, our
share of the Lucent U.S. plans' assets and liabilities is not included in our
combined balance sheets. Our combined statements of income include, however, an
allocation of the costs of the U.S. employee benefit plans. These costs were
allocated based on our active U.S. employee population for each of the years
presented. In relation to the Lucent plans, we recorded pension expense of $23
million, $38 million and $27 million, and postretirement benefit expense of $14
million, $17 million and $15 million in fiscal 1998, 1999 and 2000,
respectively.

Income Taxes. Income taxes were calculated as if we filed separate tax
returns. Lucent, however, was managing its tax position for the benefit of its
entire portfolio of businesses. Lucent's tax strategies are not necessarily
reflective of the tax strategies that we would have followed or will follow as a
stand-alone company.

Cash and Receivables. Lucent uses a centralized approach to cash
management and the financing of its operations. Our cash deposits are
transferred to Lucent on a regular basis and are netted against the owner's net
investment account. As a result, none of Lucent's cash, cash equivalents or debt
were allocated to us in our combined financial statements. Receivables due from
Lucent reflected in the combined balance sheets include direct accounts
receivable and an assumed amount due from Lucent calculated based on days sales
outstanding expected on sales to Lucent subsequent to the separation.
Receivables due from Lucent will be settled as of the separation. Changes in
invested equity represent any funding required from Lucent for working capital,
acquisition or capital expenditure requirements after giving effect to our
transfers to or from Lucent of our cash flows.

RESTRUCTURING CHARGES AND SEPARATION EXPENSES

In connection with our separation from Lucent, we are currently engaged in
a review of our operations and anticipate an associated restructuring charge in
the first fiscal quarter of 2001 and the amount may be material. As we review
opportunities to improve manufacturing asset utilization, increase manufacturing
capabilities and improve cost structure within existing manufacturing capacity,
we also may incur charges associated with reducing unnecessary manufacturing
capacity. In addition, we may incur costs to terminate some of our contracts and
leases.

We will incur third party costs, fees and expenses relating to our
separation from Lucent and this offering. Such costs, fees and expenses include
one time charges related to designing and constructing our computer
infrastructure and data storage systems and implementing treasury, real estate,
pension and records retention management services.

In addition, in connection with this offering, we will pay agreed upon
expenses of the underwriters and the underwriters' discount provided in the
underwriting agreement. We also will pay all of the costs of producing,
printing, mailing and otherwise distributing this prospectus.

40
<PAGE> 44

ACQUISITIONS

As part of our continued efforts to broaden our portfolio of product
offerings, we completed the key acquisitions described below during fiscal 1998,
1999 and 2000.

June 2000 Acquisition of Herrmann Technology, Inc., a developer and
manufacturer of passive optical filters that can be used in
conjunction with active optoelectronic components, in products
such as amplifiers. The purchase price was $432 million in Lucent
common stock and options. In connection with this acquisition,
some former stockholders of Herrmann are entitled to receive up
to a total of 677,019 additional shares of Lucent common stock
based on retention and the achievement of specified milestones.

April 2000 Acquisition of Ortel Corporation, a developer and manufacturer of
semiconductor optoelectronic components used in fiber optic
systems for cable television and data communications networks.
The purchase price was approximately $3.0 billion in Lucent
common stock and options.

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

March 2000 Acquisition of substantially all the assets of VTC Inc., a
supplier of integrated circuits to computer hard disk drive
manufacturers. The purchase price was $104 million in cash. In
connection with this acquisition, stockholders of VTC are
entitled to receive additional cash consideration of up to $50
million based on the achievement of specified milestones.

March 1999 Acquisition of Enable Semiconductor, Inc., a developer of
integrated circuits for local area network equipment. The
purchase price was $51 million in cash.

February 1999 Acquisition of Sybarus Technologies ULC, a developer of
integrated circuits for communications networks. The purchase
price was $41 million in cash.

April 1998 Acquisition of Optimay Corporation, a developer of software used
for mobile telephones. The purchase price was $64 million in
cash.

REVENUE

We derive revenue primarily from sales of products in our Optoelectronics
and Integrated Circuits segments. We sell our products globally primarily
through our direct sales force and indirectly through our network of
approximately 25 distributors. In fiscal 2000, we derived approximately 91% of
our revenue from sales made by our direct sales force and approximately 9% from
sales to distributors. Each of the Optoelectronics and Integrated Circuits
segments include revenue from the licensing of our intellectual property related
to that segment.

We recognize revenue from sales of optoelectronic components and integrated
circuits when contractual obligations have been satisfied, title and risk of
loss have been transferred to the customer and collection of the resulting
receivables is reasonably assured. We accrue a provision for estimated sales
allowances as a reduction of revenue at the time of revenue recognition. We
recognize revenue from intellectual property licensing over the license term.

Historically, we have relied on a limited number of customers for a
substantial portion of our total revenue. In fiscal 2000, our top ten end
customers, based on revenue, accounted for approximately 52% of our revenue. As
discussed above under "--Separation from Lucent," we expect our sales to Lucent
to continue to represent a significant percentage of our revenue, although we
expect that our revenue from sales to Lucent will decrease as a percentage of
our total revenue. We expect that a significant portion of our future revenue
will continue to be generated by a limited number of customers.

41
<PAGE> 45

COSTS

Our costs consist primarily of manufacturing overhead, materials, parts and
labor. Similar to many optoelectronics and integrated circuit manufacturers, we
have relatively high fixed costs related in particular to our wafer
manufacturing. Because these costs are generally fixed in nature, we may
experience significant improvements in margins when volumes increase. However,
these high fixed costs limit our ability to reduce costs in times of decreased
demand.

OPERATING EXPENSES

Our selling, general and administrative expenses and research and
development expenses consist primarily of salaries, commissions, benefits and
other expenses in support of these activities. We expect our selling, general
and administrative expenses to increase significantly in fiscal 2001, as
compared to fiscal 2000. This increase is primarily due to our anticipated
increase in the sales of our products. Further, as we increase our percentage of
sales of our products, particularly our optoelectronic components, to customers
other than Lucent, our selling and marketing costs will rise because our sales
to Lucent have historically required lower selling costs. In addition, as we
expand into new geographic areas and implement other selling initiatives, we
expect increases in our selling and marketing expenses. We also expect our
research and development expenses to increase significantly in fiscal 2001 over
fiscal 2000. We expect to invest approximately $1.2 billion in research and
development in fiscal 2001, an increase of approximately 45% compared to fiscal
2000. For a discussion of our purchased in-process research and development,
please see "--Purchased In-Process Research and Development."

AMORTIZATION OF GOODWILL AND OTHER ACQUIRED INTANGIBLES

In fiscal 2000, we amortized $189 million of goodwill and other acquired
intangibles, in connection with acquisitions completed primarily in the second
half of fiscal 2000. The fiscal 2000 acquisitions were of Herrmann Technology,
Inc., Ortel Corporation, Agere, Inc. and substantially all the assets of VTC
Inc. We recorded a total of $3.6 billion in goodwill and other acquired
intangibles in connection with these acquisitions. Accordingly, we expect our
amortization of this amount to significantly reduce our net income in future
periods. In addition, our amortization of goodwill and other acquired
intangibles could increase in the future because of other acquisitions.

OPERATING TRENDS

Because our industry is characterized by rapid technological change and
short product life cycles, in any given year we may have a substantial amount of
revenue from products which are becoming obsolete. We may experience substantial
decreases in sales of these products in subsequent years. If we do not offset
these decreases by increases in our sales of other products, including new
products, our revenue and profitability will decline. Therefore, it is important
that we continue to win new business from our customers, design new products and
introduce them successfully into high-volume production.

In the optoelectronics and integrated circuits market segments, prices paid
for a specific capability or functionality are expected to decline over time.
This is due to the introduction of new technologies, increases in product
volumes that generally lead to better manufacturing yields and product
innovations. We must continually design and sell new products and introduce
competitive technologies so that our costs are improved and our profitability is
maintained. Newer technologies allow products to incorporate additional
functions and features that are valued by customers. By continually replacing
older products with newer products, average selling prices are not reduced as
quickly. It is important that we continue to develop or otherwise gain access to
new manufacturing technologies. The introduction of new manufacturing
technologies requires continuing capital equipment investment in our
manufacturing facilities or agreements to gain access to manufacturing
technologies through arrangements with third parties.

We may never generate any revenue from our products after incurring
significant design and development expenditures. After winning and beginning a
product design for one of our customers, that customer may not begin volume
production of their equipment for a period of up to two years, if at all. Due to
this lengthy design
42
<PAGE> 46

and development cycle, we will experience delays from the time we begin
incurring expenses until the time we generate revenue from our products. A delay
or cancellation of a customer's plans could adversely affect our financial
results significantly. If we invest resources in a competitive bidding process
and do not achieve a design win, or we achieve a design win but our customer's
product is ultimately not introduced or is not well received, we will have
difficulties in quickly finding other customers to offset this lost potential
revenue. Other potential customers may be engaged with one of our competitors to
develop components specifically for their end products, and we might not be able
to generate any sales to these customers. Further, given our long development
and design cycle, there may be significant delays in recognizing revenue from
any new customer relationships we develop to replace any customers we lose.

RESULTS OF OPERATIONS

The following table sets forth line items from our combined statements of
income as a percentage of revenue for the periods indicated.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
REVENUE..................................................... 100.0% 100.0% 100.0%
COSTS....................................................... 51.3 52.5 54.3
----- ----- -----
GROSS MARGIN................................................ 48.7 47.5 45.7
----- ----- -----
OPERATING EXPENSES
Selling, general and administrative....................... 16.9 15.4 11.3
Research and development.................................. 15.0 18.4 17.6
Purchased in-process research and development............. 1.7 0.5 9.5
Amortization of goodwill and other acquired intangibles... -- 0.3 4.0
----- ----- -----
Total operating expenses............................... 33.6 34.6 42.4
----- ----- -----
OPERATING INCOME............................................ 15.1 12.9 3.3
Other income-net............................................ 2.1 1.0 0.7
Interest expense............................................ 0.7 1.0 1.2
----- ----- -----
Income before income taxes.................................. 16.5 12.9 2.8
Provision for income taxes.................................. 6.7 4.3 4.4
----- ----- -----
Income (loss) before cumulative effect of accounting
change.................................................... 9.8 8.6 (1.6)
Cumulative effect of accounting change (net of provision for
income taxes in 1999)..................................... -- 0.9 --
----- ----- -----
NET INCOME (LOSS)........................................... 9.8% 9.5% (1.6)%
===== ===== =====
</TABLE>

43
<PAGE> 47

FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 1999

The following table shows the change in revenue for each of our operating
segments, both in dollars and in percentage terms.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, CHANGE
------------------ ------------
1999 2000 $ %
------ ------ ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING SEGMENT
Optoelectronics................................ $ 659 $1,201 $542 82.2%
Integrated Circuits............................ 3,055 3,507 452 14.8
------ ------ ----
Total.................................. $3,714 $4,708 $994 26.8%
====== ====== ====
</TABLE>

Revenue. Revenue increased 26.8%, or $994 million, from $3,714 million in
fiscal 1999 to $4,708 million in fiscal 2000, due to increases in both the
Optoelectronics and Integrated Circuits segments. The increase of $542 million
in the Optoelectronics segment was led by increased sales of many of our key
products for high-speed transport and submarine network applications. The
increase of $452 million in the Integrated Circuits segment was driven by net
increases across all of our product groups other than our wireless products
group. We experienced a net decrease in our wireless products group due to a
decrease in fiscal 2000 sales of our wireless terminal devices due to a missed
design win with a large customer in 1999, which resulted in our not generating
sales from a generation of that customer's mobile telephones.

Costs and gross margin. Costs increased 31.1%, or $606 million, from
$1,949 million in fiscal 1999 to $2,555 million in fiscal 2000, primarily due to
increased sales volume. Gross margin decreased 1.8 percentage points from 47.5%
to 45.7% in fiscal 2000 compared with fiscal 1999. This decrease was primarily
due to lower utilization of manufacturing capacity within the Integrated
Circuits segment. Gross margins for the Integrated Circuits segment were 48.6%
in fiscal 1999 and 44.7% in fiscal 2000. Gross margin for the Optoelectronics
segment increased from 42.5% in fiscal 1999 to 48.7% in fiscal 2000, as a result
of increased sales volume and manufacturing cost improvements.

Selling, general and administrative. Selling, general and administrative
expenses decreased 6.6%, or $38 million, from $573 million in fiscal 1999 to
$535 million in fiscal 2000. This decrease was primarily due to lower costs
associated with the implementation of our advanced logistics and planning
systems. These systems were primarily implemented and paid for in fiscal 1999.

Research and development. Research and development expenses increased
21.1%, or $144 million, from $683 million in fiscal 1999 to $827 million in
fiscal 2000. This increase was primarily due to new and ongoing product
development expenses within the Integrated Circuits and Optoelectronics
segments, including $50 million added during the year as a result of our
acquisitions.

Purchased in-process research and development. In-process research and
development increased $429 million, from $17 million in fiscal 1999 to $446
million in fiscal 2000. This increase was due to the acquisitions of Ortel,
Agere, Inc., Herrmann and substantially all the assets of VTC.

Amortization of goodwill and other acquired intangibles. Amortization
expense increased $176 million, from $13 million in fiscal 1999 to $189 million
in fiscal 2000. This increase was driven primarily by the acquisitions of Ortel,
Herrmann and Agere, Inc.

Operating income (loss). Operating income decreased 67.4%, or $323
million, from $479 million in fiscal 1999 to $156 million in fiscal 2000.
Operating income includes purchased in-process research and development and
amortization of goodwill and other acquired intangibles. The Optoelectronics
segment had operating income of $126 million in fiscal 1999 and an operating
loss of $127 million in fiscal 2000. The fiscal 2000 results for the
Optoelectronics segment included $341 million of purchased in-process research
and development and $143 million of amortization of goodwill and other acquired
intangibles. The fiscal 1999 results for the Optoelectronics segment included no
purchased in-process research and development and no amortization of goodwill
and other acquired intangibles. The Integrated Circuits segment had operating
income of $353 million in fiscal 1999 and $283 million in fiscal 2000. The
fiscal 2000 results for the Integrated

44
<PAGE> 48

Circuits segment included $105 million of purchased in-process research and
development and $46 million of amortization of goodwill and other acquired
intangibles as compared to $17 million and $13 million in fiscal 1999,
respectively.

The following table shows the change in operating income, excluding
purchased in-process research and development and amortization of goodwill and
other acquired intangibles, both in dollars and percentage terms.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, CHANGE
-------------- -------------
1999 2000 $ %
----- ----- ---- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING SEGMENT
Optoelectronics......................... $126 $357 $231 183.3%
Integrated Circuits..................... 383 434 51 13.3
---- ---- ----
Total............................ $509 $791 $282 55.4%
==== ==== ====
</TABLE>

Other income-net. Other income-net decreased 8.3%, or $3 million, from $36
million in fiscal 1999 to $33 million in fiscal 2000. The $36 million in 1999
was comprised primarily of gains on sales of investments of $32 million, a $20
million equity loss and a $9 million gain on foreign currency transactions. The
$33 million in 2000 was comprised primarily of gains on sales of investments of
$18 million, $4 million of equity income and a $6 million gain on foreign
currency transactions.

Provision for income taxes. The effective tax rates were 33.1% and 158.0%
for fiscal 1999 and 2000, respectively. The increase in effective tax rates was
due to the fiscal 2000 write-offs of purchased in-process research and
development costs that are not deductible for tax purposes. Excluding the impact
of non-tax deductible purchased in-process research and development expenses and
amortization of goodwill and other acquired intangibles expenses, the effective
tax rate was 32.2% and 27.8% for fiscal 1999 and 2000, respectively. The
decrease was primarily due to the tax impact of non-U.S. activity and increased
research tax credits.

FISCAL YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1998

The following table shows the change in revenue for each of our operating
segments, both in dollars and percentage terms.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, CHANGE
------------------ --------------
1998 1999 $ %
------ ------ ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING SEGMENT
Optoelectronics............................ $ 374 $ 659 $285 76.2%
Integrated Circuits........................ 2,727 3,055 328 12.0
------ ------ ----
Total.............................. $3,101 $3,714 $613 19.8%
====== ====== ====
</TABLE>

Revenue. Revenue increased 19.8% or $613 million, from $3,101 million in
fiscal 1998 to $3,714 million in fiscal 1999, due to increases in both the
Integrated Circuits and Optoelectronics segments. The increase of $328 million
in the Integrated Circuits segment was due to net increases across all of our
product groups. The increase of $285 million in the Optoelectronics segment was
led by increased sales of many of our key products for high-speed transport and
submarine network applications.

Costs and gross margin. Costs increased 22.4%, or $357 million, from
$1,592 million in fiscal 1998 to $1,949 million in fiscal 1999, primarily due to
increases in sales volume. Gross margin decreased 1.2 percentage points from
48.7% to 47.5% in fiscal 1999 compared with fiscal 1998. Gross margin decreased
1.3 percentage points within the Integrated Circuits segment from 49.9% in
fiscal 1998, to 48.6% in fiscal 1999,

45
<PAGE> 49

because revenue from licensing of our intellectual property was a smaller
percentage of total Integrated Circuits segment revenue in fiscal 1999, as
compared to fiscal 1998. This decrease was partially offset by the increase in
gross margin within the Optoelectronics segment from 39.8% in fiscal 1998, to
42.5% in fiscal 1999, as a result of increased sales volume and manufacturing
cost improvements.

Selling, general and administrative. Selling, general and administrative
expenses increased 9.1%, or $48 million, from $525 million in fiscal 1998 to
$573 million in fiscal 1999. This increase was primarily due to expansion of our
sales and marketing efforts in Europe and Asia and costs associated with the
implementation of our advanced logistics and planning systems.

Research and development. Research and development expenses increased
46.6%, or $217 million, from $466 million in fiscal 1998 to $683 million in
fiscal 1999. This increase was primarily due to new and ongoing product
development expenses within the Integrated Circuits segment. These programs were
primarily directed toward the development of integrated circuits for high-speed
communications networks and local area networks.

Purchased in-process research and development. In-process research and
development was $48 million in fiscal 1998 due to the acquisition of Optimay and
was $17 million in fiscal 1999 due to the acquisitions of Sybarus and Enable.

Amortization of goodwill and other acquired intangibles. Amortization
expense increased $10 million from $3 million in fiscal 1998 to $13 million in
fiscal 1999. This increase was driven primarily by the acquisitions of Sybarus
and Enable.

Operating income. Operating income increased 2.6%, or $12 million, from
$467 million in fiscal 1998 to $479 million in fiscal 1999. Operating income
includes purchased in-process research and development and amortization of
goodwill and other acquired intangibles. The Optoelectronics segment operating
income was $50 million in fiscal 1998 and $126 million in fiscal 1999. The
Optoelectronics segment had no purchased in-process research and development and
no amortization of goodwill and other acquired intangibles for both fiscal 1998
and 1999. The Integrated Circuits segment operating income was $417 million in
1998 and $353 million in fiscal 1999. The fiscal 1999 results for the Integrated
Circuits segment included $17 million of purchased in-process research and
development and $13 million of amortization of goodwill and other acquired
intangibles as compared to $48 million and $3 million in fiscal 1998,
respectively.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30, CHANGE
-------------- --------------
1998 1999 $ %
---- ---- ---- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPERATING SEGMENT
Optoelectronics.............................. $ 50 $126 $ 76 152.0%
Integrated Circuits.......................... 468 383 (85) (18.2)%
---- ---- ----
Total................................... $518 $509 $ (9) $ (1.7)%
==== ==== ====
</TABLE>

Other income-net. Other income-net decreased 46.3%, or $31 million, from
$67 million in fiscal 1998 to $36 million in fiscal 1999. The $67 million in
1998 was comprised primarily of gains on sales of investments of $53 million, a
$22 million equity loss from investments and a $7 million gain on foreign
currency transactions. The $36 million in 1999 was comprised primarily of gains
on sales of investments of $32 million, a $20 million equity loss from
investments, and a $9 million gain on foreign currency transactions.

Provision for income taxes. The effective tax rates were 40.9% and 33.1%
for fiscal 1998 and 1999, respectively. Excluding the impact of non-tax
deductible purchased in-process research and development expenses and
amortization of goodwill and other acquired intangibles expenses, the effective
tax rate was

46
<PAGE> 50

37.3% and 32.2% for fiscal 1998 and 1999, respectively. This decrease was
primarily due to a reduced effective state tax rate and increased research tax
credits.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth quarterly financial information for our most
recent eight fiscal quarters. This quarterly information has been prepared on a
basis consistent with our audited combined financial statements. We believe this
quarterly information includes all normal recurring adjustments necessary for a
fair presentation of the information shown.

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999 1999 2000 2000 2000
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE.............. $884 $907 $955 $ 968 $966 $1,067 $1,186 $1,489
COSTS................ 471 479 500 499 502 613 666 774
GROSS PROFIT......... 413 428 455 469 464 454 520 715
OPERATING EXPENSES
In-process research
and development.... 0 17 0 0 0 11 435 0
Amortization of
goodwill and other
acquired
intangibles........ 1 2 5 5 5 5 67 112
Total operating
expenses........... 289 315 339 343 288 338 851 520
OPERATING
INCOME(LOSS)....... 124 113 116 126 176 116 (331) 195
NET INCOME(LOSS)..... $114 $ 76 $ 73 $ 88 $ 94 $ 65 $ (365) $ 130
</TABLE>

<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999 1999 2000 2000 2000
------------ --------- -------- ------------- ------------ --------- -------- -------------
(AS A PERCENTAGE OF REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
COSTS................ 53.3 52.8 52.4 51.5 52.0 57.5 56.2 52.0
GROSS MARGIN......... 46.7 47.2 47.6 48.5 48.0 42.5 43.8 48.0
OPERATING EXPENSES In
process research
and development.... -- 1.9 -- -- -- 1.0 36.7 --
Amortization of
goodwill and other
acquired
intangibles........ 0.1 0.2 0.5 0.5 0.5 0.5 5.6 7.5
Total operating
expenses........... 32.7 34.7 35.5 35.4 29.8 31.7 71.8 34.9
OPERATING
INCOME(LOSS)....... 14.0 12.5 12.1 13.0 18.2 10.9 (27.9) 13.1
NET INCOME(LOSS)..... 12.9% 8.4% 7.6% 9.1% 9.7% 6.1% (30.8)% 8.7%
</TABLE>

We have experienced and expect to continue to experience fluctuations in
quarterly operating results as a result of many factors. We believe that
period-to-period comparisons of our operating results are not meaningful and
should not be relied upon as any indication of future performance. It is likely
that future quarterly operating results from time to time will not meet the
expectations of market analysts or investors, which may have an adverse effect
on the price of our common stock.

Our quarterly financial results can vary from quarter to quarter due to the
introduction of new technologies which require significant capital investment in
our manufacturing facilities. Because we make investments in new products
significantly before revenue is realized, there may be periods when our gross
margins are negatively impacted. Our quarterly results also may be impacted by
the generally fixed nature of our costs. Because a substantial portion of our
costs are fixed, we may have improvements in gross margins

47
<PAGE> 51

when volumes increase and deterioration in gross margins when volumes decline.
The decline in gross margin in the quarter ended March 31, 2000, was due
primarily to lower utilization of manufacturing capacity. Gross margins also may
be affected by the timing of intellectual property revenue because this revenue
has significantly higher gross margins compared to product revenue.

Our quarterly financial results also can vary from quarter to quarter due
to the financial impact of acquisitions. In the quarter ended June 30, 2000, we
completed the acquisitions of Ortel, Herrmann and Agere, Inc. These acquisitions
resulted in goodwill and acquired intangibles combined of $3.5 billion and
purchased in-process research and development expenses of $435 million. The
purchased in-process research and development was completely expensed during the
quarter.

Our revenue has experienced limited consistent seasonal trends. We have
experienced some effects from additional sales to Lucent, our largest customer,
in its fourth fiscal quarter which ends on September 30. In addition, sales in
some of our businesses, such as modems and wireless terminals, reflect seasonal
patterns in consumer spending. These product areas tend to have higher revenue
growth in our fourth and first fiscal quarters, ending September 30 and December
31, as consumers spend in preparation for the beginning of the school year and
the December holidays. The seasonality in our revenue may, at times, be
overshadowed by general market trends and customer-specific circumstances.

LIQUIDITY AND CAPITAL RESOURCES

We generated cash flow from operations of $524 million, $690 million and
$762 million for fiscal 1998, 1999 and 2000, respectively. The improvement in
our cash flow from operations for fiscal 2000, compared with fiscal 1999, and
for fiscal 1999, compared with fiscal 1998, was primarily the result of
increases in net income, excluding the non-cash financial impact associated with
depreciation and amortization and purchased in-process research and development.
In fiscal 2000 our cash flows from operations reflect a use of cash to finance
higher receivables, which increased by $237 million as a result of increased
revenue. In fiscal 1999 our cash flows from operations reflect a use of cash due
to a pre-payment of some costs in connection with the expansion of our non-U.S.
integrated circuits operations. In fiscal 1998, our cash flows from operations
reflect a use of cash due to higher receivables, which increased by $122 million
as a result of increased revenue.

Cash flow used in investing activities was $541 million, $753 million and
$829 million for fiscal 1998, 1999 and 2000, respectively. Capital expenditures
and acquisitions of businesses are the primary components of our investing
activities. Generally, we have generated sufficient cash from our operating
activities to fund our working capital and capital expenditure requirements.

Net cash provided by financing activities was $17 million, $63 million and
$67 million for fiscal 1998, 1999 and 2000, respectively. We historically have
relied on Lucent to provide financing for our operations. Our cash flow from
financing activities does not reflect changes in our assumed capital structure.

Capital expenditures were $672 million in fiscal 2000. Our capital spending
is used primarily in support of our manufacturing facilities. This includes
expansion of manufacturing capacity and enhancement of existing capacity for the
manufacture of newer technologies. Capital is also used to purchase equipment to
improve yield, increase automation, and increase manufacturing productivity.
Additional capital in fiscal 2000 was spent on information technology
infrastructure, including computer servers and networking capability. Capital
expenditures in fiscal 2001 are budgeted at approximately $1.2 billion. Of this
amount, we expect approximately $900 million to be used for the on-going
businesses of our segments. In addition, approximately $155 million will be
spent in support of a new office facility adjacent to our current corporate
headquarters in Pennsylvania. The remaining approximately $150 million of fiscal
2001 capital expenditures will be used for requirements related to one-time
costs of our separation from Lucent.

Following the separation, Lucent will no longer be providing funds to
finance our operations. Lucent intends to issue approximately $2.5 billion of
short-term debt in the form of commercial paper or other short-term notes, which
we will assume upon completion of this offering. We will not receive any of the
proceeds of this short-term debt. Upon the completion of this offering, Lucent
will be relieved of all obligations related to

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this short-term debt. We may refinance all or a portion of the short-term debt
we are assuming with long-term or other short-term debt.

Our primary future cash needs on a recurring basis will be working capital,
capital expenditures and debt service. We believe that our cash flows from
operations, together with the net proceeds of this offering, will be sufficient
to meet these cash needs for the foreseeable future. If our cash flows from
operations are less than we expect, we may need to incur additional debt. We are
currently evaluating our capital structure and have not yet determined the
amount of financing we will have in the future. We may from time to time incur
additional debt.

We may need to incur additional debt or issue equity to make any strategic
acquisition or investment. We can not assure that such financing will be
available to us on acceptable terms or at all. Our ability to issue additional
equity is constrained because our issuance of additional common stock may cause
the distribution to be taxable under Section 355(e) of the Internal Revenue
Code, and under the tax sharing agreement we would be required to indemnify
Lucent against that tax.

Our ability to make payments on and to refinance our indebtedness,
including the short-term debt we will assume from Lucent, and to fund working
capital, capital expenditures, debt service and strategic acquisitions, joint
ventures and investments will depend on our ability to generate cash in the
future, which is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. Further,
the short-term debt we will assume from Lucent and future indebtedness may
impose various restrictions and covenants on us which could limit our ability to
respond to market conditions, to provide for unanticipated capital investments
or to take advantage of business opportunities.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with the acquisitions of Agere, Inc., Herrmann, Ortel and
substantially all the assets of VTC in fiscal 2000, the acquisitions of Enable
and Sybarus in fiscal 1999 and the acquisition of Optimay in fiscal 1998, a
portion of each purchase price was allocated to purchased in-process research
and development. In analyzing these acquisitions, we made decisions to buy
technology that had not yet been commercialized rather than develop the
technology internally. We relied on factors such as the amount of time it would
take to bring the technology to market in making these decisions. We also
considered Lucent's Bell Laboratories' resource allocation and its progress on
comparable technology, if any. Our management expects to use a similar decision
process in the future.

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

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

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Set forth below are descriptions of the major acquired in-process research
and development projects in connection with our significant acquisitions:

AGERE, INC.

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

Overall, substantial progress had been made on the in-process research and
development projects at the valuation date, with completion estimated at
approximately 65%. Agere, Inc. estimated that the projects would be completed in
the first quarter of fiscal 2001, after which time it expected to begin
generating economic benefits from the completed projects. Revenue attributable
to the resulting products were estimated to be $21 million in fiscal 2001 and
$65 million in fiscal 2002. Revenue was expected to peak in fiscal 2007 and
decline thereafter through the end of the product's life, which was expected to
be in fiscal 2009, as new product technologies were expected to be introduced by
us. Revenue growth was expected to decrease from 205% in fiscal 2002 to 5% in
fiscal 2007 and be negative for the remainder of the projection period. At the
acquisition date, costs to complete Agere, Inc.'s in-process research and
development were expected to total approximately $3.4 million.

Projected future net cash flows attributable to Agere, Inc.'s in-process
research and development, assuming successful development, were discounted to
net present value using a discount rate of 30%.

ORTEL CORPORATION

On April 27, 2000, Lucent completed the acquisition of Ortel. Ortel was a
developer and manufacturer of semiconductor-based optoelectronic components used
in fiber optic systems for data communications and cable television networks. At
the acquisition date, Ortel was conducting development, engineering and testing
activities associated with high-speed optical transmitters, receivers and
transceivers.

Overall, Ortel's in-process research and development projects were at
completion stages ranging from 50% to 75%. Ortel anticipated that the projects
would be completed in phases beginning in June 2000, after which point economic
benefits would begin to be generated. The allocation to purchased in-process
research and development of $307 million represented its estimated fair value
using the methodology described above. The $307 million was allocated to the
following projects, which are explained below.

- 10G New Products - $61 million;

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

- 980 Products - $95 million;

- 1550 Products - $27 million; and

- CATV Products - $19 million.

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

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date, costs to complete the research and development efforts related to the
product were expected to be $3 million.

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

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

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

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

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

HERRMANN TECHNOLOGY, INC.

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

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

Overall, Herrmann's in-process research and development projects were at
completion stages ranging from 20% to 60%. Herrmann estimated that the projects
would be completed in phases beginning in the fourth quarter of fiscal 2000,
after which time it expected to begin generating economic benefits from the
completed
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projects. In total, costs to complete Herrmann's in-process research and
development were expected to equal approximately $1.8 million. Projected future
net cash flows attributable to Herrmann's in-process research and development,
assuming successful development, were discounted to net present value using a
discount rate of 27.5%.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

We are subject to a wide range of laws and regulations relating to
protection of the environment and employee safety and health. We are currently
involved in investigations and/or cleanup of known contamination at eight sites
either voluntarily or pursuant to government directives. We have established
reserves for environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental remediation are,
depending on the site, based primarily upon internal or third party
environmental studies, estimates as to the number, participation level and
financial viability of all potential responsible parties, the extent of
contamination and the nature of required remedial actions. Although we believe
that our reserves are adequate to cover known environmental liabilities, it is
often difficult to estimate with certainty the future cost of such matters.
Therefore, we cannot be assured that expenditures that will be required relating
to remedial actions and compliance with applicable environmental laws will not
exceed the amount reflected in our reserves for such matters or will not have a
material adverse effect on our financial condition, results of operations or
cash flows. Please see "Business--Environmental, Health and Safety Matters" for
a more detailed discussion of these matters.

LEGAL PROCEEDINGS

From time to time we are involved in legal proceedings arising in the
ordinary course of business. We may be subject to litigation and infringement
claims, which could cause us to incur significant expenses or prevent us from
selling our products or services.

Lucent is currently involved in two intellectual property proceedings in
which it is being accused of patent infringement. Because the allegations relate
to technologies we use and products we sell, we expect to be named a party to
these actions following the separation. For a more complete description of these
legal proceedings, please see "Business--Legal Proceedings." Other than as
described above, we believe there is no litigation pending that could have,
individually or in the aggregate, a material adverse effect on our financial
position, results of operations or cash flows.

RISK MANAGEMENT

We are exposed to market risk from changes in foreign currency exchange
rates that could impact our results of operations and financial position. We
manage our exposure to these market risks through our regular operating and
financing activities and, when deemed appropriate, through the use of derivative
financial instruments. We use derivative financial instruments as risk
management tools and not for speculative purposes. In addition, derivative
financial instruments are entered into with a diversified group of major
financial institutions in order to manage our exposure to nonperformance on such
instruments.

We use foreign currency forward contracts, and to a lesser extent may from
time to time use foreign currency options, to manage the volatility of
non-functional currency cash flows resulting from changes in exchange rates.
Foreign currency exchange contracts are designated for recorded, firmly
committed or anticipated purchases and sales. The use of these derivative
financial instruments allows us to reduce our overall exposure to exchange rate
movements, since the gains and losses on these contracts substantially offset
losses and gains on the assets, liabilities and transactions being hedged. As of
September 30, 2000, our primary net foreign currency market exposures included
the Euro and its legacy currencies, Singapore dollars, Japanese yen and Thai
baht.

The fair value of foreign currency exchange contracts is sensitive to
changes in foreign currency exchange rates. As of September 30, 1999 and 2000, a
10% appreciation in foreign currency exchange rates from the prevailing market
rates would increase our related net unrealized gain for fiscal 1999 and 2000 by
approximately $17 million and $12 million, respectively. Conversely, a 10%
depreciation in these currencies
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from the prevailing market rates would decrease our related net unrealized gain
for fiscal 1999 and 2000 by approximately $17 million and $12 million,
respectively. Consistent with the nature of the economic hedge of such foreign
currency exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, of the underlying instrument
or transaction being hedged.

While we hedge many foreign currency transactions, the decline in value of
non-U.S. dollar currencies may, if not reversed, adversely affect our ability to
contract for product sales in U.S. dollars because our products may become more
expensive to purchase in U.S. dollars for local customers doing business in the
countries of the affected currencies.

As we become a stand-alone company, we may enter into interest rate swap
agreements to manage the risk between fixed, floating and variable interest
rates and long-term and short-term maturity debt instruments. There were no
interest rate swap agreements in effect during fiscal 1999 and 2000.

The Separation and Distribution Agreement is expected to provide that, as
between us and Lucent, we will assume all liabilities under or otherwise
relating to derivatives and similar obligations primarily related to our
business. Initially, Lucent may continue to perform obligations under such
derivatives and similar obligations on behalf of us, but all amounts paid to or
received from third parties will be charged to, or paid over or credited to us,
as the case may be.

By their nature all such instruments involve risk including the credit risk
of nonperformance by counterparties, and our maximum potential loss may exceed
the amount recognized in our balance sheet. However, at both September 30, 1999
and 2000, in management's opinion there was no significant risk of loss in the
event of nonperformance of the counterparties to these financial instruments. We
control our exposure to credit risk through credit approvals, credit limits and
monitoring procedures, and management believes that reserves for losses are
adequate. We do not have any significant exposure to any individual customer or
counterparty nor any major concentration of credit risk related to any financial
instruments.

EUROPEAN MONETARY UNION--EURO

Several member countries of the European Union have established fixed
conversion rates between their existing sovereign currencies and the Euro, and
have adopted the Euro as their new single legal currency. The legacy currencies
will remain legal tender in the participating countries for a transition period
between January 1, 1999 and January 1, 2002. During the transition period,
cash-less payments can be made in the Euro. Between January 1, 2002 and February
28, 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 our company. This team is evaluating Euro-related
issues affecting us that include our pricing and marketing strategies,
conversion of information technology systems and existing contracts. The Euro
conversion may affect cross-border competition by creating cross-border price
transparency.

We 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 our current assessment, we do not
expect that the Euro conversion will have a material adverse effect on our
business or financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
us to recognize all derivative instruments at fair value on our combined balance
sheets. Subsequent to the issuance of SFAS 133, the FASB has received many
requests to clarify certain issues causing difficulties in implementation. In
June 2000, the FASB issued SFAS 138, which responds to those requests by
amending certain provisions of SFAS 133. These amendments include allowing
foreign currency denominated assets and liabilities to qualify for hedge
accounting, permitting the offsetting of selected inter-entity foreign currency
exposures that reduce the need for third party derivatives and redefining
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the nature of interest rate risk to avoid sources of ineffectiveness. We adopted
SFAS 133 and the corresponding amendments under SFAS 138 as of October 1, 2000.
The impact of adopting SFAS 133, as amended by SFAS 138, was not significant.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements and requires adoption no later than the
fourth quarter of our fiscal 2001. We are currently evaluating the impact of SAB
101 and its related interpretations to determine the effect it will have on our
combined financial position and results of operations. We are considering
adopting SAB 101 in the first fiscal quarter of 2001.

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BUSINESS

OVERVIEW

OPTOELECTRONIC COMPONENTS

Our optoelectronic components transmit, process, change, amplify and
receive light that carries data and voice traffic over optical networks. Optical
networks transmit information as pulses of light, or optical signals, through
optical fibers, which are hair-thin glass strands. An optical network utilizes a
number of interdependent active optoelectronic and passive optical components.
An active component is a device that has both optical and electronic properties.
A passive component is a device that functions only in the optical domain. We
primarily offer active optoelectronic components. In addition to our broad
portfolio of active optoelectronic components, we have started to sell passive
optical filters and silicon waveguides. Passive optical filters are devices used
in conjunction with active optoelectronic components in products such as
amplifiers. Silicon waveguides are passive optical components that manipulate
optical signals to perform a variety of functions.

We sell our optoelectronic components for use in submarine and terrestrial
optical networks. Submarine networks transmit optical signals undersea, usually
at high speeds and over long distances. Terrestrial networks include high-speed
transport networks, which transmit optical signals at high speeds over long
distances, and metropolitan networks, which transmit optical signals between
central offices of network services providers or between enterprises and central
offices. Terrestrial networks also include cable television networks, which
transmit optical signals between cable system operators and homes, and data
communication networks, which transmit optical signals within a local area
network. A local area network links data devices such as servers, computers and
printers in the same localized area to facilitate Internet access and to share
files and programs.

In fiscal 2000, we derived $1.2 billion, or 25.5% of our revenue, and
incurred an operating loss of $127 million, from sales of our optoelectronic
components.

INTEGRATED CIRCUITS

We offer integrated circuits for use in a broad range of communications
networks and computer equipment. Integrated circuits, or chips, are made using
semiconductor wafers imprinted with a network of electronic components. They are
designed to perform various functions such as processing electronic signals,
controlling electronic system functions and processing and storing data. We also
sell wireless local area networking products, which facilitate the transmission
of data and voice signals within a localized area without cables or wires.

We sell our optoelectronic components and integrated circuit products
globally to manufacturers of communications and computer equipment. We primarily
sell through our direct sales force. We generally target as customers the
leaders in the market segments in which our products are used, as well as the
companies we believe will be future leaders in these segments. Our three largest
end customers in fiscal 2000, based on revenue, were Lucent, Nortel Networks
Corp. and Cisco Systems, Inc. These customers purchased both optoelectronic
components and integrated circuits from us. Lucent is our largest customer with
purchases in fiscal 1998, 1999 and 2000 representing 22.3%, 25.7% and 21.3%,
respectively, of our revenue. As of September 30, 2000, we employed
approximately 16,500 people worldwide and had sales, research and development or
manufacturing sites in 22 countries, including the United States.

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We have historically operated as part of Lucent. We were incorporated under
the laws of the State of Delaware on August 1, 2000, as a wholly owned
subsidiary of Lucent. After completion of this offering Lucent will own
approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option in
full, in each case assuming that the exchange described in "Underwriters--The
Exchange" occurs. If the exchange does not occur, after the completion of this
offering Lucent will own approximately % of the outstanding shares of our
common stock or approximately % if the underwriters exercise their
over-allotment option in full. Lucent has announced its intention to distribute
all of the shares of our common stock that it then owns to its stockholders in a
tax-free spin off by the end of Lucent's current fiscal year, which will occur
on September 30, 2001. Lucent was formed from the systems and technology units
that were formerly a part of AT&T Corp., with the research and development
capabilities of Bell Laboratories. On September 30, 1996, Lucent became
independent of AT&T when AT&T distributed all its Lucent shares to its
stockholders in a tax-free spin off.

We will have no material assets or activities as a separate corporate
entity until the contribution to us by Lucent, prior to the completion of this
offering, of the businesses described in this prospectus. Prior to the
completion of this offering, we will enter into several agreements with Lucent
in connection with, among other things, intellectual property, interim services
and product supply. Please see "Arrangements Between Lucent and Our Company" for
a more detailed discussion of these agreements.

INDUSTRY OPPORTUNITY

Within the communications semiconductor industry, we participate in the
optoelectronic component and integrated circuit market segments. Dataquest Inc.,
a unit of Gartner Group, Inc., an independent market research company, estimated
in 2000 that the worldwide market for communications semiconductors, which
includes both active optoelectronic components and integrated circuits, will
grow from approximately $43 billion in 1999 to approximately $81 billion in
2003, a compounded annual growth rate of 17.3%. Various segments of the
communications semiconductor industry, however, are expected to grow at
different rates. For example, we expect the compounded annual growth rates of
the optical components market segment and the network communications and
wireless local area networking product areas from 1999 to 2003 to each exceed
17.3%. Because Dataquest does not separately list in their report these growth
rates, or include passive optical components in its estimates, we rely on other
reports for these growth rates. Ryan, Hankin and Kent, Inc., an independent
market research company, estimated in 2000 that the worldwide market for optical
components used in communications networks, which includes both active and
passive components, will grow from approximately $6.6 billion in 1999 to
approximately $23 billion in 2003, a compounded annual growth rate of 36.6%.
Based on various industry reports, we estimate that sales of integrated circuits
used in network communications equipment will grow from approximately $7.8
billion in 1999 to approximately $19.8 billion in 2003, a compounded annual
growth rate of 26.0%. Additionally, based on various industry reports, we
estimate that sales of wireless local area networking equipment will grow from
approximately $794 million in 1999 to approximately $2.4 billion in 2003, a
compounded annual growth rate of 31.4%.

Some of our other product areas are expected to grow more slowly. Dataquest
estimates that sales of integrated circuits used in modems, line cards, cellular
base stations and mobile telephones will experience, between 1999 and 2003,
compounded annual growth rates of -8.6%, 5.8%, 14.5% and 21.5%, respectively. A
modem is a device that facilitates the connection between computers and
communications networks. A line card converts voice signals for transmission
through communications networks. A cellular base station is a key component of a
wireless network that receives and transmits voice and data signals over radio
waves and connects those signals to the rest of a communications network.

There has been a significant increase in the volume of data and voice
traffic throughout communications networks in the past several years. The
proliferation of activities such as Internet browsing, electronic commerce,
which is the buying and selling of goods and services over the Internet and
other electronic media, and video conferencing has led to this increase.
Furthermore, the increasing number of employees capable of accessing information
and communicating and working from home or other remote locations has also
significantly added to the volume of data and voice traffic across
communications networks. With this increase in traffic, network services
providers have focused on improving the transmission capacity, or bandwidth, and
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the performance of their networks. This improvement in networks has attracted
additional users and new ways to exchange data. It also has resulted in new uses
for the exchanged data and an even greater demand for bandwidth. We expect that
continued improvements in communications networks and the further development of
new technologies through which people can access networks will result in
additional increases in data and voice traffic. Ryan, Hankin and Kent forecasted
in 2000 that the volume of data transmitted over the Internet, which constitutes
a rapidly rising portion of the data traffic transmitted through communications
networks, will increase at a compounded annual growth rate of 156% between 1999
and 2003.

To meet the demand for more bandwidth and better network performance,
optical networks, which offer the highest data transmission rate and reliability
of any type of network, are increasingly replacing traditional wireline
networks. Concurrent with the continuing development of optical networks, the
increasing use of wireless devices such as mobile telephones, pagers and
personal digital assistants, also has increased the demand for the expansion of
wireless networks. We believe that as the demand for bandwidth and network
performance increases, the market opportunity for suppliers of optoelectronic
components and integrated circuits will grow. Optoelectronic components are
critical building blocks needed to design and install an optical network.
Integrated circuits are key elements needed to operate and manage data and voice
traffic through optical, wireless and wireline networks.

