For a world - annualreports.com · Business Review 2007 INVESTOR RELATIONS Alcatel-Lucent 54, rue La Boétie 75008 Paris – France For a world that’s always on

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INVESTOR RELATIONSAlcatel-Lucent 54, rue La Boétie 75008 Paris – Francewww.alcatel-lucent.com

For a world that’s always onBusiness Review 2007

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1 —— Alcatel-LucentBusiness Review 2007

Alcatel-Lucent

Profi le

Alcatel-Lucent provides solutions that enable service providers, enterprises and governments worldwide to deliver voice, data and video communication services to end users.

As a leader in fi xed, mobile and converged broadband networking, IP technologies, applications and services, Alcatel-Lucent offers the end-to-end solutions that enable compelling communications services for people at home, at work and on the move.

With operations in more than 130 countries, Alcatel-Lucent is a local partner with global reach. The company has the most experienced global services team in the industry, and one of the largest research, technology and innovation organizations in the telecommunications industry. Alcatel-Lucent achieved revenues of Euro 17.8 billion in 2007 and is incorporated in France, with executive offi ces located in Paris.

02 —— 17

Creating the Right Conditions02 Company Overview 04 Message from the Chairman06 Statement from the CEO08 Corporate Governance10 Shareholders12 Alcatel-Lucent’s Main Sites14 Key Figures16 Key Events

18 —— 39

Realizing the Possibilities18 Vision 20 Perspective: Gabrielle Gauthey22 A View of the Market Today24 The Alcatel-Lucent Strategy

28 Action 30 Perspective: Sandra Ng32 Our Activities34 Carrier Business Segment36 Enterprise Business Segment38 Services Business Segment

40 —— 67

Shaping the Future40 Innovation 42 Perspective: Malcolm Johnson44 Generating Big Ideas 46 Always Facing Forward48 Innovation at Work

50 Human Resources 52 Perspective: Alain Bravo54 Valuing People56 Realizing Integration59 Addressing the Challenge

of Change

60 Responsibility 62 Perspective: Ann Van Dusen64 Corporate Social Responsibility

68 —— 73

Financial Panorama

Contents

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Creating the Right Conditions

Company Overview






Message from the Chairman

2007 was undeniably a difficult year for Alcatel-Lucent. The specific chal-lenges associated with integrating two well-established companies were intensi-fied by larger-scale trends affecting our entire sector—namely, severe price com-petition that offset robust increases in business volume. Further complexities were introduced by our acquisition of Nortel’s UMTS business and the divest-ment of satellite and other security activities to Thales.

As Chairman, I wish to express the Board’s appreciation to all the Alcatel-Lucent teams that have faced these challenges with such dedication. And I also want to convey strongly our faith in the future to all shareholders who have endured this difficult period with us.

THE PATH AHEADThe telecoms industry continued its trend towards consolidation last year—a trend that has unfolded at an extremely rapid pace. In roughly three years, we have seen a widespread, large-scale merging of companies, altering the competitive landscape signifi cantly.



What is the basis for faith in the future? Telecommunications is an inherently dynamic market in which innovation is driving technological change at a very rapid pace. The evolution of our industry is reshaping communications in profound ways, creating new market opportunities.

Telecommunications operators are consid-erably expanding the scope of their services and becoming more global. We, their suppliers, are going through a massive consolidation process. Although not fully complete, this dramatic change to our competitive landscape has taken place in just three years—when it took decades in other industries—resulting in some imme-diate challenges to be addressed. Going forward however, it means that there will

be fewer but larger equipment providers addressing a market with rapid growth in volume. This is why we have a positive view of our industry in the long term.

Is our strategy well adapted to this environment? The merger between Alcatel and Lucent—the largest in the sector to date—has pro-duced a company with the ideal mix of regional markets, from technology-savvy markets such as the U.S. to fast-developing markets in Asia, Africa and Latin America. The merger has also given us a comprehen-sive, first-rate technology portfolio—essential in a business where nearly 15% of revenues are reinvested in R&D. We are proud to be among the top world players in what is one of the most sophisticated hi-tech industries.

This new company plays a leading role in the carrier segment, including the delivery of associated services, and is well equipped to expand its activities among enterprises, in industry and the public sector. Our purpose is not to multiply the scope of our activity, but rather to provide our technology to a larger customer base, leading the way to new growth.

Through the merger we have leveraged the best of our two formative companies—their expertise and history. Throughout the challenges we have faced, our Board has extensively evaluated and supported the strategy of maintaining a focused portfolio of technologies. This strategy is central to increasing the company’s long-term value in the interest of shareholders, customers and employees. Our Board is committed to seeing through the imple-mentation of management’s action plans and taking advantage of the industry’s growth opportunities, operating as effi-ciently and cost-effectively as possible.

The Board has also been particularly active in dealing with governance issues. Concerning membership: half of our Directors have experience in the high-technology sector, and 11 of the 14 are considered independent according to the criteria of the New York Stock Exchange. The principles of AFEP-MEDEF are also adhered to by a vast majority of Directors. While these scores are quite favorable and while the need for stability linked to the merger process was essential, provisions of the bylaws specifically associated with the merger may now be removed as soon as is practical. This is why the Board pro-poses to the vote of its shareholders a resolution to remove the requirement for a 2/3 supermajority vote for the posts of Chairman and CEO. Also, the Board considers that its composition, which in large part reflects input from the two merged companies, may now evolve freely under the guidance of its governance committee.

Overall, the year 2007 saw significant disruptions related to the massive changes in our portfolio. These are now, to a large extent, behind us. We on the Board are confident in this company’s assets: its people, technology and world-wide reach. We will do our part to ensure that shareholders benefit from that strong potential.

This new company plays a leading role in the carrier segment, including the delivery of associated services, and is well equipped to expand its activities among enterprises, in industry and the public sector. Our purpose is not to multiply the scope of our activity, but rather to provide our technology to a larger customer base, leading the way to new growth.Serge Tchuruk – Chairman



YEAR ONE, AND OUR STRATEGY GOING FORWARDWe participate in an industry that is central to the global economy, an industry transforming itself to produce a new wave of communication services that are reshaping how people live and work. Our merger created a true world leader in communications with both the capability and the opportunity to enrich people’s lives by transforming the way the world communicates.


Statement from the CEO



The Year in Review

Clearly, 2007 was a difficult year for our company. Carrying out a complex merger we were further challenged by a highly competitive market and a difficult pricing environment. At the start of the year, customer uncertainty about our product plans had a definite impact. Internally, our efforts to implement a streamlined organi-zation model took longer than anticipated and our workforce experienced disrup-tion as a result of many changes, including restructuring. While we have more work to do, these major issues are behind us.

Our overall financial performance in 2007 was disappointing; however, we saw good progress in a number of areas. Our wireline and services businesses performed solidly. The benefits of the merger are reflected in the fact that each of those segments grew faster than the market last year, with improved year-over-year profitability. Our enterprise business also performed well, achieving good year-over-year growth.

The merger enabled us to leverage the capabilities of two R&D teams, creating a global innovation engine focused on developing powerful new technologies. Throughout the year we strengthened our portfolio and bolstered our market lead-ership in several areas including fixed access, IP service routing, and terrestrial and submarine optics. Externally we reaf-firmed our customer relationships; inter-nally we executed our synergy plans.

A Strategy for Profi table Growth

Our primary objective is to profitably grow the business by following a three-part strategy that capitalizes on our strengths and market opportunities. We will continue to build our carrier busi-ness in developed and emerging mar-kets; to expand our offerings of services and applications to customers around the world; and to strengthen our posi-tion in the enterprise, industry and public-sector markets. In each of these areas we are leveraging the breadth and depth of our capabilities, portfolio, innovations and people.

Where our carrier business is con-cerned, we are already leveraging our

leading position to support customers in the IP transformation that is taking place across wireless and wireline net-works. With respect to services, we are building on our strengths as a leading network integrator, pursuing new man-aged services opportunities, providing end-to-end communications and security solutions, and strengthening our multi-vendor maintenance capability. In the applications arena we are focusing on high-demand areas such as multimedia, payment and messaging services.

To serve customers in the enterprise market, we are strengthening our posi-tion, expanding into fast-growing seg-ments such as security and investing in sales and marketing efforts to pursue attractive growth opportunities. Look-ing at the industry and public sector segment, we are targeting key vertical markets such as transport, energy, health and government, including defense. At the same time, we are taking steps to establish a competitive cost structure for our company.

Additionally, as part of our commitment to corporate social responsibility, we have made it a priority to extend the benefits of today’s communications technologies to all people in developed and emerging markets, bridging the digital divide.

Looking Ahead

Going forward, we are committed to executing on our strategy to profitably grow the business and create value for our shareholders. We believe the long-term prospects for the communication industry are good and we have the oppor-tunity to play a key role in driving the transformation that is underway in our industry. Through our strategy, we have identified a number of catalysts for growth. We believe that through the actions we are taking, the assets we pos-sess, and the dedication of our people, we are well positioned for future success on our journey.

I conclude by thanking the Alcatel-Lucent teams who worked so diligently through a difficult year in the midst of a great deal of change. And I thank our customers for their confidence and our shareowners for their support.

We believe the long-term prospects for the communication industry are good. Through our strategy, we have identifi ed a number of catalysts for growth. We believe that through the actions we are taking, the assets we possess, and the dedication of our people, we are well positioned for future success on our journey.Patricia Russo – Chief Executive Offi cer



Management Committee *

Patricia F. RussoChief Executive Offi cer

Cindy ChristyPresident Americas Region

Étienne FouquesSenior Executive Vice-President Research, Technology, Strategy and Corporate Marketing

Claire PediniSenior Vice-President Corporate Human Resources and Communications

Hubert de PesquidouxChief Financial Offi cer and President Enterprise Business Segment

Michel RahierPresident Carrier Business Segment

Frédéric RosePresident Europe, Africa and Asia Region

Andy WilliamsPresident Services Business Segment —Janet DavidsonManagement Committee SecretaryChief Compliance Offi cer, IT and Integration Program


Corporate Governance



Responsibilities of Committees of the Board

Audit and Finance CommitteeThe Audit and Finance Committee’s role and operation meet the requirements of the American Sarbanes-Oxley Act and follow the key recommendations of the various reports on corporate governance. Its main areas of activity concern the company’s accounts, internal controls, fi nancial position and relations with our Statutory Auditors.

Corporate Governance and Nominating Committee The fi rst responsibility of our Corporate Governance and Nominating Committee, as defi ned by the Board of Directors’ Operating Rules, is to review questions related to the composition, organization and operation of the Board of Directors and its committees, to identify and propose to

Board of Directors

Serge TchurukChairman of the Board of Directors

Patricia RussoChief Executive Offi cer and Director

Daniel BernardIndependent DirectorChairman of Provestis

W. Frank BlountIndependent DirectorChairman and Chief Executive Offi cer of JI Ventures Inc.

Jozef CornuIndependent DirectorChief Executive Offi cer of Agfa-Gevaert

Linnet F. DeilyIndependent Director

Robert E. DenhamIndependent DirectorPartner of the law fi rm Munger, Tolles & Olson, LLP

Edward E. HagenlockerIndependent Director

Jean-Pierre HalbronIndependent Director

Sylvia JayIndependent DirectorVice-Chairman of L’Oréal UK Ltd

Karl J. KrapekIndependent Director

Daniel LebègueIndependent DirectorChairman of the Institut Français des Administrateurs (IFA)

Henry B. SchachtIndependent Director

Jean-Cyril SpinettaIndependent DirectorPresident and Chief Executive Offi cer of Air France-KLM

—

Jean-Pierre DesboisBoard Observer Engineer with Alcatel-Lucent France

Thierry de LoppinotBoard ObserverLegal Counsel at Alcatel-Lucent’s Head Offi ce

—

Pascal Durand-BarthezSecretary to the Board of Directors

Nathalie TrolezDeputy Secretary to the Board of Directors

—

Audit and Finance Committee

Robert E. Denham, PresidentJean-Pierre Halbron Daniel Lebègue Karl J. Krapek

Corporate Governance and Nominating Committee

Daniel Bernard, PresidentW. Franck Blount Linnet F. Deily

Henry B. Schacht Jean-Cyril Spinetta

Compensation Committee

Edward E. Hagenlocker, President Linnet F. DeilySylvia Jay Jean-Pierre Halbron

Strategy and Investments Committee

Serge Tchuruk, President Jozef Cornu Edward E. HagenlockerHenry B. Schacht

—

Statutory AuditorsDeloitte & Associés Represented by Antoine de Riedmatten

Ernst & Young et AutresRepresented by Jean-Yves Jégourel

the Board individuals who are qualifi ed to hold the position of Director and serve on committees, to develop and recommend to the Board a set of corporate governance principles applicable to the company, and to oversee the evaluations of the Board and its committees.

The second responsibility of our Corporate Governance and Nominating Committee is to examine the succession plans for the Chairman of the Board, the CEO and our Group’s other senior executives.

Compensation CommitteeThe role of our Compensation Committee, as defi ned by the Board of Directors’ Operating Rules, is to study and make proposals to the Board regarding compensation of the Directors, the Chairman, the CEO and the key senior executives, to review policies related to the grant of stock options and bonus shares to senior managers and employees, and to examine proposals to increase the company’s capital in the form of an issuance of shares reserved for employees.

Strategy and Investments CommitteeThe role of our Strategy and Investments Committee, as defi ned by the Board of Directors’ Operating Rules, is to review our Group’s proposed strategic direction and investments, all related internal restructuring activities, all proposed investments and sales of assets, and in particular, to monitor, on the Board’s behalf, the integration of historical Alcatel and Lucent and the creation of synergies.

