Approximately $410.0 Million of Debt Securities Affected

NEW YORK, August 30, 2002 -- Moody's Investors Service lowered the ratings of Agere Systems (NYSE:AGRa - News) on its subordinated convertible debt to B3 from B2. The downgrade reflects expectations that the company is likely to continue incurring operating losses and consuming cash as it contends with the prolonged industry downturn, notwithstanding its good execution so far of its ongoing cost reduction efforts. Moody's also assigned a B1 senior implied rating. The rating outlook is stable.

Ratings affected include:

Senior Implied rating at B1

Issuer rating at B2

$410 million of subordinated convertible debt to B3 from B2

Moody's said that there are few signs that indicate a near term rebound in the demand environment for semiconductors and end electronic equipment. Consequently, even though Agere achieved very modest sequential revenue growth in the last two quarters, reaching $560 million in the quarter ended June 2002 (with about $64 million related to the to-be-exited optoelectronics business) it will likely continue to post operating losses over the near to intermediate term. At the same time, it will continue to use cash, both for operations and in order to affect is restructuring actions.

Agere's cash flow from operations less capital expenditures approximated negative $135 million for its third quarter ended June 2002 and over negative $650 million for the nine month period. Given expected operating losses as well as approximately $325 million of additional cash costs under its revised restructuring plan, Moody's expects Agere to continue to consume cash over the next several quarters. Even though Agere has $1.2 billion of cash on hand at June 2002, and manageable bank debt maturities, the new rating reflects the negative aspect of unprofitable operations and negative cash flow from operations for an extended period of time. Total debt of $832 million at June 2002 includes $410 million of 6.5% cash pay subordinated convertible debt due 2009, about $220 million of secured bank borrowings, and about $165 million of borrowings from accounts receivable securitizations due January 2003.

The bank borrowings mature September 30, 2002, unless the company achieves an additional $90 million of fund raising as defined in the bank facility. Should the company not achieve the necessary fund raising, Moody's expects the company will pay off the bank facility with cash on hand. Agere recently announced a plan to exit from its optoelectronics business, and to focus on advanced integrated circuit solutions that access, move and store network information, and further consolidate manufacturing facilities in order to achieve a break even operating cost structure by the second half of calendar year 2003. Moody's considers the plan to be beneficial from a longer term strategic standpoint since the business, which has seen revenues of $1.2 billion in fiscal 2001 dwindle to under $260 million on an annualized basis, has greatly diminished prospects over the next few years due to the excess supply in the global telecom infrastructure and related ongoing cuts in capital spending by those customers.

Upon finalizing the optoelectronics exit, planned by June 2003, the company expects to save about $190 million per quarter in operating expenses due to reduced depreciation, material costs and R&D as well as cost savings from the related employee reduction of about 4,000 from its current 11,200 level. As part of the restructuring announcement, Agere will seek a buyer for all or parts of the optoelectronics business, but will discontinue the business no later than June 30, 2003.

The company will also further its previous plans to discontinue, sell, and consolidate manufacturing, with its Orlando Florida facility becoming the company's sole U.S. manufacturing site. At the same time, while the company will operate the Orlando facility at least through September 2004, it will also continue to look for a buyer of that site, consistent with its strategy of outsourcing more production to foundries over time. The rating recognizes Agere's breadth of technology and its solid or leading market positions in a number of areas including integrated circuits for the hard disk drive, wireless data, and computing sectors.

Moody's believes that its technological and product strength, as well as its customer relationships, will provide a base off of which it should be able to generate improved revenues and profits once demand conditions improve and after Agere has achieved the significant cost reductions that are part of its most recent restructuring efforts. The prospect of achieving the planned cost reductions over time is good, given Agere's experience in moving and requalifying similar products in earlier restructuring efforts, and that some of the related facility consolidations and headcount reductions have already been completed. The company's plan calls for breakeven operating profits some time in the second half of calendar 2003 at a $500 million revenue level.