The demand for more bandwidth and better network performance has resulted
in intense competition in the market for communications equipment. This demand
has caused the complexity and performance requirements of networks and their
underlying communications equipment to increase. Manufacturers of communications
equipment often do not have the resources, expertise or time to invest heavily
in engineering and design of communications equipment or developing supporting
software. They increasingly look to component suppliers to help reduce the cost
and time required to develop their systems. Instead of maintaining a different
supplier for each of the parts they purchase, we believe manufacturers of
communications equipment increasingly prefer that fewer suppliers provide them
with broader, more integrated solutions. Integrated solutions are products that
are engineered to work together to more efficiently carry out complex
communications functions. We believe that manufacturers of communications
equipment will increasingly purchase integrated solutions to improve the
performance and cost of their equipment as well as help them deliver their
products to market more quickly.

COMPETITIVE STRENGTHS

We are the world leader in sales of semiconductors that are used in various
segments of today's communications networks. We describe our key competitive
advantages below.

INTEGRATED SOLUTIONS

As networks and network communications equipment become more complex, we
believe that manufacturers of communications and computer equipment will
increasingly value our ability to provide integrated solutions for both
optoelectronic components and integrated circuits, as well as our growing
capabilities in combining optoelectronic components and integrated circuits into
single products. We offer manufacturers of communications equipment a broad
portfolio of optoelectronic components that are designed to operate together to
create integrated solutions. We also combine multiple devices into single
products, often referred to as modules, to deliver to customers functions
traditionally performed by a number of separate optoelectronic devices. We also
offer integrated product offerings that combine integrated circuits and
supporting software as part of a complete solution. In addition, we have
advanced system-on-a-chip capabilities that allow us to integrate, on a single
integrated circuit, multiple functions that historically required multiple
integrated circuits. We have started to sell our first product that combines our
integrated circuit and optoelectronic capabilities into a single module, a
transponder, which is a device used in an optical network that transmits and
receives optical signals. We believe that our integrated solutions bring key
benefits to manufacturers of communications and computer equipment, such as
improved product performance, reduced product size and cost and decreased
time-to-market. We also believe that our customers benefit by having the ability
to purchase a broad array of products and solutions from a single supplier. We
will seek to develop more

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integrated products and solutions that capitalize on our experience in both
optoelectronic components and integrated circuits.

PRODUCT AND TECHNOLOGY LEADERSHIP

We offer many products and solutions that use sophisticated technology to
manage complex communications challenges faced by our customers. According to a
2000 Dataquest report, we were the number one supplier, based on revenue, of
communications semiconductors in 1999, which includes both active optoelectronic
components and integrated circuits.

We believe our leadership position is based on our strengths in combining
our extensive design capabilities, systems knowledge and valuable intellectual
property into leading products. We invest heavily in research and development,
spending $827 million in fiscal 2000. Many of our products use technology and
manufacturing processes derived from innovations developed by Lucent's Bell
Laboratories, one of the world's leading research and development institutions.
Approximately 275 research engineers, who previously performed basic research at
Bell Laboratories, will be transferred to us as part of our separation from
Lucent. These engineers will complement approximately 2,800 development
engineers and scientists, also previously part of Bell Laboratories, who perform
their work in support of our product and technology groups. Approximately 80% of
our 275 research engineers have Ph.D.'s, and many of our development engineers
and scientists also have advanced degrees. We also will receive an extensive
intellectual property portfolio from Bell Laboratories as part of our separation
from Lucent. Further, our strong design and development relationships with
market- and technology-leading customers give us practical insights into
customer requirements to help deliver the products our customers need.

ADVANCED MANUFACTURING TECHNOLOGY AND PROCESSES

Our integrated circuit manufacturing facilities are supported by
sophisticated logistics and planning systems and advanced manufacturing
practices, which we believe, based on customer feedback and various industry
reports, allow us to manufacture and deliver our products to customers more
quickly and reliably than most of our competitors. We believe this speed and
flexibility give our customers significantly more control over their own
manufacturing processes, which is a key reason for them to choose our products.
We are using this experience to implement similar advanced logistics and
planning systems for the manufacture of our optoelectronic components. We have
invested more than $100 million over the last three fiscal years for logistics
and planning systems. We also have invested over $2 billion in capital purchases
and leases over the last three fiscal years primarily in support of new
manufacturing capacity, automation and productivity improvements. We have
automated many of the processes used to manufacture our optoelectronic
components, which allows us to respond more quickly to customer demands. We
believe we lead the optoelectronic component market segment in achieving
efficiencies through high-volume manufacturing automation.

CLOSE RELATIONSHIPS WITH CUSTOMERS

We have established close design, development and support relationships
with our customers. We believe these close relationships allow us to better
understand our customers' specific needs early in the development process and to
deliver more responsive solutions and support. By becoming involved early in our
customers' product development cycles, we often have the opportunity to
incorporate our designs and products into a customer's product or system. This
allows us to maintain long-term customer relationships. Five of our ten largest
customers in fiscal 2000 were also among our ten largest customers in fiscal
1997. These long-term relationships also help us develop valuable intellectual
property to add to our portfolio and improve our design capabilities and future
products. In fiscal 2000 we received 26 supplier awards from our customers,
which we believe reflect the significant value that we bring to our customers'
businesses.

STRATEGY

We intend to maintain and enhance our position as the leading global
provider of communications semiconductors. To accomplish this goal, we are
pursuing the major strategies described below.

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FOCUS ON HIGH GROWTH OPPORTUNITIES WITHIN THE COMMUNICATIONS SEMICONDUCTOR
INDUSTRY

We believe that our target product areas within the communications
semiconductor industry will continue to provide us with significant growth
opportunities as a result of the demand for faster and more complex
communications products and applications. We are focusing resources on optical
components and integrated circuits for network communications equipment and
wireless local area networking products because of the high growth we believe
these product areas will experience in the future.

Optical Components

We continue to enhance the speed and performance of our existing
optoelectronic products and introduce new products. We recently introduced
transponders, which are our first combined optoelectronic and integrated circuit
products, silicon waveguides and micro electro-mechanical systems, or MEMS,
which are optical products that manipulate, switch and route an optical signal
without converting it into electronic form. According to Ryan, Hankin and Kent,
the worldwide market for optical components used in communications networks will
grow from approximately $6.6 billion in 1999 to approximately $23 billion in
2003, a compounded annual growth rate of 36.6%.

Integrated Circuits for Network Communications Equipment

As communications networks become more complex, we believe there will be an
increased demand for advanced integrated circuit solutions that switch, route
and process communications signals within high-speed networks. We offer network
communications products, and are in the process of further developing and
enhancing products, that allow information to be transported through the entire
communications network. Based on various industry reports, we estimate that
sales of integrated circuits used in network communications equipment will grow
from approximately $7.8 billion in 1999 to approximately $19.8 billion in 2003,
a compounded annual growth rate of 26.0%.

Wireless Local Area Networking

There is an increasing demand for wireless connections to communications
networks within a localized area. We have started to sell our ORiNOCO(TM)
products, which are complete solutions that create a wireless local area
network. These products facilitate mobile Internet connectivity to the end user
in an enterprise, home or public space, such as an airport lounge or hotel
lobby. Based on various industry reports, we estimate that sales of wireless
local area networking equipment will grow from approximately $794 million in
1999 to approximately $2.4 billion in 2003, a compounded annual growth rate of
31.4%.

We will continue to identify opportunities to use our technology strengths
and extensive experience in creating integrated solutions for our customers in
new growth segments within the communications semiconductor industry.

MAINTAIN PRODUCT AND TECHNOLOGY LEADERSHIP

We intend to build on our product and technology leadership by continuing
to make significant investments in research and development and continuing to
work closely with our customers. We expect to invest $1.2 billion in research
and development in fiscal 2001, including our financial commitments as part of
our strategic technology relationships. This amount represents an increase of
45% compared to fiscal 2000. We also plan to focus our attention on the
recruitment, retention and development of engineers and other technical
personnel. We intend to improve the utilization of our existing technology by
drawing on our extensive portfolio of intellectual property and our design
methods to develop the sophisticated products and solutions demanded by our
customers. In addition, we will continue to develop strategic relationships with
other companies to improve our manufacturing processes and to pursue new
technologies. For example, we recently entered into an agreement with Chartered
Semiconductor Manufacturing Ltd. to jointly develop manufacturing technologies
for future advancements in integrated circuits targeted at high-growth
communications product areas. Finally, we will continue to build on our close
relationships with our customers, which we

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believe gives us valuable insights into the issues and challenges that will
shape the demand for new technologies and practices.

EXPAND EXISTING AND DEVELOP NEW CUSTOMER RELATIONSHIPS

We will seek to capitalize on our status as a stand-alone company to
increase our sales to existing customers and develop new customers. Because many
of our existing customers compete with Lucent, we believe they are reluctant to
purchase some components from one of Lucent's divisions. After our separation
from Lucent, we believe our existing and potential customers will be more
willing to purchase products from us. Thus, we plan to expand existing
relationships with customers who have historically been reluctant to have us
supply some portion of their communications component needs. Also, we will seek
to develop new relationships with potential customers who may have been
reluctant to buy products from us at all because of our relationship with
Lucent.

DEVELOP COMBINED OPTOELECTRONIC AND INTEGRATED CIRCUIT SOLUTIONS

We believe that the rapid pace of technological innovation, shortened
product life cycles and increasing complexity of networks and communications
components will lead customers to demand combined optoelectronic and integrated
circuit solutions in order to reduce their time and expense in developing new
communications equipment. We believe that we are well-positioned to capitalize
on this trend because we have significant research and development capabilities
and market experience in both areas. We have started to sell transponders, our
first product that combines both optoelectronic components and integrated
circuits into a single product offering. We will continue to devote appropriate
resources to this market opportunity. We believe that as networks and
communications equipment become more complex and time-to-market becomes more
important, our customers will also benefit from the ability to purchase
optoelectronic components and integrated circuits from a single supplier. As a
single supplier, we will be able to design product solutions that will enhance
compatibility, improve performance, reduce size and lower costs.

IMPROVE OPERATIONAL EFFICIENCIES

We will continue to manage our portfolio of manufacturing resources,
seeking to improve manufacturing asset utilization, order fulfillment and
customer responsiveness. We intend to continue our capital investments in
expanding our integrated circuit and automated optoelectronics manufacturing
capacity and other advanced manufacturing processes. We will seek to introduce
and refine processes to build on the speed and flexibility we already offer our
customers. For example, we are developing advanced internal systems which will
allow us to start manufacturing a customer's specific order for some integrated
circuits within hours after receipt. For both optoelectronic components and
integrated circuits, we intend to explore opportunities to increase our
manufacturing capabilities through joint ventures or by developing strategic
relationships with third parties. We also will seek to improve our cost
structure across our existing manufacturing capacity. For example, we have
started to manufacture some of our silicon-wafer-based optoelectronic components
in our integrated circuit facilities to capture economies of scale. This also
allows us to apply our extensive experience in integrated circuit manufacturing
to the high-volume manufacturing of optoelectronic components. In addition, we
plan to continue to reduce manufacturing costs by increasing the size of wafers
used in our production of integrated circuits and optoelectronic components to
improve economies of scale. We continue to seek long-term supply agreements for
some parts and work closely with suppliers to improve the availability and
prices of purchased parts for our optoelectronic products.

SELECTIVELY PURSUE STRATEGIC ACQUISITIONS AND INVESTMENTS

We believe that strategic acquisitions offer attractive opportunities to
obtain new technologies that will help us improve our offering of integrated
solutions and our operational efficiencies. In particular, we seek to acquire
companies that provide us with design capabilities, processes, technologies and
products. For example, in April 2000, we acquired Ortel Corporation, a leading
developer of optoelectronic components for cable television networks. We now
offer these components as part of our integrated optoelectronics solutions. In
addition, in April 2000 we acquired Agere, Inc., a developer of programmable
network processor integrated
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circuits. Programmable network processors control how data is sent over a
network and are now included in our network communications solutions. In June
2000, we acquired Herrmann Technology, Inc., a developer of passive filters for
optoelectronic components, which we now offer to our customers. While we have no
current commitments with respect to any future acquisitions, we frequently
evaluate strategic opportunities and intend to actively pursue acquisitions and
investments in complementary businesses. We have entered into joint ventures for
manufacturing and may pursue similar opportunities in the future to achieve
operational efficiencies.

PRODUCTS

We offer a broad array of optoelectronic components and integrated circuits
to manufacturers of communications and computer equipment. Our products range
from single integrated circuits to integrated solutions that include
combinations of integrated circuits, optoelectronic components and supporting
software. We offer both standard products and customized solutions to our
customers. Our customized solutions range from slight modifications of our
standard products to solutions that contain unique combinations of our
intellectual property and our customers' intellectual property.

OPTOELECTRONIC COMPONENTS

We are a leader in the sale of active optoelectronic components to
manufacturers of communications equipment. Optoelectronic components are devices
that convert electronic signals into light, or optical signals, to be
transmitted within optical networks, as well as the devices that transmit,
process, change, amplify and receive the optical signals within these networks.
Optical networks transmit information as pulses of light through hair-thin glass
strands, which are called optical fibers. In fiscal 2000, we derived $1.2
billion or 25.5% of our revenue from sales of our optoelectronic components.

We believe the primary considerations for customers selecting
optoelectronic components are:

-- manufacturing capacity, as measured by ability to satisfy orders;

-- performance, as measured by speed, power requirements and
reliability;

-- price;

-- breadth of product line and ability to offer integrated solutions;

-- quality and automation of manufacturing processes; and

-- compatibility of products with other products and communications
standards used in communications networks.

We offer manufacturers of communications equipment a broad portfolio of
optoelectronic components that are designed to operate together to create
integrated solutions. We offer optoelectronic components needed for optical
networks on land and under sea. We continue to use our extensive research and
development capabilities to develop faster and smaller products for our
customers. We believe we were among the first component manufacturers to offer
10 gigabits per second products. In addition, we have 40 gigabits per second
components which are currently being sampled by some of our customers. A gigabit
is a unit of measurement for data and is equal to roughly one billion bits. We
also offer a broad range of wavelength management products that increase the
amount of information transmitted over a single fiber by sending

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information through multiple wavelengths. For example, we offer tunable lasers
that can be tuned to a specific wavelength, among 20 frequencies, after
production. The ability to tune a laser to operate in a desired communications
channel is valuable to our customers. Our customers often cannot forecast the
demand for specific wavelength requirements of their lasers until they determine
the mix of their own customers' actual orders.

Our optoelectronic products are engineered to work together in an optical
network. We sell integrated solutions that combine multiple components into a
single product. We believe our integrated solutions allow our customers to
reduce the size and costs of their optical network equipment and reduce their
time to develop new products. We also believe these solutions allow our
customers to rely on a smaller number of suppliers and improve the performance
of their products.

We have described below the network applications for our products within
the optoelectronic components market segment and our key products.

Network Applications

We sell optoelectronic components for the following five network
applications:

-- submarine;

-- high-speed transport;

-- metropolitan;

-- cable television; and

-- data communication.

Submarine. We offer optoelectronic components for submarine, or undersea,
communications networks. We offer a variety of highly reliable, ultrastable
components designed to withstand the rigors of long-distance undersea
transmission. Given the difficulties associated with repairing and replacing
undersea networks, reliability and durability are two of the most important
factors for manufacturers of equipment for undersea networks. We rigorously test
our submarine products to ensure the durability and reliability demanded by our
customers. Customers for our submarine products are manufacturers of undersea
communications equipment.

High-Speed Transport. We sell optoelectronic components that facilitate
the transport of optical signals over long distances and at high speeds. Our
products support transmissions of optical signals at speeds of 2.5 or 10
gigabits per second. We also have 40 gigabits per second modulators and
receivers that are currently being sampled by customers. Our high-speed
transport products can send multiple optical signals for distances up to 720
kilometers without amplification, and much further when used in conjunction with
optical amplifiers. These systems are often used to carry multiple streams of
optical signals over a single fiber. Customers for our high-speed transport
products are manufacturers of communications equipment who sell to network
services providers that operate long-distance communications networks.

Metropolitan. We sell optoelectronic components that are used in optical
networks in metropolitan areas to carry information between central offices of
network services providers or between large enterprises and central offices. The
information transmitted within these networks is carried for shorter distances,
generally 40 kilometers or less, and at lower speeds than those used in
high-speed transport network applications. We sell products designed for
metropolitan communications networks to manufacturers of communications
equipment, which sell to regional Bell operating companies, or RBOCs, and
competitive local exchange carriers, or CLECs.

Cable Television. We sell optoelectronic components that transmit optical
signals from cable system operators to and from the home. Over the past ten
years, cable system operators have upgraded their networks to add optical fiber
to their networks. The optical network is used as the communications path from
the originating point of the network's signal to connection points, or nodes.
From a node, the signal is passed on to cables which carry the signal to the
home. Our cable television optoelectronic components provide a high-speed return
path from the consumer's home to the cable system operator. This return path
allows cable
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system operators to offer Internet and telephone services, in direct competition
with network services providers. Customers for our cable television
optoelectronic components are manufacturers of cable television transmission
equipment.

Data Communication. We sell optoelectronic components that transmit
optical signals within a local area network. A local area network links data
devices such as servers, computers and printers in the same localized area to
facilitate Internet access and to share files and programs. Because early local
area networks had relatively limited performance requirements, they generally
used copper wire as the network medium.

Several factors have created the need for high-bandwidth capacity,
high-performance local area networking systems. These factors include:

-- the continuing expansion of local area networks;

-- the growing number of users accessing local area networks;

-- the increasing importance of data networking;

-- the increasing use of communications in the workplace and at home,
including access to the Internet and the gathering and distribution
of data; and

-- the need to accommodate higher bandwidth.

As bandwidth and transmission distance requirements of enterprises have
increased, it has become more practical to utilize the superior transmission
capabilities of optical networks to build high-speed local area networks. These
networks require transceivers to convert electronic signals into optical signals
and back into electronic signals at high speeds. Customers for our data
communication optoelectronic components are manufacturers of network equipment
for enterprises.

Key Products

We are a leader in the sale of active optoelectronic components. An optical
network utilizes a number of interdependent active optoelectronic and passive
optical components. An active component is a device that has both optical and
electronic properties. A passive component is a device that performs its
functions only in the optical domain. Generally, active components provide the
source, amplification power and modulation to optical networks. Passive
components are used to mix, filter, adjust, isolate and stabilize the optical
signals in optical networks. Some devices, such as optical amplifiers, combine
active and passive components into one product. We describe the functions of
active and passive components in an optical network in greater detail below the
table listing our key products.

We have started to broaden our product portfolio to include passive
components. With our acquisition in June 2000 of Herrmann Technology, we now
sell passive optical filters used in conjunction with active optoelectronic
components in products such as amplifiers. We also have, in various stages of
development, a number of silicon waveguides. Silicon waveguides are passive
optical components that manipulate optical signals to perform a variety of
functions. Some of these silicon waveguides are being sampled by one or more of
our customers and we have started to manufacture others in commercial
quantities.

We list in the table below our key optoelectronic components. The table
includes a brief discussion of some of the main characteristics and network
applications of the products. It also includes products that are being sampled
by one or more of our customers and are not yet being shipped in commercial
quantities.

In the table, "Gb/s" refers to gigabits per second and "Mb/s" refers to
megabits per second. A gigabit is a unit of measurement for data and is equal to
roughly one billion bits. A megabit is a unit of measurement for data and is
equal to roughly one million bits. "GHz" refers to gigahertz and is a measure of
the frequency of a signal, equivalent to one billion cycles per second. "NTSC"
means National Television Standards Committee and refers to the channel capacity
of the communication link for our cable television products.

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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION SPEED NETWORK APPLICATION
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LASERS
EML lasers - electroabsorptive modulated laser - 2.5/10 Gb/s - high-speed transport,
metropolitan
DML lasers - directly modulated laser - 2.5/10 Gb/s - high-speed transport,
- Our 10 Gb/s product is being metropolitan, cable
sampled by some customers but television
further design and manufacturing
process development is required
before it will be available for
sale in commercial quantities.
Uncooled lasers - lasers that are used in - 155 Mb/s to 10 Gb/s - metropolitan
applications where the temperature
of the device is not internally
stabilized
Source lasers - laser source for externally -- - high-speed transport
modulated transmissions
Pump lasers - provides power to our erbium -- - submarine, high-speed
doped fiber amplifiers transport, metropolitan
Analog DFB lasers - analog distributed feedback laser - up to 1 GHz - metropolitan, cable
- directly modulated lasers - 110 NTSC channels television
----------------------------------------------------------------------------------------------------------------------------
MODULATORS
Lithium niobate - external modulator - 10/40 Gb/s - high-speed transport,
modulators - Lithium niobate is a material - Our 40 Gb/s product is being metropolitan
that is effective in modulating sampled by some customers but
light. further design and manufacturing
process development is required
before it will be available for
sale in commercial quantities.
Lithium niobate - modulates the polarization of - 10/40 Gb/s - high-speed transport
polarization transmission signals for ultra - Both our 10 Gb/s and 40 Gb/s
controllers long or very high speed systems products are being sampled by
customers and currently able to
manufacture commercial
quantities.
----------------------------------------------------------------------------------------------------------------------------
AMPLIFIERS
Erbium doped fiber - optically amplifies signals using -- - high-speed transport,
amplifiers erbium doped fiber metropolitan
----------------------------------------------------------------------------------------------------------------------------
TRANSMITTERS
Cooled laser - contains a laser module and the - 2.5/10 Gb/s - high-speed transport,
transmitters circuitry necessary to control - 110 NTSC channels metropolitan, cable
and modulate for cable television - Our 10 Gb/s product is being television
systems or dense wavelength sampled by some customers but
division multiplexing, or DWDM, further design and manufacturing
systems which are systems that process development is required
transmit two or more signals over before it will be available for
a single optical fiber sale in commercial quantities.
Uncooled laser - contains an uncooled laser - 2.5/10 Gb/s - metropolitan
transmitters - Our 10 Gb/s product is being
sampled by some customers but
further design and manufacturing
process development is required
before it will be available for
sale in commercial quantities.
Tunable laser - various transmitters, which each - 2.5 Gb/s - high-speed transport
transmitters use a tunable laser as the source
with various abilities to manage
wavelength
- can be tuned to one of 10
adjacent channels for DWDM systems
- most recently introduced product
is a CW, or continuous wave,
tunable source laser module that
can be tuned to one of 20
adjacent channels for DWDM
systems
- Our CW tunable source laser
module is being sampled by some
customers but further design and
manufacturing process development
is required before it will be
available for sale in commercial
quantities.
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION SPEED NETWORK APPLICATION
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECEIVERS
PIN receivers - receives optical signals with a - 2.5/10/40 Gb/s - high-speed transport,
positive intrinsic negative - 110 NTSC channels metropolitan, cable
detector and converts it to an - Our 40 Gb/s product is being television
electronic signal sampled by some customers but
further design and manufacturing
process development is required
before it will be available for
sale in commercial quantities.
APD receivers - receives optical signals with an - 2.5/10 Gb/s - high-speed transport,
avalanche photo detector and - Our 10 Gb/s product is being metropolitan
converts it to an electronic sampled by some customers but
signal further design and manufacturing
process development is required
before it will be available for
sale in commercial quantities.
----------------------------------------------------------------------------------------------------------------------------
TRANSCEIVERS
Transceivers - a module that contains both an - 155 Mb/s to 2.5 Gb/s - metropolitan, cable
optical transmitter and receiver - 110 NTSC channels television, data
communication
----------------------------------------------------------------------------------------------------------------------------
TRANSPONDERS
Transponders - integrated modules that contain - 2.5/10 Gb/s - high-speed transport,
both a transmitter and receiver - Our 10 Gb/s product is being metropolitan
plus a variety of integrated sampled by some customers but
circuits such as multiplexors and further design and manufacturing
demultiplexors process development is required
before it will be available for
sale in commercial quantities.
----------------------------------------------------------------------------------------------------------------------------
SILICON WAVEGUIDES
Optical - can optically combine up to 40 -- - high-speed transport
multiplexors optical wavelengths into a single
fiber
- being sampled by customers and
currently able to manufacture
commercial quantities
Optical - can optically split up to 40 -- - high-speed transport
demultiplexors optical wavelengths from a single
fiber
- being sampled by customers and
currently able to manufacture
commercial quantities
----------------------------------------------------------------------------------------------------------------------------
MEMS DEVICES
Dynamic gain - can be tuned to optimize the -- - high-speed transport,
equalizers performance of DWDM systems metropolitan
- being sampled by some customers
but further design and
manufacturing process development
is required before it will be
available for sale in commercial
quantities
Optical cross - an optical switch that is capable -- - high-speed transport,
connects of switching a number of optical metropolitan
signals without converting the
signals into electronic form
- being sampled by some customers
but further design and
manufacturing process development
is required before it will be
available for sale in commercial
quantities
----------------------------------------------------------------------------------------------------------------------------
PASSIVE OPTICAL FILTERS
Thin film optical - used in a variety of optical -- - submarine, high-speed
filters communications equipment to transport, metropolitan,
condition optical signals cable television, data
communication
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

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Key Product Descriptions

Lasers. A laser generates the light transmitted over an optical network.
Higher power lasers can transmit light greater distances than lower power
lasers. A single laser is required for each channel in a dense wavelength
division multiplexing, or DWDM, system, which is a system that transmits two or
more signals over a single optical fiber. Communications equipment manufacturers
use different types of lasers depending on the needs of the specific network
application.

Modulators. A modulator is an optoelectronic component which turns an
optical signal on and off to encode and send the information through an optical
network. Modulation can be achieved directly by turning a laser on and off or by
external modulators that transmit or interrupt a continuous optical signal to
achieve the same on and off effect. Long-distance and submarine networks
typically use high power lasers and external modulators, while short-distance
networks use direct modulation.

Amplifiers. During transmission, an optical signal must be periodically
renewed because it loses its strength as it travels within the network. Optical
amplifiers increase the strength of an optical signal without converting it back
into an electronic signal. Optical amplifiers represent a major cost efficiency,
as network services providers can reduce the number of costly
optical-to-electronic-to-optical conversions.

Transmitters, Receivers and Transceivers. Other optoelectronic components
are used to convert, transmit and receive optical signals within an optical
network. Transmitters encode electronic information into optical form for
transmission. Transmitters are often packaged with a laser, a modulator, if
external, and a wavelocker into a transmit module. Wavelockers ensure that the
laser is precisely tuned to the correct wavelength. A receiver is a device that
converts optical signals back into electronic form on the receiving end of a
communication system. Transmitters and receivers are also sometimes combined
into one module, which is called a transceiver.

Transponders. Our transponders offer both optoelectronic components and
integrated circuits in one combined unit, or module. This module combines a
transceiver with a multiplexor/demultiplexor into a unified product. A
multiplexor is an electronic device that allows two or more signals to be
combined for transmission over one communications circuit. A demultiplexor
separates two or more signals previously combined by compatible multiplexing
equipment. Our transponders are capable of multiplexing 16 electronic signals
into one optical signal. Our transponders are also capable of demultiplexing one
optical signal into 16 electronic signals. We have recently begun shipping our
2.5 gigabits per second transponders in commercial quantities to our customers.
We expect that future versions of our transponder products will support faster
speeds and switching capabilities.

Silicon Waveguides. Silicon waveguides are passive components that
manipulate optical signals to perform a variety of functions. We have started to
offer optical multiplexors and demultiplexors, which are our first silicon
waveguide products. We believe our experience in silicon-based integrated
circuit manufacturing processes is an important factor in our ability to
manufacture these products. These silicon-based processes will permit production
of these products in high volumes. In addition, silicon-based technology allows
active components such as transmitters and receivers to be integrated with
silicon waveguides, permitting reductions in size and cost of integrated
modules. Some of these silicon waveguides are being sampled by one or more of
our customers and others have recently become available in commercial
quantities.

MEMS Devices. Optical micro electro-mechanical systems, or MEMS, are small
mechanical products that perform a variety of optical functions which include
optical switching, dynamic gain equalization and add-drop multiplexing. We
recently introduced optical cross connects and dynamic gain equalizers, which
are our first MEMS devices. An optical cross connect is an optical switching
device that maintains the optical signal as light from input to output, without
converting it into electronic form. A dynamic gain equalizer is an optical
device that optimizes transmissions in an optical network by equalizing the
amplitude of specific wavelengths of light within the optical fiber. These
products are being sampled by some customers but further design and
manufacturing process development is required before they will be available for
sale in commercial quantities. We are working to develop future MEMS devices
with more extensive capabilities. We have entered into a joint development
agreement with Lucent for this technology, as described more fully under
"--Strategic Relationships."

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Thin Film Optical Filters. Thin film optical filters are designed to allow
only selected wavelengths of light to pass through them. Our filters are
manufactured by depositing many thin layers on a base of specially made glass.
Thin film optical filters are used in dense wavelength division multiplexing, or
DWDM, systems, which are systems that transmit two or more signals over a single
fiber. They can also be used to correct the amplitude of the signal coming from
an optical amplifier. Our thin film optical filters are generally sold to
optical component manufacturers which package and combine them with active
optoelectronic components.

INTEGRATED CIRCUITS

We sell integrated circuits for a wide variety of communications
applications. We often develop an integrated solution for a specific
communications function, including one or more integrated circuits, supporting
software and the software development tools used by our customers to incorporate
our solution into their final products. In fiscal 2000, we derived $3.5 billion
or 74.5% of our revenue from sales of our integrated circuits products and our
wireless local area networking equipment.

Our integrated solutions combine a number of functions into a single unit.
Because of this integration, we have the ability to deliver products that
interact more effectively and enhance performance. This allows our customers to
meet the requirements of their end customers faster and more cost effectively
than if they purchase a number of separate integrated circuits.

We sell integrated circuits in primarily four product groups:

-- network communications products;

-- client access and network connectivity products;

-- wireless products; and

-- storage and analog products.

We also have a product group that sells wireless local area networking
equipment.

We have dedicated engineering groups that develop core manufacturing
technology, common design methodology and commonly used integrated circuit
design elements for use across our integrated circuit product groups. By using
common core technologies, we simplify our design methods, create reusable
intellectual property and achieve manufacturing efficiencies.

We believe the primary considerations for customers selecting integrated
circuit products are:

-- design capabilities, including the ability to deliver integrated
solutions;

-- performance, as measured by speed, power requirements and
reliability;

-- feature set;

-- price;

-- flexibility, which refers to the ability to design products using the
manufacturer's own intellectual property, the manufacturer's
customers' intellectual property or a combination of both; and

-- compatibility with other products and communications standards used
in communications networks.

We focus our product development and sales efforts to address the customer
considerations listed above. The relative importance of these factors may vary
depending on the product group or the particular customer's requirements. For
example, price may be one of the most important considerations for a customer
selecting many of our client access and network connectivity integrated circuits
because these integrated circuits are used in price sensitive products sold to
consumers. On the other hand, a customer selecting our network communications
integrated circuits typically will be more focused on design and performance
rather than price because these customers often have specialized demands that
require customized solutions.

We have described below the five primary product groups of our Integrated
Circuits segment.

Network Communications Products

We offer integrated circuits that facilitate the transmission and switching
of data and voice signals within communications networks. We supply networking
integrated circuits that allow information to be transported

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through the entire communications network. Our integrated circuits perform the
required processing of the signals and transmit the signals to deliver
information throughout the network. Our integrated circuits are key building
blocks in both optical and wireline communications networks. We sell our network
communications products worldwide to manufacturers of communications equipment.
The majority of our revenue in this product group is derived from manufacturing
customized integrated circuits utilizing our experience in the network
communications product areas described below. Networks often require
sophisticated integrated circuits that are developed and manufactured for a
specific application. These integrated circuits are designed to perform
operations at high speeds without having to interpret unnecessary instructions.
This results in improvements in operating speeds and reductions in system size,
power consumption and total system cost. We believe that our extensive knowledge
of how communications networks operate and of the communications equipment used
in these networks allows us to develop products to meet the specialized and
often demanding requests of our customers.

We sell a complete integrated circuit solution that supports speeds up to
2.5 gigabits per second. This solution consists of physical layer devices,
integrated circuits supporting SONET/SDH communication standards, network
processing devices, multi-service switching devices and broadband access
devices, each of which is described below. We have, in various stages of
development, 10 gigabits per second products that have either recently been
introduced in commercial quantities or are currently being sampled by one or
more customers. We expect to offer a complete 10 gigabits per second solution in
the next few months.

We design many of our network communications integrated circuit products to
integrate several functions on one chip. This approach is designed to allow our
customers to reduce the size and material costs of their products, reduce the
number of their component suppliers and improve the performance of their
products. We also offer integrated circuits with supporting software as part of
a complete integrated circuit product solution. All of our products discussed
below, except for physical layer devices, have a significant software component.
Our products also are highly programmable. Programmability refers to the
capacity of equipment functions to be modified by accepting a new set of
software instructions, which affords our customers more flexibility when
deploying our products in their networks.

Physical Layer Devices. We sell integrated circuits for high-speed
physical layer devices. High-speed physical layer devices are key elements in
the conversion between optical signals and electronic signals, as required by
communications networks. High-speed physical layer devices accept the output
from an optical receiver and convert it into a digital data signal that can be
used in communications switching and processing functions. We offer a set of
five integrated circuit components for physical layer devices. We expect to
introduce a sixth integrated circuit component, a forward error correction
device, to complete our product offering for 10 gigabits per second
transmission. A forward error correction device increases the performance of
optical networks by detecting and correcting errors in the data that is being
transmitted. We offer our customers physical layer device components either
separately or together with optoelectronic components. In particular, we sell a
transponder which combines our physical layer device components together with
our optoelectronic components in a single product.

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

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Multi-Service Switching Devices. We sell integrated circuits for use in
multi-service switching devices. Switching devices guide data to different local
area networks and wide area networks based on the intended destination.
Multi-service switching devices support the transmission of voice and video
signals as well as data. We sell switch fabrics and network processors to
communications equipment manufacturers. A switch fabric directs the data within
a switching device. A network processor is a component that controls how data is
sent over a network or over a switch fabric such that the data retains its
quality of service without interfering with other data traffic. We also offer
supporting software with our switching products. In addition, our customers
sometimes add their own supporting software to switch fabrics and network
processors that they purchase from us to produce complete switching equipment.

We currently offer switching products for asynchronous transfer mode, or
ATM. We are developing switching products for the Internet protocol standard and
protocol independent switching products which support different standards
simultaneously. These products are being sampled by some customers but further
design work is required before they will be available for sale in commercial
quantities. Asynchronous transfer mode and Internet protocol refer to different
procedures for the formatting and timing of data transmission between two pieces
of equipment. Our switching integrated solutions reduce the number of required
integrated circuits needed in a switching device.

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

Our products support data transport for T-carrier data transport in North
America. T-carrier is a digital transmission service from a common carrier. We
support similar services worldwide which are referred to as J-carrier in Japan
and E-carrier in Europe. Introduced by AT&T Corp. in 1983 as a voice service,
T-carrier use for data has grown steadily. T-carrier services such as T1 and T3
lines are widely used to create point-to-point networks for use by enterprises.
T1 and T3 lines refer to different levels of T-carrier service which transmit
data at 1.5 megabits per second and 44.7 megabits per second, respectively. A
megabit is a unit of measurement for data and is equal to one million bits.

Customized Solutions. The majority of our revenue from our network
communications products is derived from the manufacture of customized integrated
circuits for our customers. These integrated circuits incorporate our
intellectual property or combine our intellectual property with our customers'
intellectual property to create a customized solution for these customers. For
some customers, we design and manufacture the integrated circuit while the key
intellectual property belongs solely to our customers. We draw our intellectual
property from the various product areas described above in order to meet our
customers' specific requirements.

We also deliver customized solutions with our field-programmable gate
arrays, or FPGAs, or our field-programmable systems-on-a-chip, or FPSCs. Our
field-programmable gate array is a specialized processor of electronic signals
that can be modified by a customer for a number of functions after the
integrated circuit has been deployed in a network. Our field-programmable
system-on-a-chip incorporates several complex functions as well as a
field-programmable gate array on one integrated circuit. Our field-programmable
system-on-a-chip capability allows us to combine the benefits of
system-on-a-chip and programmability.

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

Client Access and Network Connectivity Products

We sell integrated circuits for use in products that allow users to access
communications networks through a variety of different methods. We offer our
customers solutions that include integrated circuits and software.

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

Our primary client access and network connectivity products and our newly
introduced products are described below.

Modem Products. We sell integrated circuits for use in analog modems,
which is our traditional modem business. A modem is a device that converts
digital information into audio signals, allowing a computer to transmit data
over an analog telephone line. Our analog modem solutions also are built into
applications for products such as television set-top boxes, electronic game
machines, email terminals, Internet screenphones, printers, fax machines and
other electronic equipment to facilitate network access. We are currently
developing modem products to support digital subscriber line, or DSL, service.
Digital subscriber line technology substantially increases the digital capacity
of ordinary telephone lines into the home or office. We primarily sell our modem
products directly to leading manufacturers of personal computers and other
electronic equipment as well as to manufacturers who sell modem solutions to
manufacturers of personal computers.

Input/Output Products. We supply integrated circuits for use in computers,
peripheral equipment, such as printers, scanners and digital cameras, and other
data processing input/output operations. Input/output refers to the transfer of
data within and between computers, peripheral equipment and data networks. We
sell these products primarily to manufacturers of computers, peripheral
equipment and communications equipment. A majority of our sales are customized
solutions that combine our intellectual property with that of our customers in
the design of our integrated circuits. Our products support Universal Serial
Bus, or USB, and IEEE-1394 industry standards, which are both established
connectivity and transmission standards. We also are currently developing
solutions that utilize InfiniBand(TM), a new industry standard for
high-bandwidth input/ output operations for enterprise computing. We have
started to sell our first InfiniBand product.

Analog Line Card and Analog Telephone Products. We sell integrated
circuits for use in analog line cards and analog telephone interface equipment.
Traditional voice telephone equipment uses technology in which voice
communications are transmitted as analog signals until they reach a network
services provider's central office, where analog line cards are located. Analog
line cards convert analog voice signals into digital signals to be transmitted
through the communications network and convert the digital signal coming from
the network back to analog in order to complete the telephone call. Our
customers also use our products in telephone interfaces, or lines, located
closer to an end user in devices such as television set-top boxes, broadband
gateways and integrated access devices. Broadband gateways and integrated access
devices combine a variety of communications technologies such as analog and
digital subscriber line in the end-user's premises onto a single telephone line
for transmission to the network. We sell our analog line card and telephone
solutions to manufacturers of communications equipment for use worldwide.

Traditional Voice Systems. We provide integrated circuits to Lucent and
other telecommunications equipment manufacturers for use in traditional voice
telephone networks and integrated services digital network, or ISDN, systems and
networks. Traditional voice telephone networks use circuit switched based
equipment, which is designed to handle voice transmissions. Circuit switching
establishes a dedicated channel for each communication. The integrated services
digital network standard is a standard for providing digital service to a
client's premises through traditional voice systems. These systems are not as
advanced as newer voice and data networks that manufacturers of communications
equipment currently offer. We expect sales for these systems to decline rapidly
over the next several years.

Newly Introduced Products. We have started to sell products in product
areas for which, if sufficient demand emerges, we expect to expand our
offerings. We have started to offer integrated circuits and software for use in
digital telephony products. Digital telephony products are solutions that access
and interface with merged voice and data networks. We also have introduced a
series of asynchronous transfer mode interconnect products for use in
infrastructure equipment for digital telephony services. Asynchronous transfer
mode, or ATM, refers to a specific set of procedures for the formatting and
timing of data transmission between two pieces of equipment. We sell our digital
telephony solutions to manufacturers of business telephone
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equipment. In addition, we have started to sell integrated circuits and
supporting software for an in-home local area network, or LAN. A local area
network links data devices, such as servers, computers and printers in the same
localized area to facilitate Internet access and to share files and programs. We
sell these products to manufacturers of home networking products and to other
home networking integrated circuit suppliers.

Wireless Products

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

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

-- radio frequency integrated circuits to transmit and receive signals;

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

-- software that controls the communication process.

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

Our integrated circuit solutions for wireless products extend across the
major cellular standards worldwide. A cellular standard is a system of mobile
voice and data transmission. The major current and emerging cellular standards
include:

-- Global Systems for Mobile Communications, known as GSM;

-- Code Division Multiple Access, known as CDMA;

-- Time Division Multiple Access, known as TDMA; and

-- Third Generation standards, known as 3G, which are in early stages of
development.

While CDMA and TDMA are currently the most widely used wireless standards in the
United States, GSM is the most widely used wireless standard worldwide. We
primarily sell GSM products. We are making significant investments in research
and development of integrated circuit products for the 3G standards in order to
have products available when our customers begin to deploy this new standard.
However, we do not expect the demand for, and implementation of, this standard
to develop sufficiently for us to sell significant quantities of our 3G products
for several years.

All of the above mentioned cellular standards, with the exception of the 3G
standards, were designed to handle voice communications and have limited
capabilities in transmitting data communications. More data is being transmitted
over wireless networks, and we believe this trend will continue in the future.
We expect that wireless networks will begin to adopt new cellular standards that
are better able to transmit and receive data prior to the widespread
implementation of the 3G standards. For instance, the General Packet Radio
Service, or GPRS, is an enhancement to the GSM standard that will facilitate
higher speed wireless data transmission and is one of the standards currently
under development to handle data communications. We are developing integrated
circuit solutions for cellular base stations and terminals that support the
General Packet Radio Service standard. These solutions are being sampled by some
customers but further design activity is required before they will be available
for sale in commercial quantities.

Wireless Infrastructure Products. We sell integrated circuit solutions
used in wireless infrastructure products, which are primarily cellular base
stations and cellular base transceiver stations. A cellular base station is a
key component of a wireless network that receives and transmits voice and data
signals over radio waves and connects those signals to the rest of the
communications network. A cellular base station includes base station
controllers that require integrated circuits and are more fully discussed below.
A base transceiver station converts wireless information into digital signals
and processes multiple channels of digital signals. We offer an integrated
circuit solution for base transceiver stations which includes our StarCore
digital signal processor technology, which was developed as part of a strategic
relationship. A key factor for customers

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selecting our base transceiver station solution is that it offers a high degree
of channel density, which refers to the number of calls in an area that can be
supported by a singular cellular base station.

Our integrated circuit solutions also are included in base station
controllers. Among other things, a base station controller performs
administrative functions such as checking the status of a caller's account and
coordinating activities between cellular base stations. Our base station
controller solution includes multiple integrated circuits and the associated
software.

Wireless Terminal Products. We offer integrated circuit products for use
in wireless terminals. Wireless terminals include mobile telephones, pagers and
personal digital assistants, or PDAs. We sell our wireless terminal products to
wireless terminal manufacturers with different integration requirements. Our
customers may choose to buy from us only integrated circuits for terminal
devices or the integrated circuits and supporting software. We also offer
customers the ability to license from us a full mobile telephone design. The
design includes specifications for all components required to manufacture the
mobile telephone, including our integrated circuits and software and components
from other suppliers.

Wireless Local Area Networking Products

We sell integrated circuits, software and equipment for wireless networks.
We offer our ORiNOCO(TM) products for wireless local area networking and
Bluetooth(TM) products for personal area networking, as described below.

ORiNOCO Products. Our ORiNOCO products comprise a complete wireless local
area network system that provides broadband network access through mobile and
fixed data devices. Broadband is a general term which refers to high-speed data
transmission. We offer the software and equipment necessary to create and
support wireless local area networks, which are typically referred to as
wireless LANs. A local area network links data devices such as servers, personal
computers and printers in the same localized area to facilitate Internet access
and to share files and programs. A wireless local area network performs the same
functions as a conventional local area network without cables or wires by
transmitting data and voice traffic by radio technology through the air. This
wireless technology also allows mobile devices to be connected to the local area
network. Our wireless local area network solution currently supports data
transmission speeds of over 10 megabits per second. A megabit is a unit of
measurement for data and is equal to roughly one million bits. We sell a
complete solution for wireless networking that facilitates mobile Internet
connectivity to the end-user in an enterprise, home or public space, such as an
airport lounge or hotel lobby.

We sell wireless local area network solutions to network services providers
and to customers that sell to enterprises and home users under the ORiNOCO
brand. We also sell our ORiNOCO products to personal computer manufacturers that
integrate them into their products. Our primary indirect channel into the
enterprise market is Avaya Inc., formerly the enterprise networks group of
Lucent. As part of the separation, we will also enter into a product purchase
agreement with Lucent for the resale of our ORiNOCO products.

Bluetooth Products. We sell integrated circuit solutions and supporting
software for the new market of Bluetooth technology applications. Bluetooth is
an open standard for short-range radio transmission of digital voice and data
that facilitates a wireless personal area network. Wireless personal area
networks, which are typically referred to as PANs, allow mobile communications
devices to communicate with each other and connect to the Internet at high
speeds without the use of wires or cables. The Bluetooth technology also makes
it easier for data synchronization of mobile computers, mobile telephones and
handheld devices. Bluetooth uses radio waves that can transmit through walls and
other non-metal barriers to create a personal area network.