This committee’s role is to ensure that our fi nancial and human resources are allocated as effi ciently as possible in order to achieve the growth and profi tability objectives established by the Board.

Our Strategy and Investments Committee reviews the annual strategic plans presented to it by management. These plans include an analysis of the markets that are relevant for the company, their expected evolution and the company’s positioning in these markets (market share, fi nancial results).

These plans include proposed commercial and R&D initiatives

and any legal or other constraints that may apply, and take into consideration other avenues available to us in the form of internal development, cooperation agreements and business acquisitions or sales of businesses.

Our Strategy and Investments Committee reviews the proposed decisions that the CEO must submit to the Board of Directors for prior approval.

It also examines the Group’s annual budget and annual investment plan.

* Outgoing members of the Management Committee in 2007 and 2008F. D’Amélio and M. Quigley were members until August 2007.J.-P. Beaufret was a member until November 2007.J. Meyer was a member until January 2008.

Appointment of members to the Management Committee in 2007 and 2008C. Christy, H. de Pesquidoux, M. Rahier and F. Rose became members in November 2007.A. Williams became a member in January 2008.

Left to right: Hubert de Pesquidoux, Janet Davidson, Andy Williams, Étienne Fouques, Patricia Russo, Claire Pedini, Michel Rahier, Cindy Christy, Frédéric Rose.




Shareholders

Contacts

Retail Shareholders Shareholder Relations Department54 rue La Boétie 75008 Paris – FranceToll-free number in France: 0800 354 354US Offi ce: +1 908 582 6173E-mail: fi [email protected]

Analysts & Institutional InvestorsParis (France): +33 1 40 76 13 27Murray Hill (USA): +1 908 582 8528

Evolution of the dividend over the last fi ve years

Year of payment 2007 2006 2005 2004 2003

Dividend distributed 0.16* 0.16** – – –(in euros, per share)

* The dividend for the 2006 fi scal year was paid on June 4, 2007.** The dividend for the 2005 fi scal year was paid on September 11, 2006.

At its meeting of February 7, 2008, our Board of Directors determined that it is prudent to suspend dividend payment for the fi scal year 2007.

Alcatel-Lucent Shareholder Profi le at December 31, 2007

Breakdown of the capital by type of shareholder

1.

3.

2.

1.

4.

2.

3.

5. 1. France 28%2. Rest of world 6%3. Continental Europe 9%4. UK/Ireland 8%5. USA 49%

Breakdown of the capital by location of record owner

*Source: Capital Bridge. Number of shares at December 31, 2007: 2,317,441,420.

Shareholders’ General Meeting

The most recent Shareholders’ Meeting was held on June 1, 2007, the date for which it was initially convened, and was chaired by Mr. Tchuruk.

The shareholders who were present or represented had in the aggregate a total of 887.6 million shares, which represents a quorum of 39.36%. The shareholder attendance rate increased from 25.4% in 2001 to 39.4% at the most recent meeting, a 14% increase in attendance.

All of the resolutions that were presented at the General Shareholders’ Meeting of June 1, 2007 were adopted. Voting results were published online on our Internet site.

1. Institutional 72%2. Company-related holding 6%3. Retail 22%



(1) Source: shareholders.(2) Source: Alcatel-Lucent (TPI as of December 31, 2007).(3) Fidelity Management & Research (U.S.) and Fidelity International Ltd.(4) Total gross number of voting rights, published by Alcatel-Lucent, including the treasury stock held by the parent company and the treasury stock held by the subsidiaries.(5) Other institutional investors in France holding more than 1% of the capital.

Breakdown of capital and voting rights

Situation on December 31, 2007 Shares % Capital Voting rights %Brandes Investment Partners, L.P. (1) 237,102,900 10.23 237,102,900 10.08Pzena Investment Management (1) (2) 113,482,400 4.90 113,482,400 4.83Tradewinds Global Investors (1) (2) 76,958,800 3.32 76,958,800 3.27Other institutional investors in France (5) 68,334,600 2.95 68,334,600 2.91Fidelity Investments (2) (3) 53,961,100 2.33 53,961,100 2.29Caisse des Dépôts et Consignations (CDC) (2) 48,001,700 2.07 48,288,650 2.05BT Pension Scheme/Hermès (1) (2) 40,128,584 1.73 40,128,584 1.71BNP PARIBAS Asset Management (2) 38,740,100 1.67 38,740,100 1.65Crédit Agricole Asset Management (2) 36,306,500 1.57 36,306,500 1.54Mutual Fund FCP 2AL (1) 29,188,686 1.26 54,590,086 2.32Treasury stock held by the parent company 25,343,255 1.09 – –Treasury stock held by the subsidiaries 33,056,313 1.43 – –Public 1,516,836,482 65.45 1,583,363,214 67.35Total 2,317,441,420 100.00 2,351,256,934 (4) 100.00

At December 31, 2007, shareholders benefi ting from double voting rights had a total of 67,631,028 votes, representing 2.88% of voting rights.

Changes in shareholding over the last three years

Situation on December 31, 2007 2007 2006 2005(In %) % Capital % Voting % Capital % Voting % Capital % Voting rights rights rightsBrandes Investment Partners, L.P. 10.23 10.08 9.75 9.86 10.67 10.88Pzena Investment Management 4.90 4.83 NC (1) NC NC NCTradewinds Global Investors 3.32 3.27 NC NC NC NCOther institutional investors in France 2.95 2.91 NC NC NC NCFidelity 2.33 2.29 5.22 5.27 NC NCCaisse des Dépôts et Consignations (CDC) 2.07 2.05 2.08 2.11 4.12 4.22BT Pension Scheme/Hermès 1.73 1.71 NC NC NC NCBNP PARIBAS Asset Management 1.67 1.65 0.44 0.44 NC NCCrédit Agricole Asset Management 1.57 1.54 2.74 2.77 NC NCFCP 2AL 1.26 2.32 1.23 2.34 1.89 3.14Treasury stock held by parent company 1.09 N/A 1.10 N/A 1.77 N/ATreasury stock held by subsidiaries 1.43 N/A 1.45 N/A 2.35 N/APublic 65.45 67.35 75.99 77.21 79.20 81.76Total 100 100 100 100 100 100(1) In this table, NC means “not communicated”.




Alcatel-Lucent’s Main Sites

GLOBAL PRESENCE, LOCAL ENGAGEMENTAlcatel-Lucent combines leading technology solutions with network integration specialists located around the world and a global sales presence, helping customers worldwide with every step of the IP transformation process.

77,000 employeesMore than 100 nationalities in 130 countries

€2.7 billion dedicated to R&D (15% of 2007 revenues)3,000 patents awarded in 2007, resulting a portfolio of over 25,000 active patents worldwide

600 experts in more than 100 standards organizations

Americas Region

IP Transformation and Operations Centers Plano, TexasLisle/Naperville, IllinoisWhippany, New Jersey

Innovation Teams•• •• Canada•• •• USA—•• Product & Solution Development Centers• Research Centers



—•• Product & Solution Development Centers• Research Centers

Europe, Middle East Africa & Asia Region

IP Transformation and Operations Centers Antwerp, BelgiumHilversum, NetherlandsSingapore

Innovation Teams•• •• UK• •• Ireland•• • • France•• • • Germany• •• Netherlands•• • • Belgium•• • Italy•• • Spain

•• • Israel•• • Russia•• • Romania•• • Poland•• • Slovakia•• •• China•• •• India•• • Australia

• Alcatel-Lucent’s main business sites



1.

3.

2.


Key Figures

2007 was a transition year for the company as we executed our integration plans in a diffi cult market environment. Notwithstanding these challenges, the performance of our wireline, enterprise and services business has been solid. On the other hand, the slower-than-expected ramp up of revenues in WCDMA and NGN/IMS, two areas in which we have been investing, has severely impacted profi tability. Patricia Russo – Chief Executive Offi cer

In 2007

€17,792 millionRevenues

€110 millionOperating Profi t

€(443) millionNet Income€(0.20) per share

€271 millionNet Cash on December 31, 2007

Breakdown of revenues by operating segment

1.

2.3.

4.

1. North America 32%2. Asia-Pacifi c 17%3. RoW 18%4. Europe 33%

Breakdown of revenues by geographical area

1. Carrier 73%2. Services 18%3. Enterprise 9%

Alcatel-Lucent had revenues (both reported and adjusted) of €17.8 billion in 2007.

Following the business combination with Lucent, the Group is evenly distributed geographically between North America, Europe, Asia-Pacifi c and the rest of the world, including an array of

emerging countries. This balanced geographical presence considerably limits the Group’s exposure to the investment cycles of its carrier clients in a particular area.



While the long-term prospects of our industry remain good, the macroeconomic environment has created uncertainty in our markets in the last few months. Our latest projections for 2008 indicate that the global telecommunications equipment and related services market should be fl at at constant EUR/USD rate. With this in mind, we will continue to execute against our three-year plan. The ongoing implementation of a more selective pricing approach as well as a product cost reduction program should enable us to improve our gross margin. Patricia Russo – Chief Executive Offi cer

* In revenues (1) Dell’Oro(2) Ovum RHK(3) Ovum RHK(4) Dell’Oro(5) Dell’Oro

(6) Dell’Oro(7) Current Analysis Inc.(8) Synergy Research Group(9) Technology Business Research (10) IDC

Market share highlights*

#1 in Broadband Access with 44% of DSL market share (1)

#1 in Optics (Terrestrial and Submarine) with 23.5% of market share (2)

#2 in IP/MPLS Service EDGE Routers with 18% of market share (3)

#3 in GSM/GPRS/EDGE Radio Access Networks with 10.1% of market share (4)

#3 in W-CDMA with 10.5% of market share (5)

#1 in CDMA with 47.4% of market share (6)

Included in 1st tier WiMAX vendors (7)

#1 in Western Europe Enterprise Telephonywith 21.2% of market share (8)

#2 in Global Telecom Infrastructure Serviceswith 9% of market share (9)

#2 in Network Consulting and Integration Services with 14% of market share (10)



Bringing 3G wireless to France with SFR

April 2007Alcatel-Lucent is partnering strategically with SFR, France’s second-largest mobile operator, to supply the country with a UMTS (universal mobile telecommunications system) network. The win confi rmed Alcatel-Lucent’s number-one position in the 3G market: one in four W-CDMA operators worldwide is an Alcatel-Lucent customer. The company’s acquisition of Nortel’s 3G/UMTS group has helped it strengthen its market leadership in mobile broadband.


Key Events

Going broadband in Nigeria: Alcatel-Lucent and Globacom

February 2007Last winter, Nigerian operator Globacom chose Alcatel-Lucent to enable the delivery of converged, triple-play services throughout Nigeria. Under the US$600 million agreement, Alcatel-Lucent—selected for its proven ability to provide complex turnkey solutions—is to deploy fi xed and mobile networks as well as next-generation IP/MPLS and optical network technologies.

E-Plus outsourcing its mobile network management to Alcatel-Lucent

February 2007 E-Plus Mobilfunk last year became Germany’s fi rst mobile operator to outsource the operation and maintenance of its cellular network. In order to focus on its core business and assure customers of the highest possible network quality, the company called upon Alcatel-Lucent to manage several of its network business divisions—joining a growing number of providers around the world using managed services to keep pace with changing technologies, regulations and customer expectations.



Breaking the record: Innovations set new standards for speed

March/September 2007 Alcatel-Lucent broke two signifi cant transmission speed records last year. In March, the company transmitted optical data at 25.6 Terabits/second over a single fi ber strand—equal to the data of more than 600 DVDs every second. In September, Alcatel-Lucent demonstrated its capability to send optical data at the ultra-fast rate of 12.8 Terabits/second over a distance of 2,550 kilometers, shattering earlier distance records.

Focusing on our core business: Divestitures to Thales

April 2007Last spring, Alcatel-Lucent sold its interests in Alcatel Alenia Space and Telespazio to Thales, the world leader in mission-critical information systems for the aerospace, defense and security markets. Previously, Alcatel-Lucent sold Thales its railway signaling and non-telecom integration and services activities in January. The exchange allows Alcatel-Lucent to focus its activities on products and services for operators and enterprises.

Taking wireless broadband indoors: Femto trial with Softbank Mobile

July 2007Last summer, Softbank Mobile invited Alcatel-Lucent to Japan to demonstrate its Femto Base Station Router—a real-world opportunity to prove the Femto BSR’s ability to handle wireless voice and HSPA (high-speed packet access) data in indoor environments. These settings often pose challenges to the quality and reliability of wireless services.

Web Services Gateway extends network security

December 2007 Launched late last year, the Alcatel-Lucent OmniAccess 8550 Web Services Gateway (WSG) is the fi rst network appliance that enables controlled access to sensitive information across multiple IT systems by implementing network-aware information access policies, organization-wide and in real time. It facilitates corporate-wide interoperability among business-critical internal information systems and external partner networks, creating a comprehensive compliance infrastructure that reduces cost and risk.

ACQUISITIONS

April — Tropic NetworksAlcatel-Lucent acquired the assets and intellectual property of Canadian metro WDM networking supplier Tropic Networks, Inc., building on a collaborative relationship between the two companies established in 2004. Tropic’s technology simplifi es network planning, accelerates wavelength and service provisioning and eases overall maintenance activities across optical infrastructures.