We have started to sell a two-component Bluetooth solution and supporting
software. Our solution facilitates a wireless personal area network which
supports data transmission speeds of up to 1 megabit per second for devices
within an approximately 30-foot radius. We expect to increase our development
and sales efforts in this area as more Bluetooth applications come to market. We
sell our Bluetooth products to manufacturers of communications and computer
equipment.

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Storage and Analog Products

We sell integrated circuits for use in storage devices, commonly referred
to as hard disk drives. As applications used on computers and communications
equipment become more complex, we expect an increased demand for higher storage
capability. We also sell integrated circuits for use in analog signal processing
and control functions within various products. Analog integrated circuits shape
or condition electronic signals and amplify electronic signal strength. They
also regulate voltage levels and provide interfaces between products within an
analog environment. We currently focus on development opportunities in the hard
disk drive product area, the analog communications product area and in the
product area for analog power products, which are products that regulate power.

Storage Products. We offer many of the integrated circuits necessary for
hard disk drives to function. Hard disk drives store data and are used in
personal computers, servers and new consumer devices. Although information used
by a computer is in digital form, hard disk drives store information in magnetic
pulses, which are analog signals. In order for a computer's data to be stored on
a hard disk, it must be converted to magnetic form. When data is read from the
disk, it must be converted from analog back to digital form. Integrated circuits
manage these storage and retrieval functions in hard disk drives and control the
overall operation of the disk drive. We sell integrated circuits that support
both the analog and digital functions required in hard disk drives.

We also supply an integrated product, our system-on-a-chip solution, that
combines various integrated circuits onto one integrated circuit. Integrating
components reduces power consumption and enhances performance. This integrated
product assists our customers in meeting the requirements of their end-
customers faster and more cost-effectively. We are focusing on using our
advanced system-on-a-chip technology and experience to expand our customer base.

We sell our storage products to manufacturers of computer hard disk drives.
Our customers then sell complete hard disk drives to computer manufacturers and
system integrators. We expect our customers to provide hard disk drives in the
future to manufacturers of other consumer products such as television set-top
boxes, digital videorecorders and portable music players.

Analog Products. We sell integrated circuits used to perform various
analog functions within electronic products. We are currently focused on
developing and selling analog integrated circuits for communications products
and power products. We have started to offer these integrated circuits. An
example of our analog communications products is the line driver. A line driver
is a device that extends the transmission distance between terminals and
computers connected via private lines or networks. A line driver can extend a
signal that is normally limited to a few hundred feet up to several miles. An
example of our analog power products is a radio frequency power transistor. This
device is used in wireless equipment and provides the power to the antenna of
the cellular base station. We sell our analog products through our direct sales
force to a diverse set of equipment manufacturers, including electronic test
equipment and communications equipment manufacturers.

RESEARCH AND DEVELOPMENT

Our research and development personnel focus on product and manufacturing
process development, which provides the technological basis for our commercial
products, and on basic research, which helps provide the scientific advances
which ultimately lead to new products and technology and manufacturing
processes. Our product and process development team is comprised of
approximately 2,800 development engineers and scientists who previously operated
as part of Lucent's Bell Laboratories, one of the world's leading research and
development institutions. Approximately 2,200 of these development engineers and
scientists work directly in our business units to design and implement product
solutions. The remaining 600 development engineers and scientists work primarily
on manufacturing and design technology that spans large segments of our
business, such as the technology for system-on-a-chip and high-performance
optical modules.

We historically have had access to innovations produced by the Bell
Laboratories central research organization. Approximately 275 research
engineers, who previously performed basic research at Bell

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Laboratories, also will be transferred to us as part of our separation from
Lucent. Our basic research effort will be organized into three areas:

-- optoelectronics;

-- electronic devices; and

-- circuits and systems.

Our researchers will perform application-focused research, primarily around
optical communications, semiconductor technology and manufacturing processes and
advanced circuit and systems development for future communications technologies.
Across each of the areas, we also will focus on products that seek to combine
our integrated circuit and optoelectronic capabilities. We believe that the
combination of our optoelectronic components and integrated circuits may offer
our customers several benefits, including improved product performance and
reduced product size and costs. This combination also may allow our customers to
decrease time-to-market and reduce the number of their suppliers.

Overall, 35% of our product and process development team have advanced
degrees, and approximately 80% of our 275 research engineers have Ph.D.'s. In
addition to our internal research and development team, we also work closely
with numerous universities around the world. These relationships include both
direct collaboration with our scientists and engineers and also direct funding
and industrial supported consortia, such as the Semiconductor Research
Corporation, a consortia comprised of integrated circuit manufacturers that fund
university research work of common interest. We also have entered into joint
research and development initiatives with a number of our customers. With our
newly independent research organization, we expect that these initiatives will
broaden, assisting us in developing advanced communications solutions with a
variety of leading systems suppliers. As part of the separation from Lucent, we
will enter into a joint technology development agreement with Lucent for micro
electro-mechanical systems, or MEMS, as described under "--Strategic
Relationships." We also will enter into a development project agreement with
Lucent's Bell Laboratories for other products and technologies, as described
under "Arrangements Between Lucent and Our Company--Development Project
Agreement."

Our research and development expenditures were $466 million, $683 million
and $827 million for fiscal years 1998, 1999 and 2000, respectively. After our
separation from Lucent, we will be able to direct the allocation of resources
within our research and development organization. We anticipate that we will
continue to make significant research and development expenditures to maintain
our competitive position with a continuing flow of innovative products and
technology and manufacturing process. In fiscal 2001, we intend to invest
approximately $1.2 billion for research and development, including our financial
commitments as part of our strategic technology relationships.

STRATEGIC RELATIONSHIPS

As part of our manufacturing strategy, we have entered into joint ventures
with various partners. We also have developed strategic relationships to augment
our technological capabilities.

MANUFACTURING RELATIONSHIPS

Our most important manufacturing relationships are described below.

Silicon Manufacturing Partners

In December 1997, we entered into a joint venture, called Silicon
Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd., a
leading manufacturing foundry for integrated circuits, to operate a 54,000
square foot integrated circuit manufacturing facility in Singapore. We have a
51% equity interest in this joint venture, and Chartered Semiconductor owns the
remaining 49% equity interest. Our equity investment over the life of this joint
venture will be approximately Singapore $217 million, which is approximately
U.S. $125 million. Under the terms of our agreement with Chartered Semiconductor
and Silicon Manufacturing Partners, we agreed to purchase 51% of the production
output from this facility and Chartered Semiconductor agreed to purchase the
remaining 49% of the production output. If we do not purchase all the wafers
allotted to us, we are obligated to reimburse the joint venture for the portion
of fixed costs associated with the unpurchased wafers. Chartered Semiconductor
is similarly obligated with respect to
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the wafers allotted to it. Chartered Semiconductor will also have the right of
first refusal to the wafers produced in excess of our requirements. The joint
manufacturing venture is currently operational.

The agreement may be terminated by either party upon two years written
notice, but may not be terminated prior to February 2008. The agreement also may
be terminated for material breach, bankruptcy or insolvency. In the event of
termination, other than by mutual consent or Chartered Semiconductor's
bankruptcy or insolvency, Chartered Semiconductor will have the option to buy,
or we will have the option to sell to Chartered Semiconductor, our equity
interest in the joint venture, depending upon the circumstances of the
termination. The purchase price will generally be between 90% and 110% of the
fair market value of the joint venture at the time of termination.

FiNET Technologies

In February 1997, we entered into a joint venture, called FiNET
Technologies, with Fitel General Inc., a wholly owned subsidiary of The Furukawa
Electric Co., Ltd. Furukawa is a manufacturer and distributor of electric wire
and cable and optical fiber cable. The purpose of this joint venture is to
manufacture and distribute optoelectronic components. The manufacturing facility
is located in Scranton, Pennsylvania and is approximately 20,000 square feet. We
have a 51% equity interest in this joint venture and Fitel owns the remaining
49% equity interest. The initial term of the agreement is five years, which will
be automatically extended for successive one year terms, unless written notice
of nonrenewal is given six months prior to the expiration a term. This joint
venture manufacturing facility is currently operational. The agreement may be
terminated within the initial term if the financial performance of the joint
venture falls below a predetermined level. The agreement also may be terminated
by either us or Fitel for breach of material terms, insolvency or bankruptcy. If
the joint venture is terminated, unless either Fitel or we elect to continue the
joint venture's business, the joint venture will terminate and wind up its
business.

At the time we entered into the joint venture, we also entered into a
development collaboration agreement with Furukawa. Under this agreement, any
intellectual property developed jointly by us and Furukawa in connection with
our joint venture with Fitel will be jointly owned by us and Furukawa. Either
party may terminate the agreement for the same reasons described above.

TECHNOLOGY RELATIONSHIPS

Our most important technology relationships are described below.

Integrated Circuit Manufacturing Process Technology

In July 2000, we entered into an agreement with Chartered Semiconductor
committing us and Chartered Semiconductor to jointly develop manufacturing
technologies for future generations of integrated circuits targeted at
high-growth communications markets. We have agreed to invest up to $350 million
over a five year period. As part of the joint development activities, our two
companies will staff a new research and development team at Chartered
Semiconductor's Woodlands campus in Singapore. These scientists and engineers
will work with our teams in Murray Hill, New Jersey, and Orlando, Florida, as
well as with Chartered Semiconductor's technology development organization, to
create a 600-person research and development team. This relationship is in the
early stages of development.

During the term of the agreement and for five years thereafter, we and
Chartered Semiconductor will be required to update each other, without
compensation, with technical information relating to any corrections or
improvements made to the processes which we have jointly developed. All
intellectual property jointly developed, other than patents, will be jointly
owned by us and Chartered Semiconductor. Jointly made inventions and patents
which issue from these inventions will be equally divided between us and
Chartered Semiconductor, and the non-owning party will receive a nonexclusive,
royalty-free and nontransferable license for each invention or patent. The
agreement may be terminated for breach of material terms upon 30 days notice or
for convenience upon six months notice prior to the planned successful
completion of a development project, in which case the agreement will terminate
upon the actual successful completion of such project.

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StarCore

In June 1998, we entered into a Joint Design Center operating agreement
with Motorola, Inc. to develop advanced digital signal processor technologies.
We and Motorola will develop these technologies in a joint design center called
the StarCore Technology Center located in Atlanta, Georgia. We and Motorola will
equally share the funding of the costs and expenses of operating the center. The
board of advisors comprised of ours and Motorola's representatives will
determine, on a yearly basis, the annual budget for operating the center. In the
first two years of operation, the annual budget of the center was approximately
$24 million and approximately $31 million, respectively. The StarCore Technology
Center designs digital signal processor cores and development tools that we can
incorporate in our complete system-on-a-chip solutions for communications
applications. StarCore focuses on digital signal processor technologies for
cellular base stations and the transmission of wireless data and other
applications. The StarCore SC-140 digital signal processor core, the first core
developed by the StarCore Technology Center, was produced in April 1999. We
expect to begin shipping samples of integrated circuit solutions which include
this digital signal processor core in the next few months.

During the term of the agreement, the items developed within the joint
design center, other than patents, may be licensed to third parties only upon
mutual consent by Motorola and us. All joint patents, which are patents arising
out of inventions made jointly by our employees or consultants and those of
Motorola where such employees or consultants were assigned to the joint design
center, will be jointly owned by us and Motorola. We and Motorola will be free
to use these jointly owned patents for any purpose and to license third parties
under these patents without approval from the other.

The initial term of the agreement will expire on May 1, 2008, and may be
extended for successive two year periods by mutual agreement. We and Motorola
will review the operations of the joint design center in June 2002 and every two
years thereafter. After any such review either we or Motorola may terminate the
agreement upon one year written notice. The agreement also may be terminated for
breach of material terms, insolvency or bankruptcy.

MEMS

Prior to completion of this offering, we will enter into a joint design
center agreement with Lucent to develop technology for micro electro-mechanical
systems, or MEMS, which are small mechanical devices that perform a variety of
functions. The primary focus of the joint design center will be the development
of optical MEMS. We and Lucent both will agree to jointly fund, manage and staff
the joint design center over the following three years to develop this
technology in Murray Hill, New Jersey. We and Lucent will each have a one-half
interest in the MEMS technical information owned by Lucent as of February 1,
2001. We and Lucent will grant each other a perpetual, nonexclusive,
royalty-free license in our respective patents which issue from applications
having an effective first filing date prior to February 1, 2003 to make and sell
MEMS products. All joint patents, which are patents issued from any application
filed with respect to any invention made jointly by us and Lucent while working
on a joint design center product and conceived or reduced to practice during
performance under the agreement, will be jointly owned by us and Lucent. We and
Lucent will be free to use these jointly owned patents for any purpose and to
license third parties under these patents. Some of these products may be
manufactured exclusively for Lucent, subject to some restrictions, for a limited
period following the first commercial availability of a product, on a case by
case basis. The initial term of the agreement will expire on January 31, 2004
and may be extended with the consent of both parties. The agreement may be
terminated for breach of material terms or by prior written notice of either
party for convenience.

CUSTOMERS, SALES AND DISTRIBUTION

CUSTOMERS

We have a globally diverse base of customers, consisting primarily of
manufacturers of communications and computer equipment. We generally target as
customers the leaders in the market segments in which our products are used as
well as the companies we believe will be future leaders in these segments. In
fiscal 2000, we sold our products directly to approximately 275 end customers
and indirectly, through distributors, to

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approximately 1,000 customers. By end customer, we are referring to the company
with which we have negotiated the design and price of our product. For some end
customers, we deliver the product to, and are paid by, a third party associated
with the customer, such as their contract manufacturer. Our top 20 end customers
in fiscal 2000, based on revenue, accounted for approximately two-thirds of our
revenue. Our top ten end customers in fiscal 2000, based on revenue, which
accounted for approximately 52% of our revenue, were:

<TABLE>
<S> <C>
Apple Computer, Inc. Motorola, Inc.
Cisco Systems, Inc. Nortel Networks Corp.
Globespan Inc. Quantum Corp.
Lucent Technologies Inc. 3Com Corp.
Maxtor Corp. Tyco Submarine Systems Ltd.
</TABLE>

All of the customers listed above purchased integrated circuits from us.
Lucent, Nortel, Motorola, Cisco Systems and Tyco Submarine Systems also
purchased optoelectronic components from us. Our sales to Lucent represented
22.3%, 25.7% and 21.3% of our revenue for fiscal 1998, 1999 and 2000,
respectively. No other customer accounted for 10% or more of our revenue in
fiscal 1998, 1999 or 2000.

SALES AND DISTRIBUTION

We have a worldwide sales organization with approximately 520 employees as
of September 30, 2000, located in 17 domestic and 16 international sales
offices. We sell our products globally primarily through our direct sales force.
Our sales force sometimes uses manufacturers' representatives as part of the
selling effort. To complement our direct sales force, we also sell our products
through distributors, which sales in fiscal 2000 represented approximately 9% of
our revenue.

When selling both our optoelectronic components and integrated circuits, we
aim to have our customers incorporate our products into the end products they
design and develop. Typically, manufacturers of communications and computer
equipment conduct a competitive process to select suppliers for the parts that
they will include in their end products. Our sales, marketing and technical
personnel work with customers to demonstrate our products' ability to satisfy
any specific requirements. We call winning the competitive process a design win.
A design win is important because it allows us to establish a long-term
relationship with the customer, at least through the life-cycle of the product.
We generally do not, however, enter into written agreements with our customers
after achieving a design win. A customer could terminate our relationship or
discontinue developing the product. Most of our revenue originates from sales
that are the result of design wins. We have 16 design centers located in seven
countries at which products are designed and implemented to meet local customer
needs. These design centers work closely with regional sales teams to satisfy
customer requests for new products.

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

Direct Sales

In fiscal 2000, our sales force sold directly to approximately 275 end
customers, which represented approximately 91% of our revenue. Our direct sales
organization is divided into three regional areas, which are North America,
Europe and Asia Pacific. We also have a direct sales team comprised of 25 to 30
employees that is responsible for our customer relationship with Lucent globally
and a team that focuses on ORiNOCO,

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our wireless local area networking products. Our sales compensation program
includes incentive compensation paid quarterly based, among other things, on
design wins and total revenue derived from the customer.

We have global account management teams for 20 of our key end customers,
based on revenue, potential growth and fit with our strategic direction. Our
global account management teams work closely with our customers in order to
understand and anticipate their needs at an early stage in their product
development cycles and to ensure that our products are designed to meet their
specific performance and time-to-market needs.

Our direct sales force also utilizes the services of approximately 15
manufacturers' representative firms globally to assist in sales of both
optoelectronic components and integrated circuits. Manufacturers'
representatives have relationships with our existing and potential customers and
work with us to solicit orders and better understand customer product design
requirements. These manufacturers' representatives do not accept orders or enter
contracts on our behalf. Instead, they work with our direct sales operations
teams, who control the sales order process.

Indirect Sales

Our indirect sales channel consists of a network of approximately 25
distributors and four trading companies, which serve as distributors in Japan.
Approximately half of our indirect sales in fiscal 2000 were through one of our
distributors. In fiscal 2000, we sold to approximately 1,000 customers through
our indirect sales channel. Instead of contracting with our smaller customers
directly, we generally have them purchase our products through distributors,
although some of our larger customers choose to purchase products from us
through this channel as well. We sell our products to the distributors. The
distributors are able to negotiate terms of their sale to the end customer.
Title and risk of loss transfers when delivery is made to the distributors and
they own the products, even if they are unable to complete the sale to the end
customer. Our relationships with distributors are not exclusive. We typically
enter into agreements with our distributors that generally set forth sales,
quotas, service levels and termination clauses. Further, we have started to
develop relationships with value-added resellers to sell our wireless local area
networking equipment. At this time, our primary indirect channel into the
enterprise market is Avaya Inc., formerly the enterprise networks group of
Lucent. As part of the separation, we also will enter into a product purchase
agreement with Lucent for the resale of our wireless local area networking
equipment. For a more detailed description of this agreement, please see
"Arrangements Between Lucent and Our Company--Fiber, Microelectronics and
ORiNOCO Product Purchase Agreements."

Order Procurement

We have entered into written purchase agreements with some of our largest
customers that generally govern the terms of our sales to those customers. As
part of our separation from Lucent, we will enter into a written purchase
agreement with Lucent as well. For a more detailed description of our agreements
with Lucent, please see "Arrangements Between Lucent and Our Company--Fiber,
Microelectronics and ORiNOCO Product Purchase Agreements." We also have
order-specific written agreements with a number of customers that generally
govern the terms of the specific customer order. As is customary in our
industry, however, we also sell to many of our customers on a purchase order
basis instead of using formal written agreements. In these instances, the
customer provides a purchase order and we send back to the customer an order
acknowledgment. The customer's purchase order typically specifies the product
ordered and the price as well as the customer's proposed terms of sale. We
respond by providing the customer with an order acknowledgment that contains our
standard terms of sale. To the extent the terms contained within the exchanged
purchase orders and order acknowledgments are not consistent with each other and
do not fully set forth our legal rights, we could experience difficulties in
collecting fees, protecting our intellectual property and protecting ourselves
from liability.

MANUFACTURING AND SUPPLIES

MANUFACTURING

Our manufacturing operations are currently organized in two distinct
groups: optoelectronic component and integrated circuit manufacturing. Due to
increasing overlap of our products and manufacturing processes,

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we have started to integrate our manufacturing operations, where appropriate, to
improve operational efficiencies.

Optoelectronic Component Manufacturing

We have seven facilities located in the United States and one facility
located in Mexico devoted to manufacturing optoelectronic components. These
sites utilize approximately one million square feet. As of September 30, 2000,
we had approximately 3,200 employees devoted to optoelectronic component
manufacturing. Currently, we manufacture substantially all of our optoelectronic
components internally. A small percentage of our components, however, are sent
to sub-assembly manufacturers. These are manufacturers that add some pieces to
the unfinished product and send the unfinished product back to us. In these
cases, we complete the manufacturing of the final product and deliver the
product to our customers.

We intend to continue our capital investments to expand our automated
optoelectronics manufacturing capacity and other advanced manufacturing
processes. We will invest in additional systems and processes to build on the
speed and flexibility we already offer our customers. We intend to explore
opportunities to increase our manufacturing capabilities through joint ventures
or strategic relationships with third parties. If we form these ventures or
develop these relationships, we will maintain rigorous processes designed to
ensure consistent quality so that neither our customers nor our customers'
end-users can differentiate between products that are manufactured in-house and
those that are not. Additionally, we have started to manufacture some of our
silicon-wafer-based optoelectronic components in our integrated circuit
facilities to capture economies of scale. This allows us to apply our extensive
experience in integrated circuit manufacturing to the high-volume manufacturing
of optoelectronic components.

We have automated the manufacturing of core technologies used in our
optoelectronic components. In particular, we have automated our optical
sub-assembly manufacturing process, which is the core technology used in all of
our laser-based optoelectronic products. We believe we lead the optoelectronic
component industry in achieving efficiencies through automation. The benefits of
automation include:

-- greater volume;

-- improved quality and reliability;

-- reduced costs; and

-- improved speed in responding to customer demands.

Integrated Circuit Manufacturing

We have seven facilities located in four countries devoted to manufacturing
integrated circuits. These sites utilize approximately 2.4 million square feet.
As of September 30, 2000, we had approximately 7,465 employees devoted to
integrated circuit manufacturing. At this time, our company-owned wafer
fabrication is done in the United States, Spain and Singapore, while our
assembly and test operations are in the United States, Singapore and Thailand.

Currently, we manufacture most of our integrated circuits in facilities
that we own. We have third-party manufacturing relationships to improve our
manufacturing efficiency and flexibility and to allow us to focus on
manufacturing and developing leading products. In particular, we entered into a
joint venture with Chartered Semiconductor Manufacturing Ltd. in December 1997
to open an integrated circuit manufacturing facility in Singapore. Under the
terms of our agreement with Chartered Semiconductor, we agreed to purchase 51%
of the production output from this facility and Chartered Semiconductor agreed
to purchase the remaining 49% of the production output. For more information
regarding our joint venture with Chartered Semiconductor, please see
"--Strategic Relationships--Manufacturing Relationships." In the future, we
expect to increase the amount of integrated circuits we buy at market prices,
whether through our relationship with Chartered Semiconductor or other strategic
relationships.

We believe, based on customer feedback and industry reports, that our
sophisticated logistics and planning systems and manufacturing processes allow
us to manufacture and deliver our integrated circuits more quickly and reliably
than most of our competitors. The sophisticated internal systems we are
implementing will allow us to start manufacturing a customer's specific order
for some integrated circuits within hours of receipt. Today, we believe we are
able to manufacture silicon wafers faster than most of our

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competitors. However, as we increase our percentage of wafer fabrication
manufactured through strategic relationships, we may not be able to maintain our
industry-leading manufacturing cycle times. We assemble, test and ship our
integrated circuits, on average, in approximately two and a half days, which we
believe is better than the industry average. We intend to continue performing
these activities for substantially all of our integrated circuits in the future
and to maintain our industry-leading cycle time.

SUPPLIES

The optoelectronic components industry is generally supply constrained,
meaning that demand for components is greater than the ability of most
manufacturers of optoelectronic components, including us and our competitors, to
supply products. We routinely experience shortages in supplies of parts for our
products and in the equipment needed to increase the capacity of our
manufacturing plants. The integrated circuit industry also faces a worldwide
shortage of silicon, the raw material used to make wafers, as well as a shortage
in some of the manufacturing equipment needed to increase manufacturing capacity
to make integrated circuits. Also, there are a limited number of qualified
engineers with the talent to develop and manufacture new products as quickly as
desired. A significant price increase from our suppliers may cause our
profitability to decline if we could not pass the increase to our customers. The
loss of a significant supplier or the inability of a supplier to meet
performance and quality specifications or delivery schedules may cause our
revenue and profitability to decline.

We currently purchase several different parts that are used in our
optoelectronic components for which there is only one qualified manufacturer of
each part. Some of these single source suppliers also are competitors of ours.
We believe that of the products in which these parts are included, the material
products are our digital lasers, optical amplifiers, pump lasers used in
submarine networks, lithium niobate modulators and our PIN and APD receivers,
which are described under "--Products--Optoelectronic Components." We also have
a single source of supply for some of the parts and processes used for our
integrated circuits. In particular, of these single source parts and processes,
we believe that the manufacturing process used in the assembly of some of our
input/output integrated circuit solutions and Bluetooth products is material.
The number of qualified alternative suppliers for our single source parts and
processes is limited and the process of qualifying new suppliers requires a
substantial lead time. Although we have not experienced any significant
difficulties in obtaining the above parts or manufacturing process, we are
currently looking for alternative sources of these parts and processes, either
through internal development or alternative suppliers.

COMPETITION

We compete in the optoelectronic component and integrated circuit market
segments within the communications semiconductor industry. These market segments
are intensely competitive, and are characterized by:

-- rapid technological change;

-- evolving standards;

-- short product life cycles; and

-- price erosion.

The number of competitors has risen in the past few years. We expect the
intensity of competition in the market segments we serve to continue to increase
in the future as existing competitors enhance and expand their product offerings
and as new participants enter these market segments. Increased competition may
result in price reductions, reduced profitability and loss of market share. We
cannot assure you that we will be able to compete successfully against existing
or future competitors. Some of our customers and companies with which we have
strategic relationships also are, or may be in the future, competitors of ours.

The size and number of our competitors vary across our product areas, as do
the resources we have allocated to the segments we target. Therefore, many of
our competitors have greater financial, personnel, capacity and other resources
than we have in a particular market segment or overall. Competitors with greater
financial resources may be able to offer lower prices, additional products or
services or other incentives that we cannot match or offer. These competitors
may be in a stronger position to respond quickly to new technologies and may be
able to undertake more extensive marketing campaigns. They also may adopt more
aggressive

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pricing policies and make more attractive offers to potential customers,
employees and strategic partners. These competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties to increase their ability to gain market share. Because we have a
unionized workforce and many of our main competitors are not unionized to the
same extent or at all, our product costs may be higher. As a result, our
competitors may be more profitable or may be able to compete for customers more
effectively based on price. In the event of a union work stoppage at our
facilities, we may be adversely affected.

Our primary competitors within our various product areas are listed in the
table below.

<TABLE>
<CAPTION>
CLIENT ACCESS WIRELESS
OPTOELECTRONIC NETWORK AND NETWORK WIRELESS LOCAL AREA STORAGE
COMPONENTS COMMUNICATIONS CONNECTIVITY PRODUCTS NETWORKING AND ANALOG
-------------- -------------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Agilent Technologies, Applied Micro Broadcom Corp. Fujitsu Ltd. BreezeCOM Ltd. Analog Devices,
Inc. Circuits Corp. Inc.

Alcatel Broadcom Corp. Conexant Systems, Infineon Cisco Systems, Infineon
Inc. Technologies AG Inc. Technologies AG

Corning Inc. Conexant Systems, Globespan Inc. Koninklijke Intel Corp. LSI Logic Corp.
Inc. Philips
Electronics AG

Fujitsu Ltd. IBM Corp. Infineon Motorola, Inc. Intersil Holding Marvel
Technologies AG Corp. Communications
Corp.
Infineon Technologies Infineon LSI Logic Corp. NEC Corp. Nokia Corp. STMicroelectronics
AG Technologies AG N.V.

JDS Uniphase Corp. PMC-Sierra, Inc. Koninklijke QUALCOMM Inc. Nortel Networks Texas Instruments
Philips Corp. Incorporated
Electronics AG

NEC Corp. TranSwitch Corp. NEC Corp. STMicroelectronics Proxim, Inc.
N.V.

Nortel Networks Corp. Vitesse Texas Instruments Texas Instruments Symbol
Semiconductor Incorporated Incorporated Technologies, Inc.
Corp.
SDL, Inc. 3Com Corp.
</TABLE>

In addition, following our separation from Lucent, we may compete against Lucent
in some of our current or future product areas and Lucent may compete against
us. In particular, Lucent may choose to reestablish a component manufacturing
capability, or work with a third party to establish a competitive capability.

While we are the world leader in sales of communications semiconductors,
our competitive position varies depending on the market segment and product
areas within these segments. For example, we are number one or two, based on
revenue, in many of our product areas, including the analog modem, digital
signal processors for wireless infrastructure, SONET/SDH integrated circuit and
10 gigabits per second optical modulator product areas. However, our competitive
position is not as strong in the wireless terminal, digital subscriber line
technology and passive optical component product areas. While improving our
position in many of the product areas where our position is less
well-established is an objective of ours, we cannot assure you that we will be
able to accomplish this goal. Further, because we expect to face increasing
competitive pressures from both current and future competitors in the product
areas we serve, we may not be able to maintain our position in the product areas
in which we are currently a leader.

We believe the following factors are the principal methods of competition
in our industry:

-- performance and reliability;

-- price;

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

-- product size;

-- ability to offer integrated solutions;

-- time to market;

-- breadth of product line;

-- logistics and planning systems; and

-- quality of manufacturing processes.

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

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

Prior to this offering, we will own or have rights to a number of patents,
trademarks, copyrights, trade secrets and other intellectual property directly
related to and important to our business. Lucent and its subsidiaries also will
grant us rights and licenses to patents, trademarks, copyrights, trade secrets
and other intellectual property that allow us to manufacture, market and sell
our products. In addition, Lucent will convey to us numerous sublicenses under
patents of third parties. We derive revenue from licensing our intellectual
property. This revenue is apportioned between optoelectronics and integrated
circuits.

Under the intellectual property agreements we are entering into with Lucent
as part of the separation, Lucent and one of its subsidiaries will assign or
exclusively license to us approximately 6,000 U.S. patents and patent
applications and their corresponding foreign patents and patent applications. In
connection with these patents, we will enter into a cross license agreement with
Lucent. In addition, Lucent will assign to us numerous trademarks, both in the
United States and in foreign countries. It is contemplated that the primary
trademarks used in the sale of our products will be transferred to us, except
for the Lucent name and logo and the Bell Laboratories name.

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

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

GOVERNMENT REGULATION

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

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

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

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

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

PROPERTIES

As of September 30, 2000, we operated 22 manufacturing facilities and three
warehouse locations in the United States and 20 other countries. We also have 50
offices located in 17 countries, 44 research and development facilities located
in 11 countries and 16 design centers located in seven countries. Our principal
owned manufacturing facilities are located in the United States, Mexico, Spain,
Singapore and Thailand. We also have a 51% interest in a joint venture located
in Singapore which is predominantly used as a manufacturing site. Our facilities
have an aggregate floor space of approximately 7.7 million square feet, of which
approximately 5.3 million square feet is owned and approximately 2.4 million
square feet is leased. Our lease terms range from monthly leases to 14 years. We
believe that all of our facilities and equipment are in good condition and are
well maintained and able to operate at present levels.

EMPLOYEES

As of September 30, 2000, we employed approximately 16,500 full-time
employees, including approximately 3,075 research and development employees and
10,665 manufacturing employees. Of our 16,500 employees, approximately 7,540 are
management and non union-represented employees, and approximately 5,730 are U.S.
union-represented employees covered by collective bargaining agreements. In
addition, approximately 300 employees are union-represented employees located in
Mexico and covered by a collective bargaining agreement.

On May 31, 1998, Lucent entered into a collective bargaining agreement with
the Communications Workers of America and into a separate agreement with the
International Brotherhood of Electrical Workers. In connection with the
distribution, we will assume the obligations under these agreements with respect
to our U.S. union-represented employees. These agreements will be effective
until May 31, 2003, unless the parties to each agreement reach a mutual
agreement to amend the terms. All of our unionized employees in Mexico are
members of the Mexican National Union of Industrial Workers. We entered into a
collective bargaining agreement with this union on January 10, 2000. As is
typical in Mexico, wages are renegotiated every year, while other terms and
conditions of employment are renegotiated every two years. We believe that we
generally have a good relationship with our employees and the unions that
represent them. We are subject from time to time to unfair labor charges filed
by the unions with the National Labor Relations Board. If we are unsuccessful in
resolving these charges, our operations may be disrupted or we may incur
additional costs that may decrease our profitability. If we experience any work
stoppages by our union employees, we believe that we may be affected to a
greater extent than our competitors.

BACKLOG

Our backlog, which represents the aggregate of the sales price of orders
received from customers, but not yet recognized as revenue, was approximately
$1.9 billion and $600 million on September 30, 2000 and September 30, 1999,
respectively. The majority of these orders are fulfilled within three months.
All orders, however, are subject to possible rescheduling by customers. Our
customers often change their order two or three times between initial order and
delivery. Our customers' frequent changes usually relate to quantities or

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<PAGE> 87

delivery dates, but sometimes relate to the specifications of the products we
are shipping. Although we believe that the orders included in the backlog are
firm, some orders may be cancelled by the customer without penalty. We also may
elect to permit cancellation of orders without penalty where management believes
it is in our best interests to do so.

ENVIRONMENTAL, HEALTH AND SAFETY

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

We are subject to environmental laws, including the Comprehensive
Environmental Response, Compensation and Liability Act, also known as Superfund,
that require the cleanup of soil and groundwater contamination at sites
currently or formerly owned or operated by us, or at sites where we may have
sent waste for disposal. These laws often require parties to fund remedial
action at sites regardless of fault. Lucent is a potentially responsible party
at numerous Superfund sites and sites otherwise requiring cleanup action. Under
the Separation and Distribution Agreement, we will assume liabilities for the
costs associated with eight of these sites--five Superfund sites, two of our
former facilities and one of our current manufacturing facilities.

It is often difficult to estimate with certainty the future impact of
environmental matters, including potential liabilities. We record an
environmental reserve when it is probable that a liability has been incurred and
the amount of the liability is reasonably estimable. This practice is followed
whether the claims are asserted or unasserted. Management expects that the
amounts reserved will be paid out over the period of remediation for the
applicable site, which typically ranges from five to thirty years. Reserves for
estimated losses from environmental remediation are, depending upon the site,
based primarily upon internal or third party environmental studies, estimates as
to the number, participation level and financial viability of all potentially
responsible parties, the extent of the contamination and the nature of required
remedial actions. Accruals will be adjusted as further information develops or
circumstances change. The amounts provided for in our consolidated financial
statements for environmental reserves are the gross undiscounted amount of such
reserves, without deductions for insurance or third party indemnity claims.
Although we believe that our reserves are adequate, there can be no assurance
that expenditures that will be required relating to remedial actions and
compliance with applicable environmental laws will not exceed the amounts
reflected in our reserves or will not have a material adverse effect on our
financial condition, results of operations or cash flows.

LEGAL PROCEEDINGS

From time to time we are involved in legal proceedings arising in the
ordinary course of business, including unfair labor charges filed by the unions
with the National Labor Relations Board, claims before the U.S. Equal Employment
Opportunity Commission and other employee grievances. We also are subject to
intellectual property litigation and infringement claims, which could cause us
to incur significant expenses or prevent us from selling our products. For
example, a patent infringement lawsuit was filed against Lucent, among other
optoelectronic components manufacturers, by Litton Systems, Inc. and The Board
of Trustees of the Leland Stanford Junior University in the United States
District Court for the Central District of California (Western Division) on
October 3, 2000. The complaint has not yet been served on Lucent. Following the
offering, we expect to be named as a defendant in the suit. The complaint
alleges that each of the defendants is infringing a patent related to the
manufacture of optical amplifiers. The patent is owned by Stanford University
and is exclusively licensed to Litton. The complaint seeks, among other
remedies, monetary damages, counsel fees and injunctive relief.

Another patent infringement lawsuit was filed against Lucent, among other
semiconductors manufacturers, by Lemelson Medical, Education & Research
Foundation, LP, in the United States District Court for the
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<PAGE> 88

District of Arizona on June 15, 1999. Following the offering, we expect to be
named as a defendant in the suit. The complaint alleges infringement of 16
patents, 14 of which relate to machine vision and bar code readers, and the
other two of which relate to semiconductor processing technology. The action has
been stayed with respect to the 14 patents relating to machine vision and bar
code readers, pending a request by the equipment manufacturers to join the suit
and assume responsibility for the litigation. The complaint seeks monetary
damages, counsel fees and injunctive relief.

If we are unsuccessful in resolving these two proceedings, as they relate
to us, our operations may be disrupted or we may incur additional costs that may
decrease our profitability.

Other than described above, we believe there is no litigation pending that
should have, individually or in the aggregate, a material adverse effect on our
financial position or results of operations.

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<PAGE> 89

MANAGEMENT

OUR DIRECTORS AND EXECUTIVE OFFICERS

Currently, three individuals, Richard J. Rawson, Paul D. Diczok and Jean F.
Rankin are serving as our directors. Prior to the completion of this offering,
we expect to increase the size of our board of directors to include additional
directors, one of whom will be an executive officer of our company. Pursuant to
the Separation and Distribution Agreement, Lucent will nominate a majority of
the members of our board of directors and we expect those directors nominated by
Lucent will be employees of Lucent. At the time of the distribution, the
Lucent-nominated directors will resign.

Upon completion of this offering, our board of directors will be divided
into three classes. Commencing with the annual meeting of stockholders to be
held in February 2002, directors for each class will be elected at the annual
meeting of stockholders held in the year in which the term for that class
expires and thereafter will serve for a term of three years.

The following table sets forth information as to persons who serve or who
are expected to serve as our directors, executive officers or key employees at
the time of the separation.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John A. Young............... 68 Chairman of the Board Nominee
John T. Dickson............. 54 President, Chief Executive Officer and Director Nominee
Daniel A. Dileo............. 53 Executive Vice President, Optoelectronics
Sohail A. Khan.............. 46 Executive Vice President, Integrated Circuits
Ahmed Nawaz................. 51 Executive Vice President, Sales
Jean F. Rankin.............. 41 Senior Vice President, General Counsel, Secretary and Director
Paul D. Diczok.............. 57 Director
Richard J. Rawson........... 48 Director
</TABLE>

John A. Young will become Chairman of our Board prior to the completion of
this offering. Mr. Young has been a director of Lucent since 1996. In 1992, Mr.
Young retired from his position as President and Chief Executive Officer of
Hewlett-Packard Company, a position he held since 1978. Mr. Young is currently
Vice Chairman of SmithKline Beecham p.l.c. since January 1999 and Vice Chairman
of Novell, Inc. since 1997. He is also a director of Affymetrix, Inc., Chevron
Corp. and Ciphergen Biosystems Inc.

John T. Dickson will become our President, Chief Executive Officer and a
director prior to the completion of this offering. In August 2000, Mr. Dickson
was named President and Chief Executive Officer-designate of Lucent's
Microelectronics Group, which includes the businesses to be transferred to us as
part of the separation. Previously, Mr. Dickson was Executive Vice President and
Chief Executive Officer of Lucent's Microelectronics and Communications
Technologies Group since January 1998. He joined AT&T in 1993 as Vice President
of its Integrated Circuit business unit and moved to Lucent following its spin
off in 1996, where he continued in the same role until December 1997, when he
was named Chief Operating Officer for Microelectronics. Mr. Dickson is currently
a director of the Semiconductor Industry Association, or SIA, and Mettler-Toledo
International Inc. and a member of the board of trustees of Lehigh Valley Health
Network.

Daniel A. Dileo will become our Executive Vice President of Optoelectronics
prior to the completion of this offering. Mr. Dileo has been President of the
Optoelectronics business of Lucent's Microelectronics and Communications
Technologies Group since November 1999. From June 1998 to November 1999, Mr.
Dileo was Vice President and Chief Operating Officer of the Optoelectronics
business. Mr. Dileo joined AT&T in 1970 and moved to Lucent following its spin
off in 1996. While at AT&T, he held a variety of positions, including Vice
President of the Wireless and Multimedia business unit from January 1996 to
September 1996, a position in which he continued at Lucent until May 1998. Mr.
Dileo is currently a director of Data I/O Corporation.

Sohail A. Khan will become our Executive Vice President of Integrated
Circuits prior to the completion of this offering. Mr. Khan has been President
of the Integrated Circuits business of Lucent's Microelectronics
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<PAGE> 90

and Communications Technologies Group since April 2000. Mr. Khan was the
strategy and business development Vice President of Lucent's Microelectronics
and Communications Technologies Group from September 1996 to April 2000. From
April 1996 to September 1996, Mr. Khan was Vice President of Marketing for MMC
Networks, a developer and supplier of network processing platforms and services.
Mr. Khan joined AT&T in 1990 as the director of marketing and applications
engineering for the digital signal processing product line and moved to Lucent
following its spin off in 1996. While at AT&T, he held a variety of positions,
including Vice President and General Manager of the Wireless and Multimedia
business unit of AT&T from February 1994 to April 1996. Mr. Khan is currently a
director of Tripath Technology Inc.

Ahmed Nawaz will become our Executive Vice President of Sales prior to the
completion of this offering. Mr. Nawaz has been President of Worldwide Sales,
Strategy and Business Development of Lucent's Microelectronics and
Communications Technologies Group since April 2000. He joined AT&T in 1992 and
moved to Lucent following its spin off in 1996. Mr. Nawaz was Vice President of
Lucent's Network Communications business unit from January 1996 to July 1998.
While at AT&T, he was Vice President of the Applications business unit from 1994
to 1995. Prior to joining AT&T, Mr. Nawaz was at Texas Instruments Incorporated,
where he was responsible for the personal computer business unit from 1990 to
1992 and also held various marketing and design management positions. Mr. Nawaz
is currently a director of Digi International Inc.

Jean F. Rankin is a director of our company and will become our Senior Vice
President, General Counsel and Secretary prior to the completion of this
offering. Previously, Ms. Rankin was Vice President-Law of Lucent. Ms. Rankin
joined AT&T in 1990 and moved to Lucent after its spin off in 1996. While at
AT&T, she held various legal positions. From 1986 to 1990, Ms. Rankin was with
Cravath, Swaine & Moore.

Paul D. Diczok is a director of our company. Mr. Diczok has been Managing
Corporate Counsel at Lucent since December 1999. From September 1996 to December
1999, Mr. Diczok was Chief Counsel for Lucent's BCS division. He joined AT&T in
December 1977 and moved to Lucent after its spin off in 1996. While at AT&T, he
held a variety of positions, including Chief Counsel of its BCS division from
April 1990 to September 1996.

Richard J. Rawson is a director of our company. Mr. Rawson has been Senior
Vice President, General Counsel and Secretary of Lucent since April 1996. Mr.
Rawson joined AT&T in 1984 and moved to Lucent after its spin off in 1996. While
at AT&T, he held a variety of positions, including Vice President, Law--AT&T
Network Systems Group from September 1992 to January 1996.

ANNUAL MEETING

Our first annual meeting of stockholders after the offering is expected to
be held in February 2002. This will be an annual meeting of stockholders for the
election of directors. The annual meeting will be held at our principal office
or at such other place or by electronic means as permitted by Delaware law and
on such date as may be fixed from time to time by resolution of our board of
directors.

COMMITTEES OF THE BOARD OF DIRECTORS

We will be managed under the direction of our board of directors. Our board
of directors has established two committees: an audit and finance committee and
a corporate governance and compensation committee.

AUDIT AND FINANCE COMMITTEE

The audit and finance committee will be comprised solely of directors who
are not our employees. The functions of this committee include:

-- assisting the board of directors with respect to the adequacy of our
internal controls and financial reporting process and the reliability
of our financial statements;

-- assisting the board of directors with respect to the independence and
performance of our internal auditors and independent auditors;

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<PAGE> 91

-- assisting the board of directors with respect to our compliance with
legal and regulatory requirements;

-- recommending to our board of directors the appointment of the
independent auditors; and

-- reviewing our financing plans and reporting recommendations to our
full board for approval and to authorize action.

We expect that this committee will meet periodically with management to
consider the adequacy of our internal controls and the objectivity of our
financial reporting and that this committee will discuss these matters with our
independent auditors and with appropriate company financial personnel and
internal auditors. We also expect that both the independent auditors and the
internal auditors will regularly meet privately with this committee and have
unrestricted access to this committee.

CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE

Our corporate governance and compensation committee will be comprised
solely of directors who are not our employees. The functions of this committee
include:

-- recommending to our full board of directors nominees for election as
directors;

-- making recommendations to our board of directors from time to time as
to matters of corporate governance;

-- administering management incentive compensation plans;

-- establishing the compensation of executive officers; and

-- reviewing the compensation of directors.

This committee will consider qualified candidates for director suggested by
stockholders in written submissions to our corporate secretary.

DIRECTOR COMPENSATION

Following this offering, all our directors, other than those who are
employees of Lucent or us, will receive an annual retainer of $ . The
chair of each committee will receive an additional annual retainer of $ .
Directors will not receive separate meeting fees. Directors must elect to
receive between 50% and 100% of their retainers in our common stock or an option
to purchase our common stock or a combination of common stock and an option. Any
remaining amount may be paid in cash, but shall not exceed 50% of the retainer.
If a director elects to receive an option, the number of shares purchasable
under the option will be determined pursuant to the following formula:

<TABLE>
<S> <C> <C> <C>
Dollar value of retainer taken as an option
Number of shares = 3 X -----------------------------------------------
Fair market value of our stock on date of grant
</TABLE>

The exercise price per share under the option will be the fair market value
of a share on the date of grant. Options will generally become exercisable on
the six-month anniversary of the date of grant and have a ten year term.
Directors may defer all or a portion of their cash and stock retainers under our
Deferred Compensation Plan.