May — NetDevicesThe acquisition of California’s privately held NetDevices expands Alcatel-Lucent’s enterprise portfolio with the innovative, market-recognized Unifi ed Service Gateway enterprise networking platform, which reduces the cost and complexity of managing branch offi ce networks.

December — InformiamAlcatel-Lucent Genesys Telecommunications Laboratories acquired privately held software pioneer Informiam LLC, gaining the ability to optimize large-enterprise customer service operations through real-time business performance management.



Realizing the Possibilities

Vision






Vision

The global market for telecommunications continues to grow, driven by broadband and mobility, with offers for unlimited connection time and an ever-broader range of services. While industrial nations are concentrating on mobile broadband services and on the transition to fi ber optics, emerging countries are building out mobile networks at a frenetic pace (every month, China is building the equivalent of a mobile network of a country such as France). These nations are also developing specifi c services: some African countries, for example, have implemented payment by mobile phone—sometimes in advance of Europe.

The French telecommunications and postal regulatory authority ARCEP (Autorité de Régulation des Télécommunications Electroniques et des Postes) has, like its counterparts in other industrial nations, two main missions: to guarantee fair competition for the benefi t of the consumer while ensuring national and regional development, employment and innovation; and to manage scarce resources (allocating telephone numbers and frequencies).

At the national level, ARCEP works with the Competition Council, the Audiovisual Council (CSA) and local authorities, who, thanks to public-private partnerships, are key players in France’s digital development. At the international level, its work is framed by European directives and the European Commission; it cooperates closely with its counterparts in the European Regulators Group (ERG) to defi ne common positions and move towards greater harmonization of European markets.

The deployment of fi ber in access networks will be a structural investment for the coming decades, involving a challenge much like the electrifi cation of industrial nations at the start of the

20th century. Broadband will have leisure-related applications, with the enrichment of interactive multimedia content, as well as socio-economic ones, with the digitalization of content in the world of culture, the digital environment for work in education, and with remote monitoring of the elderly at home, the sharing of medical fi les and online medical assistance in health. Fiber is moreover one of the only kinds of transport infrastructure that saves energy, supporting the sustainable development of society.

The future is one of ubiquitous use in the context of an explosion of services. Ubiquity gives rise to a dual convergence: fi xed/mobile and network/content. Often, wireline and wireless networks are opposed, while they are in fact complementary, and this for two reasons. Firstly, wireless networks supplement the geographical coverage of wireline networks that are ever more hungry for bandwidth. Secondly, the extension of fi ber will enable the deployment of small, more modular wireless base stations (such as femtocells or home gateways), facilitating mobility. In parallel, networks and terminals are becoming ever more interoperable, to enable connectivity to any network from any terminal.

Finally, the relation between network operators and content providers should also evolve: without going so far as to merge their core business activities, which remain quite different, content providers are drawing closer to carriers in order to equitably share value. The new networks should be seen less as a source of danger (from piracy) than as an expanded opportunity for economic and technological growth. ARCEP will argue that this convergence should be accompanied by a shared investment and a balanced collaboration among the various market players.

Gabrielle Gauthey

A member of the French telecommunications regulatory authority and graduate of the Ecole Polytechnique, Gabrielle Gauthey has made her career in the telecommunications industry, working notably to extend broadband coverage in France and establish French-language digital television in Africa.

The arrival of fi ber in access networks will have as powerful a structural impact for investment and usage as did the electrifi cation of industrial nations at the start of the 20th century. Fiber will have innumerable applications for leisure and socio-economic activity. Its deployment will supplement that of wireless base stations, enabling total mobility.





Change is a constant in the telecommuni-cations industry. Technologies are rapidly advancing and markets are continually evolving—revealing new opportunities and making fresh demands.

Positive, long-term prospects

On the whole, the long-term prospects for the telecommunications market remain good, with a number of key drivers behind this progression. Strong sub-scriber growth and growth in usage across the globe is a very significant factor. A massive proportion of the world’s population still does not have a phone—and that demand will have to be met.

A VIEW OF THE MARKET TODAYTelecommunications plays a fundamental role in the global economy. Indeed, it has become essential, ensuring its vitality as an industry for years to come. The potential for further growth is strong—and Alcatel-Lucent is well positioned to capitalize on that potential, maintaining its leadership both as a business and an innovator.


Vision



This need is spurring investment in emerging markets, which have enormous potential for growth.

IP transformation is another major driver. In the wireline and wireless domains, ongoing migration to new tech-nology is having tremendous impact. After half a century, fixed networks orig-inally built for voice telephony sevices are moving to packet-based IP technolo-gies to support all kinds of new services such as video, email, instant messaging, information and video sharing, video on demand, social networking services, and e-commerce. That same IP transforma-tion has now started in the wireless realm, where bandwidth demands are escalating rapidly.

The proliferation of video content is having an accelerating impact on fixed and mobile broadband networks, driv-ing demand for bandwidth. This is accompanied by a growing appetite for mobile high-speed data, including 3G and WiMAX, with 4G already in sight.

Shorter-term downside risks

In the shorter term, however, the indus-try is confronting a number of downside risks, including:

• • Consolidation among equipment ven-dors, which has intensified price pressure• • Mobile network-sharing agreements, which may slow the pace of wireless car-rier investment• • Regulation associated with the deploy-ment of fiber-based networks, which may impede wireline operator spending as

companies wait to understand the impli-cations for their individual network build-outs• • The current macroeconomic environ-ment, which is generating uncertainty• • The decline in the value of the US dollar relative to the euro, which is hav-ing an impact on our revenues, 50% of which are realized in dollars or in cur-rencies linked to the dollar.

A look at the customer landscape

The customer landscape will remain a mix of large, established carriers and recent entrants who entered the field after the initial successful wave of dereg-ulation, giving rise to highly dynamic triple-play markets. As telecom compa-nies seek to expand into new sectors, fixed and mobile alike, they will depend on global partners to help them define and evolve their business models.

Moving ahead

Alcatel-Lucent is well positioned to capi-talize on the telecom industry’s growth, with a portfolio that aligns well with the direction of the market. Once the pres-ent phase of industry consolidation is over, Alcatel-Lucent expects to stand out among the world’s few end-to-end solu-tion providers, differentiated from pure equipment manufacturers by its exper-tise as a network integrator in an increas-ingly complex technological milieu, and positioned strongly as a result of its present strategies.



Strategically, Alcatel-Lucent is evolving its business mix to pursue higher growth, higher margin opportunities associated with the world’s shift to all-IP networks; the advent of mobile broadband; and the delivery of converged, blended services across wired and wireless networks alike.

To achieve its aims, Alcatel-Lucent will leverage its global presence, techno-

logical breadth and the world-leading innovation capabilities of Alcatel-Lucent Bell Labs, and will seek to strengthen its bottom line through efficient operations and cost reductions.

The company’s strength in the car-rier space affords opportunities for growth both in developed and emerg-ing markets among carriers as well as

enterprise, industry and public-sector customers whose networks are becom-ing increasingly complex. The need for integration in multi-vendor environ-ments—and for the support of rapidly proliferating IP-based applications—creates demand for new value-added services that Alcatel-Lucent is well posi-tioned to deliver.

To achieve profi table growth, we must help our customers transform their networks to IP and focus our growth efforts on areas of the greatest potential.Patricia Russo – Chief Executive Offi cer

The increase in subscribers alone will propel the sale of telecoms equipment over the next 10 to 15 years. Carriers will have to expand their networks to keep pace and remain competitive. That alone is good news for the long term—and it is far from the only growth driver at work.Rémi Thomas – Vice-President, Investor Relations

THE ALCATEL-LUCENT STRATEGYIn 2007, Alcatel-Lucent began enacting a three-part strategy to build its carrier business, expand its service and application offerings, and strengthen its position in key markets—all with a strong focus on helping customers derive the greatest advantage from the IP transformation of their networks.


Vision



Growing the carrierbusiness

A key pillar of Alcatel-Lucent’s strategy is to grow its carrier business, leveraging its leading position with service providers worldwide—both wireline and wireless—and capitalizing on the enormous potential in this sector, in which carriers are undertaking a broad-based transformation to IP technology. While expanding to a new customer base in this sector, Alcatel-Lucent is simultaneously putting an increased focus on profi tability and execution.

Targeting carrier marketsActive in all carrier markets, Alcatel-Lucent offers solutions that address the very different needs of service providers, according to their sector. In developed markets, for example, where incumbents are undertaking a migration towards full IP, Alcatel-Lucent is assisting them with end-to-end solutions for access, routing, transport, switching and applications.

In emerging markets, where carriers need to ensure high capacity and broad coverage in a cost-effective way, optimizing the total cost of ownership, Alcatel-Lucent responds with highly innovative solutions. An example is the compact and effi cient Twin TRX base station, which doubles the transceiver capacity or the range of coverage, depending on the mobile operator’s needs.

Targeting new marketsLarge enterprises, and industry and public sector organizations have many of the same communications needs as carriers. Alcatel-Lucent is increasingly targeting this sector to deliver state-of-the-art, IP-based telecommunications solutions that support their business or government activities.

Partnering for growthTo enhance its technological edge and market penetration, Alcatel-Lucent builds partnerships with industry leaders. Last year, in a major milestone, Alcatel-Lucent and NEC worked to form a joint venture, announced in early 2008, to accelerate the development and commercialization of LTE wireless broadband access solutions. These will support the network evolution of leading international customers such as NTT DoCoMo and Verizon.



Expanding in services and applications

In pursuing its strategy for growth, Alcatel-Lucent is expanding into logically adjacent sectors. A case in point is the company’s drive to expand in value-added services and applications that are essential to the telecoms business. This approach enables the company to grow in areas where it can compete and win—again, leveraging its expertise in IP transformation while broadening its market horizons and expanding its customer footprint and opportunity base.

Meeting the need for servicesThe increasing complexity of multi-vendor, multi-technology networks is driving service providers to seek the assistance of specialists to integrate and manage these heterogeneous systems. As one of the world’s leading network integrators, Alcatel-Lucent is actively pursuing business in this fi eld, offering the broad array of value-added services required for end-to-end network solutions.

In this context, the company offers professional services that include consulting; network design, integration and deployment; and the full set of operations and maintenance functions, including managed services for fi eld operations, network operations, multi-vendor maintenance, and security. Thus, Alcatel-Lucent’s Network Operations Centers (NOCs) are in increasing demand for operating third-party networks, as well as its own.

Leveraging communications applicationsApplications are playing a growing role in the telecommunications fi eld, as service providers seek new avenues to generate revenue streams. Key among them are multimedia applications, a varied range of services that includes IPTV and other video applications, music downloads, photo sharing, user-generated content and much more.

Alcatel-Lucent has a robust portfolio in multimedia applications, as it does in messaging and payment solutions. In the fi eld of operations support systems/business support systems (OSS/BSS), Alcatel-Lucent is recognized as the world leader, and fully intends to leverage this success, further expanding in the sector.


Vision



Engagingenterprises, industry and the public sector

Already a vigorous player in the enterprise market, Alcatel-Lucent is expanding its activity in this domain. In parallel, the company is targeting growth in industry and the public sector, in vertical market segments where IP transformation and its implications are creating demand for products, solutions, applications and services from both the company’s enterprise and carrier spaces. This is a logical place for Alcatel-Lucent to expand and develop.

Growing the enterprise businessThe enterprise business is a profi table activity for Alcatel-Lucent, where it delivers a range of security, collaboration, mobility, contact center and unifi ed communications solutions to enterprises of all sizes. The company plans to grow this business through market expansion, product innovation, improving its go-to-market activity, and through non-standard investments such as acquisitions, where appropriate.

Alcatel-Lucent’s activities in 2007 already point to the range of initiatives involved, such as the launch of ground-breaking security solutions; the achievement of a major partnership with NCR for support services for Alcatel-Lucent customers; and the acquisition of NetDevices to round out the company’s networking portfolio.

Building the industry and public sectorAlcatel-Lucent intends to leverage the strength and success of its carrier and enterprise businesses to serve related markets that require similar products, solutions and integration services. The industry and public sector thus represents the point of intersection for Alcatel-Lucent’s full range of offerings.

Within that domain, Alcatel-Lucent is particularly addressing the markets for transport, energy and government/e-Communities, including defense and health, which have extensive needs for high-performance telecommunications solutions that must be seamlessly integrated with their highly specialized networks.




Action






Action

The transformation to IP networks is well underway in wireline segments of the industry, and will continue throughout 2008. The same is occurring on the wireless side, where network bandwidth is growing rapidly.

This is highlighted in IDC’s analysis of the top ten telecoms trends across APEJ, which shows that GSM operators that do not have a 3G license but want to deploy next-generation wireless data services will migrate their mobile switching centers, base-station controllers, customer care and billing systems, SMS (Short Messaging Service) and other value-added voice services to an all-IP core. This will give them the fl exibility to scale in keeping with new, bandwidth-hungry applications—and to prepare for a future 4G network at the same time. We expect more operators in the Asia-Pacifi c region to migrate to IP core networks in 2008.

One of the key outcomes of IP transformation on the user side is that the distinction between personal and business communication is going to disappear. For example, the enterprise need for constant presence, information and more effective communication and collaborative workfl ows is driving the adoption not only of unifi ed communications (UC) but also of Web 2.0 applications like social networking that have up to now belonged to the consumer domain.

Mobile versions of various Web 2.0 applications will entice enterprise and consumer subscribers to use their mobile phones for Internet access, social networking and other communications—and operators will benefi t from this increase in data usage. Of course, they must fi rst connect their users to the network. In many Asia-Pacifi c markets, large numbers of households are without Internet access or even Plain

Old Telephone Service (POTS). Wireless broadband is a cost-effective solution in such cases. We believe HSDPA will be the preferred solution for mobile broadband among 3G carriers, and mobile WiMAX the winner with 2G carriers and with wireline carriers seeking a fi xed service mode.

Streaming services are likely to be a strong revenue generator for mobile operators. The emergence of HSDPA, which promises speeds of 3.6Mbps or greater, will fi nally make possible music and video streaming services with user appeal. HSDPA also allows mobile TV to become a reality. Provided that content is compelling to users and the associated tariff plans are easy for consumers to understand, operators can expect to profi t from such offerings.

In looking at all these developments, it is clear that customized services almost always yield higher premiums than generalized offerings. We’re going to see carriers focus increasingly on specifi c vertical or industry markets to maximize their revenues going forward, with gaming, healthcare, hospitality, off-shoring and retail sectors in APEJ holding great potential.

A fi nal trend worth noting is the ‘greening’ of IT. In pursuit of cost savings, out of environmental concern, and in keeping with the requirements of corporate social responsibility, IT managers are looking increasingly for environmentally friendly solutions. Datacenter consolidation will be an immediate focus point in this respect; video conferencing will also become popular as it minimizes travel.

This movement is just beginning. Enterprises will increase pressure on their partners and suppliers to provide green solutions, and IDC expects more green initiatives in 2008 and beyond.

Sandra Ng

Sandra Ng is Group Vice President for IDC’s Asia/Pacifi c Communications, Peripherals and Services Research. A 15-year veteran of the IT and telecoms industries, her analysis of the ever-changing landscape of the communications sector is often cited in regional publications.

An analysis of telecoms trends across APEJ (Asia/Pacifi c, excluding Japan) shows that providers will continue experimenting with business models as they seek an optimal balance between market protection and strategic growth, exploring various go-to-market offerings, partnerships, solutions and network investment models. Growth from broadband, IP-based and 3G services will further propel the services and infrastructure markets.






Action

IP transformation isn’t a choice. It’s a business imperative for our customers. They need a partner who understands both networking and IT. We have that breadth of expertise. Patricia Russo – Chief Executive Offi cer



OUR ACTIVITIESIP transformation is an idea whose time has come. In 2007, the wireline carriers that spearheaded the move to IP were increasingly joined by mobile carriers, enterprises and industry and public sector organizations in taking this step.

The transformation to IP of today’s net-works has implications for every area of Alcatel-Lucent’s business. IP (Internet Protocol) converts voice, video, data and other information into digital packets that can be controlled and routed with great precision according to content and priority, enabling precise routing and end-to-end tracking. IP enables a whole new range of services and applications, from high-bandwidth offerings such as HDTV for carriers to mission-critical communications and security applica-tions for industry and government.

Across all its business segments—Car-rier, Enterprise, and Services—Alcatel-Lucent continued to support this IP transformation throughout 2007. The company drew on its expertise in net-work infrastructure and integration to help customers realize the cost efficien-cies, new service capabilities and new revenue opportunities associated with IP. Wireline carriers—long in the van-guard of IP transformation—were joined by wireless carriers, enterprises, industry and public sector organizations in recog-nizing the urgency and opportunity of this migration.




Action

Driving forward

In 2007, Alcatel-Lucent confirmed its leadership in fixed-access, IP and optical networking, continuing to demonstrate its strength in helping customers trans-form their networks to IP. Today, that transformation is occurring in both the wireline and wireless sectors. Committed to ensuring that carriers reap the full ben-efits of the complex change to IP, Alcatel-Lucent delivers the complete range of required solutions. On the wireless side specifically, the company consolidated and enhanced its product portfolio last year, confirming its number-one standing in CDMA and enhancing its position in GSM and WiMAX.

Addressing customer challenges

To derive full value from their networks, service providers must maximize user con-nectivity time and bandwidth consumption. They must also simplify their networks to reduce operating expenses, and at the same time create more value with their networks, for example, by storing user-generated con-tent—such as video, photos and music—and making it accessible from a PC, TV or mobile device. All of these depend on IP transformation—to enable new, compelling services that drive usage and generate additional revenue; and to achieve effi-ciencies within the network. Alcatel-Lucent is actively developing solutions for service providers to address these opportunities.

Combining strengths

Alcatel-Lucent successfully consolidated product lines from the former Alcatel and former Lucent as well as Nortel’s UMTS radio access portfolio, transitioning

customers via tailored migration paths. In a joint venture with NEC, Alcatel-Lucent is to develop Long Term Evolu-tion (LTE) wireless broadband access solutions to support leading customers around the world such as NTT DoCoMo in Japan and Verizon Wireless in the USA. In 2008, Alcatel-Lucent will con-tinue to leverage its worldwide presence, in particular in China, supported by the Alcatel Shanghai Bell platform.

Pursuing strategic priorities

The Carrier Business Segment will continue to support the strategic aims of the company by growing its base of service providers, enterprise, and industry and public sector customers, and by expanding its offering of applications—including multimedia, IPTV, messaging and payment solutions. Creating value for customers, such applications are deliverable over the Alcatel-Lucent infra-structure and leverage the company’s experi-ence in end-to-end integration.

CARRIER BUSINESS SEGMENT: ENABLING IP TRANSFORMATIONWe continually push the thresholds of innovation—supporting service providers, enterprises, and industry and public sector customers with end-to-end fi xed and mobile network solutions that create value by enabling end-user services accessible from any device.



Our portfolio meets the full range of network needs in an all-IP world. The end-to-end expertise of our teams provides our customers with the bridge between technological innovations and market opportunities. Michel Rahier – President, Carrier Business Segment

OrascomAlcatel-Lucent announced in September a deal with Mobilink—the Pakistani telecommunications subsidiary of the Orascom group. The deal illustrates Alcatel-Lucent’s solid presence in emerging markets and represents a success with WiMAX, an area in which Alcatel-Lucent is a leader, as shown by its 22 WiMAX contracts and over 70 trials around the globe awarded since January 1, 2007.

VerizonLast year, Verizon awarded Alcatel-Lucent one of the fi rst major contracts to combine wireline and wireless products from former Alcatel and former Lucent, delivering on the promises of the merger. Highlights of the Alcatel-Lucent/Verizon agreements include:

• • A $6 billion framework contract over three years to expand Verizon’s wireless networks.• • The deployment of gigabit passive optical networking (GPON) equipment throughout Verizon’s FiOS network to deliver fi ber to the premises (FTTP) high-bandwidth connectivity to customers.• • A 4G LTE fi eld trial to advance Verizon’s capabilities, demonstrating Alcatel-Lucent’s strong standing in 4G, while showing the migration path for its large installed base with Verizon.• • The combination of Femto cells (see Innovation chapter) with Alcatel-Lucent’s fl at IP infrastructure in 3G and 4G, differentiating the company from its competition.

Telecom New ZealandTelecom New Zealand (TNZ) selected Alcatel-Lucent as its 3G W-CDMA/UMTS supplier in 2007—a signifi cant proof point for Alcatel-Lucent’s technology-leading 3G offering—highlighting the winning combination of former Alcatel, former Lucent and former Nortel’s UMTS radio access activities. On the wireline side, Alcatel-Lucent is handling IP transformation for TNZ.

SFRAlcatel-Lucent was selected by SFR as a supplier of 3G HSDPA: rollout began in 2007. Alcatel-Lucent’s leadership role in IP solutions was further highlighted when SFR chose it to supply and deploy its IP/MPLS networks.

CARRIER BUSINESS SEGMENT

WHAT: A world-leading supplier of wireline and wireless solutions, supporting traditional fi xed and mobile service providers, cable operators, multi-system operators (MSOs), enterprises, and industry and public sector organizations in their transformation to IP.

LEAD: Michel Rahier.

ACTIVITY: Developing end-to-end solutions for wireline and wireless networks,including access, routing, transport, switching and applications.

VALUE: Enables service providers, enterprises, and industry and public sector organizations to launch new services that enrich people’s lives while reducing the cost and complexity of managing networks and their evolution.




Action

Alcatel-Lucent Enterprise delivers secure, scalable communications, network-ing and applications solutions and services. With an emphasis on high-growth markets, the organization tar-gets security, unified communications and mobility solutions that support business-critical enterprises and gov-ernment agencies.

Strong growth, clear results

Alcatel-Lucent continues to invest in the enterprise space, seeking growth through market expansion, product innovation, development of sales and marketing, and selected acquisitions. In 2007, the company acquired Net-Devices and Informiam LLC, bringing a recognized, flexible enterprise-net-working platform into the portfolio, and strengthening the reporting and analytics capabilities of Alcatel-Lucent’s Genesys contact center offering. Alcatel-Lucent’s enterprise business continued to return strong results, yielding an 8.1 percent operating margin and

growing at a rate of five percent in 2007, while Genesys had a very strong year, growing at twice the market rate.

An exceptional portfolio

In 2007, Alcatel-Lucent unveiled its strat-egy to address the burgeoning security and compliance concerns of enterprises, introducing several solutions geared towards mobility and SOA (service-oriented architectures). A prime example was the OmniAccess 3500 Nonstop Lap-top Guardian, which secures the mobile laptop with 3G capabilities for remote tracking, monitoring and control of the asset. Another key launch was the Omni-Access 8550 Web Services Gateway, a network appliance that ensures informa-tion privacy and guarantees traceability of user activity.

Alcatel-Lucent also launched its OmniTouch 8610 My Instant Com-municator platform and was quickly awarded Unified Communications® Magazine’s 2007 Product of the Year Award. In partnership with IBM, the

ENTERPRISE BUSINESS SEGMENT: DELIVERING VALUE, REALIZING GROWTHFocused on the communications needs of today’s mobile, information-driven organizations, we deliver secure, real-time solutions that interconnect the enterprise’s networks, people, processes and knowledge—growing our business faster than the market average as a result.



company will integrate its Unified Communications offerings with IBM Lotus Sametime.

Regarding the enterprise-related services business—where the group achieved double-digit growth—Alcatel-Lucent last year formalized a global partnership with NCR for on-site installation and maintenance to sup-port Alcatel-Lucent’s growing base of enterprise customers.

Next steps

To grow the company’s global pres-ence, Alcatel-Lucent will expand its focus on selling enterprise products via service providers, business part-ners and direct sales—concentrating on the vertical markets of education, finance, government, hospitality and healthcare, and looking to emerging markets for opportunities as well. A main focus for 2008 is to achieve prof-itable above-market growth, and to continue rounding out the technology portfolio.

A new vision: A framework for the Dynamic EnterpriseFour key assets are combined in the Dynamic Enterprise: the network; people; business processes; and knowledge of employees, partners and customers. Alcatel-Lucent is helping companies to integrate these four assets with real-time communications to become truly dynamic. A communications framework with solutions such as Unifi ed Communications, and security from desktop to core allow for knowledge to be shared and utilized with maximum effi ciency.

Innovation in enterprise security: Laptop GuardianThe OmniAccess 3500 Nonstop Laptop Guardian is an innovative solution that allows enterprises to maintain complete control over corporate laptops whether lost, stolen, turned on or powered off. Developed by Alcatel-Lucent Bell Labs and recognized for its innovative approach to mobile security, the product provides an early point of entry for the company into the fast-growing mobile security market (estimated by IDC to exceed $1 billion by 2010). Major carriers worldwide are targeted for distribution of this solution, with North American Sprint leading the deployment of this solution in the US.

Expanding in the carrier spaceAs part of its strategy to sell products to enterprises via carrier partners, Alcatel-Lucent last year provided PCCW in Hong Kong with the technology to offer cellular extension, push email and Unifi ed Communications to 200,000 small and medium-sized businesses. Korea Telecom is leveraging Alcatel-Lucent VitalQIP to offer managed services to seven million IP subscribers.

Genesys: Growing the businessIn a signifi cant achievement, Genesys—Alcatel-Lucent’s contact center business—grew at twice the pace of the market in 2007. Growth was fueled by the Genesys Dynamic Contact Center platform, Voice Platform, Business Process Routing and SIP solutions. In a key initiative, Genesys acquired Informiam to expand its ability to deliver innovative solutions throughout the customer service chain.

Our enterprise business is growing strongly. It is highly profi table—and we are expanding our investments to ensure that it remains so. Already, the investments we have made are paying off.Hubert de Pesquidoux – President, Enterprise Business Segment

ENTERPRISE BUSINESS SEGMENT

WHAT: A world leader in the delivery of secure, dynamic communication solutions for enterprises and government agencies, with an emphasis on education, fi nance, healthcare and hospitality industries.

LEAD: Hubert de Pesquidoux.

ACTIVITY: Supplies IP communication solutions for secure networking, collaboration, mobility, Unifi ed Communications, Genesys contact centers, and telephony.

VALUE: Provides a Dynamic Communications Framework that interconnects networks, people, business processes and knowledge with real-time communications.



2007 was a strong year for the Services Business Segment, which grew reve-nues and boosted profitability. Network operations performed strongest, the result of some very large contracts. Network integration revenues also climbed sig-nificantly, driven by IPTV and IP trans-formation projects. Moreover, a focus on industry and public-sector markets began to pay off with several wins for end-to-end communications and secu-rity solutions. In 2008, Services will continue to refine its cost model and simplify its offerings to further stream-line the customer experience.

Delivering the services customers need

As demonstrated by the success in 2007, telecommunications is rapidly becoming a services market, and Alcatel-Lucent—as network integrator—is well positioned to deliver those services. The company pos-sesses the combined expertise in net-working and information technology to

meet today’s complex network integra-tion challenges.