We also provide non-employee directors with travel accident insurance when
traveling on our business.

STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS

All of our common stock is currently owned by Lucent, and thus none of our
officers, directors or director nominees owns any of our common stock. Following
this offering, any Lucent stock-based awards held by these individuals will be
converted to our stock-based awards. To the extent our directors and officers
own shares of Lucent common stock at the time of the distribution, they will
participate in the distribution on the same terms as other holders of Lucent
common stock.

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<PAGE> 92

The following table sets forth the number of shares of Lucent common stock
beneficially owned on December 1, 2000, by each director, each director nominee,
our chief executive officer and our three other most highly compensated
executive officers, identified in the "--Executive Compensation" section below,
and all of our directors, director nominees and executive officers as a group.
Except as otherwise noted, the individual director or executive officer or their
family members had sole voting and investment power with respect to such
securities. The total number of shares of Lucent common stock outstanding as of
November 30, 2000 was 3,388,942,883. No individual director, director nominee or
executive officer owned 1% or more of Lucent's outstanding common stock, nor did
the directors, director nominees and executive officers as a group.

<TABLE>
<CAPTION>
COMMON STOCK
AND OPTIONS OTHER COMMON
NAME BENEFICIALLY OWNED(1) STOCK EQUIVALENTS(2) TOTAL
------------------------------------------ --------------------- -------------------- ---------
<S> <C> <C> <C>
John A. Young............................. 10,072(3) 15,096 25,168
John T. Dickson........................... 189,112(4) 315,541 504,653
Daniel A. Dileo........................... 70,268(5) -- 70,268
Sohail A. Khan............................ 67,607(6) -- 67,607
Ahmed Nawaz............................... 462,500(7) 53,722 516,222
Paul D. Diczok............................ 46,899(8) -- 46,899
Jean F. Rankin............................ 22,160(9) 4,029 26,189
Directors, director nominees and executive
officers as a group (7 persons)......... 868,618(10) 388,388 1,257,006
</TABLE>

------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock subject
to options that are exercisable or will become exercisable within 60 days
of December 1, 2000 into shares of Lucent common stock are deemed to be
outstanding and to be beneficially owned by the person holding the options
for the purpose of computing the percentage ownership of the person, but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.

(2) Includes restricted stock units and amounts held in Lucent stock accounts
under the Lucent Deferred Compensation Plan.

(3) Mr. Young's holdings include 10,072 shares subject to options.

(4) Mr. Dickson's holdings include 183,062 shares subject to options.

(5) Mr. Dileo's holdings include 70,268 shares subject to options.

(6) Mr. Khan's holdings include 67,507 shares subject to options.

(7) Mr. Nawaz's holdings include 135,988 shares subject to options.

(8) Mr. Diczok's holdings include 46,899 shares subject to options.

(9) Ms. Rankin's holdings include 22,160 shares subject to options.

(10) Includes 535,956 shares subject to options. Mr. Rawson is not included in
this table or this amount because he is expected to resign from our board
of directors prior to this offering.

EXECUTIVE COMPENSATION

The compensation of our executive officers will be approved by the
corporate governance and compensation committee of our board of directors. Our
corporate governance and compensation committee will consist entirely of
non-employee directors. Our corporate governance and compensation committee has
not yet established the compensation of our executive officers. We expect,
however, that the compensation of the executive and other officers will consist
principally of base salary, annual cash bonus and long-term equity-based
incentive compensation.

Salaries of the executive officers will be based, among other factors, on
our corporate governance and compensation committee's assessment of the
executive's responsibilities, experience and performance, compensation data of
other companies, and the competitive environment for attracting and retaining
executives.

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<PAGE> 93

We expect that cash bonuses for executive officers will be determined
annually at or following the end of our fiscal year, in accordance with targets
established at or near the beginning of the fiscal year. Factors which may be
considered in determining the amount of cash bonuses paid to executive officers
will be, among others, the executive officer's individual performance, including
the quality of strategic plans, organizational and management development,
special project leadership and similar indicators of individual performance, and
our financial performance, which may be measured by earnings per share, return
on equity and total return to the shareholders in the form of stock price
appreciation and dividends, if paid, or other measures.

Our future equity-based awards will consist principally of stock options
and restricted stock unit awards which will be granted from time to time under
our 2001 Long Term Incentive Plan. We anticipate that our corporate governance
and compensation committee will base grants of stock-based awards on various
factors, including the number of shares of common stock outstanding, the number
of shares of common stock authorized under our 2001 Long Term Incentive Plan,
the executive officer's ability to contribute to our future success and the
other elements of the executive's compensation.

The following table sets forth compensation information for our chief
executive officer and our three other executive officers who, based on the
salary and bonus compensation received from Lucent, were the most highly
compensated for the fiscal year ended September 30, 2000. All information set
forth in this table reflects compensation earned by these individuals for
service with Lucent for the fiscal year ended September 30, 2000. The individual
currently acting in the role of chief financial officer is not expected to serve
as one of our executive officers following this offering and the individual who
will serve as the actual chief financial officer following this offering has not
yet been determined. Accordingly, no information on the compensation of our
interim chief financial officer is reported in this table. Our proxy statement
for the annual meeting to be held in 2002 will contain information on the
compensation paid to our chief financial officer serving after this offering
because we expect that he or she will be one of our four most highly compensated
executive officers, other than our chief executive officer.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------------- --------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP
NAME AND COMPENSATION STOCK OPTIONS/ PAYOUTS ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARD(S)($)(2) SARS(#) ($) COMPENSATION($)
------------------ ---- --------- -------- ------------ -------------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John T. Dickson........ 2000 436,667 350,000 22,745 -- 1,551,242 -- 28,773(3)
President and Chief
Executive Officer
Daniel A. Dileo........ 2000 297,262 300,000 6,093 -- 97,707 -- 39,245(4)
Executive Vice
President,
Optoelectronics
Sohail A. Khan......... 2000 276,812 250,000 3,807 -- 171,241 -- 31,273(5)
Executive Vice
President, Integrated
Circuits
Ahmed Nawaz............ 2000 325,000 280,000 5,386 -- 133,466 -- 20,689(6)
Executive Vice
President, Sales
</TABLE>

------------
(1) Includes payments of above-market interest on deferred compensation and tax
reimbursement payments.

(2) Mr. Dickson's holdings at the end of fiscal 2000 include 256,793 restricted
stock units valued at $7,791,356. Mr. Nawaz's holdings at the end of fiscal
2000 include 53,722 restricted stock units valued at $1,629,979. The value
of the restricted stock unit holdings is calculated by multiplying the
closing market price of a share of Lucent common stock on September 30,
2000, adjusted to reflect the spin off of Avaya Inc., by the number of
restricted stock units held.

(footnotes continued on next page)

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<PAGE> 94

(3) The amount shown for Mr. Dickson includes $7,208 of company contributions to
a 401(k) savings plan, $8,802 value of the benefits or premiums paid for
split-dollar life insurance projected on an actuarial basis and $12,763 in
payments equal to lost company savings plan matching contributions resulting
from tax code limitations.

(4) The amount shown for Mr. Dileo includes $8,085 of company contributions to a
401(k) savings plan, $1,350 value of the benefits or premiums paid for
split-dollar life insurance projected on an actuarial basis and $29,810 in
payments equal to lost company savings plan matching contributions resulting
from tax code limitations.

(5) The amount shown for Mr. Khan includes $7,548 of company contributions to a
401(k) savings plan, $900 value of the benefits or premiums paid for
split-dollar life insurance projected on an actuarial basis and $22,825 in
payments equal to lost company savings plan matching contributions resulting
from tax code limitations.

(6) The amount shown for Mr. Nawaz includes $8,364 of company contributions to a
401(k) savings plan, $1,180 value of the benefits or premiums paid for
split-dollar life insurance projected on an actuarial basis and $11,145 in
payments equal to lost company savings plan matching contributions resulting
from tax code limitations.

GRANTS OF STOCK OPTIONS

The following table shows all grants of options to acquire shares of Lucent
common stock granted to the executive officers named in the Summary Compensation
Table in the "--Executive Compensation" section above for the fiscal year ended
September 30, 2000. Pursuant to the employee benefits agreement, Lucent stock
options and restricted stock units held by our employees, including these
executive officers, will be converted to our stock options and restricted stock
units.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS GRANT DATE VALUE
------------------------------------------------------- ----------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS AGERE EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE PRESENT VALUE($)
--------------------------------- ---------- --------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
John T. Dickson.................. 402,920 58.1071 10/24/2009 10,043,968(1)
141,022 58.1071 10/24/2009 3,515,383(1)
1,007,300 52.3367 2/15/2010 22,985,378(2)
Daniel A. Dileo.................. 22,160 58.1071 10/24/2009 552,403(1)
25,182 52.3367 2/15/2010 574,623(2)
50,365 58.6034 5/31/2010 1,331,156(3)
Sohail A. Khan................... 30,219 58.1071 10/24/2009 753,298(1)
100,730 52.3367 2/15/2010 2,298,538(2)
40,292 58.6035 5/31/2010 1,064,925(3)
Ahmed Nawaz...................... 57,919 58.1071 10/24/2009 1,443,802(1)
25,182 52.3367 2/15/2010 574,623(2)
50,365 58.6034 5/31/2010 1,331,156(3)
</TABLE>

------------
(1) The grant date present value was calculated based upon the following
assumptions: the term of five years, 37% volatility, dividend yield of
0.001% and interest rate of 6.36%.

(2) The grant date present value was calculated based upon the following
assumptions: the term of five years, 37% volatility, dividend yield of
0.001% and interest rate of 6.77%.

(3) The grant date present value was calculated based upon the following
assumptions: the term of five years, 40% volatility, dividend yield of
0.002% and interest rate of 6.52%.

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<PAGE> 95

EXERCISE OF STOCK OPTIONS

The following table shows aggregate exercises of options to purchase Lucent
common stock in the fiscal year ended September 30, 2000, by the executive
officers named in the Summary Compensation Table in the "--Executive
Compensation" section above.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(#) AT FISCAL YEAR-END($)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John T. Dickson........... 137,288 6,507,063 183,062 1,723,826 2,482,387 1,398,496
Daniel A. Dileo........... -- -- 70,268 190,378 1,037,156 19,686
Sohail A. Khan............ -- -- 67,507 219,519 940,514 78,748
Ahmed Nawaz............... 157,760 8,339,629 135,988 329,889 1,399,240 1,035,926
</TABLE>

PENSION PLANS

Prior to the distribution, most of our U.S. management employees, including
executive officers, are participants in Lucent's retirement income plan.
Effective at the time of the distribution, we will adopt a retirement income
plan that will replicate, in all material respects, the Lucent retirement income
plan, and that will be a non-contributory pension plan which covers most
management employees, including the executive officers. We also will adopt a
non-contributory supplemental pension plan that will replicate in all material
respects Lucent's supplemental pension plan. The following is a summary
description of the expected terms of our retirement income plan and our
supplemental pension plan as those plans apply to management employees hired
prior to January 1, 1999, including the individuals named in the Summary
Compensation Table above.

Participants will be given full credit under our retirement income plan for
service and compensation accrued under the Lucent retirement income plan. Under
our retirement income plan, annual pensions will be computed on an adjusted
career average pay basis. A participant's adjusted career average pay will be
equal to 1.4% of the sum of the individual's:

-- average annual pay for the five years ending December 31, 1998,
excluding the annual bonus award paid in December 1997, times the
number of years of service prior to January 1, 1999;

-- pay subsequent to December 31, 1998; and

-- annual bonus award paid in December 1997.

The normal retirement age under our retirement income plan will be 65.
However, employees who are at least age 50 with at least 15 years of service can
retire with reduced benefits. If an employee's age is at least 50 and, when
added to service, is equal to or greater than 75, the employee may retire with
unreduced pension benefits. A reduction equal to 3% is made for each year age
plus service is less than 75. Pension amounts under our retirement income plan
will not be subject to reductions for social security benefits or other offset
amounts.

Average annual pay includes base salary and annual bonus awards. However,
federal laws place limitations on compensation amounts that may be included
under this plan. In 2000, up to $170,000 in eligible base salary and annual
bonus could be included in the calculation under this plan.

Pension amounts based on our retirement income plan formula which exceed
the applicable limitations will be paid under our supplemental pension plan.
Compensation and benefit amounts which exceed the applicable federal limitations
will be taken into account, and pension amounts related to annual bonus awards
payable to executive officers will be paid, under our supplemental pension plan.
This plan will be a non-contributory plan, and will use the same adjusted career
average pay formula and eligibility rules as our

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retirement income plan to provide supplemental pension benefits to our
management employees hired before January 1, 1999, including our executive
officers.

Our supplemental pension plan will provide executive officers and other of
our eligible employees with minimum pensions. Eligible retired executive
officers and surviving spouses may receive an annual minimum pension equal to
15% of the sum of final base salary plus annual bonus awards. This minimum
pension will be offset by amounts received by plan participants as pensions
under all our pension plans.

In addition, Messrs. Dickson, Khan and Nawaz will also be entitled to a
supplemental pension benefit under our supplemental pension plan. This plan will
provide additional pension credits equal to the difference between 35 and the
maximum possible years of service attainable at age 65, but not to exceed actual
net credited service, at one-half the rate in our retirement income plan.

If Messrs. Dickson, Dileo, Khan and Nawaz continue in the positions
identified above and retire at the normal retirement age of 65, the estimated
annual pension payable to them under the retirement income plan and supplemental
pension plan would be $635,000, $338,000, $455,000 and $370,000, respectively.
These amounts are straight-life annuity amounts. Other optional forms of
payment, which provide for actually reduced pensions, are available.

It is anticipated that some of our non-qualified executive benefit plans
will be supported by a benefits protection trust, the assets of which will be
subject to the claims of our creditors. In the event of a change in control or a
potential change in control of our company, additional funds might be required
to be contributed to such trust to support benefits under such plans.

2001 COMPANY LONG TERM INCENTIVE PLAN

We intend to adopt, with the approval of Lucent in its capacity as our sole
stockholder, the Agere Systems Inc. 2001 Long Term Incentive Plan, for the
benefit of our officers and some of our other employees. The plan is in addition
to any other broad-based plan that we may adopt for the grant of stock options
to our employees more generally. After this offering, the 2001 Long Term
Incentive Plan will be administered by the corporate governance and compensation
committee of our board of directors. In order to ensure that compensation paid
pursuant to the 2001 Long Term Incentive Plan can qualify as "performance-based
compensation" not subject to the limitation on deductibility of executive
compensation in excess of $1 million, we intend to seek stockholder approval of
the 2001 Long Term Incentive Plan at a future annual meeting of stockholders.

The following description of our 2001 Long Term Incentive Plan is qualified
by reference to the full text thereof, a copy of which will be filed as an
exhibit to the registration statement.

AWARDS

The 2001 Long Term Incentive Plan provides for the grant of incentive stock
options that qualify under Section 422 of the Internal Revenue Code and
non-statutory stock options, stock appreciation rights, restricted stock awards,
performance awards, and other stock unit awards, as such terms are defined in
the 2001 Long Term Incentive Plan. No determination has yet been made as to the
number of our employees who will be eligible to participate in the 2001 Long
Term Incentive Plan.

SHARES AVAILABLE

The total number of shares of our common stock available for awards granted
under the 2001 Long Term Incentive Plan will be shares. During the ten
year term of the long term plan, no more than shares of our common
stock will be available for the grant of incentive stock options. No individual
may be granted awards with respect to more than shares of our common
stock over the ten year term of the long term plan.

Any shares issued by us through the assumption of or substitution for
outstanding grants from Lucent or an acquired company will not reduce the number
of shares of our common stock available for grants under the

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2001 Long Term Incentive Plan. Any shares of our common stock issued under the
2001 Long Term Incentive Plan, including in connection with substitute awards
may consist, in whole or in part, of authorized and unissued shares of our
common stock or treasury shares of our common stock or shares of our common
stock purchased in the open market or otherwise. If any shares of our common
stock subject to any award are forfeited or such award otherwise terminates
without the issuance of such shares of our common stock or of other
consideration in lieu of such shares, the shares of our common stock subject to
such award, to the extent of any such forfeiture or termination, will again be
available for grant under the 2001 Long Term Incentive Plan. In the event of any
corporate event affecting the shares of our common stock, such adjustment will
be made in the aggregate number and class of shares of our common stock which
may be delivered under the 2001 Long Term Incentive Plan, in the individual
limits described above, in the number, class and option price of shares of our
common stock subject to outstanding options thereunder, and in the value of, or
number or class of shares of our common stock subject to, awards as may be
determined to be appropriate by the compensation committee, in its sole
discretion; provided that the number of shares of our common stock subject to
any award will always be a whole number.

PLAN ADMINISTRATION

The corporate governance and compensation committee of our board of
directors will administer the 2001 Long Term Incentive Plan.

OPTIONS; STOCK APPRECIATION RIGHTS

Options to purchase shares of our common stock may be granted under the
2001 Long Term Incentive Plan, either alone or in addition to other awards.
Except in the case of substitute awards, the purchase price per share of our
common stock purchasable under an option will be determined by our corporate
governance and compensation committee, in its sole discretion; provided that
such purchase price will not be less than the fair market value, as defined in
the 2001 Long Term Incentive Plan, of a share of our common stock on the date of
the grant of the option. The term of each option will be fixed by our corporate
governance and compensation committee in its sole discretion; provided that no
incentive stock option will be exercisable after the expiration of 10 years from
the date the option is granted. Options will be exercisable at such time or
times as determined by our corporate governance and compensation committee at or
subsequent to grant. Subject to the other provisions of the 2001 Long Term
Incentive Plan and any applicable award agreement, any option may be exercised
by the participant in such form or forms, including, without limitation, payment
by delivery of cash, shares of our common stock or other consideration
including, where permitted by law and our corporate governance and compensation
committee, awards having a fair market value on the exercise date equal to the
total option price, or by any combination of cash, shares of our common stock
and other consideration as our corporate governance and compensation committee
may specify in the applicable award agreement.

The aggregate fair market value of the shares of our common stock with
respect to which incentive stock options held by any participant become
exercisable for the first time by such participant during any calendar year
under the 2001 Long Term Incentive Plan, including under any of our other
benefit plans or of any of our parent or subsidiary corporations, will not
exceed $100,000, determined at the time of grant, or, if different, the maximum
limitation in effect at the time of grant under Section 422 of the Internal
Revenue Code, or any successor provision, and any regulations promulgated
thereunder. In its sole discretion, our corporate governance and compensation
committee may provide, at the time of grant, that the shares of common stock to
be issued upon an option's exercise will be in the form of restricted stock or
other similar securities, or may reserve the right so to provide after the time
of grant.

Upon termination of employment, other than for death, disability,
retirement or specified actions initiated by us, a participant will generally
forfeit all unexercisable options and may exercise all exercisable options
within 90 days following such termination.

Stock appreciation rights may be granted to participants either alone or in
addition to other awards and may, but need not, relate to a specific option. Any
stock appreciation right related to an option other than an

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incentive stock option may be granted at the same time such option is granted or
at any time thereafter before exercise or expiration of such option. Any stock
appreciation right related to an incentive stock option must be granted at the
same time such option is granted. In the case of any stock appreciation right
related to any option, the stock appreciation right or applicable portion
thereof will terminate and no longer be exercisable upon the termination or
exercise of the related option, except that any stock appreciation right granted
with respect to less than the full number of shares of our common stock covered
by a related option will not be reduced except to the extent that the number of
shares of our common stock affected by the exercise or termination of the
related option exceeds the number of shares of our common stock not covered by
the stock appreciation right. Any option related to any stock appreciation right
will no longer be exercisable to the extent the related stock appreciation right
has been exercised. Our corporate governance and compensation committee may
impose such conditions or restrictions on the exercise of any stock appreciation
right as it may deem appropriate.

PERFORMANCE SHARES OF COMMON STOCK

Performance-based equity awards may be issued to participants, for no cash
consideration or for such minimum consideration as may be required by applicable
law, either alone or in addition to other awards granted under the 2001 Long
Term Incentive Plan. The performance criteria to be achieved during any
performance period under the 2001 Long Term Incentive Plan and the length of the
performance period will be determined by our corporate governance and
compensation committee. Performance awards will generally be paid only after the
end of the relevant performance period. Performance awards may be paid in cash,
shares of our common stock, other property or any combination thereof, in the
sole discretion of our corporate governance and compensation committee at the
time of payment. Performance awards may be paid in a lump sum or in installments
following the close of the performance period.

OTHER STOCK UNIT AWARDS

Other awards of shares of common stock and other awards that are valued in
whole or in part by reference to, or are otherwise based on, shares of our
common stock or other property may be granted to participants, either alone or
in addition to other awards. Other stock unit awards may be paid in shares of
our common stock, other securities, cash or any other form of property as the
corporate governance and compensation committee may determine. Our corporate
governance and compensation committee may impose these conditions or
restrictions on the exercise of any other stock award as the committee may deem
appropriate.

Shares of our common stock, including securities convertible into shares of
our common stock, subject to other stock unit awards may be issued for no cash
consideration or for such minimum consideration as may be required by applicable
law; shares of our common stock, including securities convertible into such
shares of our common stock pursuant to such a conversion of purchase right may
be purchased by participants for such consideration as our corporate governance
and compensation committee may, in its sole discretion, determine, which except
in the case of substitute awards will not be less than the fair market value of
such shares of our common stock or other securities as of the date such purchase
right is awarded.

RESTRICTED SHARES OF COMMON STOCK

Restricted stock awards may be issued to participants, for no cash
consideration or for such minimum consideration as may be required by applicable
law, either alone or in addition to other awards granted under the 2001 Long
Term Incentive Plan. Except as otherwise determined by our corporate governance
and compensation committee at the time of grant, upon termination of employment
for any reason during the restriction period, all restricted stock awards still
subject to restriction will be forfeited by the participant and reacquired by
us.

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CHANGE IN CONTROL

The 2001 Long Term Incentive Plan will generally provide that, unless our
corporate governance and compensation committee determines otherwise at the time
of grant with respect to a particular award, in the event of a change in
control:

-- any options and stock appreciation rights outstanding as of the date
the change in control is determined to have occurred will become
fully exercisable and vested;

-- the restrictions and deferral limitations applicable to any
restricted stock awards will lapse;

-- all performance awards will be considered to be earned and payable in
full, and any deferral or other restriction will lapse and such
performance awards will be immediately settled or distributed; and

-- the restrictions and deferral limitations and other conditions
applicable to any other stock unit awards or any other awards will
lapse, and such other stock unit awards or other awards will become
free of all restrictions, limitations or conditions and become fully
vested and transferable.

The 2001 Long Term Incentive Plan defines change in control to mean, generally:

-- an acquisition by any individual, entity or group of beneficial
ownership of 20% or more of either the then outstanding shares of our
common stock or the combined voting power of our then outstanding
voting securities entitled to vote generally in the election of
directors;

-- a change in the composition of a majority of our board of directors
which is not supported by our current board of directors;

-- the approval by the stockholders of a merger, reorganization or
consolidation or sale or other disposition of all or substantially
all of our assets of or, if consummation of such corporate
transaction is subject, at the time of such approval by stockholders,
to the consent of any government or governmental agency, the
obtaining of such consent either explicitly or implicitly by
consummation; or

-- the approval of the stockholders of our complete liquidation or
dissolution.

The 2001 Long Term Incentive Plan defines change in control price,
generally, as the higher of the highest price of a share of common stock during
the 60-day period prior to and including the date of a change in control or if
the change in control is the result of a tender or exchange offer or a corporate
transaction, the highest price per share paid in such tender or exchange offer
or corporate transaction.

OTHER PROVISIONS

Our board of directors may amend, alter or discontinue the 2001 Long Term
Incentive Plan, but no amendment, alteration or discontinuation may be made that
would impair rights under an award previously granted without the participant's
consent.

Our corporate governance and compensation committee will be authorized to
make adjustments in performance award criteria or in the terms and conditions of
other awards in recognition of unusual or nonrecurring events affecting us or
our financial statements or changes in applicable laws, regulations or
accounting principles.

Subject to the provisions of the 2001 Long Term Incentive Plan and any
award agreement, the recipient of an award, including, without limitation, any
deferred award may, if so determined by our corporate governance and
compensation committee, be entitled to receive, currently or on a deferred
basis, interest or dividends, or interest or dividend equivalents, with respect
to the number of shares of our common stock covered by the award, and our
corporate governance and compensation committee may provide that such amounts,
if any, will be deemed to have been reinvested in additional shares of our
common stock or otherwise reinvested.

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The 2001 Long Term Incentive Plan also provides that, if the corporate
governance and compensation committee determines at the time a restricted stock
award, a performance award or an other stock unit award is granted to an
individual that the individual is, or may be as of the end of the tax year in
which we would claim a tax deduction related to the award, a "covered employee"
within the meaning of Section 162(m) of the Internal Revenue Code, then that
committee may make the lapsing of restrictions thereon and the distribution of
cash, stock or other property pursuant to the award subject to us having a level
of net income, excluding specified non-recurring items, determined by the
committee. The committee will also have the discretion to reduce, but not
increase, the final amount of any performance award or other stock unit award
based on such criteria as individual and company performance.

2001 EMPLOYEE STOCK PURCHASE PLAN

ADOPTION AND ADMINISTRATION

We intend to adopt the 2001 Employee Stock Purchase Plan covering an
aggregate of shares of our common stock. The 2001 Employee Stock
Purchase Plan is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Internal Revenue Code. The 2001 Employee Stock
Purchase Plan will be administered by the corporate governance and compensation
committee.

ELIGIBILITY

All employees in the United States and certain employees outside the United
States may participate in the 2001 Employee Stock Purchase Plan. No employee
will be eligible for the grant of any rights under the 2001 Employee Stock
Purchase Plan if immediately after such rights are granted, such employee would
own 5% or more of the total voting power or value of all classes of our stock.

PURCHASE OF SHARES

We expect to implement the 2001 Employee Stock Purchase Plan by offering
eligible employees the option to purchase our common stock. To participate in
the 2001 Employee Stock Purchase Plan, an employee must authorize us to deduct
an amount not less than one percent nor more than ten percent of a participant's
total cash compensation from his or her pay during each purchase period within a
longer offering period. The first offering period will commence on the date of
the offering. The first purchase period will end on a date to be determined by
our board of directors. Thereafter, the purchase periods are expected to
commence on the first day of May and November and end on the last day of the
following October and April, respectively, of each year. Participating employees
will purchase our common stock at a price per share equal to 85% of the lesser
of the fair market value of a share of our common stock at the beginning of the
offering period and the fair market value of a share of our common stock at the
end of the purchase period. Eligible employees may be granted rights only if the
rights, together with any other rights granted under any other employee stock
purchase plan, do not permit such employee to purchase our common stock with a
fair market value determined at the time of grant in excess of $25,000 for each
calendar year in which such rights are outstanding. Employees may not purchase
more than 1,250 shares of our common stock per purchase period.

AMENDMENT AND TERMINATION

The 2001 Employee Stock Purchase Plan will terminate at the direction of
our board of directors or when all of the shares reserved for issuance have been
purchased. Our board of directors may amend the 2001 Employee Stock Purchase
Plan at any time except that shareholder approval is required to amend the plan
to increase the number of shares of our common stock reserved under the plan.

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ARRANGEMENTS BETWEEN LUCENT AND OUR COMPANY

We will enter into the Separation and Distribution Agreement and a number
of ancillary agreements with Lucent for the purpose of accomplishing the
contribution to us of the businesses described in this prospectus and the
distribution. These agreements will govern the relationship between Lucent and
us subsequent to the separation and provide for the allocation of employee
benefit, tax and other liabilities and obligations attributable to periods prior
to the separation. The ancillary agreements include:

-- Interim Services and Systems Replication Agreement;

-- Fiber Product Purchase Agreement;

-- Microelectronics Product Purchase Agreement;

-- ORiNOCO Product Purchase Agreement;

-- Employee Benefits Agreement;

-- Trademark License Agreement;

-- Trademark Assignment;

-- Trade Dress Assignment;

-- Patent and Technology License Agreement;

-- Patent Assignment;

-- Technology Assignment and Joint Ownership Agreement;

-- Development Project Agreement;

-- Joint Design Center Operating Agreement;

-- Tax Sharing Agreement; and

-- Real Estate Agreements.

In addition, the current federal Tax Allocation Agreement and the current
State and Local Income Tax Allocation Agreement by and among Lucent and its
subsidiaries governing the allocation of income taxes among Lucent and its
subsidiaries will continue to apply to us for taxable periods prior to and
including the distribution. Of the agreements summarized below, the material
agreements have been filed as exhibits to the registration statement of which
this prospectus forms a part and the summaries of such agreements are qualified
in their entirety by reference to the full text of such agreements.

SEPARATION AND DISTRIBUTION AGREEMENT

The Separation and Distribution Agreement will set forth the agreements
between us and Lucent with respect to the principal corporate transactions
required to effect our separation from Lucent, this offering and the
distribution of our shares to Lucent's stockholders, and other agreements
governing the relationship between Lucent and us.

THE SEPARATION

To effect the separation, Lucent will, or will cause its subsidiaries to,
transfer or agree to transfer, all of the assets of the contributed businesses
to us as described in this prospectus. We will assume, or agree to assume, and
will agree to perform and fulfill all of the liabilities of the contributed
businesses in accordance with their respective terms. Except as expressly set
forth in the agreement or in any other ancillary agreement, neither we nor
Lucent will make any representation or warranty as to the assets, businesses or
liabilities transferred or assumed as part of the separation, as to any consents
or approvals required in connection with the transfers, as to the value or
freedom from any security interests of any of the assets transferred, as to the
absence of any defenses or freedom from counterclaim with respect to any claim
of either us or Lucent, or as

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to the legal sufficiency of any assignment, document or instrument delivered to
convey title to any asset transferred. Except as expressly set forth in any
ancillary agreement, all assets will be transferred on an "as is," "where is"
basis, and the respective transferees will agree to bear the economic and legal
risks that any conveyance is insufficient to vest in the transferee good and
marketable title, free and clear of any security interest and that any necessary
consents or approvals are not obtained or that requirements of laws or judgments
are not complied with.

THE INITIAL PUBLIC OFFERING

-- the registration statement containing this prospectus must be
effective;

-- Lucent's assumable short-term debt must have been assumed by us;

-- United States securities and blue sky laws must be satisfied;

-- our common stock must be listed on the New York Stock Exchange;

-- all our obligations under the underwriting agreement must be met or
waived by the underwriters;

-- Lucent must own at least 80.1% of our stock and must be satisfied
that the distribution will be tax-free to Lucent, us and Lucent's
United States stockholders;

-- no legal restraints must exist preventing the consummation of this
offering;

-- the separation must have occurred;

-- the separation agreement must not have been terminated; and

-- Lucent must determine that the terms of this offering are acceptable
to it.

THE DISTRIBUTION

Following consummation of this offering, Lucent intends to distribute by
the end of Lucent's current fiscal year, which will occur on September 30, 2001,
the remaining shares of our common stock that Lucent holds to its stockholders.
We will prepare an information statement with Lucent and send it to Lucent's
stockholders before the distribution becomes effective. The information
statement will inform the stockholders of the distribution and its specifics.
Lucent's agreement to complete the distribution on or before September 30, 2001,
is contingent on the satisfaction of the conditions described below, and the
distribution may not occur by the contemplated time or at all. Lucent is
obligated to consummate the distribution only if the following conditions are
met, any of which may be waived by Lucent:

-- a private letter ruling from the IRS shall have been obtained, and
shall continue in effect, to the effect that, among other things, the
distribution will qualify as a tax-free distribution for federal
income tax purposes under Section 355 of the Internal Revenue Code
and the transfer to us of the assets and the assumption by us of the
liabilities in connection with the separation will not result in
recognition of any gain or loss for federal income tax purposes to
Lucent, us or Lucent's or our stockholders, and such ruling shall be
in form and substance satisfactory to Lucent, in its sole discretion;

-- any material governmental approvals and consents necessary to
consummate the distribution shall have been obtained and be in full
force and effect;

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-- no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the distribution shall be in effect,
and no other event outside the control of Lucent shall have occurred
or failed to occur that prevents the consummation of the
distribution; and

-- no other events or developments shall have occurred subsequent to
this offering that, in the judgment of Lucent's board of directors,
would result in the distribution having a material adverse effect on
Lucent or its stockholders.

In the event that any condition is not satisfied or waived on or before
September 30, 2001, Lucent has agreed to complete the distribution as promptly
as practicable following the satisfaction or waiver of all conditions. Lucent
may terminate its obligations to complete the distribution if the distribution
has not occurred by September 30, 2002. If the Lucent board of directors waives
a material condition to the distribution after the date of this prospectus, we
intend to issue a press release disclosing this waiver and file a report on Form
8-K with the Securities and Exchange Commission.

RELEASES AND INDEMNIFICATION

The Separation and Distribution Agreement will provide for a full and
complete release and discharge of all liabilities existing or arising from all
acts and events occurring or failing to occur or alleged to have occurred or to
have failed to occur and all conditions existing or alleged to have existed on
or before the completion of this offering, between or among us or any of our
subsidiaries or affiliates, on the one hand, and Lucent or any of its
subsidiaries or affiliates other than us, on the other hand, except as expressly
set forth in the agreement. The liabilities released or discharged will include
liabilities arising under any contractual agreements or arrangements existing or
alleged to exist between or among any such members on or before the completion
of this offering.

We will agree to indemnify, hold harmless and defend Lucent, each of its
affiliates and each of their respective directors, officers and employees, from
and against all liabilities relating to, arising out of or resulting from:

-- the failure of us or any of our affiliates or any other person or
entity to pay, perform or otherwise promptly discharge any
liabilities associated with the contributed businesses, or any
contracts associated with the contributed businesses, in accordance
with their respective terms;

-- the contributed businesses, liabilities or contracts;

-- any material breach by us or any of our affiliates, of the agreement
or any of the other ancillary agreements; and

-- any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact required to
be stated in the registration statement or this prospectus or
necessary to make the statements in the registration statement or
this prospectus not misleading.

Also, we will indemnify Lucent and its affiliates, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from the contributed businesses prior to the
separation.

Lucent will agree to indemnify, hold harmless and defend us, each of our
affiliates and each of our respective directors, officers and employees from and
against all liabilities relating to, arising out of or resulting from:

-- the failure of Lucent or any affiliate of Lucent or any other person
or entity to pay, perform or otherwise promptly discharge any
liabilities of Lucent or its affiliates other than liabilities
associated with the contributed businesses;

-- the Lucent businesses or any liability of Lucent or its affiliates
other than liabilities associated with the separation of the
businesses; and

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-- any material breach by Lucent or any of its affiliates of the
agreement or any of the other ancillary agreements.

Also, Lucent will indemnify us and our affiliates, subject to limited
exceptions, against any claims of patent, copyright or trademark infringement or
trade secret misappropriation with respect to any product, software or other
material provided by or ordered from Lucent's retained businesses prior to the
separation.

The Separation and Distribution Agreement also will specify procedures with
respect to claims subject to indemnification and related matters.

CONTINGENT LIABILITIES AND CONTINGENT GAINS

The Separation and Distribution Agreement will provide that we and Lucent
will indemnify each other with respect to contingent liabilities relating
primarily to our respective businesses or otherwise assigned to each of us. We
and Lucent will share some contingent liabilities based on agreed upon
percentages.

The Separation and Distribution Agreement will provide for the sharing of
some contingent liabilities, including:

-- any contingent liabilities that do not primarily relate to any
business of Lucent or contingent liabilities that do not primarily
relate to any of our businesses;

-- some specifically identified liabilities, other than taxes, including
liabilities relating to terminated, divested or discontinued
businesses or operations; and

-- shared contingent liabilities within the meaning of the separation
and distribution agreement among AT&T Corp., Lucent and NCR
Corporation or the contribution and distribution agreement between
Lucent and Avaya Inc.

Lucent will assume the defense of, and may seek to settle or compromise,
any third party claim that is a shared contingent liability, and those costs and
expenses will be included in the amount to be shared by us and Lucent.

The Separation and Distribution Agreement will provide that we and Lucent
will have the exclusive right to any benefit received with respect to any
contingent gain that primarily relates to the business of, or that is expressly
assigned to, us or Lucent, respectively.

The Separation and Distribution Agreement will provide for the
establishment of a contingent claims committee comprised of one representative
designated from time to time by each of Lucent and us and sets forth procedures
for the purpose of resolving disagreements among the parties as to contingent
gains and contingent liabilities.

DISPUTE RESOLUTION

The Separation and Distribution Agreement will contain provisions that
govern, except as otherwise provided in any ancillary agreement, the resolution
of disputes, controversies or claims that may arise between us and Lucent. These
provisions contemplate that efforts will be made to resolve disputes,
controversies and claims by escalation of the matter to senior management or
other mutually agreed representatives of us and Lucent. If such efforts are not
successful, either we or Lucent may submit the dispute, controversy or claim to
non-binding mediation, subject to the provisions of the agreement. If the
dispute is not resolved through mediation, an action may be brought before any
court of competent jurisdiction.

PROVISIONS RELATING TO THIRD-PARTY INTELLECTUAL PROPERTY LICENSE AGREEMENTS

The Separation and Distribution Agreement will provide, generally, for the
grant by Lucent to us of a sublicense under numerous third-party intellectual
property license agreements. The Patent and Technology License Agreement will
provide similar grants to us from Lucent's subsidiary, Lucent Technologies GRL
Corporation, with respect to third party patent license agreements executed by
that subsidiary.

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EXPENSES

We have agreed to pay all third party costs, fees and expenses relating to
this offering. We will pay all of the agreed upon expenses of the underwriters
and the underwriters' discount provided in the underwriting agreement. We also
will pay all of the costs of producing, printing, mailing and otherwise
distributing this prospectus. Except as expressly set forth in the Separation
and Distribution Agreement or in any other ancillary agreement, whether or not
this offering or the distribution is consummated, all third-party fees, costs
and expenses paid or incurred in connection with the distribution will be paid
by Lucent.

TERMINATION

The Separation and Distribution Agreement may be terminated and the
distribution may be amended, modified or abandoned at any time prior to the
distribution date by mutual consent of Lucent and us. In addition, the
obligations of Lucent to complete the distribution may be terminated by Lucent
if the distribution does not occur on or prior to September 30, 2002. In the
event of a termination of the Separation and Distribution Agreement on or after
the completion of this offering, only the provisions of the Separation and
Distribution Agreement that obligate the parties to pursue the distribution will
terminate and the other provisions of the Separation and Distribution Agreement
and the other agreements Lucent and we enter into will remain in full force and
effect.

AMENDMENTS AND WAIVERS

No provisions of the Separation and Distribution Agreement or any other
ancillary agreement will be deemed waived, amended, supplemented or modified by
any party, unless such waiver, amendment, supplement or modification is in
writing and signed by the authorized representative against whom it is sought to
enforce such waiver, amendment, supplement or modification.

FURTHER ASSURANCES

In addition to the actions specifically provided for elsewhere in the
Separation and Distribution Agreement, both we and Lucent will agree to use our
reasonable best efforts, prior to, on and after the separation date, to take, or
cause to be taken, all actions, and to do, or cause to be done, all things,
reasonably necessary, proper or advisable under applicable laws, regulations and
agreements to consummate and make effective the transactions contemplated by the
agreement and the other ancillary agreements.

INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT

We and Lucent will enter into an Interim Services and Systems Replication
Agreement to provide each other, on an interim, transitional basis, with various
data processing, telecommunications and corporate support services, and such
additional services as we and Lucent may identify from time to time after the
separation, including:

-- accounting;

-- financial management;

-- information systems management;

-- tax;

-- payroll;

-- legal;

-- human resources administration;

-- procurement; and

-- other general support.

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The agreed upon charges for such services are generally intended to allow the
providing company to fully recover the allocated direct costs of providing the
services, plus all out-of-pocket costs and expenses, without profit.

The Interim Services and Systems Replication Agreement also provides for
the replication and transfer of designated computer systems used for
administrative support or used in our businesses or Lucent's businesses. The
systems include hardware, software, data storage or maintenance and support
components. Costs and expenses of separating or replicating a system are
intended to be borne by the parties in proportion to their usage of the system
prior to February 1, 2001. Costs and expenses of purchasing new hardware or
obtaining new software licenses will be borne by the party purchasing the new
hardware or licensing the new software.

In general, the services will commence on February 1, 2001 and expire on
September 30, 2001 unless an earlier or later termination date has been agreed
upon by both parties with respect to a particular service. The agreement may be
extended by the parties in writing either in whole or in part. With respect to
data processing services, telecommunications services and corporate support
services, the receiving party may terminate the agreement with respect to one or
more of those services upon ninety days notice. With respect to systems
replication and transfer services, the receiving party may terminate the
agreement immediately, with respect to those services, upon written notice to
the providing company.

FIBER, MICROELECTRONICS AND ORiNOCO PRODUCT PURCHASE AGREEMENTS

We and Lucent will enter into a Fiber Product Purchase Agreement, a
Microelectronics Product Purchase Agreement and an ORiNOCO Product Purchase
Agreement. The pricing terms for the products and services covered by these
commercial agreements will reflect negotiated prices.

The Fiber Product Purchase Agreement governs transactions pursuant to which
Lucent will provide specialty fiber, fiber apparatus and premises cable products
to us. Under this agreement, we will have an obligation to purchase all of our
requirements of specified specialty fiber, fiber apparatus and premises cable
products from Lucent. The Fiber Product Purchase Agreement will commence on
February 1, 2001, and expire on January 31, 2004. We and Lucent may extend this
agreement for additional one-year periods with written mutual agreements. The
agreement may be terminated for breach of material terms.

The Microelectronics Product Purchase Agreement governs transactions
pursuant to which Lucent will purchase goods and services from us. In the
agreement, Lucent has committed that payments made to us, commencing on February
1, 2001, for purchases of our products will total at least $1 billion annually
during each one year period ending January 31, 2002, January 31, 2003 and
January 31, 2004, subject to customary terms and conditions with respect to
availability and acceptability of our products. Any purchases by Lucent in
excess of $1 billion during the first or second year of the agreement will
result in a reduction of the purchase commitment by Lucent during the third year
of the agreement by the amount of any such excess. In limited instances,
Lucent's purchase commitment for each year may be reduced in the event we fail
to, or choose not to, fulfill some orders. In addition, if Lucent does not meet
their minimum yearly purchase commitments for either of the first two years of
this agreement, Lucent may carry over a portion of the yearly purchase
commitment to the following year of the agreement. At the end of the third year
of the agreement, if Lucent has not purchased an aggregate total during the
course of the agreement of at least $3 billion, or such reduced aggregate
purchase commitment in the event we fail to, or choose not to, fulfill some
orders, Lucent will be obligated to purchase products from us in the amount of
the shortfall in the three month time period following the end of the third
year, unless we and Lucent agree otherwise. The Microelectronics Product
Purchase Agreement will commence on February 1, 2001, and expire on January 31,
2004. We and Lucent may extend this agreement for additional one year periods
with written mutual agreement.

The ORiNOCO Product Purchase Agreement governs transactions in which we
furnish our ORiNOCO products to Lucent for resale. The agreement does not grant
to Lucent an exclusive right to resell the products, but does grant Lucent a
right of first opportunity or refusal for some service provider customers in
exchange for a minimum purchase commitment as may be agreed from time to time.
The pricing in this agreement shall be determined by our list price in effect on
the date of the receipt of an order less any applicable discounts. This
agreement will be effective as of February 1, 2001 and expire on January 31,
2004. We and Lucent may
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extend this agreement for additional one year periods with written mutual
agreement. The agreement may be terminated for breach of material terms.

The Fiber Product Purchase Agreement, the Microelectronics Product Purchase
Agreement and the ORiNOCO Product Purchase Agreement also contain provisions
governing:

-- orders and delivery;

-- payment terms;

-- intellectual property matters;

-- product warranties;

-- product support and documentation;

-- engineering, installation, maintenance and other services;

-- dispute resolution; and

-- limitations on liability.

EMPLOYEE BENEFITS AGREEMENT AND PLANS

We will adopt a variety of employee benefit plans in connection with the
separation and distribution. Until the distribution, our employees and former
employees will continue to participate in many of Lucent's pension and other
employee benefit plans. During this period, we will bear our allocable share of
the costs of the benefits and the administration of the plans. Generally,
effective immediately after the distribution, we will establish our own pension
and employee benefit plans, which will be substantially comparable to Lucent's
plans as in effect at that time.