Priorities for growth

The Services Business Segment is focused on five growth areas:

Multi-vendor maintenanceToday’s networks require the integration of equipment and applications from many sources. Alcatel-Lucent supports 1,600 products from more than 400 ven-dors for its 3,500 maintenance custom-ers worldwide.

Network outsourcingAlcatel-Lucent runs ten Network Opera-tion Centers (NOCs), providing cost-effec-tive, service-level-based monitoring and support for customers around the world.

Applications integrationApplications integration is highly com-plex, requiring IT skills for implemen-tation plus expertise in IP networking

for applications delivery—an essential combination for IPTV. Operations sup-port and business support systems (OSS/BSS) pose equally difficult challenges. Alcatel-Lucent is the one of the leading integrators of OSS systems globally.

IP network transformationAs carriers migrate to IP networks to capi-talize on new market opportunities, Alcatel-Lucent provides valuable support through its network integration services, supported by four IP Transformation Centers.

Industry and public sectorMany enterprises and government agen-cies have large, increasingly complex networks. Alcatel-Lucent is focusing particularly on transport, energy/utilities and government/eCommunities, includ-ing defense and health.

Leveraging its abundant capabilities in each of these priority areas, Alcatel-Lucent will actively pursue the ever-increasing opportunities available in the services market.

SERVICES BUSINESS SEGMENT: STRONG RESULTS, POSITIVE OUTLOOKAs a world-leading network integrator, Alcatel-Lucent applies its broad expertise in networking and information technology to address the full range of customer challenges and unlock growth opportunities.


Action



Transpower: IP transformation for the energy industryTranspower—the state-owned enterprise that runs New Zealand’s power system—has chosen Alcatel-Lucent to design, integrate, deploy, operate and maintain a new IP-based private communications network connecting the 192 substations, offi ces and switchyards of its 12,000 km high-voltage power grid. Alcatel-Lucent will also manage the migration of Transpower’s legacy communications systems to the new network, including all mission-critical functions.

We integrated the businesses of Alcatel, Lucent and Nortel’s acquired unit, grew top-line revenue and increased our bottom-line performance. 2007 was a big year. Andy Williams – President, Services Business Segment

Wana: Bridging the digital divideIn 2007, Alcatel-Lucent cemented a two-year contract with Wana, a leading Moroccan supplier of fi xed and mobile telecommunications services. The project will expand Wana’s network coverage, making high-speed data and mobile services available to at least 80 percent of Morocco’s population by the end of 2008. Acting as Master Network Integrator, Alcatel-Lucent will provide project management, network testing and multi-vendor integration services, and carry out site research and acquisition activities, construction and electrifi cation.

E-Plus: Outsourcing to reduce costs and boost qualityIn 2007, E-Plus—the third largest mobile operator in Germany—announced two major contracts with Alcatel-Lucent for the expansion, maintenance and operation of its mobile network. Alcatel-Lucent not only reduced this customer’s network operations costs but also helped E-Plus advance its ranking signifi cantly in Germany’s annual assessment of mobile network quality.

Providing outsourced network operationsAlcatel-Lucent Network Operations Centers deliver 24-hour remote management to more than 65 customers serving 100 million subscribers worldwide.

IP Transformation Centers: Bringing possibilities to lifeAlcatel-Lucent’s IP Transformation Centers (IPTCs) help customers design, test and deploy IP networks, services and applications. Drawing on lessons learned from more than 70 transformation projects worldwide, Alcatel-Lucent and its IPTCs help operators reduce the risks associated with transformation and accelerate project completion. IPTCs are located in Texas, New Jersey, Belgium and Singapore, close to Alcatel-Lucent R&D facilities.

SERVICES BUSINESS SEGMENT

WHAT: The telecom industry’s most experienced and knowledgeable services partner whose 20,000 network experts support the world’s top service providers with a comprehensive set of professional services.

LEAD: Andy Williams.

ACTIVITY: Provides full network lifecycle services plus a variety of partnership models from operational support to partial or total outsourcing.

VALUE: Accelerates benefi ts of large-scale integration projects.



Shaping the Future

Innovation





Shaping the Future

Innovation

The last ten years have seen a steady acceleration in the development of information and communication technologies (ICT), driven by the rise of the Internet and the rapid growth of mobile telephony. The advancements made have been the product of a truly collaborative effort among global ICT industry, academia, the world’s governments and organizations such as ITU.

We’ve come in the space of a decade from predominantly dial-up Internet access to widespread broadband connectivity managed by generally wired standards such as DSL. Looking ahead, it seems clear that mobility holds the key to unlocking truly ubiquitous communications and computing. The future is one of an ever more-connected world that is mobile, converged and seamless. With united effort, everyone should be able to profi t from this connectivity.

The next-generation network (NGN) concept envisages a world where it will be possible for any person and any device to connect anytime, anywhere. Standardization is essential to support this level of interoperability. In the last few years, this has been the focus of global ICT standards development—and like the technology itself, the standards are advancing at an accelerating pace. ITU members contribute to the innovative thinking that will ultimately provide fi xed-line and mobile users with such completely seamless communication.

Roughly half the world’s inhabitants now have access to a mobile phone, with the fastest-growing mobile markets located in developing countries. India alone now adds over eight million cellular subscribers a month. As agreed by leaders at the World Summit on the Information Society (WSIS), wireless technologies offer the most promise for access to ICTs.

Technology is a critical determinant of sustainable growth and poverty reduction. Education is key to the accelerated development of ICT. Without the involvement of the world’s universities and other private and academic institutions we would not have reached the level of innovation we enjoy today. Many ideas that start in the bright young minds of students end up becoming tomorrow’s leading-edge technologies.

A truly inclusive information society brings understanding and education to a global audience. We are now beginning to understand how to use ICT to achieve positive effects in other areas as well, such as mitigating climate change. ITU will set targets at its World Telecommunication Standardization Assembly in October this year for ICT energy reductions. We must strive to end the digital divide and to reduce global carbon emissions. These are achievable goals, and this industry—which has given birth to the most positive and powerful global revolution of the last century—has a role to play in helping usher in a new era of corporate responsibility.

Malcolm Johnson

Director of the Telecommunication Standardization Bureau of the International Telecommunication Union, Malcolm Johnson has been involved with the ITU for over 20 years. He is former Director of the UK’s Radiocommunications Agency and was International Coordinator of the UK Offi ce of Communications (Ofcom) at its inception in 2003.

Over the last ten years, the development of information and communication technology (ICT) has accelerated steadily, with the rise of the Internet and rapid growth in mobile telephony. As communications converge and the shift towards mobility continues, the need for global standards will become more pronounced, while opportunities emerge for using ICT to bridge the digital divide and mitigate climate change.





Shaping the Future

Innovation

Research and development touches every aspect of business at Alcatel-Lucent, including:

• • Wireless and wireline broadband access• • Packet and optical networking• • New service delivery architectures and platforms• • Multimedia and mobile/fi xed services and applications• • Network security and network optimization.

The company also carries out research in disciplines such as mathematics, the physical sciences, nanotechnology, and computer and software science.

Alcatel-Lucent is committed to constantly innovating to enhance the quality, reliability and security of its offerings to ensure customer satisfaction and loyalty. This is a key focus for 2008 particularly—and relies in part on increased use of the company’s customer loyalty index, which makes possible the establishment of benchmarks and targets for quality and problem resolution. Olivier Baujard – Chief Technical Offi cer

Innovation plays many roles at Alcatel-Lucent, creating value for the company through the development of market-ready products and intellectual property. Innova-tion enables the company to ensure quality and deliver ever-greater levels of security and reliability in its products and solutions.

At the same time, the company’s pri-orities for innovation guide its R&D investment—by aligning invention with a vision of the future of the company, its markets and its customers’ needs. Inno-vation is also about efficiency—through the sharing of tools and knowledge. On a global level, it guides decisions about policies and strategies moving forward.

The best minds, working together

The successful integration of research-ers—both scientists and engineers—from the former Alcatel, former Lucent and former Nortel UMTS radio access group equips Alcatel-Lucent with a technical breadth and depth unrivaled in the industry. United under the esteemed Bell Labs banner, the company’s research-ers work collaboratively and exchange insights, driving the development of pre-viously unimagined technologies.

GENERATING BIG IDEASInnovation is a function of imagination—intuitingthe possibilities and applyingall the skill and knowledgeavailable to bring vision tolife. Innovation is the lifebloodof our company, key both to our competitiveness and to our ability to deliver a solid return on investment.





Shaping the Future

Innovation

investments in innovation. These are aimed at ensuring technological leader-ship not only today but also in the future. Innovation requires the taking of risks in the form of R&D programs to deliver marketable products and services.

Based on analysis and recommenda-tions from the Alcatel-Lucent technical community, the company largely ration- a lized its portfolio of products and solu-tions in 2007 to strengthen its position within chosen markets and contribute to the evolution of those markets. A fur-ther goal going forward will be to improve processes that optimize prod-uct development, to reach the market ahead of the competition.

Shaping the landscape

Through participation in standardiza-tion bodies and other influential industry organizations, Alcatel-Lucent actively

helps establish the requirements for and expectations of developing technologies. In 2007, the company emerged as one of the leaders in WiMAX standardization and took a prominent role in standard-izing LTE (Long-Term Evolution), the fourth generation (4G) wireless technol-ogy, and confirmed its prime role in the standardization of wired broadband access systems (xDSL, FTTH, etc.).

Alcatel-Lucent recognizes the need to continue investing in innovation—not only in new technologies but also in new approaches to delivering existing technology solutions, such as using renewable energy sources to power net-work systems such as mobile antennas. Notable environmental engineering accomplishments include the develop-ment and implementation of a corpo-rate energy/eco-sustainability strategy, a commitment on restricted substances, as well as an integrated product take-back approach.

ALWAYS FACING FORWARDA longstanding telecoms leader, Alcatel-Lucent invests in innovation, advances the development of technology standards, and cultivates intellectual property to drive further discovery.

Alcatel-Lucent directs its innovation efforts where they will yield the greatest returns: for customers and their users, for the company and its shareholders. The company continuously evaluates where its technology budget should be spent and makes targeted, proactive



Breaking records: Optical transmissionCombining research conducted by the former Alcatel and former Lucent, Alcatel-Lucent nearly doubled the previous transmission-speed record for optical data over a single fi ber strand, achieving a speed of 25.6 Terabits per second (Tb/s)—suffi cient to transport the information on more than 600 DVDs every second. The earlier record of 14 Tb/s was set just one year before, in September 2006. Using 160 WDM channels, the tested technology combines wavelength and polarization multiplexing with optimization of optical networking at the physical layer.

What does this achievement mean? Theoretically, if every person in the world were to be on an IP-based voice call simultaneously—approximately three billion calls connecting six billion people—at today’s rate of 8 kilobits per second (8 kb/s), every one of those calls could be supported by the technology Alcatel-Lucent tested in February 2007.

Enabling true wireless broadband: Femto cellsAlcatel-Lucent unveiled its Femto base station router, which combines third-generation (3G) wireless CDMA/HSPA radio access and core network elements in a single unit. Alcatel-Lucent’s Femto Base Station Router enables service providers to deliver broadband wireless services in the home more effi ciently than is possible with traditional cellular networks. The product incorporates elements developed by the former Lucent, the former Alcatel and the former Nortel UMTS radio access group acquired by Alcatel-Lucent in 2007.

World-changing innovationsAlcatel-Lucent Bell Labs has a long heritage of technologies that are driving telecommunications today: DSL, passive optical networking and WiMAX; wavelength division multiplexing and digital signal processing; the charge-coupled device and cellular telephony among them.

Local presence, global reachAlcatel-Lucent has research facilities and product development centers in Belgium, Canada, China, France, Germany, India, Ireland, Israel, Italy, the Netherlands, Poland, Romania, Russia, Spain, the UK and the US.

Key statisticsIn 2007, the company invested 2.7 billion euros in R&D—15% of its revenues. It was awarded more than 3,000 patents worldwide, resulting in a portfolio of over 25,000 active patents. More than 600 experts actively participated in about 100 standards organizations, providing technical contributions.



INNOVATION AT WORK: ALCATEL-LUCENT BELL LABSMission: To create substantial growth opportunities and a competitive market advantage for Alcatel-Lucent through disruptive innovation enabled by preeminent research.

A company like ours is defi ned by its mastery, invention, development and anticipation of advanced technologies. Innovation is our business—it is why we are in this business.Jeong Kim – Bell Labs President

Shaping the Future

Innovation

Bell Labs has a storied history extending back almost 100 years. The renowned research institution is guided by three principles: technical excellence, creativ-ity, and innovation. It played a driving role in every major advance made by Alcatel-Lucent in 2007.

Technical excellence is achieved by main-taining the highest possible standards and attracting and retaining the best minds in the industry—today numbering around 1,000. Within a culture of mutual respect based on technical expertise, Alcatel-Lucent Bell Labs’ technical domains are managed by experts with an understanding of the company’s markets and business objectives.

Creativity is fostered through collabo-ration and encouragement to take risks, thinking outside convention. Close part-nerships with the company’s business divi-sions support ongoing innovation.

Innovation in three dimensions

Alcatel-Lucent Bell Labs charts every research project in a unique way, assessing:

• • Its potential impact—disruptive, incre-mental or somewhere in between; • • The nature of the project—whether it is designed to solve known problems or pro-poses unfettered exploratory research; • • Its likely time to market—a unique look at how soon the research will have a com-mercial application.