EMPLOYEE BENEFITS AGREEMENT

We will enter into an employee benefits agreement with Lucent, pursuant to
which we will establish independent pension and other employee benefit plans
that are substantially similar to Lucent's existing pension and other employee
benefit plans. This agreement will provide for the transfer of assets and
liabilities of various existing Lucent pension and other employee benefit plans
covering Lucent employees who are transferring to us. Generally, following the
distribution, Lucent will cease to have any liability or obligation to our
active employees and their beneficiaries. Our benefit plans will assume and be
responsible for liabilities and obligations to those employees under all these
benefit plans, programs and practices which we may adopt. The employee benefits
agreement does not preclude us from discontinuing or changing such plans at any
time thereafter, subject to the exceptions noted below.

RETIREMENT PLANS

We will establish and administer defined benefit pension plans for our
employees who, immediately prior to the distribution, participated in Lucent's
retirement plans. Lucent has agreed to transfer particular assets and
liabilities, based on formulas set forth in the employee benefits agreement,
from the trust for Lucent's defined benefit pension plans to the trust for our
defined benefit pension plans. Each of our eligible employees will, for all
purposes under our defined benefit pension plans, be credited with the service
and any accrued benefit credited to him or her under the terms of the
corresponding Lucent plans as of the distribution.

SAVINGS PLANS

We will establish defined contribution savings/401(k)plans. Our
savings/401(k)plans will include all active employees who immediately prior to
the distribution date were participants in Lucent's savings/401(k)plans. Each
employee who participates in savings/401(k)plans will be credited with the
service and the account balance credited to him or her as of the distribution
date under the terms of Lucent's savings/

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401(k)plans. Lucent will transfer those account balances from its
savings/401(k)plans to our savings/401(k)plans.

WELFARE PLANS

We will adopt appropriate welfare benefit plans to provide welfare
benefits, including retiree medical and life benefits, to our employees and
retirees. The assets funding such liabilities under many of these plans,
including assets held in trusts constituting voluntary employee beneficiary
associations, will be transferred from trust and other funding vehicles
associated with Lucent's plans to the corresponding trusts and other funding
vehicles associated with our plans according to formulas set forth in the
employee benefits agreement.

LUCENT STOCK OPTIONS, RESTRICTED STOCK AND RESTRICTED STOCK UNITS

Pursuant to the employee benefits agreement, Lucent stock-based awards held
by our employees will be converted to our stock-based awards. As part of the
conversion, we will multiply the number of shares purchasable under each
converted stock option by a ratio determined at the time of the conversion and
divide the exercise price per share of each option by the same ratio. The number
of shares covered by each share of restricted stock and restricted stock unit
will be multiplied by the same ratio. Fractional shares will be rounded down to
the nearest whole number of shares. Generally, all other terms of the converted
stock options, restricted stock and restricted stock units will remain the same
as those in effect immediately prior to the conversion.

DEFERRED COMPENSATION PLANS

Account balances of our employees under the Lucent deferred compensation
plans will be credited to them under a deferred compensation plan of ours, and
we will thereafter be solely responsible for such obligations.

TRADEMARK LICENSE AGREEMENT, TRADEMARK ASSIGNMENT AND TRADE DRESS ASSIGNMENT

It is contemplated that the primary trademarks used in the sale of our
products and services will be transferred to us, except for Lucent's name and
logo and the Bell Laboratories name. We expect to retain the use of the Lucent
name and logo, but not the Bell Laboratories name, on a royalty-free basis, for
a transitional period. We and Lucent will enter into a Trademark License
Agreement, Trademark Assignment and Trade Dress Assignment to effectuate the
grant or transfer, as applicable, of such rights.

TECHNOLOGY ASSIGNMENT AND JOINT OWNERSHIP AGREEMENT

On or prior to the separation date, we and Lucent will execute and deliver
assignments and other agreements, including the technology assignment, related
to technology currently owned or controlled by Lucent and its subsidiaries.
Technology will include copyrights, mask works and other intellectual property
other than trademarks, trade names, trade dress, service marks and patent
rights. The technology assignment will generally divide ownership of technology
between us and Lucent, with each owning technology that was developed by or for,
or purchased by, each company for their respective businesses. Other technology
will be owned jointly by us and Lucent.

PATENT ASSIGNMENT

On or prior to the separation date, we and Lucent will execute and deliver
patent assignments and other agreements, related to patents currently owned or
controlled by Lucent and its subsidiaries. The patent assignments will divide
ownership of patents, patent applications and foreign counterparts between us
and Lucent. The ownership of patents will be divided as follows. First, Lucent
Technologies Microelectronics Guardian Corp. and Lucent Technologies
Optoelectronics Guardian Corporation will each be vested with ownership of
and/or exclusive rights in patents previously held by Lucent that relate
principally to our business. Then shares of Lucent Technologies Microelectronics
Guardian Corp. and Lucent Technologies Optoelectronics Guardian Corporation will
be contributed to us under the Separation and Distribution
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Agreement. Lucent and its other subsidiaries, will retain ownership of all other
patents and patent applications.

PATENT AND TECHNOLOGY LICENSE AGREEMENT

We and Lucent will execute and deliver a Patent and Technology License
Agreement, related to patents and technology currently owned or controlled by
Lucent and its subsidiaries and us and our subsidiaries.

The Patent and Technology License Agreement to be entered into by us and
Lucent provides for cross-licenses to each company. We and Lucent will grant to
each other, under the patents that each of us has, a nonexclusive, personal,
nontransferable license to make, have made, use, lease, import, offer to sell,
and sell any and all products and services of the businesses in which the
licensed company, including related companies, is now or hereafter engaged. The
cross-licenses also permit each company, subject to limitations, to have third
parties make items under the other company's patents, as well as to pass through
to customers limited rights under the other company's patents with respect to
products and services furnished to customers by the licensed company. Otherwise,
the right to sublicense to unaffiliated third parties will not be granted under
the cross-licenses, except for limited rights in connection with establishing
second source suppliers or rights to sublicense a divested business. The
cross-licenses between us and Lucent cover all of each company's patents,
including patents issued on patent applications with a filing date prior to
February 1, 2003.

The Patent and Technology License Agreement will also provide for personal,
worldwide, nonexclusive, and non-transferable cross-licenses to each company to
designated technology existing as of the separation date. These rights include
the right to copy, modify and improve any portion of the licensed technology.
Subject to exceptions set forth in the agreement, no right will be granted to
sublicense any of the technology other than in connection with the sale or
licensing of products. Subject to restrictions set forth in the agreement, this
agreement will further grant to us joint ownership rights in other designated
technology. This agreement will become effective February 1, 2001.

DEVELOPMENT PROJECT AGREEMENT

We and Lucent will enter into a Development Project Agreement under which
Bell Laboratories may perform some research and development activities on a
contract basis for us. We will also perform some research and development
activities for Lucent on a contingent basis. The fees paid under this agreement
are expected to be comparable to those that would be agreed upon by unrelated
parties. The agreement will commence on February 1, 2001 and expire on January
31, 2004. We and Lucent may extend this agreement for additional one-year
periods with written mutual agreement. The agreement will terminate at any time
if either we or Lucent materially breach the agreement, and fail to cure the
default within sixty days after written notice has been given.

JOINT DESIGN CENTER OPERATING AGREEMENT

We and Lucent will enter into a Joint Design Center Operating agreement to
develop technology for micro electro-mechanical systems, or MEMS. We and Lucent
will agree to jointly fund, manage and staff the joint design center over the
following three years in Murray Hill, New Jersey. We and Lucent will each have a
one-half interest in the MEMS technical information owned by Lucent as of
February 1, 2001. We and Lucent will grant each other a perpetual, nonexclusive,
royalty-free license in our respective patents which issue from applications
having an effective first filing date prior to February 1, 2003 to make and sell
MEMS products. All joint patents, which are patents issued from any application
filed with respect to any invention made jointly by us and Lucent while working
on a joint design center product and conceived or reduced to practice during
performance under the agreement, will be jointly owned by us and Lucent. We and
Lucent will be free to use these jointly owned patents for any purpose and to
license third parties under these patents. Some of these products may be
manufactured exclusively for Lucent, subject to some restrictions, for a limited
period following the first commercial availability of a product, on a case by
case basis. The initial term

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of the agreement will expire on January 31, 2004 and may be extended with the
consent of both parties. The agreement may be terminated for breach of material
terms or by written notice of either party for convenience.

TAX SHARING AGREEMENT

We and Lucent will enter into a Tax Sharing Agreement which will govern
Lucent's and our respective rights, responsibilities and obligations after the
distribution with respect to taxes for the periods ending on or before the
distribution. Generally, pre-distribution taxes that are clearly attributable to
the business of one party will be borne solely by that party, and other
pre-distribution taxes will be shared by the parties based on a formula set
forth in the Tax Sharing Agreement. In addition, the Tax Sharing Agreement will
address the allocation of liability for taxes that are incurred as a result of
restructuring activities undertaken to implement the separation. If the
distribution fails to qualify as a tax-free distribution under Section 355 of
the Internal Revenue Code because of an acquisition of our stock or assets, or
some other actions of ours, then we will be solely liable for any resulting
corporate taxes. The Tax Sharing Agreement will become effective on February 1,
2001.

REAL ESTATE AGREEMENTS

Lucent's real estate has been divided between Lucent and us. After the
separation, however, we and Lucent will continue to share some current work
locations for our respective work forces. The shared locations will be
approximately 31 of Lucent's 808 real estate locations. Approximately 25% of
these shared locations will continue to be owned by either Lucent or us; the
remaining 75% will continue to be leased commercially.

Generally, ownership of Lucent's buildings and assignment of commercially
leased buildings has been divided between Lucent and us based on which company
is the primary user of the respective building. Based on that allocation method,
we and Lucent currently contemplate that, out of approximately 1 million square
feet of space, Lucent would be the landlord or sublandlord of us for
approximately 900 thousand square feet of space, and we will be the landlord or
sublandlord of Lucent for approximately 100 thousand square feet of space.

A standard form of lease and a standard form of sublease based on
commercial models and comparable to arm's-length agreements has been employed
regardless of which company owns a building or is the assignee for a leased
building. Subleases for space in commercially leased locations have varying
terms generally to match the terms of the underlying leases. All commercial
landlord charges, such as rent, additional rent, building services and taxes
paid directly by the sublandlord, will be based on the proportionate share of
space occupied by the subtenant and marked up by a management fee payable to the
sublandlord intended to cover the costs of administering the sublease. Any other
building services provided by the sublandlord to the subtenant will be at cost
plus an administrative fee, increased annually to match the consumer price
index.

The lease term for space in owned buildings will be determined on a case by
case basis. In general, rent in owned buildings is at market price for
comparable tenants. Real estate taxes will be allocated proportionately to the
tenant, subject to a management fee. Any building services provided by the
landlord will be at cost plus an administrative fee, increased annually to match
the consumer price index.

It is contemplated that all necessary leases and subleases for transitional
shared real estate will be effective February 1, 2001. The tenant in owned
buildings and the subtenant in commercially leased buildings will be responsible
for their proportionate share of the full lease obligation, except that:

-- for space occupied by a tenant or subtenant equal to or less than 5
percent of the total space, not to exceed 5,000 square feet, the
tenant or subtenant may cancel its lease or sublease on 90-day
written notice without further liability; and

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-- for space occupied by a tenant or subtenant equal to or less than 5
percent of the total space, not to exceed 15,000 square feet, the
tenant/subtenant or landlord/sublandlord may cancel the lease or
sublease on 9 months' written notice without further liability.

OTHER AGREEMENTS

We and Lucent will continue the existing State and Local Income Tax
Allocation Agreement and the existing federal Tax Allocation Agreement by and
among Lucent and its subsidiaries. These tax agreements govern the allocation of
state, local and federal income taxes for periods prior to and including the
distribution date. In addition, after the separation, we will become a party to
Lucent's two existing collective bargaining agreements. See
"Business--Employees" for a description of these collective bargaining
agreements and how they will operate after the separation.

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OWNERSHIP OF OUR COMMON STOCK

Prior to this offering, all of the outstanding shares of our common stock
will be owned by Lucent. After completion of this offering Lucent will own
approximately % of the outstanding shares of our common stock, or
approximately % if the underwriters exercise their over-allotment option in
full, in each case assuming that the exchange described in "Underwriters--The
Exchange" occurs. If the exchange does not occur, after the completion of this
offering Lucent will own approximately % of the outstanding shares of our
common stock or approximately % if the underwriters exercise their
over-allotment option in full. Except for Lucent, we are not aware of any person
or group that will beneficially own more than 5% of the outstanding shares of
our common stock following this offering.

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DESCRIPTION OF CAPITAL STOCK

The following information reflects our certificate of incorporation and
by-laws as these documents will be in effect upon the completion of this
offering.

AUTHORIZED CAPITAL STOCK

Immediately following this offering, our authorized capital stock will
consist of shares of preferred stock, par value $1.00 per share, and
shares of common stock, par value $0.01 per share. Immediately
following this offering, approximately shares of our common stock will
be outstanding. No shares of our preferred stock will be outstanding.

COMMON STOCK

The holders of our common stock will be entitled to one vote for each share
on all matters voted on by stockholders, including elections of directors, and,
except as otherwise required by law or provided in any resolution adopted by our
board of directors with respect to any series of preferred stock, the holders of
such shares will possess all voting power. Our certificate of incorporation does
not provide for cumulative voting in the election of directors. Subject to any
preferential rights of any outstanding series of our preferred stock created by
our board of directors from time to time, the holders of common stock will be
entitled to such dividends as may be declared from time to time by our board of
directors from funds available therefor, and upon liquidation will be entitled
to receive pro rata all assets available for distribution to such holders. For a
more complete discussion of our dividend policy, please see "Dividend Policy."

PREFERRED STOCK

Our certificate of incorporation authorizes our board of directors to
establish one or more series of our preferred stock and to determine, with
respect to any series of our preferred stock, the terms and rights of such
series, including:

-- the designation of the series;

-- the number of shares of the series, which number our board of
directors may thereafter, except where otherwise provided in the
applicable certificate of designation, increase or decrease, but not
below the number of shares thereof then outstanding;

-- whether dividends, if any, will be cumulative or noncumulative, and,
in the case of shares of any series having cumulative dividend
rights, the date or dates or method of determining the date or dates
from which dividends on the shares of such series shall be
cumulative;

-- the rate of any dividends or method of determining such dividends
payable to the holders of the shares of such series, any conditions
upon which such dividends will be paid and the date or dates or the
method for determining the date or dates upon which such dividends
will be payable;

-- the redemption rights and price or prices, if any, for shares of the
series;

-- the terms and amounts of any sinking fund provided for the purchase
or redemption of shares of the series;

-- the amounts payable on and the preferences, if any, of shares of the
series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of our affairs;

-- whether the shares of the series will be convertible or exchangeable
into shares of any other class or series, or any other security, of
us or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion or
exchange price or prices or rate or rates, any adjustments thereof,
the date or dates as of which such shares will be convertible or
exchangeable and all other terms and conditions upon which such
conversion or exchange may be made;

-- restrictions on the issuance of shares of the same series or of any
other class or series;

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-- the voting rights, if any, of the holders of the shares of the
series; and

-- any other relative rights, preferences and limitations of such
series.

We believe that the ability of our board of directors to issue one or more
series of our preferred stock will provide us with flexibility in structuring
possible future financings and acquisitions, and in meeting other corporate
needs which might arise. The authorized shares of our preferred stock, as well
as shares of our common stock, will be available for issuance without further
action by our stockholders, unless such action is required by applicable law or
the rules of any stock exchange or automated quotation system on which our
securities may be listed or traded. The New York Stock Exchange currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock, or in the amount
of voting securities, outstanding of at least 20%. If the approval of our
stockholders is not required for the issuance of shares of our preferred stock
or our common stock, our board of directors may determine not to seek
stockholder approval.

Although our board of directors has no intention at the present time of
doing so, it could issue a series of our preferred stock that could, depending
on the terms of such series, impede the completion of a merger, tender offer or
other takeover attempt. Our board of directors will make any determination to
issue such shares based on its judgment as to the best interests of us and our
stockholders. Our board of directors, in so acting, could issue our preferred
stock having terms that could discourage an acquisition attempt through which an
acquiror may be able to change the composition of our board of directors,
including a tender offer or other transaction that some, or a majority, of our
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

As of the completion of this offering, shares of our Series A Junior
Participating Preferred Stock will be reserved for issuance upon exercise of
rights under our rights agreement. For a more detailed discussion of our rights
agreement and our Series A Junior Participating Preferred Stock, please see
"--Rights Agreement."

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BY-LAWS

BOARD OF DIRECTORS

Our certificate of incorporation provides that, except as otherwise fixed
by or pursuant to the provisions of a certificate of designations setting forth
the rights of the holders of any class or series of our preferred stock, the
number of our directors will be fixed from time to time exclusively pursuant to
a resolution adopted by a majority of the total number of directors which we
would have if there were no vacancies, but shall not be less than three. Our
directors, other than those who may be elected by the holders of our preferred
stock, will be classified, with respect to the time for which they severally
hold office, into three classes, as nearly equal in number as possible, one
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2002, another class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2003 and
another class to be originally elected for a term expiring at the annual meeting
of stockholders to be held in 2004, with each director to hold office until his
or her successor is duly elected and qualified. Commencing with the 2002 annual
meeting of stockholders, directors elected to succeed directors whose terms then
expire will be elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election, with each director to hold
office until such person's successor is duly elected and qualified.

Our certificate of incorporation provides that, except as otherwise
provided for or fixed by or pursuant to a certificate of designations setting
forth the rights of the holders of any class or series of our preferred stock,
newly created directorships resulting from any increase in the number of
directors and any vacancies on our board resulting from death, resignation,
disqualification, removal or other cause will be filled only by the affirmative
vote of a majority of the remaining directors then in office, even though less
than a quorum of our board, and not by the stockholders. Any director elected in
accordance with the preceding sentence will hold office until the next annual
meeting of stockholders at which time the director will stand for election for
the

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remainder of the term and until such director's successor shall have been duly
elected and qualified. No decrease in the number of directors constituting our
board of directors will shorten the term of any incumbent director. Subject to
the rights of holders of our preferred stock, any director may be removed from
office only for cause by the affirmative vote of the holders of at least a
majority of the voting power of all voting stock then outstanding, voting
together as a single class; provided, however, that any director or directors
may be removed from office by the affirmative vote of the holders of at least
80% of the voting power of all our voting stock then outstanding, voting
together as a single class.

These provisions would preclude a third party from removing incumbent
directors and simultaneously gaining control of our board of directors by
filling the vacancies created by removal with its own nominees. Under the
classified board provisions described above, it would take at least two
elections of directors for any individual or group to gain control of our board
of directors. Accordingly, these provisions could discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of us.

NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS

Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders. Except as otherwise required by law and subject to
the rights of the holders of any of our preferred stock, special meetings of our
stockholders for any purpose or purposes may be called only by our board of
directors pursuant to a resolution stating the purpose or purposes thereof
approved by a majority of the whole board of directors or by our chairman of the
board, and any power of our stockholders to call a special meeting is
specifically denied. No business other than that stated in the notice shall be
transacted at any special meeting. These provisions may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by our board or the chairman of the board.

ADVANCE NOTICE PROCEDURES

Our by-laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or to bring other business
before an annual meeting of our stockholders. Our stockholder notice procedure
provides that only persons who are nominated by, or at the direction of, our
chairman of the board, or by a stockholder who has given timely written notice
to our secretary prior to the meeting at which directors are to be elected, will
be eligible for election as our directors. Our stockholder notice procedure also
provides that at an annual meeting only such business may be conducted as has
been brought before the meeting by, or at the direction of, our chairman of the
board or our board of directors, or by a stockholder who has given timely
written notice to our secretary of such stockholder's intention to bring such
business before such meeting. Under our stockholder notice procedure, for notice
of stockholder nominations to be made at an annual meeting to be timely, such
notice must be received by our secretary not later than the close of business on
the 45th calendar day nor earlier than the close of business on the 75th
calendar day prior to the first anniversary of the preceding year's annual
meeting, except that, in the event that the date of the annual meeting is more
than 30 calendar days before or more than 60 calendar days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 75th calendar day prior to such
annual meeting and not later than the close of business on the later of the 45th
calendar day prior to such annual meeting or the 10th calendar day following the
day on which public announcement of a meeting date is first made by us.

Notwithstanding the foregoing, in the event that the number of directors to
be elected to our board of directors is increased and there is no public
announcement by us naming all of the nominees for director or specifying the
size of our increased board of directors at least 55 calendar days prior to the
first anniversary of the preceding year's annual meeting, a stockholder's notice
also will be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered not later than the
close of business on the 10th calendar day following the day on which such
public announcement is first made by us. Under our stockholder notice procedure,
for notice of a stockholder nomination to be made at a special meeting at which
directors are to be elected to be timely, such notice must be received by us not
earlier than
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the close of business on the 75th calendar day prior to such special meeting and
not later than the close of business on the later of the 45th calendar day prior
to such special meeting or the 10th calendar day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by our board of directors to be elected at such meeting.

In addition, under our stockholder notice procedure, a stockholder's notice
to us proposing to nominate a person for election as a director or relating to
the conduct of business other than the nomination of directors must contain the
information required by our by-laws. If the chairman of a meeting determines
that an individual was not nominated, or other business was not brought before
the meeting, in accordance with our stockholder notice procedure, such
individual will not be eligible for election as a director, or such business
will not be conducted at such meeting, as the case may be.

AMENDMENT

Our certificate of incorporation provides that the affirmative vote of the
holders of at least 80% of our voting stock then outstanding, voting together as
a single class, is required to amend provisions of the certificate relating to
the number, election and term of our directors; the nomination of director
candidates and the proposal of business by stockholders; the filling of
vacancies; and the removal of directors. Our certificate further provides that
the related by-laws described above, including the stockholder notice procedure,
may be amended only by our board of directors or by the affirmative vote of the
holders of at least 80% of the voting power of the outstanding shares of voting
stock, voting together as a single class.

RIGHTS AGREEMENT

Our board of directors currently expects to adopt a rights agreement, with
The Bank of New York as rights agent, on or prior to the completion of this
offering. The Rights Agreement will be filed as an exhibit to the registration
statement. For information on how to receive the Rights Agreement, please see
"Available Information."

ANTI-TAKEOVER EFFECTS

The rights are intended to have anti-takeover effects. If the rights become
exercisable, the rights will cause substantial dilution to a person or group
that attempts to acquire or merge with us in most cases. Accordingly, the
existence of the rights may deter a potential acquiror from making a takeover
proposal or tender offer. The rights should not interfere with any merger or
other business combination approved by our board of directors since we may
redeem the rights as described below and since a transaction approved by our
board of directors would not cause the rights to become exercisable.

EXERCISABILITY OF RIGHTS

Under the rights agreement, one right attaches to each share of our common
stock outstanding and, when exercisable, entitles the registered holder to
purchase from us one one-thousandth of a share of Series A Junior Participating
Preferred Stock, par value $1.00 per share, at an initial purchase price of
$ , subject to the customary antidilution adjustments. For a
description of the terms of our Series A Preferred Stock, see "--Series A Junior
Participating Preferred Stock."

The rights will not become exercisable until the earliest of:

-- 10 business days following a public announcement that a person or
group has become the beneficial owner of securities representing 10%
or more of our common shares then outstanding;

-- 10 business days after we first determine that a person or group has
become the beneficial owner of securities representing 10% or more of
our common shares then outstanding; or

-- such date, if any, as may be designated by our board of directors
following the commencement of, or the announcement of an intention to
commence, a tender offer or exchange offer that would result in a
person or group becoming the beneficial owner of securities
representing 10% or more of our common

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shares then outstanding (or such later date as our board of directors
may determine, but in no event later than the date that any person or
group actually becomes such an owner).

Additionally, at any time a person or a group has become the beneficial
owner of securities representing 10% or more of our common shares then
outstanding and we have registered the securities subject to the rights under
the Securities Act, the flip-in or flip-over features of the rights or, at the
discretion of our board of directors, the exchange features of the rights, may
be exercised by any holder, except for such person or group.

"FLIP IN" FEATURE

In the event a person or group becomes the beneficial owner of securities
representing 10% or more of our common shares then outstanding, each holder of a
right, except for such person or group, will have the right to acquire, upon
exercise of the right, instead of one one-thousandth of a share of our Series A
Preferred Stock, shares of our common stock having a value equal to twice the
exercise price of the right. For example, if we assume that the initial purchase
price of $ is in effect on the date that the flip-in feature of the
right is exercised, any holder of a right, except for the person or group that
has become the beneficial owner of securities representing 10% or more of our
common shares then outstanding, can exercise his or her right by paying us
$ in order to receive from us shares of common stock having a value
equal to $ .

"EXCHANGE" FEATURE

At any time after a person or group becomes the beneficial owner of
securities representing 10% or more, but less than 50%, of our common shares
then outstanding, our board of directors may, at its option, exchange all or
some of the rights, except for those held by such person or group, for our
common stock at an exchange ratio of one share of common stock per right,
subject to adjustment, and cash instead of fractional shares, if any. Use of
this exchange feature means that eligible rights holders would not have to pay a
purchase price before receiving shares of our common stock.

"FLIP OVER" FEATURE

In the event we are acquired in a merger or other business combination
transaction or 50% or more of our assets or our earning power and our
subsidiaries, taken as a whole, are sold, each holder of a right, except for a
person or group that is the beneficial owner of securities representing 10% or
more of our common shares then outstanding, will have the right to receive, upon
exercise of the right, the number of shares of the acquiring company's capital
stock with the greatest voting power having a value equal to twice the exercise
price of the right.

REDEMPTION OF RIGHTS

At any time before the earlier to occur of:

-- public disclosure that a person or group has become the beneficial
owner of securities representing 10% or more of our common shares
then outstanding or

-- our determination that a person or group has become the beneficial
owner of securities representing 10% or more of our common shares
then outstanding our board of directors may redeem all of the rights
at a redemption price of $0.01 per right, subject to adjustment. The
right to exercise the rights, as described under "--Exercisability of
Rights", will terminate upon redemption, and at such time, the
holders of the rights will have the right to receive only the
redemption price for each right held.

AMENDMENT OF RIGHTS

At any time before a person or group becomes the beneficial owner of
securities representing 10% or more of our common shares then outstanding, the
terms of the existing rights agreement may be amended by our board of directors
without the consent of the holders of the rights.

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However, if at any time after a person or group beneficially owns
securities representing 10% or more of our common shares then outstanding, our
board of directors may not adopt amendments to the existing rights agreement
that adversely affect the interests of holders of the rights. Furthermore, once
the rights are no longer redeemable, our board of directors may not adopt any
amendment that would lengthen the time period during which the rights are
redeemable.

TERMINATION OF RIGHTS

If not previously exercised, the rights will expire 10 years from the date
that the rights agreement commences, unless we earlier redeem or exchange the
rights or extend the final expiration date.

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK

In connection with the creation of the rights, as described above, our
board of directors has authorized the issuance of shares of Preferred Stock as
Series A Junior Participating.

We have designed the dividend, liquidation, voting and redemption features
of our Series A Preferred Stock so that the value of one one-thousandth of a
share of our Series A Preferred Stock approximates the value of one share of our
common stock. Shares of our Series A Preferred Stock may only be purchased after
the rights have become exercisable, and each share of the Series A Preferred
Stock:

-- is nonredeemable and junior to all other series of preferred stock,
unless otherwise provided in the terms of those series of preferred
stock;

-- will have a preferential dividend in an amount equal to the greater
of $1.00 or 1,000 times any dividend declared on each share of common
stock;

-- in the event of liquidation, will entitle its holder to receive a
preferred liquidation payment equal to 1,000 times the payment made
per share of common stock;

-- will have 1,000 votes, voting together with the common stock and any
other capital stock with general voting rights; and

-- in the event of any merger, consolidation or other transaction in
which shares of common stock are converted or exchanged, will be
entitled to receive 1,000 times the amount and type of consideration
received per share of common stock.

The rights of our Series A Preferred Stock as to dividends, liquidation and
voting, and in the event of mergers and consolidations, are protected by
customary antidilution provisions.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify directors and officers as well as
other employees and individuals against expenses including attorneys' fees,
judgments, fines and amounts paid in settlement in connection with various
actions, suits or proceedings, whether civil, criminal, administrative or
investigative other than an action by or in the right of the corporation, a
derivative action if they acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, if they had no reasonable
cause to believe their conduct was unlawful. A similar standard is applicable in
the case of derivative actions, except that indemnification only extends to
expenses including attorneys' fees incurred in connection with the defense or
settlement of such actions, and the statute requires court approval before there
can be any indemnification where the person seeking indemnification has been
found liable to the corporation. The statute provides that it is not exclusive
of other indemnification that may be granted by a corporation's by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.

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representative, is or was a director or officer of us or is or was serving at
our request as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
the alleged action of such person in an official capacity as a director,
officer, employee or agent or in any other capacity while serving as a director,
officer, employee or agent, will be indemnified and held harmless by us to the
fullest extent authorized by the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended against all expense,
liability and loss reasonably incurred or suffered by such person in connection
therewith. Our certificate of incorporation also provides that we will pay the
expenses incurred in defending any such proceeding in advance of its final
disposition, subject to the provisions of the General Corporation Law of the
State of Delaware. Such rights are not exclusive of any other right which any
person may have or thereafter acquire under any statute, provision of the
certificate, by-law, agreement, vote of stockholders or disinterested directors
or otherwise. No repeal or modification of such provision will in any way
diminish or adversely affect the rights of any director, officer, employee or
agent of us thereunder in respect of any occurrence or matter arising prior to
any such repeal or modification. Our certificate of incorporation also
specifically authorizes us to maintain insurance and to grant similar
indemnification rights to our employees or agents.

The General Corporation Law of the State of Delaware permits a corporation
to provide in its certificate of incorporation that a director of the
corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for:

-- any breach of the director's duty of loyalty to the corporation or
its stockholders;

-- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

-- payments of unlawful dividends or unlawful stock repurchases or
redemptions; or

-- any transaction from which the director derived an improper personal
benefit.

Our certificate of incorporation provides that none of our directors will
be personally liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director, except, if required by the General Corporation
Law of the State of Delaware as amended from time to time, for liability:

-- for any breach of the director's duty of loyalty to us or our
stockholders;

-- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

-- under Section 174 of the General Corporation Law of the State of
Delaware, which concerns unlawful payments of dividends, stock
purchases or redemptions; or

-- for any transaction from which the director derived an improper
personal benefit. Neither the amendment nor repeal of such provision
will eliminate or reduce the effect of such provision in respect of
any matter occurring, or any cause of action, suit or claim that, but
for such provision, would accrue or arise prior to such amendment or
repeal.

The Separation and Distribution Agreement provides for indemnification by
us of Lucent and its directors, officers and employees for some liabilities,
including liabilities under the Securities Act.

DELAWARE BUSINESS COMBINATION STATUTE

Section 203 of the General Corporation Law of the State of Delaware
provides that, subject to exceptions set forth therein, an interested
stockholder of a Delaware corporation shall not engage in any business
combination, including mergers or consolidations or acquisitions of additional
shares of the corporation, with

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the corporation for a three-year period following the time that such stockholder
became an interested stockholder unless:

-- prior to such time, the board of directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;

-- upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, other than
statutorily excluded shares; or

-- on or subsequent to such time, the business combination is approved
by the board of directors of the corporation and authorized at an
annual or special meeting of stockholders by the affirmative vote of
at least 66 2/3% of the outstanding voting stock which is not owned
by the interested stockholder.

Except as otherwise set forth in Section 203, an interested stockholder is
defined to include:

-- any person that is the owner of 15% or more of the outstanding voting
stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within three years
immediately prior to the date of determination; and

-- the affiliates and associates of any such person.

Section 203 may make it more difficult for a person who would be an
interested stockholder to effect various business combinations with a
corporation for a three-year period. We have not elected to be exempt from the
restrictions imposed under Section 203. The restrictions on business
combinations set forth in Section 203 would not be applicable to Lucent so long
as Lucent continues to hold 15% or more of our common stock. The provisions of
Section 203 may encourage persons interested in acquiring us to negotiate in
advance with our board of directors, since the stockholder approval requirement
would be avoided if a majority of the directors then in office approves either
the business combination or the transaction which results in any such person
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in our management. It is possible that such provisions could
make it more difficult to accomplish transactions which our stockholders may
otherwise deem to be in their best interests.

TRANSFER AGENT AND REGISTRAR

The Bank of New York will be the transfer agent and registrar for our
common stock.

NEW YORK STOCK EXCHANGE LISTING

We will apply to have our common stock listed on the New York Stock
Exchange under the symbol "AGR."

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SHARES ELIGIBLE FOR FUTURE SALE

All of the shares of our common stock sold in this offering, or
shares if the underwriters exercise their over-allotment option in
full, will be freely tradeable without restriction under the Securities Act,
except for any shares which be may acquired by an affiliate of us, as that term
is defined in Rule 144 under the Securities Act. Persons who may be deemed to be
our affiliates generally include individuals or entities that control, are
controlled by, or are under common control with us and may include our directors
and executive officers as well as our significant stockholders, if any.

Lucent has announced that, subject to specified conditions, it intends to
distribute all of the shares of our common stock owned by Lucent to its
stockholders by the end of Lucent's current fiscal year, which will occur on
September 30, 2001. Shares of our common stock distributed to Lucent
stockholders in the distribution generally will be freely transferable, except
for shares of common stock received by persons who may be deemed to be
affiliates of Lucent. Persons who are affiliates will be permitted to sell the
shares of common stock that are issued in this offering or that they receive in
the distribution only through registration under the Securities Act, or under an
exemption from registration, such as the one provided by Rule 144.

RULE 144

In general, under Rule 144 as currently in effect, an affiliate would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:

- 1% of the number of shares of our common stock then outstanding, which
will equal approximately shares of common stock immediately
after this offering; or

- the average weekly trading volume of our common stock on the New York
Stock Exchange during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to such sale.

Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

The shares of our common stock held by Lucent before distribution are
deemed "restricted securities" as defined in Rule 144, and may not be sold other
than through registration under the Securities Act or under an exemption from
registration, such as the one provided by Rule 144. Lucent, our directors and
executive officers and we have agreed not to offer or sell any shares of our
common stock, subject to exceptions, including the distribution, for a period of
180 days after the date of this prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters. For more
information relating to these restrictions, please see "Underwriters."

EMPLOYEE STOCK AWARDS

We will grant shares of our common stock and non-stock awards pursuant to
our stock plans subject to restrictions. We have reserved shares of
our common stock for issuance under our stock option plans. In addition, under
our Employee Benefits Agreement with Lucent, Lucent stock-based awards held by
our employees will be converted into our stock-based awards. The number of
options we will assume, and the number of replacement options or shares of
restricted stock we will issue, will be determined based on the number of
options and shares of restricted stock exercised by affected employees prior to
the conversion. These stock options, restricted stock and restricted stock units
would be convertible into shares of our common stock, assuming an
initial offering price of $ per share, the midpoint of the range. The actual
number of substituted awards will be determined at the time of the conversion.
We currently expect to file a registration statement under the Securities Act to
register shares reserved for issuance under our stock plans. Shares issued
pursuant to awards after the effective date of such registration statement,
other than shares issued to affiliates, generally will be freely tradable
without further registration under the Securities Act.

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MATERIAL UNITED STATES FEDERAL
TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

GENERAL

The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of common
stock that may be relevant to you if you are a non-United States Holder. In
general, a "non-United States Holder" is any person or entity that is, for
United States federal income tax purposes, a foreign corporation, a nonresident
alien individual, a foreign partnership or a foreign estate or trust. This
discussion is based on current law, which is subject to change, possibly with
retroactive effect, or different interpretations. This discussion is limited to
non-United States Holders who hold shares of common stock as capital assets.
Moreover, this discussion is for general information only and does not address
all the tax consequences that may be relevant to you in light of your personal
circumstances, nor does it discuss special tax provisions which may apply to you
if you relinquished United States citizenship or residence.

If you are an individual, you may, in many cases, be deemed to be a
resident alien, as opposed to a nonresident alien, by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year. For these purposes all the days present in the current year, one-third of
the days present in the immediately preceding year, and one-sixth of the days
present in the second preceding year are counted. Resident aliens are subject to
United States federal income tax as if they were United States citizens.

EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS ADVISED TO CONSULT A TAX
ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX CONSEQUENCES OF
PURCHASING, OWNING AND DISPOSING OF OUR COMMON STOCK AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY UNITED STATES STATE,
MUNICIPALITY OR OTHER TAXING JURISDICTION.

DIVIDENDS

If dividends are paid, as a non-United States Holder, you will be subject
to withholding of United States federal income tax at a 30% rate or a lower rate
as may be specified by an applicable income tax treaty. To claim the benefit of
a lower rate under an income tax treaty, you must properly file with the payor
an IRS Form W-8BEN, or successor form, claiming an exemption from or reduction
in withholding under the applicable tax treaty. In addition, where dividends are
paid to a non-United States Holder that is a partnership or other pass through
entity, persons holding an interest in the entity may need to provide
certification claiming an exemption or reduction in withholding under the
applicable treaty.

If dividends are considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax treaty
applies, are attributable to a United States permanent establishment of yours,
those dividends will not be subject to withholding tax, but instead will be
subject to United States federal income tax on a net basis at applicable
graduated individual or corporate rates, provided an IRS Form W-8ECI, or
successor form, is filed with the payor. If you are a foreign corporation, any
effectively connected dividends may, under certain circumstances, be subject to
an additional "branch profits tax" at a rate of 30% or a lower rate as may be
specified by an applicable income tax treaty.

You must comply with the certification procedures described above, or, in
the case of payments made outside the United States with respect to an offshore
account, certain documentary evidence procedures, directly or under certain
circumstances through an intermediary, to obtain the benefits of a reduced rate
under an income tax treaty with respect to dividends paid with respect to your
common stock. In addition, if you are required to provide an IRS Form W-8ECI or
successor form, as discussed above, you must also provide your tax
identification number.

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If you are eligible for a reduced rate of United States withholding tax
pursuant to an income tax treaty, you may obtain a refund of any excess amounts
withheld by filing an appropriate claim for refund with the IRS.

GAIN ON DISPOSITION OF COMMON STOCK

As a non-United States Holder, you generally will not be subject to United
States federal income tax on any gain recognized on the sale or other
disposition of common stock unless:

(1) the gain is considered effectively connected with the conduct of a
trade or business by you within the United States and, where a tax
treaty applies, is attributable to a United States permanent
establishment of yours (and, in which case, if you are a foreign
corporation, you may be subject to an additional branch profits tax
equal to 30% or a lower rate as may be specified by an applicable income
tax treaty);

(2) you are an individual who holds the common stock as a capital asset
and are present in the United States for 183 or more days in the taxable
year of the sale or other disposition and other conditions are met; or

(3) we are or have been a "United States real property holding
corporation," or a USRPHC, for United States federal income tax
purposes. We believe that we are not currently, and are likely not to
become, a USRPHC. If we were to become a USRPHC, then gain on the sale
or other disposition of common stock by you generally would not be
subject to United States federal income tax provided:

-- the common stock was "regularly traded" on an established
securities market; and

-- you do not actually or constructively own more than 5% of the
common stock during the shorter of the five-year period preceding
the disposition or your holding period.

FEDERAL ESTATE TAX

If you are an individual, common stock held at the time of your death will
be included in your gross estate for United States federal estate tax purposes,
and may be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

We must report annually to the IRS and to each of you the amount of
dividends paid to you and the tax withheld with respect to those dividends,
regardless of whether withholding was required. Copies of the information
returns reporting those dividends and withholding may also be made available to
the tax authorities in the country in which you reside under the provisions of
an applicable income tax treaty or other applicable agreements.

Backup withholding is generally imposed at the rate of 31% on certain
payments to persons that fail to furnish the necessary identifying information
to the payor. You generally will be subject to back-up withholding tax with
respect to dividends paid on your common stock at a 31% rate unless you certify
your non-United States status.

The payment of proceeds of a sale of common stock effected by or through a
United States office of a broker is subject to both backup withholding and
information reporting unless you provide the payor with your name and address
and you certify your non-United States status or you otherwise establish an
exemption. In general, backup withholding and information reporting will not
apply to the payment of the proceeds of a sale of common stock by or through a
foreign office of a broker. If, however, such broker is, for United States
federal income tax purposes, a United States person, a controlled foreign
corporation, a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
or, a foreign partnership that at any time during its tax year either is engaged
in the conduct of a trade or business in the United States or has as partners
one or more United States persons that, in the
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aggregate, hold more than 50% of the income or capital interest in the
partnership, such payments will be subject to information reporting, but not
backup withholding, unless such broker has documentary evidence in its records
that you are a non-United States Holder and certain other conditions are met or
you otherwise establish an exemption.

Any amounts withheld under the backup withholding rules generally will be
allowed as a refund or a credit against your United States federal income tax
liability provided the required information is furnished in a timely manner to
the IRS.

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UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and are acting as
representatives, have severally agreed to purchase, and we and the selling
stockholder have agreed to sell to them, severally, the number of shares of our
common stock indicated below:

<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------ ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................

--------
Total.............................................
========
</TABLE>

The underwriters are offering the shares of common stock subject to their
acceptance of the shares from us and subject to prior sale. The underwriting
agreement provides that the obligations of the several underwriters to pay for
and accept delivery of the shares of our common stock offered by this prospectus
are subject to the approval of legal matters by their counsel and to some other
conditions. The underwriters are obligated to take and pay for all of the shares
of our common stock offered by this prospectus, if any such shares are taken.
However, the underwriters are not required to take and pay for the shares
covered by the underwriters over-allotment option described below.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to a limited number of dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. After the initial offering of the shares of common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of additional
shares of common stock at the public offering price listed on the cover page of
this prospectus, less underwriting discounts and commissions. The underwriters
may exercise this option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of common stock offered
by this prospectus. To the extent this option is exercised, each underwriter
will become obligated, subject to specified conditions, to purchase about the
same percentage of additional shares of common stock as the number listed next
to the underwriter's name in the preceding table bears to the total number of
shares of common stock listed next to the names of all underwriters in the
preceding table. If the underwriters exercise the over-allotment option in full,
the total price to the public would be $ , the total underwriting
discounts and commissions would be $ and the total proceeds to us would
be $ .

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.

We will apply to have our common stock approved for listing on the New York
Stock Exchange under the trading symbol "AGR."

Each of us, Lucent and our executive officers and directors has agreed
that, without the prior written consent of Morgan Stanley & Co. Incorporated on
behalf of the underwriters, he, she or it will not, during the period ending 180
days after the date of this prospectus:

-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend of otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock; or

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-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the common stock;

whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.

The restrictions described in the previous paragraph do not apply to:

-- the sale of the shares of our common stock to the underwriters;

-- the issuance by us of shares of common stock upon the exercise of
those securities outstanding upon completion of this offering of
which the underwriters have been advised in writing;

-- the granting of stock options, restricted stock or restricted stock
units that do not vest prior to 180 days after the date of this
prospectus or the sale of stock pursuant to our employee benefit
plans;

-- transactions by any person other than us relating to shares of common
stock or other securities acquired in open market or other
transactions after the completion of this offering;

-- the issuances by us of shares of common stock in connection with any
acquisition of or merger with another company or the acquisition of
assets, provided that each recipient of common stock agrees that
these shares shall remain subject to lock-up restrictions;

-- the distribution; or

-- some other transfers and dispositions, provided that the recipient
remains subject to the lock-up restrictions for the remainder of the
period for which we are bound.

In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may sell more shares than they are
obligated to purchase under the underwriting agreement, creating a short
position. A short sale is "covered" if the short position is no greater than the
number of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered short sale by
exercising the over allotment option or purchasing shares in the open market. In
determining the source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market price of shares
compared to the price available under the over allotment option. The
underwriters may also sell shares in excess of the over allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market after
pricing that could adversely affect investors who purchase in the offering. In
addition, to cover any over-allotments or to stabilize the price of the common
stock, the underwriters may bid for, and purchase, shares of common stock in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or a dealer for distributing the common stock in this
offering, if the syndicate repurchases previously distributed common stock in
transactions to cover syndicate short positions, in stabilization transactions
or otherwise. Any of these activities may stabilize or maintain the market price
of the common stock above independent market levels. The underwriters are not
required to engage in these activities and may end any of these activities at
any time.

It is anticipated that Morgan Stanley Dean Witter Online, Inc., an
affiliate of Morgan Stanley and Co. Incorporated, may be a member of the
syndicate and engage in electronic offers, sales and distribution of the shares
being offered.

MSDW Online uses the following procedures in electronic distribution of
securities. MSDW Online delivers the preliminary prospectus and any amendments
by posting electronic versions of such documents on its website. Such documents
are delivered only to those customers who have agreed to accept Internet
delivery of the prospectus and any amendments thereto as indicated on both the
customer's Qualification Questionnaire and the customer's General Expression of
Interest Form. In addition to delivery through its website, MSDW Online delivers
a final paper copy of the prospectus to each purchaser by mail.

123
<PAGE> 127

The electronic version of the prospectus is identical to the electronic
version of the prospectus that the Company files via EDGAR, except that the
format matches that of the paper prospectus. There are no links leading from the
electronic version of the prospectus posted on the MSDW Online website to other
websites.

MSDW Online follows the following procedures for opening all accounts and
transacting trades in securities regardless of the type of transaction that a
customer is interested in executing.

-- Each potential customer must complete an account application and open
the account with at least $2,000 cash or with securities with a fair
market value of at least $2,000.

-- Once the account is opened, the customers may transact their trades
over the Internet, through a touch-tone phone or over the phone
through a registered representative.

-- Customers may make their trades only with cash balances in their
account or on margin.

MSDW Online follows specific procedures to allow customers to place an
indication of interest in a public offering. It requires its customers to have
funds in their account (unless securities are permissible to be purchased on
margin) on the trade date for any security transaction. Any customer who
expresses an interest in an offering is required to complete a Qualification
Questionnaire and a General Indication of Interest on a deal by deal basis. In
addition, each qualified MSDW Online customer must reconfirm his or her interest
in the offering after final pricing and effectiveness of the registration
statement or he or she will not be eligible to receive shares in the offering.

From time to time, some of the underwriters have provided, and may continue
to provide, investment banking services to us and to Lucent for which they have
received, and are expected in the future to receive, customary fees and
commissions.

We, the selling stockholder and the underwriters have agreed to indemnify
each other against some liabilities, including liabilities under the Securities
Act.

THE EXCHANGE

The selling stockholder, an affiliate of , one of the
underwriters, plans to acquire an aggregate of shares of our common stock
from Lucent at a price it expects to be between $ and $ per share in a private
placement prior to the closing of this offering in exchange for debt obligations
of Lucent held by the selling stockholder at the time of the exchange. Those
Lucent debt obligations may include debt obligations currently held by the
selling stockholder or debt obligations purchased by the selling stockholder
from third party holders in market purchases or in a tender offer or from
Lucent. The selling stockholder would purchase those Lucent debt obligations for
its own account as principal. Lucent would not be a party to the selling
stockholder's purchases from third party holders in market purchases or in a
tender offer of Lucent debt obligations. There is no binding agreement between
Lucent and the selling stockholder relating to the exchange. Neither Lucent nor
the selling stockholder has an obligation to participate in the exchange. If the
exchange occurs, the selling stockholder will offer to sell all of our common
stock acquired by it in the private placement. If the exchange does not occur,
no shares of our common stock will be sold by the selling stockholder. In that
event, only the shares of our common stock being offered by us, or
shares of our common stock if the underwriters' over-allotment option is
exercised in full will be sold in this offering. If the selling stockholder
acquires less than shares in the exchange, the number of shares of our common
stock being offered by the selling stockholder will be reduced by the amount not
acquired.

PRICING OF THIS OFFERING

Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between Lucent, us and the representatives. Among the factors considered in
determining the initial public offering price will be our future prospects and
those of our industry in general, our sales, earnings and other financial and
operating information in recent periods, and the price-earnings ratios,
price-sales ratios, market prices of securities and financial and operating
information of companies engaged in activities similar to ours.

124
<PAGE> 128

The estimated initial public offering price range set forth on the cover
page of this prospectus is subject to change as a result of market conditions
and other factors.

Because the selling stockholder is , an affiliate of one of
the underwriters and will receive approximately $ of the proceeds of this
offering, that underwriter may be deemed to have a "conflict of interest" under
Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers. Accordingly, this offering will be made in compliance with the
applicable provisions of Rule 2720 of the Conduct Rules. In accordance with this
rule, the initial public offering price can be no higher than that recommended
by a "qualified independent underwriter" meeting certain standards. In
accordance with this requirement, has assumed the responsibilities of acting
as a qualified independent underwriter and will recommend a price in compliance
with the requirements of Rule 2720. , in its role as qualified independent
underwriter, has performed due diligence investigations and reviewed and
participated in the preparation of this prospectus and the registration
statement of which this prospectus is a part. will receive no
compensation for acting in this capacity; however, we have agreed to indemnify
for acting as a qualified independent underwriter against specified
liabilities under the Securities Act.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Cravath, Swaine & Moore, New York, New York. Certain legal matters will be
passed upon for the underwriters by Davis Polk & Wardwell, New York, New York.

EXPERTS

The combined financial statements of Agere Systems Inc. and its
subsidiaries as of September 30, 1999 and 2000 and for each of the three years
in the period ended September 30, 2000 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

The consolidated financial statements of Ortel Corporation and its
subsidiaries as of April 30, 1999 and 1998 and for each of the three years in
the period ended April 30, 1999 included in this prospectus have been so
included in reliance on the report of KPMG LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.

125
<PAGE> 129

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act of 1933, as amended, with respect
to the shares of our common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits thereto, to which reference is hereby made. With respect to each
contract, agreement or other document filed as an exhibit to the registration
statement, reference is made to such exhibit for a more complete description of
the matter involved. The registration statement and the exhibits thereto filed
by us with the Securities and Exchange Commission may be inspected at the public
reference facilities of the Securities and Exchange Commission listed below.

As a result of this offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith will file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at its principal offices at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such
information may be obtained from the Public Reference Section of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission also maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.

We intend to furnish holders of our common stock with annual reports
containing combined financial statements audited by independent accountants,
beginning with the fiscal year ending September 30, 2001. We also intend to
furnish other reports as we may determine or as required by law.

126
<PAGE> 130

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AGERE SYSTEMS INC.
Combined Financial Statements:
Report of Independent Accountants........................... F-2
Combined Statements of Income for the years ended September
30, 1998, 1999 and 2000................................... F-3
Combined Balance Sheets as of September 30, 1999 and 2000... F-4
Combined Statements of Changes in Invested Equity and Total
Comprehensive Income (Loss) for the years ended September
30, 1998, 1999 and 2000................................... F-5
Combined Statements of Cash Flows for the years ended
September 30, 1998, 1999 and 2000......................... F-6
Notes to Combined Financial Statements...................... F-7

ORTEL CORPORATION
Consolidated Financial Statements:
Independent Auditors' Report................................ F-32
Consolidated Balance Sheets as of April 30, 1999 and 1998... F-33
Consolidated Statements of Operations for the years ended
April 30, 1999, 1998 and 1997............................. F-34
Consolidated Statements of Stockholders' Equity and
Comprehensive Income for the years ended April 30, 1999,
1998 and 1997............................................. F-35
Consolidated Statements of Cash Flows for the years ended
April 30, 1999, 1998 and 1997............................. F-36
Notes to Consolidated Financial Statements.................. F-37

AGERE SYSTEMS INC. FINANCIAL STATEMENT SCHEDULE:
Schedule II--Valuation and Qualifying Accounts for the
years ended September 30, 1998, 1999 and 2000.......... S-1
</TABLE>

F-1
<PAGE> 131

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the combined financial statements listed in the
accompanying index present fairly, in all material respects, the combined
financial position of Agere Systems Inc. and its subsidiaries, at September 30,
1998, 1999 and 2000, and the combined results of their operations and their
combined cash flows for each of the three years in the period ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related combined financial statements. These financial statements and the
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide reasonable basis for our opinion.

The Company is comprised of businesses which are integrated with the
businesses of Lucent Technologies Inc. ("Lucent"); consequently, as indicated in
Note 1, these financial statements have been derived from the consolidated
financial statements and accounting records of Lucent, and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, the Company
relies on Lucent and its other businesses for administrative, management,
research and other services. Accordingly, these combined financial statements do
not necessarily reflect the financial position, results of operations, and cash
flows of the Company had it been a stand-alone Company.

As discussed in Note 2 to the combined financial statements, effective
October 1, 1999, the Company changed its accounting method for computer software
developed or obtained for internal use. Also, as discussed in Note 8, effective
October 1, 1998, the Company changed its method for calculating annual pension
and postretirement benefit costs.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Florham Park, New Jersey
December 8, 2000

F-2
<PAGE> 132

AGERE SYSTEMS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF INCOME
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
REVENUE (includes $692 in 1998, $955 in 1999, and $1,002 in
2000 from Lucent Technologies Inc.)....................... $3,101 $3,714 $4,708
COSTS....................................................... 1,592 1,949 2,555
------ ------ ------
GROSS PROFIT................................................ 1,509 1,765 2,153
------ ------ ------
OPERATING EXPENSES
Selling, general and administrative....................... 525 573 535
Research and development.................................. 466 683 827
Purchased in-process research and development............. 48 17 446
Amortization of goodwill and other acquired intangibles... 3 13 189
------ ------ ------
TOTAL OPERATING EXPENSES.......................... 1,042 1,286 1,997
------ ------ ------
OPERATING INCOME............................................ 467 479 156
Other income--net........................................... 67 36 33
Interest expense............................................ 21 38 58
------ ------ ------
Income before provision for income taxes.................... 513 477 131
Provision for income taxes.................................. 210 158 207
------ ------ ------
Income (loss) before cumulative effect of accounting
change.................................................... 303 319 (76)
Cumulative effect of accounting change (net of provision for
income taxes of $21 in 1999).............................. -- 32 --
------ ------ ------
NET INCOME (LOSS)........................................... $ 303 $ 351 $ (76)
====== ====== ======
</TABLE>

See Notes to Combined Financial Statements.
F-3
<PAGE> 133

AGERE SYSTEMS INC. AND SUBSIDIARIES

COMBINED BALANCE SHEETS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1999 2000
------ ------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Trade receivables, less allowances of $11 in 1999 and $17
in 2000................................................ $ 446 $ 699
Receivables due from Lucent Technologies Inc.............. 115 122
Inventories............................................... 291 380
Deferred income taxes--net................................ 85 69
Prepaid expense........................................... 64 68
Other current assets...................................... 38 66
------ ------
TOTAL CURRENT ASSETS.............................. 1,039 1,404
Property, plant and equipment--net.......................... 1,716 1,883
Goodwill and other acquired intangibles--net of accumulated
amortization of $21 in 1999 and $210 in 2000.............. 79 3,491
Deferred income taxes--net.................................. 38 55
Other assets................................................ 148 234
------ ------
TOTAL ASSETS...................................... $3,020 $7,067
====== ======
LIABILITIES AND INVESTED EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 220 $ 267
Payroll and benefit related liabilities................... 223 193
Capitalized lease obligation.............................. 14 14
Income taxes payable...................................... 175 289
Other current liabilities................................. 188 213
------ ------
TOTAL CURRENT LIABILITIES......................... 820 976
Post-employment benefit liabilities......................... 129 95
Capitalized lease obligation................................ 64 46
Deferred income taxes--net.................................. -- 103
Other liabilities........................................... 45 66
------ ------
TOTAL LIABILITIES................................. 1,058 1,286
------ ------
Commitments and contingencies
INVESTED EQUITY
Owner's net investment...................................... 1,979 5,833
Accumulated other comprehensive income (loss)............... (17) (52)
------ ------
TOTAL INVESTED EQUITY............................. 1,962 5,781
------ ------
TOTAL LIABILITIES AND INVESTED EQUITY............. $3,020 $7,067
====== ======
</TABLE>

See Notes to Combined Financial Statements.
F-4
<PAGE> 134

AGERE SYSTEMS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CHANGES IN INVESTED EQUITY AND
TOTAL COMPREHENSIVE INCOME (LOSS)
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
OWNER'S NET INVESTMENT
Beginning balance........................................... $1,349 $1,659 $1,979
Net income (loss)........................................... 303 351 (76)
Transfers to Lucent Technologies Inc. ...................... (3,026) (3,777) (4,492)
Transfers from Lucent Technologies Inc. .................... 3,033 3,746 8,422
------ ------ ------
Ending balance.............................................. $1,659 $1,979 $5,833
------ ------ ------
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Beginning balance........................................... $ (8) $ (16) $ (17)
Foreign currency translations............................... 12 1 (35)
Unrealized holding losses net of taxes of $14 in 1998 and $1
in 1999................................................... (20) (2) --
------ ------ ------
Ending balance.............................................. (16) (17) (52)
------ ------ ------
TOTAL INVESTED EQUITY............................. $1,643 $1,962 $5,781
====== ====== ======
TOTAL COMPREHENSIVE INCOME (LOSS)
Net income (loss)........................................... $ 303 $ 351 $ (76)
Other comprehensive income (loss)........................... (8) (1) (35)
------ ------ ------
TOTAL COMPREHENSIVE INCOME (LOSS)................. $ 295 $ 350 $ (111)
====== ====== ======
</TABLE>

See Notes to Combined Financial Statements.
F-5
<PAGE> 135

AGERE SYSTEMS INC. AND SUBSIDIARIES

COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................... $ 303 $ 351 $ (76)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities, net of effects of
acquisitions of businesses:
Cumulative effect of accounting change.................... -- (32) --
Depreciation and amortization............................. 320 398 666
Provision for uncollectibles.............................. -- 3 6
Deferred income taxes..................................... (18) (14) (2)
Purchased in-process research and development............. 48 17 446
Equity (earnings) loss from investments................... 22 20 (4)
Gain on sales of investments.............................. (53) (32) (18)
(Increase) decrease in receivables.......................... (122) 25 (237)
Increase in inventories..................................... (14) (26) (66)
Increase (decrease) in accounts payable..................... (7) 70 37
Changes in other operating assets and liabilities........... 33 (93) 11
Other adjustments for non-cash items--net................... 12 3 (1)
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 524 690 762
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures........................................ (454) (656) (672)
Purchases of investments.................................... (64) (48) (65)
Sales of investments........................................ 40 36 18
Acquisitions of businesses--net of cash acquired............ (64) (92) (104)
Other investing activities--net............................. 1 7 (6)
----- ----- -----
NET CASH USED IN INVESTING ACTIVITIES....................... (541) (753) (829)
----- ----- -----
FINANCING ACTIVITIES
Transfers from Lucent Technologies Inc. .................... 17 68 85
Principal payments of capital lease obligation.............. -- (5) (18)
----- ----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 17 63 67
----- ----- -----
Net change in cash.......................................... $ -- $ -- $ --
===== ===== =====
</TABLE>

See Notes to Combined Financial Statements.
F-6
<PAGE> 136

NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

1. BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

Agere Systems Inc. (the "Company") is currently a wholly owned subsidiary
of Lucent Technologies Inc. ("Lucent"). On July 20, 2000, Lucent announced its
intention to spin off its optoelectronic components and integrated circuits
businesses (collectively, the "Company's Businesses") into a separate company.
The Company anticipates making an initial public offering (the "Offering") in
the quarter ending March 31, 2001. Lucent also has announced that it intends to
spin off the remaining shares in a tax free distribution by September 30, 2001
(the "Distribution"). The Distribution is subject to certain conditions,
including receipt of a favorable tax ruling, and may not occur by the
contemplated time or at all. On the date of the Distribution, Lucent will
distribute all of the shares of the Company's common stock that it then owns to
Lucent's stockholders. Lucent will transfer to the Company substantially all of
the assets and liabilities of the Company's Businesses prior to the completion
of the Offering (the "Separation") except for pension and post-retirement plan
assets and liabilities which will be transferred at the Distribution.

On August 1, 2000, the Company was incorporated in Delaware as a wholly
owned subsidiary of Lucent. On this date, 1,000 shares of the Company's common
stock, par value $0.01 per share, were issued, authorized and outstanding. Prior
to the completion of the Offering, there will be a recapitalization of the
Company.

The Company expects to adopt a rights agreement prior to the completion of
the Offering. The delivery of a share of the Company's common stock in
connection with the Offering also will constitute the delivery of a preferred
stock purchase right associated with such share. These rights are intended to
have anti-takeover effects in that the existence of the rights may deter a
potential acquiror from making a takeover proposal or a tender offer.

BASIS OF PRESENTATION

The combined financial statements have been derived from the consolidated
financial statements and accounting records of Lucent using the historical
results of operations and historical basis of assets and liabilities of the
Company's Businesses. Management believes the assumptions underlying the
combined financial statements are reasonable. However, the combined financial
statements included herein may not necessarily reflect the Company's results of
operations, financial position and cash flows in the future or what its results
of operations, financial position and cash flows would have been had the Company
been a stand-alone company during the periods presented. Because a direct
ownership relationship did not exist among all the various units comprising the
Company, Lucent's net investment in the Company is shown in lieu of
stockholders' equity in the combined financial statements.

The combined financial statements include allocations of certain Lucent
expenses, assets and liabilities, including the items described below.

GENERAL CORPORATE EXPENSES

Lucent allocates general corporate expenses for each fiscal year based on
revenue for that fiscal year. These allocations are reflected in the selling,
general and administrative, costs and research and development line items in the
combined statements of income. The general corporate expenses allocation is
primarily for cash management, legal, accounting, tax, insurance, public
relations, advertising, human resources and data services and amounted to $185,
$194 and $178 for fiscal 1998, 1999 and 2000, respectively. Management believes
the costs of these services charged to the Company are a reasonable
representation of the costs that would have been incurred if the Company had
performed these functions as a stand-alone company. Following the Separation,
the Company will perform these functions using its own resources or through
purchased services.

F-7
<PAGE> 137
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

BASIC RESEARCH

Research and development expenses in the combined statements of income
include an allocation from Lucent to fund a portion of the costs of basic
research conducted by Lucent's Bell Laboratories. This allocation was based on
the number of individuals conducting basic research who will be transferred from
Lucent's Bell Laboratories to the Company as part of the Separation. This
allocation amounted to $60, $64, and $66 for fiscal 1998, 1999 and 2000,
respectively. Management believes the costs of this research charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed this research as a stand-alone company.
Following the Separation, the Company will satisfy its basic research
requirements using its own resources or through purchased services.

INTEREST EXPENSE

Historically, Lucent has provided financing to the Company and incurred
debt at the parent level. The combined balance sheets do not include debt other
than a capitalized lease obligation. The combined statements of income, however,
include an allocation of interest expense totaling $21, $38 and $52 for fiscal
1998, 1999 and 2000, respectively. This allocation was based on the ratio of the
Company's net assets, excluding debt, to Lucent's total net assets, excluding
debt. The Company's interest expense as a stand-alone company may be higher or
lower than those reflected in the combined statements of income. Interest
expense also includes interest expense related to the Company's lease
obligation.

PENSION AND POSTRETIREMENT COSTS

At the Distribution, the Company will become responsible for pension and
postretirement benefits for the United States ("U.S.") active employees of the
Company. Obligations related to retired and terminated vested U.S. employees as
of the Offering will remain the responsibility of Lucent. Until the
Distribution, the Company's U.S. employees will be participants in most of
Lucent's employee benefit plans. At the Distribution, the Company will become
responsible for pension and postretirement benefits for the Company's U.S.
employees who retire or terminate after the Offering, and Lucent will transfer
to the Company the pension and postretirement assets related to those employees.
Lucent has managed its U.S. employee benefit plans on a consolidated basis and
separate Company information is not readily available. Therefore, the Company's
share of the Lucent U.S. plans' assets and liabilities is not included in the
combined balance sheets. The combined statements of income include, however, an
allocation of the costs of the U.S. employee benefit plans. These costs were
allocated based on the Company's U.S. active employee population for each of the
years presented. In relation to the Lucent plans, the Company recorded pension
expense of $23, $38 and $27, and postretirement benefit expense of $14, $17 and
$15, for fiscal 1998, 1999 and 2000, respectively. The Company is responsible
for the pension and postretirement benefits of its non-U.S. employees. The
assets and liabilities of the various country-specific plans for these employees
are reflected in the combined financial statements and were not material for the
periods presented.

INCOME TAXES

The Company's income taxes are calculated on a separate tax return basis.
However, Lucent was managing its tax position for the benefit of its entire
portfolio of businesses, and its tax strategies are not necessarily reflective
of the tax strategies that the Company would have followed or will follow as a
stand-alone company.

CASH AND RECEIVABLES

Lucent uses a centralized approach to cash management and the financing of
its operations. Cash deposits from the Company's Businesses are transferred to
Lucent on a regular basis and are netted against the owner's net investment
account. As a result, none of Lucent's cash, cash equivalents or debt have been

F-8
<PAGE> 138
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

allocated to the Company in the combined financial statements. Receivables due
from Lucent reflected in the combined balance sheets include direct accounts
receivable and an amount calculated based on days sales outstanding expected on
sales to Lucent subsequent to the Separation. Receivables due from Lucent will
be settled as of the Separation. Changes in invested equity represent any
funding required from Lucent for working capital, acquisition or capital
expenditure requirements after giving effect to the Company's transfers to or
from Lucent of its cash flows.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF COMBINATION

The combined financial statements include certain majority owned
subsidiaries and assets and liabilities of the Company's Businesses, not
currently owned by the Company that will be transferred from Lucent. Investments
in which the Company exercises significant influence, but which it does not
control are accounted for under the equity method of accounting. Investments in
which the Company does not exercise significant influence are recorded at cost.
All material intercompany transactions and balances between and among the
Company's Businesses have been eliminated.

USE OF ESTIMATES

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

FOREIGN CURRENCY TRANSLATION

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

REVENUE RECOGNITION

Revenue is derived from sales of products in the optoelectronic and
integrated circuits segments and from intellectual property licensing. Revenue
is recognized when contractual obligations have been satisfied, title and risk
of loss have been transferred to the customer and collection of the resulting
receivable is reasonably assured. The Company has not historically entered into
long-term contracts or service agreements. Revenue from intellectual property
licensing revenue is recognized over the license term. Estimated sales
allowances are provided as a reduction of revenue at the time of revenue
recognition.

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to expense as incurred.

F-9
<PAGE> 139
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

INVENTORIES

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

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization is determined using a combination of
either accelerated or straight-line methods over the estimated useful lives of
the various asset classes.

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

INTERNAL USE SOFTWARE

The Company adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" on October 1,
1999. Certain costs of computer software developed or obtained for internal use,
that were previously expensed as incurred, are capitalized and amortized on a
straight-line basis over three years. Costs for general and administrative,
overhead, maintenance and training, as well as the cost of software that does
not add functionality to the existing system, are expensed as incurred. The
impact of adopting SOP 98-1 was a reduction of costs and operating expenses of
$28 for fiscal 2000.

GOODWILL AND OTHER ACQUIRED INTANGIBLES

Goodwill and other acquired intangibles are amortized on a straight-line
basis over the periods benefited, principally in the range of 4 to 9 years.
Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.

IMPAIRMENT OF LONG-LIVED ASSETS

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

FINANCIAL INSTRUMENTS

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

INCOME TAXES

Historically, certain of the Company's operations have been included in
Lucent's consolidated income tax returns. Income tax expense in the Company's
combined statements of income has been calculated on a separate tax return
basis. The asset and liability approach is used to recognize deferred tax assets
and liabilities

F-10
<PAGE> 140
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

for the expected future tax consequences of temporary differences between the
carrying amounts and the tax bases of assets and liabilities.

OTHER COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss) includes, in addition to net income
(loss), unrealized gains and losses excluded from the combined statements of
income that are recorded directly into a separate section of invested equity on
the combined balance sheets. These unrealized gains and losses are referred to
as other comprehensive income (loss). The Company's accumulated other
comprehensive income (loss) shown on the combined balance sheets consists
primarily of foreign currency translation adjustments which are not adjusted for
income taxes because they relate to indefinite investments in non-U.S.
subsidiaries.

3. ACQUISITIONS

The following table presents information about certain acquisitions in
fiscal 1998, 1999, and 2000. All the acquisitions were accounted for under the
purchase method of accounting, and the acquired technology valuation included
existing technology, purchased in-process research and development ("IPRD") and
other intangibles. IPRD charges were recorded in the quarter in which the
transaction was completed. The combined financial statements include the results
of operations and the estimated fair value of assets and liabilities assumed
from the respective dates of acquisitions.
<TABLE>
<CAPTION>

ACQUISITION PURCHASE EXISTING OTHER PURCHASED
DATE PRICE GOODWILL TECHNOLOGY INTANGIBLES IPRD
----------- -------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
2000
Herrmann(1).......... 6/00 $432 $ 384 $ 52 $16 $ 34
Lucent Common Stock & Options
Ortel(2)............. 4/00 2,998 2,554 171 24 307
Lucent Common Stock & Options
Agere(3)............. 4/00 377 303 n/a n/a 94
Lucent Common Stock & Options
Assets of
VTC(4)............... 3/00 104 46 31 7 11
Cash
1999
Enable(5)............ 3/99 $ 51 $ 34 $ 8 n/a $ 9
Cash
Sybarus(6)........... 2/99 41 33 n/a n/a 8
Cash
1998
Optimay(7)........... 4/98 $ 64 $ 1 $ 18 n/a $ 48
Cash

<CAPTION>
AMORTIZATION PERIOD (IN YEARS)
-----------------------------------
EXISTING OTHER
GOODWILL TECHNOLOGY INTANGIBLES
-------- ---------- -----------
<S> <C> <C> <C>
2000
Herrmann(1).......... 8 7 7
Ortel(2)............. 9 7.5 4-9
Agere(3)............. 7 n/a n/a
Assets of
VTC(4)............... 7 5 7
1999
Enable(5)............ 6 7 n/a
Sybarus(6)........... 4 n/a n/a
1998
Optimay(7)........... 5 5 n/a
</TABLE>

------------
(1) Herrmann Technology, Inc. was a developer and manufacturer of passive
optical filters that can be used in conjunction with active optoelectronic
components.

(2) Ortel Corporation was a developer and manufacturer of optoelectronic
components used in fiber optic systems for cable television and data
communications networks.

(3) Agere, Inc. was a developer of network processor integrated circuits.

(4) VTC Inc. was a supplier of integrated circuits to computer hard disk drive
manufacturers.

(5) Enable Semiconductor, Inc. was a developer of integrated circuits for local
area network equipment.

(6) Sybarus Technologies, ULC was a developer of integrated circuits for
communications networks.

(7) Optimay Corporation was a developer of software used for mobile telephones.

F-11
<PAGE> 141
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

In connection with the acquisition of Herrmann, certain former stockholders
of Herrmann are entitled to receive up to a total of 677,019 additional shares
of Lucent common stock based on retention and the achievement of specified
milestones. If distributed, a portion will be recorded as compensation expense
and a portion will be treated as additional goodwill.

In connection with the acquisition of substantially all the assets of VTC,
stockholders of VTC are entitled to receive additional cash consideration of up
to $50 based on the achievement of specified milestones. If distributed, the
payment will be recorded as additional goodwill.

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

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

Revenue was 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 for each project were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include costs, 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 revenue and costs to complete
the IPRD.

The discount rates utilized to discount the projected cash flows for each
project 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.

The following unaudited pro forma statements of income data for fiscal 1999
and 2000 give effect to the acquisition of Ortel Corporation as if it occurred
on October 1, 1998 and 1999, respectively.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1999 2000
------ ------
<S> <C> <C>
Revenue.................................................... $3,783 $4,760
Income (loss) before cumulative effect of accounting
change................................................... $ 7 $ 48
</TABLE>

Pro forma adjustments to income (loss) before cumulative effect of
accounting change include the impact of a full year of amortization of goodwill
and other acquired intangibles but exclude the effect of IPRD of $307 for fiscal
2000. This is presented for information purposes only and is not necessarily
indicative of the results of future operations or results that would have been
achieved had this acquisition taken place at the beginning of each fiscal year
presented.

F-12
<PAGE> 142
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

4. RECENT PRONOUNCEMENTS

SFAS 133

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
the Company to recognize all derivative instruments at fair value on the
combined balance sheet. Subsequent to the issuance of SFAS 133, the FASB
received many requests to clarify certain issues causing difficulties in
implementation. In June 2000, the FASB issued SFAS No. 138, which responds to
those requests by amending certain provisions of SFAS 133. These amendments
include allowing foreign-currency denominated assets and liabilities to qualify
for hedge accounting, permitting the offsetting of certain inter entity foreign
currency exposures that reduce the need for third-party derivatives and
redefining the nature of interest rate risk to avoid sources of ineffectiveness.
The Company has adopted SFAS 133 and the corresponding amendments under SFAS 138
effective as of October 1, 2000. The impact of adopting SFAS 133, as amended by
SFAS 138, was not significant.

SAB 101

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements and requires adoption no later than the
fourth quarter of fiscal 2001. The Company is currently evaluating the impact of
SAB 101 and its related interpretations to determine the effect it will have on
the Company's combined financial position and results of operations. The Company
is considering adopting SAB 101 in its first fiscal quarter of 2001.

5. SUPPLEMENTARY FINANCIAL INFORMATION

INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
INCLUDED IN COSTS AND OPERATING EXPENSES
Depreciation and amortization of property, plant and
equipment................................................. $317 $385 $477
OTHER INCOME--NET
Gain on foreign currency transactions....................... 7 9 6
Gain on sales of investments................................ 53 32 18
Equity earnings (loss) from investments..................... (22) (20) 4
Other....................................................... 29 15 5
---- ---- ----
Other income--net........................................... $ 67 $ 36 $ 33
==== ==== ====
</TABLE>

F-13
<PAGE> 143
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999 2000
------- -------
<S> <C> <C>
INVENTORIES
Completed goods............................................. $ 147 $ 119
Work in process and raw materials........................... 144 261
------- -------
Inventories................................................. $ 291 $ 380
======= =======
PROPERTY, PLANT AND EQUIPMENT--NET
Land and improvements....................................... $ 29 $ 54
Buildings and improvements.................................. 574 640
Machinery, electronic and other equipment................... 3,355 3,746
------- -------
Total property, plant and equipment............... 3,958 4,440
Less: accumulated depreciation and amortization............. (2,242) (2,557)
------- -------
Property, plant and equipment--net.......................... $ 1,716 $ 1,883
======= =======
</TABLE>

CASH FLOW INFORMATION

Interest and income taxes historically have been paid by Lucent on behalf
of the Company and do not necessarily reflect what the Company would have paid
had it been a stand-alone company.

Net transfers (to) from Lucent include the following non-cash transactions:
(1) a $3,807 increase in owner's net investment to reflect the Ortel, Herrmann
and Agere, Inc. acquisitions that were made with Lucent common stock and options
in the fiscal year ended September 30, 2000, and (2) a $32 decrease in owner's
net investment for a change in accounting related to pension and benefit costs
reflected in the fiscal year ended September 30, 1999.

A capital lease obligation of the Company of $83 was entered into in the
fiscal year ended September 30, 1999, for the lease of semiconductor
manufacturing equipment.

Acquisitions of Businesses

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

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Fair value of assets acquired, net of cash acquired......... $73 $99 $106
Less: fair value of liabilities assumed..................... 9 7 2
--- --- ----
Acquisitions of businesses, net of cash acquired............ $64 $92 $104
=== === ====
</TABLE>

6. TOTAL COMPREHENSIVE INCOME (LOSS)

Total comprehensive income (loss), which is displayed in the combined
statements of changes in invested equity and total comprehensive income (loss),
represents net income (loss) plus the results of certain equity changes not
reflected in the combined statements of income.

F-14
<PAGE> 144
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The after-tax components of accumulated other comprehensive income (loss)
are shown below.

<TABLE>
<CAPTION>
FOREIGN UNREALIZED TOTAL ACCUMULATED
CURRENCY HOLDING OTHER COMPREHENSIVE
TRANSLATION GAINS (LOSSES) INCOME (LOSS)
----------- -------------- -------------------
<S> <C> <C> <C>
Beginning balance October 1,
1997............................ $(30) $ 22 $ (8)
Current-period change............. 12 (20) (8)
---- ---- ----
Ending balance September 30,
1998............................ (18) 2 (16)
Current-period change............. 1 (2) (1)
---- ---- ----
Ending balance September 30,
1999............................ (17) -- (17)
Current-period change............. (35) -- (35)
---- ---- ----
Ending balance September 30,
2000............................ $(52) $ -- $(52)
==== ==== ====
</TABLE>

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

7. INCOME TAXES

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

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
U.S. federal statutory income tax rate...................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax
effect.................................................... 3.7 1.1 2.1
Non U.S. earnings taxed at different rates.................. (0.5) (0.7) (5.1)
Research credits............................................ (0.3) (1.8) (2.5)
Foreign sales corporation................................... (1.1) (1.6) (1.4)
Other differences--net...................................... 0.5 0.2 (0.3)
---- ---- -----
Effective income tax rate excluding acquisition related
costs(1).................................................. 37.3 32.2 27.8
Acquisition related costs(1)................................ 3.6 0.9 130.2
---- ---- -----
Effective income tax rate................................... 40.9% 33.1% 158.0%
==== ==== =====
</TABLE>

------------
(1) Includes non-tax deductible IPRD and amortization of goodwill.

F-15
<PAGE> 145
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following table presents the United States and foreign components of
income before income taxes and the provision for income taxes.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES
United States............................................... $409 $332 $(221)
Non-U.S. ................................................... 104 145 352
---- ---- -----
Income before income taxes.................................. $513 $477 $ 131
==== ==== =====
PROVISION FOR INCOME TAXES
CURRENT
Federal..................................................... $160 $ 86 $ 105
State and local............................................. 29 9 21
Non-U.S. ................................................... 39 77 83
---- ---- -----
Sub-Total................................................... 228 172 209
---- ---- -----
DEFERRED
Federal..................................................... $(21) $ 32 $ 9
State and local............................................. 3 (2) 1
Non-U.S. ................................................... -- (44) (12)
---- ---- -----
Sub-total................................................... (18) (14) (2)
---- ---- -----
Provision for income taxes.................................. $210 $158 $ 207
==== ==== =====
</TABLE>

As of September 30, 2000, the Company had total federal and state and
local, net operating loss carryforwards (tax-effected) of $9, which expire
primarily after the year 2004.

The components of deferred tax assets and liabilities at September 30, 1999
and 2000 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------
1999 2000
---- ----
<S> <C> <C>
DEFERRED TAX ASSETS
Benefit obligations......................................... $ 79 $ 66
Reserves and allowances..................................... 76 65
Net operating loss/credit carryforwards..................... 9 9
Valuation allowance......................................... (2) --
Other....................................................... 5 5
---- ----
Total deferred tax assets:........................ $167 $145
==== ====
DEFERRED TAX LIABILITIES
Property, plant, and equipment.............................. $ 83 $ 87
Intangibles................................................. (39) 37
---- ----
Total deferred tax liabilities:................... $ 44 $124
==== ====
</TABLE>

The Company has not provided for U.S. deferred income taxes or foreign
withholding taxes on $517 of undistributed earnings of its non-U.S. subsidiaries
as of September 30, 2000, because these earnings are

F-16
<PAGE> 146
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

intended to be reinvested indefinitely. It is not practicable to determine the
amount of applicable taxes that would be incurred if such earnings were
repatriated.

8. BENEFIT OBLIGATIONS

PENSION AND POSTRETIREMENT BENEFITS

At the Distribution, the Company will become responsible for pension and
postretirement benefits for the U.S. active employees of the Company.
Obligations related to retired and terminated vested U.S. employees as of the
Offering will remain the responsibility of Lucent. Until the Distribution, the
Company's U.S. employees will be participants in most of Lucent's employee
benefit plans. At the Distribution, the Company will become responsible for the
pension and postretirement benefits for the Company's U.S. employees who retire
or terminate after the Offering, and Lucent will transfer to the Company the
pension and postretirement assets related to these employees. Lucent has managed
its U.S. employee benefit plans on a consolidated basis and separate company
information is not readily available. Therefore, the Company's share of the
Lucent U.S. plans' assets and liabilities is not included in the Company's
combined balance sheet. The combined statements of income include an allocation
of the costs of the U.S. employee benefit plans. These costs were allocated
based on the Company's U.S. active employee population for each of the years
presented. In connection with the Distribution, the Company will receive the
assets and liabilities of various existing Lucent pension and other employee
benefit plans related to the employees for whom the Company is assuming
responsibility.

Effective October 1, 1998, Lucent changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-plan-assets 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 recognizing 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 SFAS No. 87, "Employers' Accounting
For Pensions," 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 for the Company related to
periods prior to fiscal 1999 of $53 ($32 after-tax) is a one-time, non-cash
credit to fiscal 1999 earnings. This accounting change also resulted in a
reduction in benefit costs in fiscal 1999 that increased income by $10 ($6
after-tax) as compared with the previous accounting method. The pro forma
estimated effect if the accounting change were applied retroactively, for fiscal
1998, would be an increase to pre-tax income of $10.

F-17
<PAGE> 147
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The following information summarizes activity in Lucent's pension and
postretirement benefit plans.

<TABLE>
<CAPTION>
POST-RETIREMENT
PENSION BENEFITS BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at October 1................. $ 27,846 $ 27,401 $ 9,193 $ 8,604
Service cost.................................... 509 478 80 67
Interest cost................................... 1,671 1,915 537 601
Actuarial (losses) gains........................ (2,182) 370 (240) 33
Amendments...................................... 1,534 (1) (359) --
Benefits paid................................... (1,977) (2,294) (607) (651)
Benefit obligation assumed by Avaya Inc......... -- (1,756) -- (412)
-------- -------- -------- --------
Benefit obligation at September 30.............. 27,401 26,113 8,604 8,242
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at October 1.......... 36,191 41,067 3,959 4,467
Actual return on plan assets.................... 7,114 9,791 776 654
Lucent contributions............................ 14 19 29 8
Benefits paid................................... (1,977) (2,294) (607) (651)
Assets transferred to Avaya Inc. ............... -- (2,984) -- (255)
Other (including transfer of assets from pension
to postretirement plans)...................... (275) (337) 310 334
-------- -------- -------- --------
Fair value of plan assets at September 30....... 41,067 45,262 4,467 4,557
-------- -------- -------- --------
FUNDED (UNFUNDED) STATUS OF PLAN................ 13,666 19,149 (4,137) (3,685)
Unrecognized prior service cost................. 2,583 2,086 121 49
Unrecognized transition asset................... (645) (322) -- --
Unrecognized net gain........................... (9,466) (14,499) (1,014) (1,208)
-------- -------- -------- --------
NET AMOUNT RECOGNIZED........................... $ 6,138 $ 6,414 $ (5,030) $ (4,844)
======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
PENSION POSTRETIREMENT
BENEFITS BENEFITS
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
1999 2000 1999 2000
------ ------ ------- -------
<S> <C> <C> <C> <C>
Amounts recognized in the Lucent consolidated balance
sheet consist of:
Prepaid pension costs................................. $6,175 $6,440 $ -- $ --
Accrued benefit liability............................. (63) (37) (5,030) (4,844)
Intangible asset...................................... 9 5 -- --
Accumulated other comprehensive income................ 17 6 -- --
------ ------ ------- -------
Net amount recognized................................. $6,138 $6,414 $(5,030) $(4,844)
====== ====== ======= =======
</TABLE>

Pension plan assets include $287 and $102 of Lucent common stock at
September 30, 1999 and 2000, respectively. Postretirement plan assets include
$20 and $3 of Lucent common stock at September 30, 1999 and 2000, respectively.

F-18
<PAGE> 148
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The asset and pension amounts transferred to Avaya Inc., the former
enterprise networks group of Lucent, are subject to final adjustment. The final
amounts to be transferred to Avaya Inc. are not expected to be materially
different from the estimated amounts.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
PENSION AND POST-RETIREMENT BENEFITS
Discount rate............................................... 6.0% 7.25% 7.5%
Expected return on plan assets.............................. 9.0% 9.0% 9.0%
Rate of compensation increase............................... 4.5% 4.5% 4.5%
</TABLE>

Lucent has several non-pension post-retirement benefit plans. For
postretirement health care benefit plans, Lucent assumed a 7.6% annual health
care cost trend rate for 2001 through 2004, after which the trend rate would
decline to 3.9%. The assumed health care cost trend rate has a significant
effect on the amounts reported. A one percentage-point change in the assumed
Lucent health care cost trend rate would have the following effects:

<TABLE>
<CAPTION>
1 PERCENTAGE POINT
--------------------
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on total of service and interest cost components..... $ 26 $ 24
Effect on postretirement benefit obligation................. $353 $329
</TABLE>

SAVINGS PLANS

The majority of the Company's employees are eligible to participate in
savings plans sponsored by Lucent. The plans allow employees to contribute a
portion of their compensation on a pre-tax and/or after-tax basis in accordance
with specified guidelines. Lucent matches a percentage of employee contributions
up to certain limits. The Company's expense related to the Lucent savings plans
was $24, $25, and $21 in fiscal 1998, 1999 and 2000, respectively. The Company
expects to establish similar plans following the Distribution.

9. STOCK COMPENSATION PLANS

During fiscal 1999, 2000 and in prior years, certain employees of the
Company were granted stock options and other equity-based awards under Lucent's
stock-based compensation plans. During fiscal 1998, 1999 and 2000, the Company's
employees were also eligible to participate in the Lucent Employee Stock
Purchase Plan ("ESPP"), the Lucent Savings Plan and the Lucent Technologies Inc.
Long-Term Savings and Security Plan. The Company will initiate its own employee
stock-based compensation plans at the time of the Offering. Awards outstanding
under Lucent's stock-based compensation plans that are held by the Company's
employees will be converted to awards to acquire stock of the Company.

The stock options and other awards, as converted or adjusted, will have the
same vesting provisions, option periods, and other terms and conditions as the
Lucent options and awards they replaced. The number of shares and exercise price
of each stock option will be adjusted so that each option, whether a Lucent
option or a Company option, will have the same ratio of the exercise price per
share to the market value per share, and the same aggregate difference between
market value and exercise price as the Lucent stock options prior to the
adjustments. No new measurement date is expected to occur upon conversion of the
stock options.

Stock options generally are granted with an exercise price equal to 100% of
the market value of a share of common stock on the date of grant, have two to
ten year terms and vest within four years from the date of grant.

F-19
<PAGE> 149
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

In connection with certain of the Company's acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for Lucent's common stock effective at the acquisition date. For
acquisitions accounted for as purchases, the fair value of these options was
included as part of the purchase price.

Under the terms of Lucent's current ESPP, eligible employees may have up to
10% of eligible compensation deducted from their pay to purchase Lucent common
stock through June 30, 2001. The per share purchase price is 85% of the average
high and low per share trading price of Lucent common stock on the New York
Stock Exchange on the last trading day of each month. In fiscal 1998, 1999 and
2000, 500,000, 400,000 and 700,000 Lucent shares, respectively, were purchased
under the ESPP by the Company's employees, at a weighted average price of
$24.51, $47.21 and $46.74, respectively.

Lucent has adopted the disclosure requirements of SFAS 123, "Accounting for
Stock-Based Compensation" ("SFAS 123") and, as permitted under SFAS 123, applies
Accounting Principles Board Opinion No. 25 ("APB 25") and related
interpretations in accounting for its plans. Compensation expense recorded under
APB 25 was $2, $1 and $1 for fiscal September 30, 1998, 1999 and 2000,
respectively. If Lucent had elected to adopt the optional recognition provisions
of SFAS 123 for its stock option plans and the ESPP, net income (loss) for the
Company would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
NET INCOME (LOSS)
As reported................................................. $303 $351 $ (76)
Pro forma................................................... $290 $326 $(131)
</TABLE>

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

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-----------------------
1998 1999 2000
----- ----- -----
<S> <C> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS
Dividend yield.............................................. 0.23% 0.14% 0.22%
Expected volatility......................................... 29.5% 33.3% 39.2%
Risk free interest rate..................................... 5.3% 4.8% 6.2%
Expected holding period (in years).......................... 5.0 4.0 2.8
</TABLE>

Presented below is a summary of the status of the Lucent stock options held
by employees for whom the Company estimates it will assume responsibility, and
the related transactions for fiscal 1998, 1999 and 2000. The stock option
activity is not necessarily indicative of what the activity would have been had
the Company been a separate stand-alone company during the periods presented or
what the activity may be in the future.

F-20
<PAGE> 150
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
(000'S) EXERCISE PRICE
------- ----------------
<S> <C> <C>
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1997................... 7,555 $13.01
Granted/Assumed*(1)......................................... 5,278 34.38
Exercised................................................... (445) 9.74
Forfeited/Expired........................................... (9) 15.21
------
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998................... 12,379 22.24
Granted/Assumed*............................................ 3,432 42.88
Exercised................................................... (450) 12.22
Forfeited/Expired........................................... (37) 34.34
------
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1999................... 15,324 27.13
Granted/Assumed*............................................ 32,505 32.65
Exercised................................................... (4,339) 8.02
Forfeited/Expired........................................... (1,723) 40.29
------
OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000................... 41,767 32.87
======
OPTIONS OUTSTANDING AT SEPTEMBER 30, 2000, reflecting spin
off adjustments(2)........................................ 42,073 32.62
======
</TABLE>

------------
* Includes options converted in acquisitions.

(1) Includes options covering 2,657 shares of common stock granted under a
broad-based employee plan at a weighted average exercise price of $37.34.

(2) Effective with the spin off of Avaya Inc., on September 30, 2000, the number
of outstanding options was adjusted and all exercise prices were decreased
immediately following the spin off date to preserve the economic values of
the options that existed prior to the spin off.