Plotting every project graphically along these three axes provides a visual repre-sentation of the entire research activity of the organization. Dubbed the ‘Innovation Cube,’ this model ensures a clear under-standing of the nature of every endeavor and its business context.



Even while in the midst of reorganizing product lines and integrating companies, Alcatel-Lucent remained focused throughout 2007 on delivering innovative products, solutions and services to customers around the world.

Garnering recognition: Bell Labs awardsAlcatel-Lucent Bell Labs researchers were again recognized with many prestigious international awards in 2007—including the following three:

• • Emmanuel Desurvire, Senior Director of Photonic Technologies, received the 21st John Tyndall Award, the highest recognition in the optical telecommunications community. • • Herwig Kogelnik, Adjunct Photonics Systems Research Vice President at Bell Labs, and Bell Labs alumnus James E. West, currently Research Professor at The John Hopkins University School of Engineering, were chosen to receive 2006 U.S. National Medal of Technology awards from the President of the United States.• • Alfred Y. Cho, Adjunct Vice President of Semiconductor Research at Bell Labs, was awarded the 2005 U.S. National Medal of Technology, the highest honor bestowed by the President of the United States for technological innovation.

Alcatel-Lucent VenturesThis internal initiative supports the company’s efforts to address emerging markets. It identifi es revolutionary ideas within the company and propels their conversion into products, ‘incubating’ them while developing the right mechanisms to bring them to market in a start-up-like process. At the end of 2007, nine potentially disruptive technologies were under the wing of Alcatel-Lucent Ventures.

Mobility protected: Laptop GuardianIdentifi ed as a technology of promise, this Bell Labs invention was incubated by Alcatel-Lucent Ventures and unveiled in 2007 as the OmniAccess 3500 Nonstop Laptop Guardian—a product for enterprises. Now delivered to the market by the Enterprise Business Segment of Alcatel-Lucent, Laptop Guardian constitutes a crucial end-point security solution for organizations with mobile workers. It allows company IT overseers to protect offsite laptops and their data—keeping them under corporate control even when off the network or shut down. A defi nitively disruptive technology, Laptop Guardian has created a whole new category of security product in which Alcatel-Lucent is the leader.



Shaping the Future

Human Resources





Shaping the Future

Human Resources

The purpose of higher education is to provide future graduates with a deep scientifi c understanding and, beyond that, give them the power to create, innovate and drive forward to adapt to the various professional environments they will encounter. In a word, they need to develop their capacity to take charge in any situation.

The employability of young graduates is a key objective of engineering education. We need to establish ever more effective pathways between “grandes écoles”, universities and companies. The Perci program (Program for Research and Education in Industrial Cooperation), implemented by Supelec for over 20 years, bridges the gap between the school and more than 30 industrial partners.

In response to company request, Supelec is launching a three-year training program for bachelor degrees called “Formation par Apprentissage” (training by apprenticeship), which combines classroom work with practical training in a company, allocating time between the two settings in a very different ratio than usual. The Supelec diploma for this program will be awarded as soon as accreditation is received from the CTI (Engineering Titles Commission).

Another key issue is the new worldwide economy. Students today are excited about foreign countries, curious to go and discover the growth and culture of other major areas of economic activity. Thus, almost

one third of each class of Supelec students concludes its studies abroad. The T.I.M.E network (Top Industrial Managers for Europe), headed by Supelec, links some 50 European establishments and enables students to obtain a double diploma. Supelec has moreover developed a sustained partnership with Georgia Tech in the U.S. and the National University of Singapore, and welcomes about 30 Chinese students each year.

Research and innovation in an international environment—key factors for competitiveness—attract young people. Highlighting this trend, Supelec recently organized a joint seminar with Princeton and Bell Labs of Alcatel-Lucent on radio communications. To strengthen its partnership with Alcatel-Lucent, a research chair in Flexible Radio was created to solve complex questions in radio network reconfi guration. This relationship clearly demonstrates the benefi t of scientifi c research to industry. Supelec is also involved in France’s three technology clusters, such as the System@tic cluster.

The relationship between research and innovation is changing. The theoretical linear continuity from research to innovation is becoming obsolete and a mutual dependency is emerging. Supelec calls this the “rebound dynamic.” Research brings solutions to industry, which set new issues for research. This “respiratory” process between the two universes is continuously accelerating the cycle for product design and development.

Communication technologies play a key role in our knowledge-based twenty-fi rst century society. Telecommunications are an essential part of advanced development and contribute to the growth and productivity of the global economy.

Alain Bravo

Alain Bravo, a graduate of the École Polytechnique and École Nationale Supérieure des Télécommunications, founded SFR in 1988 and joined Alcatel in 1995. General Director of Supelec * since 2004, he has also been CEO of Abhexis since 2001.

* A leading institution in the Sciences of Information, Energy and Systems.





Shaping the Future

Human Resources

Our employees are the agents of transformation—for our company and our markets. To ensure their ability to act as such, we must provide motivation, mobility and training. Our goal is to develop within our workforce the skills of the future. Claire Pedini – Senior Vice-President, Corporate Human Resources and Communications



The ‘Culture Wizard’: an online cultural guideThe human factor is essential to the success of any corporate merger: bringing together company cultures is key. The Alcatel-Lucent ‘Culture Wizard’—available through the company’s intranet—is an online guide that helps employees better understand other cultures and helps them work more effectively in a global corporate context.

Human resources functions take on greater importance than usual in times of organizational transformation. Alcatel-Lucent worked in 2007 to facilitate the merger of the former Alcatel and Lucent, and achieved a great deal—always with the aim of balancing short-term priori-ties with long-term sustainability.

Major achievements in 2007 included:

• • Supporting the integration of theworkforce• • Implementing a global and competi-tive compensation process• • Enhancing talent-development and career-planning resources• • Launching a single HR information system.

While pursuing these initiatives, extensive support was provided to employees during this period of transition, reaching out to staff members and fostering dialogue. In parallel, significant attention was paid to preparing for the future, looking to youth to help ensure the next generation of talent.

VALUING PEOPLEHR played an essential role in integration and harmonization throughout the company’s fi rst post-merger year, serving as a strategic business partner to the broader enterprise in 2007.



REALIZING INTEGRATION, WHILE PREPARING FOR THE FUTURE

in the technology sector, Alcatel-Lucent carried out a global compensation review in 2007. Engaging in a single, unified review process throughout the entire global company is essential, as managers within the organization have ever-increasing numbers of employees report to them from all over the world. All business groups and countries car-ried out the review at the same time, using the same framework and the same tool while taking into account local market conditions.

Identifying and fostering talent

HR ensures that employees are placed in positions appropriate to their skills and experience—helping build teams that allow the company to respond to market demands. Organization and People

Reviews (OPRs) identify high-potential employees for strategic roles, define per-sonalized career plans and prepare suc-cession planning. In 2007, OPRs covered all regions and all activities.

Managing performance on a global level

Alcatel-Lucent’s Global Performance Management Process (GPMP) helps managers and employees define clear, coherent goals in conformance with the company’s strategy, values and culture, enabling employees to receive construc-tive feedback on their performance and review their professional development plans. In 2007, 90 percent of engineers and managers had set goals through the GPMP, and 74 percent benefited from development programs.

Combining two global organizations with distinct histories, cultures and operating methods is a monumental task. Through-out 2007, HR worked intensively to ensure that the integration process was as swift and seamless as possible—car-rying out a comprehensive organization mapping and staffing process, and iden-tifying and implementing best practices to support new global programs.

In this activity, HR worked as a true business partner, providing support that encompasses professional development, competitive compensation, fair and equi-table staffing, decision-making and atten-tion to diversity.

Harmonizing compensation

To remain competitive with the compen-sation packages of other major companies

An eye on the future: looking to youthUniversity graduates represent the next wave of the workforce, and a globally multicultural talent pool. In 2007, Alcatel-Lucent collaborated for a fourth consecutive year with AIESEC, a non-profi t organization of international students active in a network of more than 900 universities in 100 different countries. By interacting with AIESEC, Alcatel-Lucent establishes contact with grads whose talents may be of future value to the company.

Shaping the Future

Human Resources



Building knowledge: Alcatel-Lucent UniversityWith 21 accredited centers worldwide, Alcatel-Lucent University helps employees succeed in their current jobs and adapt to future requirements. A wide range of learning solutions is available in traditional classroom, e-learning and virtual learning formats.

Ensuring business-critical functionsLast year, the University initiated global qualifi cation and development programs for business-critical functions such as project management, sales, leadership, IP transformation, product line management, and purchasing.

Training thousands of employeesIn 2007, employees averaged 20 hours of training, 32 percent of which was online (up from 22 percent in 2006). More than 72 percent of employees received formal training in 2007.

Empowering womenAlcatel-Lucent is committed to fostering male-female diversity in the workplace. In 2007, 40% of the senior leadership team, and 24 percent of total staff were women. Three of the eight members of the Management Committee, led by Patricia Russo, are women (37.5%).

Supporting diversityand equal opportunityWith a presence in 130 countries and more than 100 nationalities represented among employees, Alcatel-Lucent is committed to recognizing and respecting the diversity of people and ideas, and ensuring equal opportunities for all.

Moreover, the company is actively working for social innovation—developing novel strategies to address social needs, such as broadening the base of available talent. Two examples illustrate this in France:

• Through the Mission Handicap program, Alcatel-Lucent is working to integrate persons with disabilities into its workforce.• The company supports Cercle Passeport Télécoms, helping students from underprivileged areas succeed in their studies and build professional networks.

Encouraging mobilityAlcatel-Lucent encourages employees to broaden their experience through geographical and functional mobility. In 2007, the company implemented the online eStaffi ng platform, a global mobility-and-recruitment tool listing hundreds of jobs that are offered to employees before being published externally.



Shaping the Future

Human Resources

Giving employees a voiceTo consult with employees, a series of internal surveys was carried out during the year. The results were communicated internally and action plans put in place to respond to all key questions and concerns.

Fostering dialogueThe European Committee for Information and Dialogue (ECID) is a consultative body that facilitates an exchange of views in Europe between senior management and employee representatives through regular meetings. In 2007, ECID was renewed, integrating former Lucent and Nortel employees. Composed of fi ve members representing the fi ve main European countries where the largest numbers of employees are located—Germany, Belgium, Spain, France and Italy—the committee held six plenary sessions and several coordination meetings.

Face to face: Engaging with employees In 2007, Alcatel-Lucent CEO Patricia Russo traveled personally to speak with employees throughout the organization. As part of this initiative, Pat Russo addressed employees at several company sites in France and the United States, as well as meeting with staff in India, Germany, Belgium, Japan and other locations.



Effecting change in a multinational cor-poration demands focus, communication and respect for people. Alcatel-Lucent concentrated last year on establishing understanding among employees, cus-tomers and partners of its merger-related plans and activities.

Reaching out to employees

To make sure the right information reached employees in a timely way throughout the first year of transforma-tion, Alcatel-Lucent established a series of internal communication initiatives in 2007. Senior executives frequently met with employees around the world and communicated regularly via the corpo-rate intranet to explain strategies and activities.

Managing headcount reductions

In the framework of a global cost reduc-tion initiative, Alcatel Lucent announced an initial restructuring plan in February 2007, which will achieve savings in annual pre-tax costs over three years, with a workforce impact of 12,500 positions by 2009. This is necessary to eliminate duplications of effort resulting from the merger of Alcatel and Lucent and the acquisition of Nortel’s UMTS activities. The restructuring is also an adaptive strategy to align the company’s invest-ments with market conditions and to

create a more competitive enterprise over the long term.

Due to intensified competition and some slowdown in spending in North America, a new plan to improve profit-ability was announced in October 2007, which will result in an additional reduc-tion of 4,000 positions by 2009.

Alcatel-Lucent pays particular atten-tion to the manner in which workforce reductions are carried out, both as regards methods and measures, making support available to affected employees, in accordance with local rules and regu-lations. To date, more than half of the original workforce reduction target has been achieved.

Facing forward: Priorities for 2008

Compensation and benefits will remain a focus for HR in 2008—fully deploying the compensation review process, completing leveling and grading, and finalizing the harmonization of country benefits road-maps. HR will continue to transform its own operations and realize additional efficiencies through a single HR informa-tion system, a single learning manage-ment system and the planning of a new service delivery model. Concentrating on the human side of the business, HR will work to engage and recognize employees and manage change in a considerate and supportive way. Fostering talent develop-ment throughout the company will also be a top priority for 2008.

ADDRESSING THE CHALLENGE OF CHANGE



Shaping the Future

Responsibility





Shaping the Future

Responsibility

This decade has seen the achievement of impressive global milestones, including rapid reductions in the number of infant and child deaths, increases in school enrollment and completion rates, reduction in the number of people living in absolute poverty and expanded opportunities for citizens to participate in civic life.

And yet, it remains more diffi cult for children in rural areas, and especially girls, to get a decent education, and for mothers living in rural areas and urban slums to receive adequate health care for themselves and their children. Ten million young children still die each year of largely preventable causes. Notwithstanding impressive economic growth in all regions of the world over the past decade, 3 billion people still live on less than $2 per day. The sad truth is that the benefi ts of economic growth are still not reaching those most in need.

And yet there is hope. Individuals, governments and businesses understand the corrosive impact of persistent social and economic inequalities. They understand that sustainable development, not to mention social and political stability, requires strategies that foster inclusion,

not exclusion; engagement, not isolation. They understand the urgency of addressing the underlying conditions that put basic opportunities beyond the reach of signifi cant portions of the world’s population.