The weighted average fair value of the Lucent stock options, held by the
Company's employees, calculated using the Black-Scholes option-pricing model,
granted during fiscal 1998, 1999 and 2000 is $12.27, $14.46 and $15.88 per
share, respectively.

The following table summarizes the status of Lucent stock options, held by
the Company's employees, outstanding and exercisable at September 30, 2000.

<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
---------------------------------- -------------------
WEIGHTED
AVERAGE
REMAINING
---------------------- WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
SHARES LIFE EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES (000'S) (YEARS) PRICE (000'S) PRICE
------------------------------------ ------- ----------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.02 to $11.14..................... 12,985 6.2 $ 4.72 7,428 $ 5.70
$11.15 to $22.53.................... 2,796 7.2 18.78 2,363 18.42
$22.54 to $41.40.................... 5,926 7.8 35.15 60 28.96
$41.41 to $42.47.................... 8,128 2.4 42.17 1 42.29
$42.48 to $58.58.................... 4,268 9.2 53.70 6 54.17
$58.59 to $59.03.................... 5,355 9.4 58.60
$59.04 to $70.61.................... 2,615 9.3 62.98 2 63.96
------ -----
Total............................... 42,073 $32.62 9,860 $ 8.94
====== =====
</TABLE>

F-21
<PAGE> 151
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

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

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Other stock unit awards granted (000's).................. 205 40 4
Weighted average market value of shares granted during
the period............................................. $19.24 $29.36 $64.91
</TABLE>

10. OPERATING SEGMENTS

The Company has two reportable segments: Optoelectronics and Integrated
Circuits. The Optoelectronics segment represents the Company's optoelectronic
components operations, including both active optoelectronic components and
passive components. Optoelectronic components transmit, process, change, amplify
and receive light that carries data and voice traffic over optical networks. The
Integrated Circuits segment represents the Company's integrated circuits
operations. Integrated circuits, or chips, are made using semiconductor wafers
imprinted with a network of electronic components. They are designed to perform
various functions such as processing electronic signals, controlling electronic
system functions and processing and storing data. The Integrated Circuits
segment also includes the Company's wireless local area networking products,
which facilitate the transmission of data and voice signals within a localized
area without cables or wires. Each of the Optoelectronics and Integrated
Circuits segments include revenue from the licensing of intellectual property
related to that segment. There were no intersegment sales during the periods
presented.

Each segment is managed separately. Disclosure of segment information is on
the same basis used internally for evaluating segment performance and for
deciding how to allocate resources.

The Company has centralized corporate functions and uses shared service
arrangements to realize economies of scale and efficient use of resources. The
costs of shared services, and other corporate center operations managed on a
common basis, are allocated to the segments based on usage or other factors
based on the nature of the activity. The accounting policies of the reportable
operating segments are the same as those described in the Summary of Significant
Accounting Policies.

Performance measurement and resource allocation for the reportable
operating segments are based on many factors. The primary financial measure used
is operating income, exclusive of the amortization of goodwill and other
acquired intangibles, and of IPRD.

F-22
<PAGE> 152
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

REPORTABLE SEGMENTS

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
INTEGRATED CIRCUITS
Revenue................................................ $2,727 $3,055 $3,507
Operating income (excluding amortization of goodwill
and other acquired intangibles and IPRD)............ 468 383 434
Assets................................................. 2,086 2,360 3,045
Capital expenditures................................... 411 572 447
Depreciation and amortization.......................... 301 354 438
OPTOELECTRONICS
Revenue................................................ $ 374 $ 659 $1,201
Operating income (excluding amortization of goodwill
and other acquired intangibles and IPRD)............ 50 126 357
Assets................................................. 230 329 3,775
Capital expenditures................................... 43 84 225
Depreciation and amortization.......................... 16 31 39
</TABLE>

RECONCILING ITEMS

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

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------
1998 1999 2000
---- ---- -----
<S> <C> <C> <C>
OPERATING INCOME
Total reportable segments................................. $518 $509 $ 791
Amortization of goodwill and other acquired intangibles... (3) (13) (189)
IPRD...................................................... (48) (17) (446)
---- ---- -----
Total operating income............................ $467 $479 $ 156
==== ==== =====
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
ASSETS
Total reportable segments................................ $2,316 $2,689 $6,820
Deferred taxes and other corporate assets................ 165 331 247
------ ------ ------
Total assets..................................... $2,481 $3,020 $7,067
====== ====== ======
</TABLE>

F-23
<PAGE> 153
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

GEOGRAPHIC INFORMATION

<TABLE>
<CAPTION>
REVENUE(1) LONG-LIVED ASSETS(2)
YEAR ENDED SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1998 1999 2000 1998 1999 2000
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
U.S. ................................ $1,632 $1,863 $2,404 $ 951 $1,333 $4,945
Foreign Regions
Asia Pacific & PRC................. 831 1,021 1,229 223 247 281
Europe, Middle East & Africa....... 567 713 867 235 214 146
Caribbean, Canada, Mexico & Latin
America......................... 71 117 208 -- 1 2
------ ------ ------ ------ ------ ------
Totals..................... $3,101 $3,714 $4,708 $1,409 $1,795 $5,374
====== ====== ====== ====== ====== ======
</TABLE>

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

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

CONCENTRATIONS

Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenue. Lucent accounted for 22.3%, 25.7% and 21.3%
of the Company's combined revenue for fiscal 1998, 1999 and 2000, respectively.
The Company expects that a significant portion of its future revenue will
continue to be generated by current customers and a limited number of other
customers. The Company currently purchases several different parts that are used
in its optoelectronic components and some parts and processes used for its
integrated circuits, in each case for which there is only one qualified
manufacturer. While the Company is currently seeking alternative internal or
external sources of these parts and processes, disruption of its sole source
could have a material adverse effect on sales and shipments of the affected
products.

11. FINANCIAL INSTRUMENTS

The Company uses foreign currency forward exchange contracts to manage risk
to the Company by generating cash flows which offset the cash flows of certain
transactions in foreign currencies or underlying financial instruments in
relation to their amount and timing. The Company's derivative financial
instruments are used as risk management tools and are not for trading purposes.

Market quotes were used to estimate the fair value of foreign currency
forward exchange contracts that approximate their book value. The carrying
amounts of receivables and payables contained in the combined balance sheets
approximate fair value.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company conducts its operations on a multinational basis in several
foreign currencies. Consequently, the Company enters into various foreign
currency forward exchange contract to manage its exposure against adverse
changes in those foreign exchange rates. The notional amounts for foreign
currency forward exchange contract represent the U.S. dollar equivalent of an
amount exchanged. Generally, foreign currency forward exchange contracts are
designated for firmly committed or forecasted sales and purchases that are
expected to occur in less than one year. Gains and losses on all hedged
contracts for firmly committed transactions are deferred in other current assets
and liabilities, are recognized in income when the transactions occur, and are
not material to the combined financial statements at September 30, 1999 and
2000. All other gains and losses on foreign currency forward exchange contracts
are recognized in other income-net as the exchange rates change.

F-24
<PAGE> 154
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

The Company engages in foreign currency hedging activities as a defensive
strategy designed to protect the Company from adverse changes in foreign
currency exchange rates that may affect the eventual net cash flows resulting
from the sale of products to foreign customers and purchases from foreign
suppliers. The Company believes that its hedge activities achieve risk reduction
and hedge effectiveness by creating a relationship whereby the gains and losses
on its derivative instruments counterbalance the changes in value of foreign
currency denominated assets, liabilities and transactions being hedged. Hedge
effectiveness is periodically measured by comparing the change in fair value of
each hedged foreign currency exposure at the applicable market rate with the
change in market value of the corresponding derivative instrument.

The notional amounts of the Company's foreign exchange forward contracts at
September 30, 1999 and 2000 were $184 and $137, respectively. In 2000, these
notional amounts represent contracts in Euros, Singapore dollars, Japanese yen
and Thai baht. Notional amounts represent the face amount of the contractual
arrangements and the basis on which U.S. dollars are to be exchanged and are not
a measure of market or credit exposure.

CREDIT RISK

By their nature, all financial instruments involve credit risk for
non-performance by counterparties. The Company seeks to reduce credit risk on
financial instruments by dealing only with financially secure counterparties.
Exposure to credit risk is controlled through credit approvals, credit limits
and continuous monitoring procedures and reserves for losses are established
when deemed necessary. The Company seeks to limit its exposure to credit risks
in any single country or region.

The Company is a party to letters of credit that represent purchased
guarantees ensuring the Company's performance or payment to third parties in
accordance with specified terms and conditions which amounted to approximately
$20 as of September 30, 1999 and 2000, respectively. The Company does not
believe it is practicable to estimate the fair value of these financial
instruments and does not expect any material losses since performance is not
likely to be required.

12. TRANSACTIONS WITH LUCENT

For fiscal 1998, 1999 and 2000, the Company had $692, $955 and $1,002,
respectively, of revenue for products sold to Lucent. Included in these
transactions were sales to Avaya Inc., formerly the enterprise networks segment
of Lucent, of $70, $82 and $65 for fiscal 1998, 1999 and 2000, respectively.
Products purchased from Lucent were not significant for the periods presented.
Certain other costs were billed directly to the Company by Lucent for specific
research and development projects related to the Company's businesses. This
amounted to $46, $49 and $67 for fiscal 1998, 1999 and 2000, respectively.

In connection with the Separation and Distribution, the Company and Lucent
are expected to execute and deliver the Separation and Distribution Agreement
(the "Separation and Distribution Agreement") and certain related agreements
which are summarized below. This summary is qualified in all respects by the
terms of the Separation and Distribution Agreement and such related agreements.

SEPARATION AND DISTRIBUTION AGREEMENT

Pursuant to the Separation and Distribution Agreement, Lucent expects to
transfer to the Company all of the assets, liabilities and operations associated
with the Company's Businesses.

The Separation and Distribution Agreement, among other things, provides
that the Company will indemnify Lucent for all liabilities relating to the
Company's Businesses and for all contingent liabilities primarily relating to
the Company's Businesses. In addition, the Separation and Distribution Agreement
will provide that certain contingent liabilities, will be shared by Lucent and
the Company based on agreed upon percentages.

F-25
<PAGE> 155
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

EMPLOYEE BENEFITS AGREEMENT AND PLANS

The Company and Lucent are expected to enter into an Employee Benefits
Agreement, pursuant to which the Company will create independent pension and
other employee benefit plans that are substantially similar to Lucent's existing
pension and other employee benefit plans. This agreement will provide that, from
the Separation until the Distribution, the Company will be a "Participating
Company" in Lucent's employee benefit plans, other than Lucent's employee stock
purchase plan (after June 30, 2001) and long term incentive plan, and will bear
its allocable share of costs for benefits and administration under these plans.
Under the agreement and effective immediately after the Distribution, Lucent
will transfer the assets and liabilities of various existing Lucent pension and
other employee benefit plans related to Lucent employees who are transferring to
the Company. Generally, following the Distribution, Lucent will cease to have
any liability or obligation to the Company's current employees and their
beneficiaries under any of Lucent's benefit plans, programs or practices.

Prior to the Separation, the Company is expected to establish an employee
stock purchase program and a long term incentive plan for its employees that
will become effective prior to the Offering.

FEDERAL, STATE AND LOCAL TAX ALLOCATION AGREEMENT

The State and Local Income Tax Allocation Agreement and the federal Tax
Allocation Agreement by and among Lucent and Lucent's other domestic
subsidiaries, including the Company, will continue in effect after the
Separation. These tax agreements govern the allocation of state, local and
federal income taxes for periods prior to and including the date of the
Distribution.

TAX SHARING AGREEMENT

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

FIBER, MICROELECTRONICS AND ORINOCO PRODUCT PURCHASE AGREEMENTS

The Company and Lucent are expected to enter into a Fiber Product Purchase
Agreement, a Microelectronics Product Purchase Agreement and an ORiNOCO Product
Purchase Agreement. The pricing terms for the products and services covered by
these commercial agreements will reflect negotiated prices. Under the Fiber
Product Purchase Agreement the Company will have an obligation to purchase all
of its requirements of specified specialty fiber, fiber apparatus and premises
cable products from Lucent. This agreement grants to Lucent an exclusive right
to provide the Company with specified products and requires the procurement of
all its requirements of specified products from Lucent.

The Microelectronics Product Purchase Agreement governs transactions
pursuant to which Lucent will purchase goods and services from the Company. In
the agreement, Lucent has committed that payments made to the Company,
commencing on February 1, 2001, for purchases of the Company's products will
total at least $1,000 annually during each one year period ending on January 31,
2002, January 31, 2003 and January 31, 2004, subject to customary terms and
conditions with respect to availability and acceptability of the Company's
products. Any purchases by Lucent in excess of $1,000 during the first or second
year of the
F-26
<PAGE> 156
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

agreement shall result in a reduction of the purchase commitment by Lucent
during the third year of the agreement by the amount of such excess. In certain
limited instances, Lucent's purchase commitment for each year may be reduced in
the event the Company fails to, or chooses not to, fulfill certain orders. In
addition, if Lucent does not meet their minimum yearly purchase commitments for
either of the first two years of this agreement, Lucent may carry over a portion
of the yearly purchase commitment to the following year of the agreement. At the
end of the third year of the agreement, if Lucent has not purchased an aggregate
total during the course of the agreement of at least $3,000 (or such reduced
aggregate purchase commitment in the event the Company fails to, or choose not
to, fulfill certain orders), Lucent will be obligated to purchase products in
the amount of the shortfall from the Company in the three months time period
thereafter unless the Company and Lucent agree otherwise.

The ORiNOCO Product Purchase Agreement governs transactions in which the
Company will furnish ORiNOCO products to Lucent for resale. The agreement does
not grant to Lucent an exclusive right to resell the products, but does grant
Lucent a right of first opportunity or refusal for certain specified service
provider customers in exchange for a minimum purchase commitment. The pricing in
the agreement shall be determined by the Company's list price in effect on the
date of the receipt of an order less any applicable discounts.

INTERIM SERVICES AND SYSTEMS REPLICATION AGREEMENT

The Company and Lucent are expected to enter into an Interim Services and
Systems Replication Agreement to provide each other, on an interim, transitional
basis, with various data processing services, telecommunications services and
corporate support services, including: accounting, financial management,
information systems management, tax, payroll, legal, human resources
administration, procurement and other general support. The Company and Lucent
also will provide each other additional services as the Company and Lucent may
identify from time to time after the Separation. Specific charges for such
services are generally intended to allow the Company providing services to
recover direct costs plus expenses, without profit.

The Interim Services and Systems Replication Agreement will also provide
for the replication and transfer of designated computer systems used for
administrative support or used in the Company's Businesses or Lucent's other
businesses. The systems include specified hardware, software, data storage or
maintenance and support components. Costs and expenses of purchasing hardware or
obtaining software will be borne by the party purchasing the hardware or
licensing the software.

REAL ESTATE AGREEMENTS

Lucent and the Company are expected to also enter into various leases and
sublease arrangements for the sharing of certain facilities for a transitional
period on commercial terms. The lease term for space in owned buildings will be
determined on a case by case basis. In the case of subleases or sub-subleases of
property, the lease term will generally coincide with the remaining term of the
primary lease or sublease, respectively.

TRADEMARK LICENSE AGREEMENT, TRADEMARK ASSIGNMENT AND TRADE DRESS ASSIGNMENT

It is contemplated that the primary trademarks used in the sale of the
Company's products and services will be transferred to the Company, except for
Lucent's name and logo and the Bell Laboratories name. It is expected that the
Company will retain the use of the Lucent name and logo, but not the Bell
Laboratories name, on a royalty-free basis, for a transitional period. Lucent
and the Company will enter into a Trademark License Agreement, Trademark
Assignment and Trade Dress Assignment to effectuate the grant or transfer, as
applicable, of such rights.

F-27
<PAGE> 157
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

PATENT ASSIGNMENT

The Company and Lucent are expected to execute and deliver patent
assignments and other agreements, related to patents currently owned or
controlled by Lucent and its subsidiaries. The patent assignments will divide
ownership of patents, patent applications and foreign counterparts between the
Company and Lucent. The ownership of patents will be divided as follows. First,
Lucent Technologies Microelectronics Guardian Corp. and Lucent Technologies
Optoelectronics Guardian Corporation will each be vested with ownership or
exclusive rights in certain patents held by Lucent or its subsidiaries that
relate principally to the Company's Businesses. Then, the shares of Lucent
Technologies Microelectronics Guardian Corp. and Lucent Technologies
Optoelectronics Guardian Corporation will be contributed to the Company under
the Separation and Distribution Agreement. Lucent and its other subsidiaries,
will retain ownership of all other patents and patent applications.

TECHNOLOGY ASSIGNMENT AND JOINT OWNERSHIP AGREEMENT

The Company and Lucent are expected to execute and deliver assignments and
other agreements, including the technology assignment, related to technology
currently owned or controlled by Lucent and its subsidiaries. Technology will
include copyrights, mask works and other intellectual property other than
trademarks, trade names, service marks and patent rights. The technology
assignment will generally divide ownership of technology between the Company and
Lucent, with each owning technology that was developed by or for, or purchased
by, each company for their respective businesses. Certain specified technology
will be owned jointly by the Company and Lucent.

PATENT AND TECHNOLOGY LICENSE AGREEMENT

The Company and Lucent are expected to enter into a Patent and Technology
License Agreement, related to patents and technology currently owned or
controlled by the Company, Lucent and their respective subsidiaries. The Patent
and Technology License Agreement provides for cross-licenses to each company.
The Company and Lucent will grant to each other, under the patents that each
company has, a nonexclusive, personal, nontransferable license to make, have
made, use, lease, import, offer to sell, and sell any and all products and
services of the businesses in which the licensed company, including related
companies, is now or hereafter engaged. The cross-licenses also permit each
company, subject to limitations, to have third parties make items under the
other company's patents, as well as to pass through to customers limited rights
under the other company's patents with respect to products and services
furnished to customers by the licensed company. Otherwise, the right to
sublicense to unaffiliated third parties will not be granted under the cross-
licenses, except for limited rights in connection with establishing second
source suppliers or rights to sublicense a divested business. The cross-licenses
between us and Lucent cover all of each company's patents, including patents
issued on patent applications with a filing date prior to February 1, 2003.

DEVELOPMENT PROJECT AGREEMENT

Lucent and the Company are expected to enter into a Development Project
Agreement under which Bell Laboratories will perform certain research and
development activities for the Company on a contract basis. The Company will
also perform certain research and development activities for Lucent on a
contract basis.

JOINT DESIGN CENTER OPERATING AGREEMENT

Lucent and the Company are expected to enter into a Joint Design Center
Operating Agreement to develop technology for micro electro-mechanical systems,
or MEMS.

F-28
<PAGE> 158
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

13. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company is subject to proceedings,
lawsuits and other claims, including proceedings under laws and government
regulations related to environmental, tax and other matters. The semiconductor
industry is characterized by substantial litigation regarding patents and other
intellectual property rights. From time to time, the Company may be party to
various inquiries or claims in connection with these rights. Such matters are
subject to many uncertainties, and outcomes are not predictable with assurance.
Consequently, the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at September 30, 2000 cannot be
ascertained. While these matters could affect the operating results of any one
quarter when resolved in future periods and while there can be no assurance with
respect thereto, management believes that after final disposition, any monetary
liability or financial impact to the Company beyond that provided for at
September 30, 2000, would not be material to the annual combined financial
statements.

In December 1997, the Company entered into a joint venture, called Silicon
Manufacturing Partners, with Chartered Semiconductor Manufacturing Ltd.
("Chartered Semiconductor"), a leading manufacturing foundry for integrated
circuits, to operate a 54,000 square foot integrated circuit manufacturing
facility in Singapore. The Company owns a 51% equity interest in this joint
venture, and Chartered Semiconductor owns the remaining 49% equity interest. The
Company accounts for its investment in the joint venture under the equity method
due to Chartered Semiconductor's participatory rights under the agreement. The
Company has an agreement with Silicon Manufacturing Partners to purchase 51% of
the production output from this facility and Chartered Semiconductor agreed to
purchase the remaining 49% of the production output. If the Company fails to
purchase its required commitments, it will be required to pay Silicon
Manufacturing Partners for the fixed costs associated with the unpurchased
wafers. Chartered Semiconductor is similarly obligated with respect to the
wafers allotted to it. The agreement also provides that Chartered Semiconductor
will have the right of first refusal to purchase integrated circuits produced in
excess of the Company's requirements. The agreement may be terminated by either
party upon two years written notice, but may not be terminated prior to February
2008. The agreement may also be terminated for material breach, bankruptcy or
insolvency.

In July 2000, the Company entered into an agreement with Chartered
Semiconductor committing the Company and Chartered Semiconductor to jointly
develop manufacturing technologies for future generations of integrated circuits
targeted at high-growth communications markets. The Company has agreed to invest
up to $350 million over a five year period. As part of the joint development
activities, the two companies will staff a new research and development team at
Chartered Semiconductor's Woodlands campus in Singapore. These scientists and
engineers will work with Company teams in Murray Hill, New Jersey, and Orlando,
Florida, as well as with Chartered Semiconductor's technology development
organization, to create a 600-person research and development team. This
relationship is in the early stages of development. The agreement may be
terminated for breach of material terms upon 30 days notice or for convenience
upon six months notice prior to the planned successful completion of a
development project, in which case the agreement will terminate upon the actual
successful completion of such project.

RISKS AND UNCERTAINTIES

The Company has no history operating as a stand-alone company, and it may
be unable to make the changes necessary to operate as a stand-alone company, or
it may incur greater costs as a stand-alone company that may cause its
profitability to decline. The Company's Businesses have been operated by Lucent
as a segment of its broader corporate organization rather than as a separate
stand-alone company. Lucent assisted the Company by performing various corporate
functions, including public relations, employee relations, investor relations,
financing and legal and tax functions. Following the Separation, Lucent will
have no obligation to provide these functions to the Company other than the
interim services which will be provided by Lucent under the Interim Services and
Systems Replication Agreement. If the Company does not have in
F-29
<PAGE> 159
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

place its own systems and business functions or if it does not have agreements
with other providers of these services once this Interim Services and Systems
Replication Agreement with Lucent expires, the Company may not be able to
effectively operate its business and its profitability may decline.

LEGAL PROCEEDINGS

From time to time the Company is involved in legal proceedings arising in
the ordinary course of business, including unfair labor charges filed by its
unions with the National Labor Relations Board, claims before the U.S. Equal
Employment Opportunity Commission and other employee grievances. The Company
also may be subject to intellectual property litigation and infringement claims,
which could cause it to incur significant expenses or prevent it from selling
its products.

A patent infringement lawsuit has been filed against Lucent, among other
optoelectronic components manufacturers, by Litton Systems, Inc. and The Board
of Trustees of the Leland Stanford Junior University in the United States
District Court for the Central District of California (Western Division) on
October 3, 2000. The complaint has not yet been served on Lucent. Following the
Offering, the Company expects to be named defendants in the suit. The complaint
alleges that each of the defendants is infringing a patent related to the
manufacture of optical amplifiers. The patent is owned by Stanford University
and is exclusively licensed to Litton. The complaint seeks, among other
remedies, monetary damages, counsel fees and injunctive relief.

Another patent infringement lawsuit has been filed against Lucent, among
other semiconductors manufacturers, by Lemelson Medical, Education & Research
Foundation, LP, in the United States District Court, District of Arizona on June
15, 1999. Following the Offering, the Company expects to be named defendants in
the suit. The complaint alleges infringement of 16 patents, 14 of which relate
to machine vision and bar code readers, and the other two relate to
semiconductor processing technology. The action has been stayed with respect to
the 14 patents relating to machine vision and bar code readers, pending a
request by the equipment manufacturers to join the suit and assume
responsibility for the litigation. The complaint alleges infringement of the two
patents related to semiconductor processing based on the manufacture and sale of
semiconductor devices. The complaint seeks monetary damages, counsel fees and
injunctive relief.

If the Company is unsuccessful in resolving these proceedings, as they
relate to the Company, its operations may be disrupted or it may incur
additional costs that may decrease its profitability.

Other than described above, the Company does not believe there is any
litigation pending that should have, individually or in the aggregate, a
material adverse effect on its financial position, results of operations or cash
flows.

ENVIRONMENTAL, HEALTH AND SAFETY

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

It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. This practice is followed whether the claims are asserted
or unasserted. Management

F-30
<PAGE> 160
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)

expects that the amounts reserved will be paid out over the period of
remediation for the applicable site, which typically ranges from five to thirty
years. Reserves for estimated losses from environmental remediation are,
depending upon the site, based primarily upon internal or third party
environmental studies, estimates as to the number, participation level and
financial viability of all potentially responsible parties, the extent of the
contamination and the nature of required remedial actions. Accruals will be
adjusted as further information develops or circumstances change. The amounts
provided for in the combined financial statements for environmental reserves are
the gross undiscounted amount of such reserves, without deductions for insurance
or third party indemnity claims. Although the Company believes that its reserves
are adequate, there can be no assurance that expenditures which will be required
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amounts reflected in these reserves or will not have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.

LEASES

The Company leases land, buildings and equipment under agreements that
expire in various years through 2013. Rental expense under operating leases was
$55, $58 and $97 for the fiscal years ended September 30, 1998, 1999 and 2000,
respectively. The table below shows the future minimum lease payments due under
non-cancelable operating leases at September 30, 2000. Such payments total $251
for operating leases. The net present value of such payments on the capital
lease obligation was $60 after deducting imputed interest of $9.

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
---------------------------------------------------
2001 2002 2003 2004 2005 LATER YEARS
---- ---- ---- ---- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating leases................ $80 $73 $54 $26 $12 $6
Capital lease................... 15 20 21 13 -- --
--- --- --- --- --- --
Total................. $95 $93 $75 $39 $12 $6
=== === === === === ==
</TABLE>

14. QUARTERLY INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
FISCAL YEAR QUARTERS
---------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 2000
Revenue........................................ $966 $1,067 $1,186 $1,489 $4,708
Gross profit................................... 464 454 520 715 2,153
Purchased in-process research & development.... -- 11 435 -- 446
Amortization of goodwill and other acquired
intangibles.................................. 5 5 67 112 189
Net income (loss).............................. 94 65 (365) 130 (76)
YEAR ENDED SEPTEMBER 30, 1999
Revenue........................................ $884 $ 907 $ 955 $ 968 $3,714
Gross profit................................... 413 428 455 469 1,765
Purchased in-process research & development.... -- 17 -- -- 17
Amortization of goodwill and other acquired
intangibles.................................. 1 2 5 5 13
Net income before cumulative effect of
accounting change............................ 82 76 73 88 319
Cumulative effect of accounting change(1)...... 32 -- -- -- 32
Net income..................................... 114 76 73 88 351
</TABLE>

------------
(1) Effective October 1, 1998, the Company 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.

F-31
<PAGE> 161

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Ortel Corporation:

We have audited the consolidated balance sheets of Ortel Corporation and
subsidiaries as of April 30, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity and comprehensive income (loss)
and cash flows for each of the years in the three-year period ended April 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ortel
Corporation and subsidiaries as of April 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended April 30, 1999, in conformity with generally accepted accounting
principles.

/s/ KPMG LLP

Los Angeles, California
May 26, 1999, except Note 12 which is as of June 2, 1999

F-32
<PAGE> 162

ORTEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
APRIL 30,
----------------------
1999 1998(1)
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 12,705 $ 12,656
Short term investments.................................... 11,066 16,012
Trade receivables less allowance for doubtful accounts of
$973 and $307 at April 30, 1999 and 1998,
respectively........................................... 14,549 12,819
Billed contract costs and fees and other receivables
(net).................................................. 684 1,415
Inventories............................................... 13,443 10,492
Income taxes receivable................................... 2,900 71
Deferred tax assets....................................... 2,574 2,775
Prepaid expenses and other current assets................. 1,042 1,281
Current assets, discontinued operations................... -- 936
-------- --------
Total current assets................................... 58,963 58,457
PROPERTY, EQUIPMENT AND IMPROVEMENTS, AT COST:
Property.................................................. 1,796 1,796
Equipment................................................. 29,615 27,511
Office furniture and fixtures............................. 5,688 4,813
Leasehold improvements.................................... 6,484 4,932
-------- --------
Total property, equipment and improvements................ 43,583 39,052
Less accumulated depreciation and amortization............ (25,159) (19,560)
-------- --------
Net property, equipment and improvements............... 18,424 19,492
Intangible assets, net...................................... 2,123 2,581
Other assets................................................ 9,718 8,802
Long-term assets, discontinued operations................... -- 1,009
-------- --------
Total assets........................................... $ 89,228 $ 90,341
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 7,168 $ 3,685
Accrued payroll and related costs......................... 1,794 2,899
Other accrued liabilities................................. 2,166 2,538
Discontinued operations reserve........................... 1,646 --
Income taxes payable...................................... 188 172
-------- --------
Total current liabilities.............................. 12,962 9,294
Deferred income............................................. -- 400
Deferred income taxes....................................... 817 1,598
-------- --------
Total liabilities........................................... 13,779 11,292
Minority interest in subsidiaries........................... 261 265
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common Stock, $.001 par value; 25,000,000 shares
authorized; issued and outstanding: 11,969,644 and
11,713,371 in 1999 and 1998............................ 12 12
Additional paid in capital................................ 55,422 53,101
Retained earnings......................................... 21,421 27,449
Loans receivable.......................................... (1,064) (1,460)
Accumulated other comprehensive loss...................... (603) (318)
-------- --------
Net stockholders' equity............................... 75,188 78,784
-------- --------
Commitments and contingencies (note 7)
Total liabilities and stockholders' equity............. $ 89,228 $ 90,341
======== ========
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

See accompanying notes to consolidated financial statements.
F-33
<PAGE> 163

ORTEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1999 1998(1) 1997(1)
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues.................................................... $72,059 $75,927 $82,363
Cost of revenues............................................ 44,091 44,065 42,746
------- ------- -------
Gross profit.............................................. 27,968 31,862 39,617
OPERATING EXPENSES:
Research and development.................................. 12,374 11,662 12,875
Sales and marketing....................................... 11,840 10,251 10,605
General and administrative................................ 6,889 6,157 5,968
------- ------- -------
Total operating expenses............................... 31,103 28,070 29,448
------- ------- -------
Operating income (loss)................................... (3,135) 3,792 10,169
OTHER:
Interest income, net...................................... 1,291 1,278 1,458
Other income (expense), net............................... 179 584 743
------- ------- -------
Income (loss) from continuing operations before income
taxes..................................................... (1,665) 5,654 12,370
Provision (credit) for income taxes......................... (995) 1,517 3,801
------- ------- -------
Income (loss) from continuing operations.................... (670) 4,137 8,569
Loss from discontinued operations, net of tax benefits of
$360 in 1999, $794 in 1998 and $113 in 1997............... (1,439) (1,400) (254)
Loss from disposal of discontinued operations, net of income
tax benefit of $980....................................... (3,919) -- --
------- ------- -------
Net income (loss)........................................... $(6,028) $ 2,737 $ 8,315
======= ======= =======
INCOME (LOSS) PER COMMON SHARE--BASIC
Income (loss) from continuing operations.................. $ (.06) $ .36 $ .75
Discontinued operations................................... (.45) (.12) (.02)
------- ------- -------
Net income (loss) per share--Basic........................ $ (.51) $ .24 $ .73
======= ======= =======
INCOME (LOSS) PER COMMON SHARE--DILUTED(2)
Income (loss) from continuing operations(2)............... $ (.06) $ .33 $ .68
Discontinued operations(2)................................ (.45) (.11) (.02)
------- ------- -------
Net income (loss) per share -- Diluted(2)................. $ (.51) $ .22 $ .66
======= ======= =======
SHARES USED IN PER SHARE COMPUTATION:
Basic..................................................... 11,876 11,634 11,463
Diluted(2)................................................ 11,876 12,639 12,609
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

(2) Options to purchase 652,000 shares at or below the average price of the
common shares were outstanding at April 30, 1999, but were excluded from the
computation of diluted earnings per share as the Company reported a loss
position and the effect would be antidilutive.

See accompanying notes to consolidated financial statements.
F-34
<PAGE> 164

ORTEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)

<TABLE>
<CAPTION>
ADDITIONAL ACCUM
COMMON PAID IN RETAINED LOANS COMPREHENSIVE STOCKHOLDERS'
SHARES STOCK CAPITAL EARNINGS RECEIVABLE INC (LOSS) EQUITY
---------- ------ ---------- -------- ---------- ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 30, 1996.............. 11,359,110 $11 $51,369 $16,397 $(1,506) $ 3 $66,274
Net income............................. 8,315 8,315
Effect of foreign translation.......... (428) (428)
Unrealized losses on investments....... (4) (4)
-------
Comprehensive income (loss)............ $ 7,883
Exercise of stock options for shares of
common stock at $1.10 to $17.25 per
share................................ 190,633 873 873
Tax benefits arising from exercise of
non-qualified stock options.......... 241 241
Repurchase of shares of stock at an
average price of $12.08 per share.... (50,000) (604) (604)
Compensation expense related to
issuance of stock options to Photon
employees............................ 51 51
Loans from exercise of stock options
due 2000-2001 at 6.36%-6.6% per year,
net of repayments.................... 165 165
---------- --- ------- ------- ------- ----- -------
BALANCE AT APRIL 30, 1997.............. 11,499,743 $11 $51,930 $24,712 $(1,341) $(429) $74,883
Net income............................. 2,737 2,737
Effect of foreign translation.......... 83 83
Unrealized losses on investments....... 28 28
-------
Comprehensive income (loss)............ 2,848
Exercise of stock options for shares of
common stock at $1.33 to $17.26 per
share................................ 238,628 1,226 1,226
Tax benefits arising from exercise of
non-qualified stock options.......... 250 250
Repurchase of shares of stock at
an average price of $16.52 per
share................................ (25,000) 1 (413) (412)
Compensation expense related to
issuance of stock option to Photon... 108 108
Loans from exercise of stock options
due 2000-2001 at 5.7%-6.85% per year,
net of repayments.................... (119) (119)
---------- --- ------- ------- ------- ----- -------
BALANCE AT APRIL 30, 1998.............. 11,713,371 $12 $53,101 $27,449 $(1,460) $(318) $78,784
Net loss............................... (6,028) (6,028)
Effect of foreign translation.......... (224) (224)
Unrealized losses on investments....... (61) (61)
-------
Comprehensive income (loss)............ (6,313)
Exercise of stock options for shares of
common stock at $4.00 to $23.25 per
share................................ 321,846 2,194 2,194
Tax benefits arising from exercise of
non-qualified stock options.......... 133 133
Repurchase of shares of stock at
an average price of $7.67 per
share................................ (63,600) (488) (488)
Compensation expense related to
remeasurement of stock options for
non-employee directors............... 375 375
Compensation expense related to
issuance of stock option to Photon... 107 107
Loans from exercise of stock options
due 2000-2002 at 4.71%-5.69%, net of
repayments........................... (1,973) 396 396
---------- --- ------- ------- ------- ----- -------
BALANCE AT APRIL 30, 1999.............. 11,969,644 $12 $55,422 $21,421 $(1,064) $(603) $75,188
========== === ======= ======= ======= ===== =======
</TABLE>

See accompanying notes to consolidated financial statements.
F-35
<PAGE> 165

ORTEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
------------------------------
1999 1998(1) 1997(1)
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,028) $ 2,737 $ 8,315
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss from discontinued operations net of income taxes... 1,439 1,400 254
Loss from disposal of discontinued operations net of
income taxes.......................................... 3,919 -- --
Stock compensation expense on remeasurement............. 375 -- --
Depreciation and amortization........................... 6,265 5,480 4,117
Increase (decrease) in minority interest in
subsidiaries.......................................... (4) 20 68
Gain/loss on disposal of equipment...................... 21 77 --
Other................................................... 128 -- --
Compensation expense related to Photon stock options.... 107 108 51
CHANGE IN ASSETS AND LIABILITIES (NET OF EFFECTS OF
ACQUIRED COMPANY):
Receivables and billed contract costs and fees............ (999) 638 (5,180)
Inventories............................................... (2,951) 3,115 (3,871)
Income tax receivable..................................... (1,490) (72) --
Prepaid expenses and other assets......................... 700 (621) (255)
Intangible assets......................................... -- 311 (779)
Accounts payable.......................................... 3,483 (1,889) 2,104
Accrued payroll and related costs......................... (1,105) (1,391) 638
Increase (decrease) in discontinued operations reserve.... (1,208) -- --
Other accrued liabilities................................. (372) (264) 914
Deferred income........................................... (400) 5 (61)
Deferred income taxes..................................... (580) (132) (435)
Income taxes payable...................................... 15 (1,456) 1,125
------- -------- -------
Net cash provided by continuing operating
activities....................................... 1,315 8,066 7,005
Net cash used by discontinued operating
activities....................................... (1,308) (2,322) (1,278)
------- -------- -------
Net cash provided by operating activities................. 7 5,744 5,727
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (5,225) (6,680) (8,142)
Investment in subsidiaries and affiliates (net of cash
acquired)............................................... (1,500) (5,753) (2,428)
Short term investments.................................... 4,885 (315) 7,598
------- -------- -------
Net cash used in investing activities..................... (1,840) (12,748) (2,972)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... 1,346 861 288
Proceeds from repayment of stockholder loans.............. 760 112 387
Alternative minimum tax related-party loans for stock
option exercises........................................ -- (262) 296
Notes payable............................................. -- -- (6)
------- -------- -------
Net cash (used in) provided by financing
activities....................................... 2,106 711 965
Effect of exchange rate changes on cash and cash
equivalents............................................... (224) 84 (428)
------- -------- -------
Net increase (decrease) in cash and equivalents.... 49 (6,209) 3,292
Cash and equivalents at beginning of year................... 12,656 18,865 15,573
------- -------- -------
Cash and equivalents at end of year......................... $12,705 $ 12,656 $18,865
======= ======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest................................................ $ 48 $ 11 $ 4
Income taxes............................................ 574 2,611 3,227
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Loans to related parties for stock option exercises....... $ 385 $ 231 $ 222
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

See accompanying notes to consolidated financial statements.
F-36
<PAGE> 166

ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF OPERATIONS (UNAUDITED)

Ortel Corporation ("Ortel" or the "Company") pioneered the development of
"linear fiberoptic" technology that enables the transmission of digital,
digitally compressed or analog information via radio frequency ("RF") signals on
fiberoptic cable. By utilizing this technology, users do not need to convert RF
signals into a digital format or transform them to individual channels at low
frequencies. The Company's linear fiberoptic technology has contributed to the
development of a network architecture called "hybrid fiber/coax," combining the
best features of fiberoptics and coaxial cable. Today, linear fiberoptics
enables CATV system operators to transform their traditional one-way, video-only
systems to interactive, two-way, video, voice and data delivery systems and
provides telephone companies with the means to cost effectively transform their
traditional telephone networks to deliver interactive video and data services.

Other applications for this technology are satellite earth stations,
cellular and personal communications systems ("PCS") and certain government
communication projects, all of which capitalize on the inherent ability of this
technology to enable longer transmission distances, improve signal quality,
higher bandwidth, and provide immunity to interfering signals and operating cost
savings as compared to most other solutions. The Company's intellectual know-how
with respect to developing and manufacturing optoelectronic devices has recently
been applied to developing products for digital telecommunications applications.
Building on its knowledge of RF electronics, the Company has also positioned
itself as a leading supplier of wireless repeaters which enhance the coverage of
base stations for cellular, PCS and other wireless services.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and Ortel Vertriebs GmbH, a 75% owned subsidiary, Ortel SARL, a 90% owned
subsidiary, Avitec AB, and Ortel Asia Private Limited both wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.

INVESTMENT IN AFFILIATED COMPANIES

During fiscal 1999 the Company increased its investment in Tellium, Inc. by
$1.5 million to a total of $6.7 million. This investment is accounted for by the
cost method and, accordingly, there is no recognition of the losses to date
incurred by Tellium in the Company's financial results. As of April 30, 1999 the
Company owns approximately 18% of the equity of Tellium with a portion in excess
of 2% held in the form of non-voting preferred stock. Therefore, the Company
believes the accounting of the investment meets the criteria required under the
cost method.

The Company has a $3.6 million investment in Photon Technology Co., Ltd.
based in Shenzhen, China. The investment includes the Company's share of net
assets valued at $2.4 million. The balance of the investment represents goodwill
and organization costs amortized on a straight line basis over ten years. As of
April 30, 1999, the Company owns approximately 38% of Photon. During fiscal year
1999, the Company recognized its equity interest in earnings of Photon of
$304,000 which has been included in other income. There were no amounts
recognized in fiscal years 1998 and 1997.

The Company purchased 100% of Avitec AB of Sweden on March 14, 1996 for
$6.7 million in cash with an additional amount not to exceed approximately $2.5
million to be paid in the year 2001 depending on levels of profitability
achieved until that time. Of the amount paid, $6.0 million was in excess of the
net asset value of Avitec of which $4.8 million was charged as an expense for
research and development in-process. The remainder is being amortized over a
period of five to ten years. Avitec AB is included as part of the wireless
operations which the Company announced is for sale.

F-37
<PAGE> 167
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

PRODUCT REVENUE RECOGNITION

Revenue on products shipped to customers is recognized upon shipment from
the Company's facilities, net of allowance for returns.

CONTRACT REVENUE RECOGNITION

Revenue from research and development contracts are netted against research
and development expenses. Revenue from cost reimbursable contracts are
recognized based on the ratio of total costs incurred to total estimated costs.
Revenue from fixed price contracts are recognized on the percentage of
completion method; however, no income is recognized until such time as a
reasonable profit estimation can be made. Provisions for estimated losses on
uncompleted contracts are made when such losses become determinable. Contract
revenue aggregated approximately $195,000, $730,000 and $1,489,000 in fiscal
years 1999, 1998 and 1997, respectively.

WARRANTY RESERVES

The Company estimates warranty reserves required by applying historical
experience with regard to probabilities of failure and cost to product sales
covered by warranty terms. Warranty reserve amounts included in other accrued
liabilities were approximately $900,000 and $1.2 million at April 30, 1999 and
April 30, 1998, respectively.

USE OF ESTIMATES

The preparation of financial statements in conformity with Generally
Accepted Accounting Principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses in the reporting period. Actual results
could differ from these estimates.

DEPRECIATION AND AMORTIZATION

Equipment, office furniture and fixtures are depreciated using the
straight-line method over estimated useful lives of three to seven years.
Leasehold improvements are amortized over the estimated useful life of the asset
or the length of the lease, whichever is less.

CONCENTRATION OF CREDIT RISK

The Company sells its products to customers throughout the world.
Management performs regular evaluations concerning the ability of its customers
to satisfy their obligations and records a provision for doubtful accounts based
upon these evaluations. The Company's credit losses for the periods presented
were insignificant and have not exceeded management's estimates to date.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of short-term investments approximate fair value due
to the relatively short maturity of such instruments.

RESEARCH AND DEVELOPMENT

Company-sponsored research and development costs are expensed as incurred.

F-38
<PAGE> 168
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

INVENTORIES

Inventories are shown below and are stated at the lower of cost (first-in,
first-out method) or market and for continuing operations are summarized below.
Prior years amounts have been reclassified to conform to current year
presentation.

<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $ 6,618 $ 4,498
Work-in-process............................................. 5,066 4,993
Finished goods.............................................. 1,759 1,001
------- -------
Total inventories................................. $13,443 $10,492
======= =======
</TABLE>

CASH EQUIVALENTS

Cash equivalents include short-term commercial paper, money market funds
and municipal securities managed by banking institutions totaling $10.3 million
and $7.8 million as of April 30, 1999 and 1998, respectively. Cash equivalents
being managed by these banking institutions includes securities with maturities
of 90 days or less which can be liquidated in a manner that is equivalent to
cash.

SHORT-TERM INVESTMENTS

Short-term investments consist of interest bearing securities with
maturities greater than 90 days and consist of U.S. treasuries and municipal
securities. The Company adopted the provisions of Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities (SFAS 115)" at May 1, 1994. Under SFAS 115, the Company has
classified its short-term investments as available-for-sale. Available-for-sale
securities are stated at market value and unrealized holding gains and losses,
net of the related tax effect, are excluded from earnings and are reported as a
separate component of stockholders' equity until realized. A decline in the
market value of the security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis for the
security. At April 30, 1999 and 1998, the Company's marketable investment
securities consisted principally of highly liquid investments in tax free
municipal obligations with various maturity dates through February 1, 2022. The
difference between market value and cost of these securities at April 30, 1999
and 1998 was immaterial.

FOREIGN CURRENCY TRANSLATION

Under the provisions of Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation," all assets and liabilities in the balance sheets
of foreign subsidiaries whose functional currency is other than the U.S. dollar
are translated at year-end exchange rates. The effects of translation gains and
losses are not included in determining net income but are accumulated in a
separate component of stockholders' equity. Gains (losses) from foreign currency
transactions were $9,000, $109,000 and ($89,000) for the fiscal years 1999, 1998
and 1997, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, on May 1, 1996. This statement requires
that long-lived assets and certain identifiable intangibles including goodwill
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying

F-39
<PAGE> 169
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

amount of an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
future operating cash flows (undiscounted and without interest) expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.

ACCOUNTING FOR STOCK OPTIONS

Prior to May 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations.
Under APB Opinion No. 25, compensation expense is recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On May 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
which permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provisions of APB Opinion No.
25 and provide pro forma net income and pro forma earnings per share disclosure
for employee stock option grants made in fiscal year 1996 and future years as if
the fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No. 25
and provide the pro forma disclosure provisions of SFAS No. 123.

NET INCOME (LOSS) PER SHARE

Basic earnings per share is based on the weighted average number of shares
outstanding and excludes the dilutive effect of unexercised Common Stock
equivalents. Diluted earnings per share is based on the weighted average number
of shares outstanding and includes the dilutive effect of unexercised Common
Stock equivalents. Net income (loss) per share from continuing operations for
all years presented is summarized as shown below:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1999 1998 1997
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
BASIC AND DILUTED COMPUTATIONS:
Income (loss) from continuing operations............... $ (670) $ 4,137 $8,569
======= ======= ======
Net income (loss)...................................... $(6,028) $ 2,737 $8,315
======= ======= ======
SHARES USED FOR BASIC PER SHARE COMPUTATIONS:
Weighted average shares outstanding.................. 11,876 11,634 11,463
Effect of dilutive securities--stock options......... -- 1,005 1,146
------- ------- ------
Shares used for diluted per share computations....... 11,876 12,639 12,609
======= ======= ======
NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE--BASIC:
Income (loss) from continuing operations............. $ (.06) $ .36 $ .75
Discontinued operations.............................. (.45) (.12) (.02)
------- ------- ------
Net income (loss) per share--Basic..................... $ (.51) $ .24 $ .73
======= ======= ======
</TABLE>

F-40
<PAGE> 170
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------
1999 1998 1997
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
NET INCOME (LOSS) PER SHARE--DILUTED(1):
Income (loss) from continuing operations(1).......... $ (.06) $ .33 $ .68
Discontinued operations(1)........................... (.45) (.11) (.02)
------- ------- ------
Net income (loss) per share diluted(1)................. $ (.51) $ .22 $ .66
======= ======= ======
</TABLE>

------------
(1) Options to purchase 652,000 shares at or below the average price of the
common shares were outstanding at April 30, 1999, but were excluded from the
computation of diluted earnings per share for fiscal 1999 as the Company
reported a loss position and the effect would be antidilutive.

Options to purchase 1,813,876, 824,349 and 622,505 shares at weighted
average exercise price of $15.26, $20.28 and $23.75 were outstanding at April
30, 1999, 1998 and 1997 respectively, but were not included in the computation
of diluted net income per share because the exercise price of the options was
greater than the average market price of the common shares and, therefore, the
effect would be antidilutive for all periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt SFAS No. 133 for all fiscal quarters of fiscal years beginning
after June 15, 2000. Based on the information currently available, management
has determined that the disclosure requirements from this statement will not
impact the financial statements of the Company.

In March 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP requires
capitalization of certain costs related to computer software developed or
obtained for internal use. The Company will adopt SOP 98-1 effective in fiscal
2000. Based on the information currently available, the Company does not expect
the adoption of SOP 98-1 to have a significant impact on its financial position
or results of operations.

In April 1998, the AICPA Accounting Standard Executive Committee issued
Statement of Position 98-5, (SOP 98-5) "Reporting on the Cost of Start-up
Activities." SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. Initial
application of SOP 98-5 should be as of the beginning of the fiscal year in
which SOP 98-5 is first adopted and should be reported as a cumulative effect of
a change in accounting principle. SOP 98-5 will be adopted in the first quarter
of fiscal 2000 at which time the Company will record a cumulative effect of a
change in accounting principle of approximately $1 million in the consolidated
statement of operations for the period ending July 31, 1999.

DISCONTINUED OPERATIONS

In the second quarter of fiscal 1999, the Company adopted a plan of
disposal for its 980nm pump laser product. In light of the dependence of this
business on a common proprietary technology and its dissimilarity to the
continuing operations of the Company, these operations have been separately
reported as discontinued operations in the accompanying consolidated financial
statements for all periods presented.

F-41
<PAGE> 171
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The results of the discontinued business has been reported separately as a
component of discontinued operations on the accompanying consolidated statements
of operations. Summarized results of the discontinued business for the years
ended April 30, 1999, 1998 and 1997, were as follows:

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------
1999 1998 1997
------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues................................................ $ 795 $ 943 $ 191
Loss before income taxes................................ (1,799) (2,194) (367)
Income tax benefit...................................... (360) (794) (113)
------- ------- -----
Loss after tax benefit.................................. $(1,439) $(1,400) $(254)
======= ======= =====
</TABLE>

During fiscal year 1999, the Company incurred a loss of $3,919,000, net of
income tax benefit of $980,000 from the disposal of assets related to the
discontinued business.

RECLASSIFICATIONS

Certain prior year balances in the accompanying consolidated financial
statements have been reclassified to conform to the current year presentation.

3. BANK LINE OF CREDIT

The Company had an unsecured revolving line of credit for $5 million which
carried an interest rate of 7.06%. The line of credit was never used and the
Company allowed it to expire in September 1998.

4. STOCKHOLDERS' EQUITY

STOCK REPURCHASES

In November 1995, the Company announced a plan to repurchase up to
one-million shares of Common Stock from time to time as market conditions
dictate. Repurchases of 63,600, 25,000 and 50,000 shares were made at a total
cost of $488,000, $413,000 and $604,000 in the fiscal years 1999, 1998 and 1997
respectively.

On March 3, 1995, the Company's Board of Directors adopted a Stockholders
Rights Plan that is intended to protect Stockholder interests in the event the
Company is confronted with coercive takeover tactics. Pursuant to the Plan, the
Company distributed Rights to purchase shares of a newly created series of Ortel
Preferred Stock. Under certain circumstances these Rights become the rights to
purchase shares of Common Stock of the Company or securities of an acquiring
entity at one-half market value. The Rights may be exercised only if certain
events occur. The Rights are not intended to prevent a takeover of Ortel. They
are designed to deal with the possibility of unilateral actions by hostile
acquirers that could deprive the Board of Directors and stockholders of Ortel of
their ability to determine the Company's destiny and obtain the highest price
for the Company's Common Stock.

STOCK OPTION PLANS

During calendar year 1990, the stockholders of the Company approved the
1990 Stock Option Plan (the "1990 Plan") which replaced the previous 1981
Incentive Stock Option Plan. Under the 1990 Plan, the Company reserved up to
2,400,000 shares of its Common Stock for issuance to eligible employees,
officers and directors upon exercise of options granted. Upon completion of the
Company's initial public offering in October 1994 no further options were
granted under the 1990 Plan.

During fiscal year 1995, the stockholders of the Company approved the 1994
Equity Participation Plan, pursuant to which 240,000 shares of Common Stock were
initially reserved for issuance. The shares of
F-42
<PAGE> 172
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Common Stock authorized to be issued under this plan increases annually by 6% of
the total common shares outstanding at the beginning of the following fiscal
year.

On December 14, 1998 the board of directors determined that in order to
incentivize the Company's employees, it would be in the best interest of the
Company and its stockholders to reprice approximately 1,332,000 options then
outstanding with an exercise price in excess of $13.00 per share. The repricing
was accomplished through the exchange of old options for new options granted at
the fair market value of the Company's stock on the date of grant, December 14,
1998 of $9.625. The vesting schedule for the repriced options is delayed one
year from the original vesting schedule, provided, however, that no options may
be exercised prior to December 14, 1999, except in the case of death, disability
or retirement.

In June 1999, the Company approved a modification to the vesting period of
stock options held by non-employee directors and certain options held by
employee directors whereby such options would become fully vested and have
extended exercise periods under certain conditions such as retirement from the
board and a change in control. Related to this remeasurement, compensation
expense of $375,000 was recorded in fiscal 1999.

This table summarizes all activity under the stock option plans for the
fiscal years 1997, 1998 and 1999.

<TABLE>
<CAPTION>
WTD. AVG.
EXERCISE
1981 1990 1994 NON- TOTAL PRICE
PLAN PLAN PLAN(1) QUALIFIED SHARES PER SHARE EXERCISABLE
------ --------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OUTSTANDING AT APRIL 30,
1996........................ 6,358 1,573,400 778,878 21,450 2,380,086 $ 9.15 855,408
Granted..................... -- -- 686,571 -- 686,571 $21.38
Exercised................... (6,358) (177,600) (4,925) (1,750) (190,633) $ 4.56
Canceled.................... (--) (27,000) (30,466) (--) (57,466) $11.10
------ --------- ---------- ------- ----------
OUTSTANDING AT APRIL 30,
1997........................ -- 1,368,800 1,430,058 19,700 2,818,558 $12.40 1,180,690
Granted..................... -- -- 1,301,276 -- 1,301,276 $14.65
Exercised................... -- (197,175) (21,753) (19,700) (238,628) $ 5.14
Canceled.................... (--) (23,650) (674,713) (--) (698,363) $19.73
------ --------- ---------- ------- ----------
OUTSTANDING AT APRIL 30,
1998........................ -- 1,147,975 2,034,868 -- 3,182,843 $12.25 1,379,055
Granted..................... -- -- 2,407,225 -- 2,407,225 $10.28
Exercised................... -- (257,325) (64,521) -- (321,846) $ 6.88
Canceled.................... (--) (19,200) (1,866,867) (--) (1,886,067) $16.21
------ --------- ---------- ------- ----------
OUTSTANDING AT APRIL 30,
1999........................ -- 871,450 2,510,705 -- 3,382,155 $ 9.12 1,003,340
====== ========= ========== ======= ==========
Total authorized.............. -- 871,450 2,887,133 -- 3,758,583
Options available for grant... -- -- 376,428 -- 376,428
Exercisable(2)................ -- 842,350 160,990 -- 1,003,340 $ 6.24
</TABLE>

------------
(1) Effective May 1, 1999, the number of options authorized to be granted
increased to 3,696,511.

(2) As a result of the December 14, 1998 option repricing, shares totaling
451,388 become exercisable on December 15, 1999.

The weighted average fair market value of options granted in fiscal years
1999, 1998 and 1997 was $10.28, $7.86 and $12.27 respectively, on the date of
grant using Black-Sholes option-pricing model with the

F-43
<PAGE> 173
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

assumptions tabled below. The following table summarized information regarding
options outstanding and options exercisable at April 30, 1999.

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE WEIGHTED-
OPTIONS REMAINING WEIGHTED- NUMBER OF AVERAGE PRICE
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE AVERAGE OPTIONS OF EXERCISABLE
EXERCISE PRICES APRIL 30, 1999 (YEARS) EXERCISE PRICE EXERCISABLE OPTIONS
--------------- -------------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 4.00 - $ 4.00 657,850 3.22 $ 4.00 657,850 $ 4.00
$ 7.00 - $ 7.75 421,962 9.83 $ 7.28 -- $ --
$ 8.00 - $ 8.50 296,390 6.43 $ 8.06 184,500 $ 8.00
$ 9.63 - $ 9.63 1,022,030 9.62 $ 9.63 1,428 $ 9.63
$10.44 - $12.88 708,497 8.84 $12.59 90,535 $12.19
$13.25 - $17.50 258,176 8.03 $13.95 62,567 $14.09
$23.13 - $23.25 17,250 7.91 $23.19 6,460 $23.21
--------- ---- ------ --------- ------
$ 4.00 - $23.25 3,382,155 7.83 $ 9.12 1,003,340 $ 6.24
========= ==== ====== ========= ======
</TABLE>

During fiscal 1997 approximately 70,000 stock option shares were granted to
key employees of Photon at an option price of $20.75 which was the fair market
value on the date of grant. These options vest over a five-year period. During
fiscal 1998, in return for the cancellation of this prior stock option, a new
grant of 70,000 option shares were granted to the employees of Photon at an
option price of $13.25 which was the fair market value on that new date of
grant. During fiscal years, 1998 and 1997, approximately $108,000 and $51,000,
respectively was recorded as expense related to these options. No expense was
recorded in fiscal year 1999. The amount of expense was determined using the
Black-Sholes option-pricing model with the same assumptions tabled below.

For financial reporting purposes, the Company recognizes compensation
expense for the difference between the estimated fair market value of the Common
Stock and the stock option exercise price at date of grant, if any, over the
vesting period. Further, to the extent the Company derives a tax benefit from
non-qualified options exercised by employees, such benefit is credited to
additional paid in capital when realized on the Company's income tax return. Tax
benefits realized totaling $133,000, $250,000 and $241,000 were credited to
additional paid in capital in 1999, 1998 and 1997, respectively.

STOCK-BASED COMPENSATION

The Company applies APB Opinion No. 25 in accounting for stock-based
compensation. Because options were granted at fair market value, no compensation
cost has been recognized for its stock options except as related to those given
to key employees of Photon and certain modifications made to options to
non-employee directors. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's income (loss) from continuing operations would have been reduced to
the pro forma amounts indicated below and the next page. Prior years amounts
have been reclassified to conform to current year presentation.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
ASSUMPTIONS
Expected dividend yield................................... --% --% --%
Risk-free interest rate................................... 5.16% 6.19% 6.50%
Expected volatility....................................... 50% 50% 50%
Expected life (years)..................................... 5.5 5.5 6.2
</TABLE>

F-44
<PAGE> 174
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------
1999 1998 1997
----- ------ ------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
PRO FORMA NET INCOME (LOSS) PER SHARE
INCOME (LOSS) FROM CONTINUING OPERATIONS:
As reported............................................. $(670) $4,137 $8,569
Pro forma............................................... $(874) $2,710 $6,695
Income (loss) per share
As reported:
Basic................................................ $(.06) $ .36 $ .75
Diluted.............................................. $(.06) $ .33 $ .68
Pro forma:
Basic................................................ $(.06) $ .21 $ .56
Diluted.............................................. $(.06) $ .20 $ .51
</TABLE>

The full impact of calculating compensation cost for stock options under
SFAS No. 123 is not reflected in the above pro forma disclosures because
compensation cost is reflected over the options vesting periods and compensation
costs for options granted prior to fiscal year 1996 is not considered. Because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of pro forma effects of reported net income
for future years.

5. INCOME TAXES

The provision (credit) for income taxes for continuing operations is
comprised of the following. Prior years amounts have been reclassified to
conform to current year presentation.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current............................................... $(1,241) $ 915 $3,386
Deferred.............................................. (66) (35) (79)
------- ------ ------
Total.............................................. (1,307) 880 3,307
State:
Current............................................... 79 305 52
Deferred.............................................. (33) (12) 178
------- ------ ------
Total.............................................. 46 293 230
Foreign:
Current............................................... 413 456 520
Deferred.............................................. (147) (112) (256)
------- ------ ------
Total.............................................. 266 344 264
------- ------ ------
Total......................................... $ (995) $1,517 $3,801
======= ====== ======
</TABLE>

Total income tax credits related to losses on discontinued operations are
not included in the above table. Such credits were $360,000, $794,000 and
$113,000 in the fiscal years 1999, 1998 and 1997, respectively.

F-45
<PAGE> 175
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Temporary differences which give rise to deferred tax assets and
liabilities are shown in the table below. Prior year amounts have been
reclassified to conform to current year presentation.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------
1999 1998
-------------------- -------------------
ASSET LIABILITY ASSET LIABILITY
------- --------- ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inventory reserves......................... $ 854 -- $1,141 --
Accrued vacation........................... 395 -- 387 --
Warranty accrual........................... 361 -- 494 --
Bad debt reserve........................... 199 -- 123 --
Goodwill, net of amortization.............. -- $156 -- $ 216
Depreciation............................... -- 356 -- 821
Tax credits................................ 2,343 -- -- --
Tax loss carryforwards..................... 694 -- -- --
Other...................................... 271 305 630 561
------- ---- ------ ------
Sub total............................. 5,117 817 2,775 1,598
Less valuation allowance................... (2,543) -- -- --
------- ---- ------ ------
Total............................ $ 2,574 $817 $2,775 $1,598
======= ==== ====== ======
</TABLE>

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income. The Company has recorded
a valuation allowance of $2,543,000 to reflect the estimated amount of deferred
tax assets which may not be realized.

At April 30, 1999, the Company had a federal research and development
credit carryforward of $518,000 that will expire in the fiscal year ending April
30, 2019. The Company also had a federal minimum tax carryforward of $914,000
that does not expire. In addition, the Company had a California research and
development credit carryforward of $971,000 and a minimum tax credit
carryforward of $45,000 neither of which expires. The Company also had a
California manufacturers' investment credit of $189,000 that will begin to
expire in the fiscal year ending April 30, 2006. At April 30, 1999, the Company
had a California net operating loss carryforward of $3.5 million which expires
in the fiscal year ending April 30, 2004.

The consolidated effective income tax rate on income before income taxes
differs from the United States statutory income tax rate for the reasons set
forth in the table below. The tax rate shown is for taxes paid on income or loss
from continuing operations. Fiscal 1999 includes the effective use of tax
credits which it was previously unable to apply.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
U.S. statutory tax rate..................................... 34.0% 34.0% 34.0%
Benefits of tax credits..................................... 76.1 (10.2) (2.8)
Tax effect of permanent differences......................... 7.3 (2.3) (2.7)
Tax rate differential on foreign earnings................... (10.6) 2.4 1.0
State income taxes.......................................... 46.5 3.8 2.3
Change in valuation allowance............................... (95.8) -- --
Other....................................................... 2.2 (.9) (1.1)
----- ----- ----
Effective rate.............................................. 59.7% 26.8% 30.7%
===== ===== ====
</TABLE>

F-46
<PAGE> 176
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

During fiscal year 1999, the U.S. Internal Revenue Service completed its
audit of the Company's income tax return for the fiscal year ended April 30,
1996. The resolution of the audit did not result in a material effect on the
Company's financial condition or results of operations.

6. RELATED PARTY TRANSACTIONS

LOANS TO RELATED PARTIES

From time to time the Company makes loans to certain officers and key
employees related to the exercise of stock options. These loans are full
recourse and secured by the shares of Common Stock issued upon such exercise.
Interest is payable annually at rates specified below in accordance with
Internal Revenue Service (IRS) guidelines on such loans. In addition, the
Company extends loans related to the alternative minimum tax on the exercise of
these stock options and on similar terms and conditions as the underlying loans
based on the amount exercised. Loans extended for the exercise of incentive
stock options are netted against equity while those loans extended to cover
alternative minimum taxes resulting from such exercises are classified as other
assets.

<TABLE>
<CAPTION>
NO. OF
STOCK STOCK AMT
OPTION OPTION LOAN INTEREST LOAN AMOUNT
SHARES PRICE AMOUNT MATURITY DATES RATES AMOUNT TOTAL
------ ------------ ------- --------------------- ------------ ------- -------
(IN THOUSANDS, EXCEPT SHARE AND OPTION PRICE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
LOAN TOTAL
BALANCE AT APRIL 30,
1997.................... $1,341 $ 978 $ 2,319
New Loans............... 45,750 $4.00 - 8.00 231 5/06/2000 - 8/08/2001 5.70 - 6.85% 262 493
Payments................ (112) (--) (112)
------ ------ -------
BALANCE AT APRIL 30,
1998.................... $1,460 $1,240 $ 2,700
New Loans............... 85,500 $4.00 - 4.53 385 9/05/2000 - 7/02/2002 4.71 - 5.69% -- 385
Payments................ (781) (854) (1,635)
------ ------ -------
BALANCE AT APRIL 30,
1999.................... $1,064 $ 386 $ 1,450
====== ====== =======
</TABLE>

Subsequent to year end, the Board of Directors approved a two-year
extension of all pre-existing loans to all officers and key personnel employed
as of June 5, 1999.

PURCHASES FROM AND SALES TO RELATED PARTIES

The Company purchases from and sells to Sumitomo Osaka Cement Co., Ltd.
(Sumitomo) which owns approximately 20% of the Company's Common Stock. The
Company also purchases from and sells to Photon in which the Company owns
approximately 38%. Sales and purchases to related parties are made at prices and
with payment terms comparable to unrelated parties. The amount of sales and
purchases to related parties is tabled below.

<TABLE>
<CAPTION>
SUMITOMO PHOTON
------------------------ ------------------------
PURCHASES PURCHASES
FROM SALES TO FROM SALES TO
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997.............................. $ 828,000 $2,156,000 $ -- $ --
1998.............................. $ 650,000 $1,860,000 $ 823,000 $ 622,000
1999.............................. $1,003,000 $2,721,000 $1,480,000 $2,266,000
</TABLE>

At April 30, 1999 accounts payable to Sumitomo and Photon were
approximately $172,000 and $500,000, respectively. At April 30, 1999 accounts
receivable from Sumitomo and Photon were approximately $309,000 and $955,000,
respectively.

F-47
<PAGE> 177
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

7. COMMITMENTS AND CONTINGENCIES

LEASES

As of April 30, 1999, the Company leased its operating facilities
consisting of nine buildings, numerous trailers and parking space in Alhambra,
California. These agreements typically provide that the Company is responsible
for maintenance costs and for property taxes over a predetermined base amount.
Some leases are subject to an annual increase based on the Consumer Price Index
("CPI"). The annual cost of these leases was approximately $1,010,000, $910,000
and $725,000 in the fiscal years 1999, 1998 and 1997, respectively.

During fiscal 1999, the Company entered into a two-year lease for building
six combining the space it previously leased in two separate increments. The
Company also exercised an option period for building seven extending the lease
term for two years.

Summarized below are total future minimum lease commitments for the
Alhambra, California facilities, parking, field sales offices and other
equipment (including the next option to renew under all leases but excluding
adjustments for CPI increases):

<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 30, $000
------------------------------------------------------------ ------
<S> <C>
2000........................................................ $ 915
2001........................................................ $ 985
2002........................................................ $1,226
2003........................................................ $1,231
2004........................................................ $1,117
2005........................................................ $1,098
</TABLE>

PATENTS

As early as January, 1990, the Company received notices from Rockwell
International Corporation ("Rockwell") alleging that a process used by Ortel for
growing epitaxial layers infringes certain broad patent rights that Rockwell
holds. In August 1993, Rockwell sued the U.S. government alleging infringement
of these patent rights with respect to the contracts the U.S. government has had
with at least 15 companies, including Ortel. During fiscal 1997, this patent was
held invalid in a court action brought by Rockwell. A subsequent ruling of the
Court of Appeals for the federal circuit sent the case back to trial. The U.S.
government settled the lawsuit and in April 1999, Rockwell once again approached
the Company asserting its rights to the patent. The Company has requested
information regarding terms of a possible license.

If the Company were found to be infringing on any patent holder's rights,
the Company could be subject to liabilities for such infringement, which could
be material, and could be required to seek licenses from other companies or to
refrain from manufacturing certain products. Although patent holders commonly
offer licenses to their patent or other intellectual property rights, no
assurance can be given that the licenses would be offered, or that the terms of
any offered license would be acceptable to the Company or that failure to obtain
a license would not adversely affect the Company's operating results.

From time to time, the Company receives letters claiming infringement of
certain patent rights purportedly owned by potential claimants. Certain of such
letters propose prospective royalty arrangements and indeterminate claims for
prior patent use. While in the opinion of management such assertions are without
merit, based in part upon advice of counsel, management believes the ultimate
outcome of such matters will not materially affect the Company's financial
position or results of operations.

F-48
<PAGE> 178
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

LEGAL PROCEEDINGS

The Company is, from time to time, involved in routine legal matters
incidental to its business. In the opinion of Company management, the resolution
of such matters will not have a material effect on its financial condition or
results of operations.

8. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISK

During the fiscal years ended April 30, 1999, 1998 and 1997, revenues from
General Instrument and Antec Corporation represented 46%, 26% and 42%,
respectively. There were no other customers which accounted for more than 10% of
revenues during any of these periods.

The Company sells its products generally to large CATV equipment
manufacturers and telecommunications companies. Accounts receivable from General
Instruments and Antec Corporation total $6.2 million, $5.2 million and $4.1
million or 42%, 39% and 30% of total accounts receivable at April 30, 1999, 1998
and 1997, respectively.

9. SUPPLEMENTAL INFORMATION AND INTERNATIONAL OPERATIONS

For continuing operations, revenues, pretax income/(loss) and net
income/(loss) from foreign and domestic operations reflect results on the basis
of the country in which operations are conducted. These results are summarized
as shown below. Prior years amounts have been reclassified to conform to current
year presentation.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------
1999 1998(1) 1997(1)
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUE
Domestic operations................................... $63,333 $67,459 $74,323
International operations.............................. 14,194 13,437 15,474
Intercompany eliminations............................. (5,468) (4,969) (7,434)
------- ------- -------
Total revenues.............................. $72,059 $75,927 $82,363
======= ======= =======
PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS
Domestic operations................................... $ (720) $ 4,559 $13,549
International operations.............................. (761) 55 (67)
Intercompany eliminations............................. (184) 1,040 (1,112)
------- ------- -------
Pretax income (loss)........................ $(1,665) $ 5,654 $12,370
======= ======= =======
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
Domestic operations................................... $ 541 $ 3,385 $10,011
International operations.............................. (1,028) (288) (330)
Intercompany eliminations............................. (183) 1,040 (1,112)
------- ------- -------
Net income (loss)........................... $ (670) $ 4,137 $ 8,569
======= ======= =======
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

F-49
<PAGE> 179
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Identifiable assets attributable to foreign operations, which principally
consist of trade receivables from European customers and inventories, totaled
$7.5 million, $7.7 million and $8.4 million at April 30, 1999, 1998 and 1997,
respectively.

10. 401(k) PLAN

The Company has a 401(k) benefit plan ("401(k) Plan") allowing each
employee to contribute up to a maximum of 17% of gross salary or $10,000,
whichever is less. The Company will match the employee's contributions based on
certain percentages of the employee's contributions, as defined, up to Internal
Revenue Service applicable limits. The Company made contributions of $386,000,
$445,000 and $407,000 to the 401(k) Plan during the years ended April 30, 1999,
1998 and 1997, respectively.

11. COMPREHENSIVE INCOME

In fiscal 1999, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. The statement required that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Accumulated other comprehensive income of the Company
consists of net unrealized gains (losses) on available for sale investment and
cumulative effect of foreign currency translation.

The change in the components of other accumulated comprehensive income
(losses) net of taxes are as follows:

<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED EFFECT OF FOREIGN ACCUMULATED
GAIN (LOSS) ON CURRENCY OTHER
AVAILABLE FOR TRANSLATION COMPREHENSIVE
SALE INVESTMENTS GAIN (LOSS) INCOME/(LOSS)
---------------- ----------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance............... $ 24 $(342) $(318)
Current period change........... (61) (224) (285)
---- ----- -----
Ending balance.................. $(37) $(566) $(603)
==== ===== =====
</TABLE>

The related tax effects allocated to each component of other comprehensive
income.

<TABLE>
<CAPTION>
TAX
BEFORE TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Unrealized gains (losses) on securities...... (61) $ 36 $ (25)
Foreign currency translation adjustments..... (224) 134 (90)
----- ---- -----
Other comprehensive income................... $(285) $170 $(115)
===== ==== =====
</TABLE>

F-50
<PAGE> 180
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. SEGMENT REPORTING

On April 30, 1999 the Company adopted FASB Statement No. 131, "Disclosures
About Segments of an Enterprise and Related Information" (SFAS 131). The new
rules establish revised standards for public companies relating to the reporting
of financial and descriptive information about their operating segments in
financial statements. The adoption of SFAS 131 did not have a material effect on
the Company's primary financial statements and did not effect the disclosure of
segment information contained herein. The method of determining what information
to report is based on the way management organizes the operating segments within
the Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's Chief Executive Officer ("CEO"). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by product lines for purposes of making operating
decisions and assessing financial performance.

The fiber optics segment consists of broadband, satellite communications
and telecommunications products. The wireless segment is comprised of products
for cellular telephone systems and includes repeater products designed and
manufactured both in the U.S. and in the Swedish subsidiary, Avitec AB. In June
1999, the Company announced its intention to sell its wireless operations in
order to focus on its fiber optic business.

Information about the Company's operations by business segments for the
fiscal years ended April 30, 1999, 1998 and 1997 is presented below:

Revenues of the fiber optics segment increased 2% in 1999 compared to 1998.
Fiber optics revenues decreased 14% in 1998 compared to 1997 and reflected a
dramatic slowdown in domestic broadband industry offset somewhat by an increase
in revenues from satellite communications products. Wireless segment revenues
for fiscal 1999 decreased 43% when compared to fiscal 1998 which included a
multi-million dollar single sale of in-building product to an Asian customer.

REVENUE BY SEGMENT

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------------
1999 1998(1) 1997(1)
------------------- ------------------- -------------------
$ PERCENT $ PERCENT $ PERCENT
(000) OF TOTAL (000) OF TOTAL (000) OF TOTAL
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Segments
Fiber Optics....... $65,028 90% $63,558 84% $73,943 90%
Wireless........... 7,031 10% 12,369 16% 8,420 10%
------- --- ------- --- ------- ---
Total Sales.......... $72,059 100% $75,927 100% $82,363 100%
======= === ======= === ======= ===
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

F-51
<PAGE> 181
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Gross margins in fiber optics have decreased each year. Losses in the
wireless segment reflect substantial research and development spending in
repeater products. Increased G&A spending negatively impacted both segments.

OPERATING INCOME (LOSS) BY SEGMENT

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------------------
1999 1998(1) 1997(1)
--------------------- --------------------- ---------------------
$ PERCENT $ PERCENT $ PERCENT
(000) OF REVENUE (000) OF REVENUE (000) OF REVENUE
------- ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Segments
Fiber Optics........ $ 186 -- $ 8,044 13% $18,357 25%
Wireless............ (3,321) (47)% (4,252) (34)% (8,188) (97)%
------- --- ------- --- ------- ---
Total Operating Income
(Loss).............. $(3,135) (4)% $ 3,792 5% $10,169 12%
======= === ======= === ======= ===
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

In addition to evaluating the segments on the basis of their profit or
loss, two significant assets are tracked and measured: accounts receivable and
inventory. Identification of accounts receivable to a specific segment is
generally on the basis of the customer. Inventory can also be linked to a
specific segment; however, there are cases where components are shared across
segments and a reasonable method of allocating such inventory was adopted.
Reserves for accounts receivable and inventory are not separated by segments.
The following tables compare accounts receivable and inventory levels at the
past two fiscal years ended April 30, (in thousands):

<TABLE>
<CAPTION>
ACCOUNTS
RECEIVABLE INVENTORY
------------------ ------------------
YEAR ENDED YEAR ENDED
APRIL 30, APRIL 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<C> <C> <S> <C> <C>
$13,382 $11,007 Fiber Optics................................ $12,196 $ 8,985
2,140 2,119 Wireless.................................... 3,727 4,276
------- ------- ------- -------
$15,522 $13,126 Total Gross................................. $15,923 $13,261
(973) (307) Reserves.................................... (2,480) (2,769)
------- ------- ------- -------
$14,549 $12,819 Total Net................................... $13,443 $10,492
======= ======= ======= =======
</TABLE>

F-52
<PAGE> 182
ORTEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Set forth below is selected quarterly consolidated financial data with
respect to the Company for the two years ended April 30, 1999 and 1998. Certain
amounts related to discontinued operations have been reclassified to conform to
current year presentation. This data should be read in conjunction with the
consolidated financial statements and notes thereto set forth elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1999 YEAR ENDED APRIL 30, 1998
------------------------------------- -------------------------------------
Q1(1) Q2(1) Q3(1) Q4(1) Q1(1) Q2(1) Q3(1) Q4(1)
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.......................... $18,444 $19,765 $16,915 $16,935 $19,620 $21,701 $18,589 $16,017
Cost of revenues.................. 10,511 11,830 11,447 10,303 10,771 11,908 11,378 10,008
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 7,933 7,935 5,468 6,632 8,849 9,793 7,211 6,009
OPERATING EXPENSES:
Research and development........ 3,116 3,004 3,017 3,237 2,710 3,189 2,780 2,983
Sales and marketing............. 2,665 3,444 2,729 3,002 2,434 2,571 2,290 2,956
General and administrative...... 1,541 1,772 1,416 2,160 1,337 1,491 1,604 1,725
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 7,322 8,220 7,162 8,399 6,481 7,251 6,674 7,664
------- ------- ------- ------- ------- ------- ------- -------
Operating Income (loss)......... 611 (285) (1,694) (1,767) 2,368 2,542 537 (1,655)
OTHER:
Interest income, net............ 259 430 212 390 284 340 367 287
Other income (expense), net..... 44 119 73 (57) (97) 28 (111) 764
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes........................... $ 914 $ 264 $(1,409) $(1,434) $ 2,555 $ 2,910 $ 793 $ (604)
Provision (credit) for income
taxes........................... 190 53 (289) (949) 731 737 188 (139)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes........................... $ 724 $ 211 $(1,120) $ (485) $ 1,824 $ 2,173 $ 605 $ (465)
Loss from disposal of discontinued
operations, net of taxes........ (518) (4,840) -- -- (329) (262) (234) (575)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 206 $(4,629) $(1,120) $ (485) $ 1,495 $ 1,911 $ 371 $(1,040)
======= ======= ======= ======= ======= ======= ======= =======
INCOME (LOSS) PER COMMON
SHARE--BASIC(3)
Income (loss) from continuing
operations.................... $ .06 $ .02 $ (.09) $ (.04) $ .16 $ .18 $ .05 $ (.04)
Discontinued operations......... (.04) (.41) -- -- (.03) (.02) (.02) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) per
share--Basic................ $ .02 $ (.39) $ (.09) $ (.04) $ .13 $ .16 $ .03 $ (.09)
======= ======= ======= ======= ======= ======= ======= =======
INCOME (LOSS) PER COMMON SHARE--
DILUTED(2)(3)
Income (loss) from continuing
operations.................... $ .06 $ .02 $ (.09) $ (.04) $ .15 $ .17 $ .05 $ (.04)
Discontinued operations......... (.04) (.41) -- -- (.03) (.02) (.02) (.05)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) per share--
Diluted..................... $ .02 $ (.39) $ (.09) $ (.04) $ .12 $ .15 $ .03 $ (.09)
======= ======= ======= ======= ======= ======= ======= =======
SHARES USED IN PER SHARE
COMPUTATION:
Basic........................... 11,751 11,860 11,920 11,976 11,524 11,624 11,684 11,707
Diluted......................... 12,629 11,860 11,920 11,976 12,559 12,963 12,654 11,707
</TABLE>

------------
(1) Certain amounts related to discontinued operations have been reclassified to
conform to current year presentation.

(2) Computed using basic shares; diluted share computation would be
antidilutive.

(3) Quarterly per share amounts may not aggregate to total per share amounts for
the year.

F-53
<PAGE> 183

AGERE SYSTEMS INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

(DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------------------------------- ------------ --------------------- ---------- -------------
ADDITIONS
---------------------
BALANCE AT CHARGED CHARGED
BEGINNING OF TO COSTS & TO OTHER BALANCE AT
PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
------------ ---------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year 2000:
Allowance for doubtful
accounts..................... 11 10 0 4 17
Year 1999:
Allowance for doubtful
accounts..................... 9 4 0 2 11
Year 1998:
Allowance for doubtful
accounts..................... 11 0 0 2 9
</TABLE>

S-1
<PAGE> 184

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the fees and expenses to be paid by us in
connection with the issuance and distribution for the securities being
registered hereunder. Except for the Securities and Exchange Commission
registration fee, the NASD fee and the NYSE fee, all amounts are estimates.

<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- -------
<S> <C>
Securities and Exchange Commission registration fee......... $26,400
New York Stock Exchange listing fee......................... *
National Association of Securities Dealers, Inc. filing
fee....................................................... 10,500
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Printing and engraving fees and expenses.................... *
Blue Sky fees and expenses.................................. *
Transfer Agent fees and expenses............................ *
Miscellaneous expenses...................................... *
-------
Total............................................. *
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Our certificate of incorporation provides that each person who was or is
made a party or is threatened to be made a party to or is involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person, or a person of whom such
person is the legal representative, is or was a director or officer of us or is
or was serving at our request as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to employee benefit plans, whether
the basis of such proceeding is the alleged action of such person in an official
capacity as a director, officer, employee or agent or in any other capacity
while serving as a director, officer, employee or agent, will be indemnified and
held harmless by us to the fullest extent authorized by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended
against all expense, liability and loss reasonably incurred or suffered by such
person in connection therewith. Our certificate of incorporation also provides
that we will pay the expenses incurred in defending any such proceeding in
advance of its final disposition, subject to the provisions of the General
Corporation Law of the State of Delaware. Such rights are not exclusive of any
other right which any person may have or thereafter acquire under any statute,
provision of the certificate, by-law, agreement, vote of stockholders or
disinterested directors or otherwise. No repeal or modification of such
provision will in any way diminish or adversely affect the rights of any
director, officer, employee or agent of us thereunder in respect of

II-1
<PAGE> 185

any occurrence or matter arising prior to any such repeal or modification. Our
certificate of incorporation also specifically authorizes us to maintain
insurance and to grant similar indemnification rights to our employees or
agents.

-- any breach of the director's duty of loyalty to the corporation or
its stockholders;

-- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

-- payments of unlawful dividends or unlawful stock repurchases or
redemptions; or

-- any transaction from which the director derived an improper personal
benefit.

-- for any breach of the director's duty of loyalty to us or our
stockholders;

-- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

-- under Section 174 of the General Corporation Law of the State of
Delaware, which concerns unlawful payments of dividends, stock
purchases or redemptions; or

The Separation and Distribution Agreement by and between us and Lucent
dated as of February 1, 2001, provides for indemnification by us of Lucent and
its directors, officers and employees for some liabilities, including
liabilities under the Securities Act.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

We were incorporated under the laws of the State of Delaware under the name
Lucent ME Corp. on August 1, 2000 and changed our name to Agere Systems Inc. on
December 5, 2000. We issued 1,000 shares of our common stock, par value $0.01
per share, to Lucent in consideration of a capital contribution of $10.00 by
Lucent. That issuance was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof because such issuance did not
involve any public offering of securities.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

The following exhibits are filed pursuant to Item 601 of Regulation
S-K.

II-2
<PAGE> 186

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.2 Amended and Restated By-laws of Agere Systems Inc.*
4.1 Specimen Common Stock certificate*
4.2 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 3.1 hereto)*
4.3 Amended and Restated By-laws of Agere Systems Inc. (filed as
Exhibit 3.2 hereto)*
4.4 Rights Agreement between Agere Systems Inc. and The Bank of
New York, as Rights Agent*
4.5 Form of Certificate of Designations of Series A Junior
Participating Preferred Stock (attached as Exhibit A to the
Rights Agreement filed as Exhibit 4.4 hereto)*
4.6 Form of Right Certificate (attached as Exhibit B to the
Rights Agreement filed as Exhibit 4.4 hereto)*
5 Opinion of Cravath, Swaine & Moore as to legality of the
common stock being registered*
8 Opinion re tax matters*
10.1 Separation and Distribution Agreement (filed as Exhibit 2
hereto)*
10.2 Interim Services and Systems Replication Agreement*
10.3 Employee Benefits Agreement*
10.4 Tax Sharing Agreement*
10.5 Agere Systems Inc. Short Term Incentive Plan*
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan*
10.7 Agere Systems Inc. 2001 Long Term Incentive Plan Restricted
Stock Unit Award Agreement*
10.8 Agere Systems Inc. 2001 Long Term Incentive Plan
Nonstatutory Stock Option Agreement*
10.9 Agere Systems Inc. Deferred Compensation Plan*
10.10 Agere Systems Inc. Supplemental Pension Plan*
10.11 Agere Systems Inc. 2001 Stock Compensation Plan for
Non-Employee Directors*
10.12 Agere Systems Inc. 2001 Global Stock Option Plan*
10.13 Trademark License Agreement*
10.14 Patent and Technology License Agreement*
10.15 Technology Assignment and Joint Ownership Agreement*
10.16 Joint Design Center Operating Agreement*
10.17 Fiber Product Purchase Agreement*
10.18 Microelectronics Product Purchase Agreement*
10.19 ORiNOCO Product Purchase Agreement*
11 Statement re: Computation of Per Share Earnings*
21 List of Subsidiaries of Agere Systems Inc.*
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of KPMG LLP**
23.3 Consent of Cravath, Swaine & Moore (contained in Exhibit
5.1)*
24 Power of Attorney (included on signature page to the
Registration Statement)*
27 Financial Data Schedule**
99.1 Consent of John A. Young to be named as a director nominee**
99.2 Consent of John T. Dickson to be named as a director
nominee**
</TABLE>

------------
* To be filed by amendment.

** Filed herewith.

II-3
<PAGE> 187

(b) Financial statement schedules:

Schedule II--Valuation and Qualification Accounts and Reserves

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes to the underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

(1) For purpose of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 188

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereto duly authorized, in the city of Allentown, State of
Pennsylvania, on December 11, 2000.

AGERE SYSTEMS INC.

By: /s/ JOHN T. DICKSON
------------------------------------
John T. Dickson
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints John T. Dickson and Jean F. Rankin
his or her true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, any and all capacities, to sign any and all amendments (including
post-effective amendments) of and supplements to this registration statement, or
any related registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto such attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, to all intents and purposes and as fully as he or she
might or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or his or her substitute, may lawfully do or cause
to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the date indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ JOHN T. DICKSON President and Chief Executive December 11, 2000
--------------------------------------------------- Officer (Principal Executive
John T. Dickson Officer)

/s/ MATTHEW C. RILEY Acting Chief Financial Officer December 11, 2000
--------------------------------------------------- (Principal Financial and
Matthew C. Riley Accounting Officer)

/s/ PAUL D. DICZOK Director December 11, 2000
---------------------------------------------------
Paul D. Diczok

/s/ JEAN F. RANKIN Director December 11, 2000
---------------------------------------------------
Jean F. Rankin

/s/ RICHARD J. RAWSON Director December 11, 2000
---------------------------------------------------
Richard J. Rawson
</TABLE>

II-5
<PAGE> 189

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement*
2 Separation and Distribution Agreement*
3.1 Restated Certificate of Incorporation of Agere Systems Inc.*
3.2 Amended and Restated By-laws of Agere Systems Inc.*
4.1 Specimen Common Stock certificate*
4.2 Restated Certificate of Incorporation of Agere Systems Inc.
(filed as Exhibit 3.1 hereto)*
4.3 Amended and Restated By-laws of Agere Systems Inc. (filed as
Exhibit 3.2 hereto)*
4.4 Rights Agreement between Agere Systems Inc. and The Bank of
New York, as Rights Agent*
4.5 Form of Certificate of Designations of Series A Junior
Participating Preferred Stock (attached as Exhibit A to the
Rights Agreement filed as Exhibit 4.4 hereto)*
4.6 Form of Right Certificate (attached as Exhibit B to the
Rights Agreement filed as Exhibit 4.4 hereto)*
5 Opinion of Cravath, Swaine & Moore as to legality of the
common stock being registered.*
8 Opinion re tax matters*
10.1 Separation and Distribution Agreement (filed as Exhibit 2
hereto)*
10.2 Interim Services and Systems Replication Agreement*
10.3 Employee Benefits Agreement*
10.4 Tax Sharing Agreement*
10.5 Agere Systems Inc. Short Term Incentive Plan*
10.6 Agere Systems Inc. 2001 Long Term Incentive Plan*
10.7 Agere Systems Inc. 2001 Long Term Incentive Plan Restricted
Stock Unit Award Agreement*
10.8 Agere Systems Inc. 2001 Long Term Incentive Plan
Nonstatutory Stock Option Agreement*
10.9 Agere Systems Inc. Deferred Compensation Plan*
10.10 Agere Systems Inc. Supplemental Pension Plan*
10.11 Agere Systems Inc. 2001 Stock Compensation Plan for
Non-Employee Directors*
10.12 Agere Systems Inc. 2001 Global Stock Option Plan*
10.13 Trademark License Agreement*
10.14 Patent and Technology License Agreement*
10.15 Technology Assignment and Joint Ownership Agreement*
10.16 Joint Design Center Project Agreement*
10.17 Fiber Product Purchase Agreement*
10.18 Microelectronics Product Purchase Agreement*
10.19 ORiNOCO Product Purchase Agreement*
11 Statement re: Computation of Per Share Earnings*
21 List of Subsidiaries of Agere Systems Inc.*
23.1 Consent of PricewaterhouseCoopers LLP**
23.2 Consent of KPMG LLP**
23.3 Consent of Cravath, Swaine & Moore (contained in Exhibit
5.1)*
24 Power of Attorney (included on signature page to the
Registration Statement)**
</TABLE>
<PAGE> 190

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
27 Financial Data Schedule**
99.1 Consent of John A. Young to be named as a director nominee**
99.2 Consent of John T. Dickson to be named as a director
nominee**
</TABLE>

------------
* To be filed by amendment.

** Filed herewith.