At the heart of this “opportunity divide,” to my mind, is education. Without education it is virtually impossible for individuals, families and communities to escape poverty. Fortunately, there is growing acceptance both that everyone has a right to an education, and that an educated population benefi ts everyone. In the lingo of economists, education is a public good. Equally fortunately, the global commitment to making access to education universal comes at a time when we have the tools and technologies to make it happen. Exciting new programs are using radio, the Internet and other communications technologies to reach students “off the grid” (whether in remote rural areas or in crowded urban slums); and to train teachers, share library resources, exchange information about successes and failures, and promote learning. Imagine a world where everyone can read and write, and you will imagine a world of endless opportunities.

Looking back over the past decade, the long-run trend towards progress in human development has continued. On average, people born in a developing country today can anticipate being wealthier, healthier and better educated than their parents’ generation. They are also more likely to live in a multiparty democracy and less likely to be affected by confl ict. Source : UNDP Human Development Report 2005, page 19.

Ann Van Dusen

A veteran of the U.S. Agency for International Development and of Save the Children, with a career working for economic and social development, humanitarian assistance and poverty alleviation, Professor Ann Van Dusen currently teaches at Georgetown University and advises private foundations and non-governmental organizations on strategic planning.





Shaping the Future

Responsibility

CSR is not merely a concern in addition to our company’s core business—it is at the very heart of that business. We defi ne our role as a telecoms leader through our responsibilities. Caroline Guillaumin – Vice-PresidentCorporate Communications and CSR



CORPORATE SOCIAL RESPONSIBILITYAlcatel-Lucent is committed to upholding its corporate responsibilities in every sphere—socially, economically and environmentally—and to serving and supporting the communities in which it operates.

Bridging the digital divideAlcatel-Lucent is working to realize the vision of a truly global informa-tion society, making digital inclusion a central part of its approach to corporate social responsibility. The company’s Digital Bridge Initiative uses informa-tion and communication technologies (ICT) to improve life in the under-served, usually rural areas of emerging countries.

Giving back to communitiesEstablished last year, the Alcatel-Lucent Foundation leads the company’s chari-table activities, awarding grants glob-ally with a focus on education and youth development. Receiving funding from Alcatel-Lucent, it is a non-govern-mental, non-profit, private organiza-tion governed by its own board of trustees and constituting a legally inde-pendent entity.

Acting for the environmentRecognizing the important role the tele-communications sector must play in the global effort to address environmental issues such as climate change, Alcatel-Lucent last year became a signatory to the UN Global Compact’s ‘Caring for Cli-mate’ initiative. By doing so, the company committed to continually strengthen its efforts to increase the energy efficiency of its products and reduce the carbon foot-print of its activities.

Social responsibility in the supply chainTo achieve their CSR objectives, companies must engage not only their own organiza-tions but also those in their sphere of influ-ence, such as partners, suppliers and customers. Alcatel-Lucent engages actively with its key stakeholders to address the issue of meeting standards for Environ-ment, Health & Safety (EHS), labor and human rights along the entire supply chain.



Shaping the Future

Responsibility

Protecting the environment

Caring for the climateAlcatel-Lucent is committed to eco-sustainability with a particular focus on climate change. This is a key component of its business strategy. The company has developed corporate strategies and practices to reduce the environmental impact of its products and operations. It leverages its research and innovation teams to develop and implement ground-breaking, environmentally friendly and energy-efficient technologies.

Regulatory complianceAlcatel-Lucent continued to ensure that its products comply with Direc-tive 2002/95/EC on the Restriction of the Use of Certain Hazardous Sub-stances (RoHS), and with China’s RoHS legislation. The company is committed to ensuring its substance restrictions are upheld in all markets around the world.

Measuring energy useIn 2007, each Alcatel-Lucent business division developed baseline energy-con-sumption measures for key product families, defining energy use as a mea-sure of function (e.g., gigabits of data transported per watt of energy con-sumed). Alcatel-Lucent is working with standards bodies to support these met-rics. Last year, Alcatel-Lucent also intro-duced several innovations to improve the energy efficiency of its products.

Recycling telecoms productsAlcatel-Lucent enhanced its product take-back and recycling programs to improve efficiency and user friendli-ness for customers and partners. The company revised its voluntary recycling goal for the 2005-2007 period—aiming to recover 907.2 metric tons of lead from lead-acid batteries. As of Decem-ber 2007, Alcatel-Lucent had recovered 934.4 metric tons, meeting its three-year goal.

CSR throughout the supply chain

Corporate social responsibility extends beyond the walls of a company to include its relationships with suppliers and other partners. With this understanding, Alcatel-Lucent worked in 2007 to ensure its commitments were carried throughout its supply chain, reinforcing sustainable, responsible purchasing tools and methods.

Training programs were rolled out so that all involved in purchasing understand their roles and responsibilities, working collaboratively to manage CSR through-out the company’s supply base. Some 500 procurement personnel were made aware of the Responsible Purchasing program.

The Global Procurement and Sourcing Department (GPS), the Corporate Audit Services (CAS) and the EHS Department within Alcatel-Lucent collaborated to monitor the commitment and conformance of Alcatel-Lucent suppliers to internationally recognized standards for ethical, social, health & safety and environmental practices.



Promoting digital inclusion

Among its initiatives to bridge the digital divide, Alcatel-Lucent has been working since the fall of 2006 to supply high-speed Internet access to the underprivileged of Madagascar in collaboration with part-ners ATD Quart Monde and Data Tele-com Service. The company has provided and installed a WiMAX station free of charge as well as the associated terminals needed for the digital connectivity to sup-port the development of IT and literacy skills and build economic capacity.

In Haiti, through a project called “Tra-çabilité du Café” (Coffee Traceability), coffee growers have been given the wire-less technology to electronically monitor fair trade-labeled production and sell coffee on the best possible terms. This is helping farming communities increase the profitability of their cooperatives while developing local expertise in WiMAX rev-e (for broadband Internet) and RFID labels (for traceability).

The Alcatel-Lucent Foundation

Drawing on its heritage of social responsibility, Alcatel-Lucent seeks to be an active, contributing member of the communities where it does busi-ness. The Alcatel-Lucent Foundation guides the company’s contributions in the priority areas of education, youth, health and human services, arts and culture, employee volunteerism and special business or community oppor-tunities. Last year, Alcatel-Lucent completed a three-year, US$2.8 mil-lion program with the International Youth Foundation to support young people and teachers in 14 countries through curriculum development, teacher training and improved quality of education.

Other key initiatives include:

Alcatel-Lucent Employee Volunteer Program This employee-driven program capital-izes on the long history of community involvement by former Alcatel and former

Lucent employees—representing thou-sands of hours of community service and reflecting the community commitment that was an important part of the history of both companies. Ongoing team-based projects include International Days of Caring and an International Youth Development Project.

Alcatel-Lucent CSR Champions AwardThis program recognizes individuals and teams who made extraordinary contribu-tions in the area of CSR. The competi-tion is judged by CSR Europe, an independent, non-governmental organi-zation focused on CSR issues. From the

58 nominations submitted by Alcatel-Lucent employees, CSR Europe selected eight winners in fields ranging from renewable energy programs to tutoring services for disadvantaged youth.

Using E-medicine to fi ght infant mortalityIn Mali, Alcatel-Lucent joined forces with partners to launch a pilot project called “Pésinet” that uses remote diagnosis—based on weight monitoring—to deliver affordable preventive healthcare to underprivileged children.

Lambada Tribals, Shahapur Tanda Village, Andhra Pradesh.



Alcatel-Lucent

Financial Panorama





Financial Panorama

Extract from the Consolidated Financial Statements

Our 2007 consolidated fi nancial statements, available on our 2007 Annual Report on Form 20-F and Document de Référence 2007, have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. IFRS, as adopted by the European Union, differs in certain respects from the International Financial Reporting Standards issued by the International Accounting Standards Board. However, data extracted from our consolidated fi nancial statements (see our 2007 Annual Report on 20-F and Document de Référence 2007) and presented in this document in accordance with IFRS would be no different if we had applied International Financial Reporting Standards issued by the International Accounting Standards Board.

We did not prepare fi nancial statements in accordance with IFRS prior to 2004 as we were only required to present our fi nancial statements in accordance with French Generally Accepted Accounting Principles (GAAP). Accordingly, we have not provided selected fi nancial data for 2003.

Also, as permitted by recent changes in U.S. securities laws, we no longer provide a reconciliation of our net income and shareholders’ equity as refl ected in our fi nancial statements that are prepared in accordance with IFRS, as adopted by the European Union and that are also in conformity with IFRS as issued by the International Accounting Standards Board, to U.S. GAAP.

On November 30, 2006, historical Alcatel and Lucent Technologies Inc. (“Lucent”) completed a business combination pursuant to which Lucent became a wholly owned subsidiary of Alcatel. On December 1, 2006, we and Thales signed a defi nitive agreement for the acquisition by Thales of our ownership interests in two joint ventures in the space sector created with Finmeccanica and our railway signaling business and integration and services activities for mission-critical systems not dedicated to operators or suppliers of telecommunications services. In January 2007, the transportation and security activities were contributed to Thales, and in April 2007, we completed

the sale of our ownership interests in the two joint ventures in the space sector.

As a result of the Lucent transaction, our 2006 fi nancial results include (I) 11 months of results of only historical Alcatel and (II) one month of results of the combined company. As a result of the Thales transaction, our 2004, 2005 and 2006 fi nancial results pertaining to the businesses transferred to Thales are treated as discontinued operations. Further, our 2005 and 2006 fi nancial results take into account the effect of the change in accounting policies on employee benefi ts with retroactive effect from January 1, 2005 as described in the section “Changes in Accounting Standards as of January 1, 2007” and in Note 4 of our consolidated fi nancial statements included in our 2007 Annual Report on Form 20-F and Document de Référence 2007.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2007 and 2006 included several negative, non-cash impacts of purchase accounting entries.



Consolidated income statements (In millions except, per share information)

2007 (1) 2007 2006 (2) 2005 (2)

Revenues $25,982 €17,792 12,282 11,219Cost of sales (2) (17,645) (12,083) (8,214) (7,086)

Gross profi t 8,337 5,709 4,068 4,133

Administrative and selling expenses (3) (5,056) (3,462) (1,911) (1,816)

Research and development expenses before capitalization of development expenses (4,537) (3,107) (1,579) (1,409)

Impact of capitalization of development expenses 223 153 109 108

Research and development costs (3) (4,314) (2,954) (1,470) (1,301)

Income (loss) from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefi t plan amendment (1,033) (707) 687 1,016

Restructuring costs (1,250) (856) (707) (79)Impairment of assets (4,299) (2,944) (141) –Gain/(loss) on disposal of consolidated entities – – 15 129Post-retirement benefi t plan amendment 377 258 – –

Income (loss) from operating activities (6,205) (4,249) (146) 1,066

Interest relative to gross fi nancial debt (589) (403) (241) (215)Interest relative to cash and cash equivalents 336 230 143 122

Finance costs (253) (173) (98) (93)

Other fi nancial income (loss) 790 541 (34) 42

Share in net income (losses) of equity affi liates 161 110 22 (14)

Income (loss) before tax, related reduction of goodwill and discontinued operations (5,507) (3,771) (256) 1,001

Reduction of goodwill related to deferred tax assets initially unrecognized (374) (256) (5) –

Income tax (expense) benefi t (88) (60) 42 (146)

Income (loss) from continuing operations (5,969) (4,087) (219) 855

Income (loss) from discontinued operations 891 610 158 108

Net income (loss) (5,078) (3,477) (61) 963

Attributable to: – Equity holders of the parent (5,138) (3,518) (106) 922– Minority interests 60 41 45 41

Net income (loss) attributable to the equity holders of the parent per share (in euros/US dollars) – Basic earnings per share $(2.28) €(1.56) €(0.07) €0.67– Diluted earnings per share $(2.28) €(1.56) €(0.07) €0.67

Net income (loss) (before discontinued operations) attributable to the equity holders of the parent per share (in euros/US dollars) – Basic earnings per share $(2.67) €(1.83) €(0.18) €0.59– Diluted earnings per share $(2.67) €(1.83) €(0.18) €0.59

Net income (loss) of discontinued operations per share (in euros/US dollars) – Basic earnings per share $0.39 €0.27 €0.11 €0.08– Diluted earnings per share $0.39 €0.27 €0.11 €0.08

(1) Translation of amounts from € into $ has been made merely for the convenience of the reader at the Noon Buying Rate of €1 = $1.4603 on December 31, 2007.(2) Consolidated income statements for 2005 and 2006 are represented to refl ect the impacts of the discontinued operations and the change in accounting policies (for more information, see Notes 10 and 4 of our consolidated fi nancial statements disclosed in our 2007 Annual Report on Form 20-F). Lucent’s results were consolidated from December 1, 2006 onwards.(3) Classifi cation of share-based payments among cost of sales, administrative and selling expenses, and research and development costs (for more information, see Note 23 of our consolidated fi nancial statements included in our 2007 Annual Report on Form 20-F).



Financial Panorama

Extract from the Consolidated Financial Statements

Consolidated balance sheets(In millions) December December December DecemberAssets 31, 2007 (1) 31, 2007 31, 2006 (2) 31, 2005 (3)

Goodwill $10,701 €7,328 €10,891 €3,772Intangible assets, net 6,177 4,230 5,441 819Goodwill and intangible assets, net 16,878 11,558 16,332 4,591Property, plant and equipment, net 2,085 1,428 1,821 1,111Share in net assets of equity affi liates 1,974 1,352 682 606Other non-current fi nancial assets, net 1,028 704 803 306Deferred tax assets 1,799 1,232 1,692 1,768Prepaid pension costs 5,070 3,472 3,435 525Marketable securities, net – – 697 –Other non-current assets 568 389 203 468Total non-current assets 29,402 20,135 25,665 9,375Inventories and work in progress, net 3,264 2,235 2,259 1,438Amounts due from customers on construction contracts 1,028 704 615 917Trade receivables and related accounts, net 6,079 4,163 3,877 3,420Advances and progress payments 161 110 87 124Other current assets 1,631 1,117 1,006 827Assets held for sale 51 35 2,127 50Current income taxes 88 60 260 45Marketable securities, net 1,306 894 1,245 640Cash and cash equivalents 6,392 4,377 4,749 4,510Total current assets 20 000 13,695 16,225 11,971Total assets 49,402 33,830 41,890 21,346

(1) Translation of amounts from € into $ has been made merely for the convenience of the reader at the Noon Buying Rate of €1 = $1.4603 on December 31, 2007.(2) The consolidated balance sheet as of December 31, 2006 is represented to refl ect the impacts of the change in accounting policies and the changes in the purchase price allocation related to the business combination with Lucent (for more information, see Notes 4 and 3 of our consolidated fi nancial statements included in our 2007 Annual Report on Form 20-F). (3) The consolidated balance sheet as of December 31, 2005 is represented to refl ect the impact of the change in accounting policy (see Note 4 of our consolidated fi nancial statements included in our 2007 Annual Report on Form 20-F).

December December December December Liabilities and shareholders’ equity 31, 2007 (1) 31, 2007 31, 2006 (3) 31, 2005 (2)

Capital stock (€2 nominal value: 2,317,441,420 ordinary shares issued at December 31, 2007, 2,309,679,141 ordinary shares issued at December 31, 2006 and 1,428,541,640 ordinary shares issued at December 31, 2005) $6,768 €4,635 €4,619 €2,857Additional paid-in capital 24,158 16,543 16,443 8,308Less treasury stock at cost (2,288) (1,567) (1,572) (1,575)Retained earnings, fair value and other reserves (5,514) (3,776) (3,359) (4,556)Cumulative translation adjustments (1,584) (1,085) (115) 174Net income (loss)—attributable to the equity holders of the parent (5,138) (3,518) (106) 922Shareholders’ equity—attributable to the equity holders of the parent 16,402 11,232 15,910 6,130Minority interests 752 515 495 475Total shareholders’ equity 17,154 11,747 16,405 6,605Pensions, retirement indemnities and other post-retirement benefi ts 6,428 4,402 5,367 1,745Bonds and notes issued, long-term 6,596 4,517 4,901 2,393Other long-term debt 70 48 147 359Deferred tax liabilities 2,770 1,897 2,583 242Other non-current liabilities 535 366 276 268Total non-current liabilities 16,399 11,230 13,274 5,007Provisions 3,747 2,566 2,366 1,621Current portion of long-term debt 705 483 1,161 1,046Customers’ deposits and advances 1,237 847 778 1,144Amounts due to customers on construction contracts 595 407 273 138Trade payables and related accounts 6,592 4,514 4,027 3,755Liabilities related to disposal groups held for sale – – 1,606 –Current income tax liabilities 102 70 66 99Other current liabilities 2,871 1,966 1,934 1,931Total current liabilities 15,849 10,853 12,211 9,734Total liabilities and shareholders’ equity 49,402 33,830 41,890 21,346



Consolidated statements of cash fl ows(In millions) 2007 (1) 2007 2006 2005

Cash fl ows from operating activities Net income (loss)—attributable to the equity holders of the parent $(5,138) €(3,518) €(106) €922 Minority interests 60 41 45 41 Adjustments 5,681 3,890 990 (81)

Net cash provided (used) by operating activities before changes in working capital, interest and taxes 603 413 929 882

Net change in current assets and liabilities (excluding fi nancing): – Inventories and work in progress (454) (311) (116) (41) – Trade receivables and related accounts (1,000) (685) (137) (519) – Advances and progress payments (42) (29) (5) (35)– Trade payables and related accounts 916 627 229 219– Customers’ deposits and advances 239 164 (100) 84– Other current assets and liabilities 32 22 (280) 58

Cash provided (used) by operating activities before interest and taxes 294 201 520 648

– Interest received 295 202 109 113 – Interest paid (517) (354) (207) (136)– Taxes (paid)/received (107) (73) (71) (15)

Net cash provided (used) by operating activities (35) (24) 351 610

Cash fl ows from investing activities: Proceeds from disposal of tangible and intangible assets 136 93 252 136 Capital expenditures (1,230) (842) (684) (593)Of which impact of development costs (605) (414) (386) (341)

Decrease (increase) in loans and other non-current fi nancial assets (45) (31) – 110

Cash expenditures for acquisition of consolidated and non-consolidated companies (35) (24) (424) (107)

Cash and cash equivalents from consolidated companies acquired – – 1,397 22Cash proceeds from sale of previously consolidated and non-consolidated companies 428 293 76 285

Cash proceeds from sale of (Increase in) marketable securities 1,533 1,050 144 (30)

Net cash provided (used) by investing activities 787 539 761 (177)

Cash fl ows from fi nancing activities: Issuance/(repayment) of short-term debt (367) (251) 11 160 Issuance of long-term debt – – – –Repayment/repurchase of long-term debt (743) (509) (516) (805) Proceeds from issuance of shares 22 15 19 13Proceeds from disposal/(acquisition) of treasury stock 7 5 6 5Dividends paid (534) (366) (219) (26)

Net cash provided (used) by fi nancing activities (1,615) (1,106) (699) (653)

Cash provided (used) by operating activities of discontinued operations (112) (77) 172 220Cash provided (used) by investing activities of discontinued operations 952 652 (24) 10Cash provided (used) by fi nancing activities of discontinued operations (514) (352) (159) (235)Net effect of exchange rate changes (183) (125) (42) 124

Net increase (decrease) in cash and cash equivalents (720) (493) 360 (101)

Cash and cash equivalents at beginning of period/year 6,935 4,749 4,510 4,611

Cash and cash equivalents at end of period/year 6,392 4,377 (2) 4,749 (2) 4,510 (2)

Cash and cash equivalents at beginning of period/year classifi ed as assets held for sale 177 121 – –

Cash and cash equivalents at end of period/year classifi ed as assets held for sale – – 121 –

(1) Translation of amounts from € into $ has been made merely for the convenience of the reader at the Noon Buying Rate of €1 = €1.4603 on December 31, 2007.(2) Includes €415 million of cash and cash equivalents held in countries subject to exchange control restrictions as of December 31, 2007 (€622 million as of December 31, 2006 and €337 million as of December 31, 2005). Such restrictions can limit the use of such cash and cash equivalents by other group subsidiaries and the parent.



3G—Third Generation: mobile technologies that allow enhanced services such as multimedia and video.

BSS—Business Support Systems: software tools used to manage a telecommunications provider’s business.

CDMA—Code Division Multiple Access: a 3G mobile technology standard used primarily in North America.

DSL—Digital Subscriber Line: a type of broadband access that uses existing copper telephone lines.

EDGE—Enhanced Data rates for GSM Evolution: an enhancement to GSM that allows for data transmission rates of up to 473 kbit/s.

EV-DO—Evolution-Data Optimized: an enhancement to CDMA that allows for data transmission rates of up to 3.1 Mbit/s.

FTTP—Fiber To The Premises: is a form of fi ber-optic communication delivery in which an optical fi ber is run directly onto the customers’ premises.

FTTH—Fiber To The Home: is a form of fi ber optic communication delivery in which the optical signal reaches the end user’s living or offi ce space.

GNOC—Global Network Operations Center: a location that is used to monitor network and service operations.

GPON—Gigabit Passive Optical Network: a PON enhancement that allows transmission rates of up to 2.488 Gbit/s.

GSM—Global System for Mobile communications: a mobile technology standard used primarily outside of North America.

HDTV—High-Defi nition Television.

HSPA—High-Speed Packet Access: mobile technology protocols that together improve the performance of UMTS.

IP—Internet Protocol: a data transmission method used on computer networks such as the Internet.

IPTC—IP Transformation Center: a specialized Alcatel-Lucent lab that is used to develop, integrate and test end-to-end solutions that service providers can use to migrate their networks to full IP-based architectures.

IPTV—IP Television: a method of broadcasting television content over IP-based networks.

IMS—IP Multimedia Subsystem: an architectural framework for delivering internet protocol (IP) multimedia to mobile users.

LTE—Long-Term Evolution: the name given to a project within the 3GPP (the Third-Generation Partnership Project) to prepare UMTS mobile phone standard for future requirements [the evolution of the 3G standard is the fourth generation of mobile technologies (4G)].

MPLS—Multi-Protocol Label Switching: a data transmission method that can used with a variety of technologies, including ATM, IP, and SONET.

NGN—Next-Generation Network: a network designed to provide the advanced services needed for the convergence of voice, video and data applications.

OSS—Operations Support Systems: used to maintain and manage communications networks.

PBX—Private Branch Exchange: a telephone system designed for enterprises that handles internal calls and manages shared external telephone lines.

PON—Passive Optical Network: an optical network that uses passive components to reduce overall operating costs.

R&D—Research and Development.

UMTS—Universal Mobile Telecommunications System: a 3G mobile technology standard used primarily outside of North America.

VoIP—Voice over IP: a method of transmitting voice calls over an IP network instead of a traditional telephone network.

WDM—Wavelength Division Multiplexing: an optical transmission method that allows multiple signals to be transmitted over a single optical fi ber.

WAN—Wide Area Network: a geographically dispersed long-haul telecommunications network usually associated with large enterprises.

W-CDMA—Wideband Code-Division Multiple Access: an enhancement to CDMA that allows for data transmission rates of up to 2 Mbit/s.

WiMAX—Worldwide Interoperability for Microwave Access: a broadband wireless data transmission method that is expected to allow service providers to offer a wireless solution for the “last mile” to consumers instead of optical fi ber or copper lines.

Glossary of Acronyms

Alcatel-Lucent



Company Fact Sheet

Profi le: Telecommunications services supplier

Indexes: CAC 40/DJ Euro Stoxx 50Stock Symbol: ALUShares outstanding: 2.3 billion

ListingAlcatel-Lucent shares are listed on:

•• Euronext Paris•• New York Stock Exchange in the form of American Depository Shares (ADS).Each Alcatel-Lucent American Depository Share (ADS) listed in the United States on The New York Stock Exchange represents an Alcatel-Lucent ordinary share.

Alcatel Lucent shares are also listed on:•• Euronext in Amsterdam and Brussels•• SWX Swiss Exchange (Basel, Geneva, Zurich)•• Frankfurt•• Tokyo•• SEAQ (London)

Shareowner inquiriesIf you are a bearer shareholder (managed by the fi nancial entity of your choice) of ordinary shares, you should contact your chosen fi nancial advisor for all information regarding your account. If you are an ADS shareholder, you should contact The Bank of New York at 1-888-582-3686 (within the U.S.) or (212) 815-3700, company code 3460 (outside the U.S.) for all information regarding your account.

You may access your account online at www.stockbny.com

If you are a registered holder and hold ordinary shares, you should contact Société Générale at +33 2 51 85 67 89

Agenda 2008 •• Shareholders’ meeting Marseille, March 26•• Ordinary and Extraordinary Annual General Meeting Paris, May 30•• Shareholders’ meeting Paris, December 3

Financial agenda•• 2007 fourth quarter and full year results: February 8, 2008 •• 2008 fi rst quarter results: April 30, 2008 •• 2008 second quarter results: July 29, 2008 •• 2008 third quarter results: October 30, 2008

Shareholders’ information Publications Internet

Innovation MagazineOur semi-annual review gets you up to date on our fi nancial results and business activity.

2007 Corporate Social Responsibility ReportOur annual report on sustainable development—a priority for our company—describes our efforts in the areas of ethics, social and environmental responsibility, and health and safety.

The Internet site www.alcatel-lucent.com provides access to all information on the Group, such as press releases and pages for investors and shareholders, where visitors can fi nd the latest fi nancial reports as well as the stock price, details on Alcatel-Lucent’s business activities and a look at new technologies.



Alcatel-Lucent

Credits

Investor Relations54, rue La Boétie75008 Paris – Francewww.alcatel-lucent.com

Most of the photos used to illustrate this report are of Alcatel-Lucent employees. The photo essay entitled “People at Work” was made by William Daniels at the beginning of 2008 at Alcatel-Lucent sites in China, France, India and the USA.

We sincerely thank all the employees who agreed to be photographed and especially those whose photos appear here.

Design and production Lowe Stratéus

ContentAlcatel-Lucent, Editech, Ascribe.

Photos© Alcatel-Lucent, all rights reserved. William Daniels, Raphaël Dautigny, Jérôme De Perlinghi, Live Studios, Peter Allan, Anne Roos-Weil, ITU,Raghu Rai/Magnum Photos.

This document is printed on Magno Satin coated paper, which is chlorine-free, PEFC-certifi ed and produced by EMAS- and ISO 9001-certifi ed factories. The pulp used to produce this paper is sourced from trees that come from forests that meet environmental standards.

Printed by Comelli, a holder of FSC™ and PEFC chain-of-custody certifi cates.

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